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 27, 1998
OR
TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File No. 0-24502
ROCK BOTTOM RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1265838
(State of incorporation) (I.R.S. Employer Identification No.)
248 Centennial Parkway, 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 [ ].
At March 26, 1999, 8,045,796 shares of common stock were outstanding.
At March 26, 1999, the aggregate market value of the voting and
non-voting common equity held by non-affiliates was approximately $49,230,000.
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INDEX
Page
PART I
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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. was incorporated in April 1994 and
currently operates 23 brewery restaurants and 39 Old Chicago(R) restaurants in
17 states and the District of Columbia. The company's brewery restaurants
operate under the names Rock Bottom Restaurant & BrewerySM (17 restaurants),
Walnut Brewery (two restaurants) and ChopHouse & Brewery (three restaurants).
During 1998, the company opened four brewery restaurants and closed three Old
Chicago restaurants and three brewery restaurants for a net decrease of two
restaurants (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations Overview"). All of the company's restaurants are
casual dining restaurants that feature high quality, moderately priced food and
a distinctive selection of microbrewed and specialty beers. Two of the company's
brewery restaurants also operate Sing Sing nightclubs, which emphasize comedy
shows performed by dueling pianists.
The company also owned an indirect 50% equity interest in Trolley Barn
Brewery, Inc. which it sold during the fourth quarter of 1998 (see "Business --
Trolley Barn"). As of the date of sale, Trolley Barn operated nine restaurants
in the southeastern United States.
On March 18, 1999, the company entered into an Agreement and Plan of
Merger with RB Capital, Inc., a newly formed corporation organized by the
company's Chairman of the Board, President and Chief Executive Officer, and RBR
Acquisition Corp., a wholly-owned subsidiary of RB Capital, whereby RB Capital,
through RBR Acquisition, will acquire the company in a cash merger with the
company as the surviving corporation. The proposed merger requires approval by
the holders of a majority of all outstanding shares of the company, and is
expected to be voted upon by the company's stockholders at a special meeting
anticipated be held during the third quarter of 1999. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources".
Brewery Restaurants
Design and Layout. The company's brewery restaurants generally range in
size from 7,400 to 11,500 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 generally range between 200 and 375 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 billiards areas.
Menu and Pricing. The brewery restaurant menu typically includes
approximately 45 bistro style items consisting of appetizers, soups, meal-sized
salads, and other offerings 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 $7.95 to $19.95 with most
entrees priced below $10.00. Management analyzes menu items for popularity and
profitability and often adapts new items to local market preferences.
Hand-crafted Beer. All 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 and Firechief Ale. The company has
received several local and national awards for its beers, including a silver
medal for its Devil's Back Stout (Oatmeal Stout category) in 1998 at the Great
American Beer FestivalSM. 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 were developed to
increase their compatibility with beer. The hand-crafted beer selection ranges
in price from $3.25 to $3.75 per pint, or $4.25 to $5.95 for a sampler which
includes one four ounce taster of each beer brewed at the restaurant.
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Customers. The company believes its 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 marketing and promotions to
attract new customers. To supplement these marketing efforts, the company sells
a selection of Rock Bottom Restaurant & Brewery, Walnut Brewery and ChopHouse &
Brewery merchandise including T-shirts, sweatshirts, 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, cable television and radio.
Site Selection and Location. The company currently operates 23 brewery
restaurants in 17 states and the District of Columbia, four of which opened
during 1998, and one of which opened during the first quarter of 1999. The
company seeks to locate its brewery restaurants in visible, high-traffic sites
in metropolitan or suburban areas that are recognized as established restaurant,
theater, sporting and shopping destination locations. Sixteen of the company's
restaurants are located near pedestrian malls, theaters, convention centers,
sports arenas, or downtown shopping areas. The other seven restaurants are
located in destination restaurant and bar or shopping districts in Campbell and
Irvine, California; Englewood, Colorado; Des Moines, Iowa; Warrenville,
Illinois; Bellevue, Washington (opened March, 1999) and Addison, Texas. Three of
the company's restaurants located in Denver, Colorado, Washington D.C. and
Cleveland, Ohio operate under the names "Denver ChopHouse & BreweryTM",
"District ChopHouse & Brewery" and "Cleveland ChopHouse & BreweryTM",
respectively, while brewery restaurants in Boulder and Englewood, Colorado
operate under the name "Walnut Brewery". During the first quarter of 1998, the
company closed restaurants located in Houston, Texas and Overland Park, Kansas,
and during the third quarter of 1998, closed a restaurant located in Fresno,
California. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview".
Restaurant Economics. During 1998, the 18 brewery restaurants operating
for the entire fiscal year generated average revenues of approximately $4.2
million, with per restaurant revenues ranging from $2.2 million to more than
$7.0 million, and average earnings before interest, taxes, depreciation and
amortization ("EBITDA") of approximately $883,000 (21.0% of average revenues).
Additionally, the average cash investment for the four restaurants opened in
1998 totaled $2.4 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"). These restaurant economics may not be
maintained in the future.
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 generally ranging from 180 to 340. 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 50 items,
including the company's signature Chicago-style deep dish pizza, thin-crust
pizza, 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 typically range in price from $5.49 for a hamburger to
$18.99 for the most expensive specialty pizza that serves four.
<PAGE>
Wide Beer Selection. Old Chicago restaurants provide a 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 dozens of 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 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.
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 generally open seven days a
week from 11:00 a.m. and typically remain active across the lunch, happy hour,
dinner and late-night time periods.
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, over the course of several visits, 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 39 Old
Chicago restaurants, 33 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. In connection with the company's reduced
expansion plans, no new Old Chicago restaurants were opened during 1998 (see
"Business - Expansion Strategy"). 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, and during
the third quarter of 1998 closed an additional Old Chicago restaurant located in
Salem, Oregon (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview").
Restaurant Economics. During 1998, the Old Chicago restaurants
operating for the entire fiscal year generated average revenues of approximately
$1.9 million, with per restaurant revenues ranging from $1.3 million to $2.5
million, and average EBITDA of approximately $305,000 (16.1% of average
revenues). These restaurant economics may not 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. Trolley Barn
operates nine casual dining restaurants throughout the southeastern United
States, including four under the name Big River Grille & Brewing Works(TM) and
two under the name Rock Bottom Restaurant & Brewery. During November 1998, the
company executed an agreement with Trolley Barn to sell the company's indirect
50% interest for cash of $7.0 million. In connection therewith, the company was
released from its guarantee of Trolley Barn's debt, and Trolley Barn's rights to
develop restaurants throughout the southeastern United States under the Rock
Bottom Restaurant & Brewery and Old Chicago names were terminated. However, the
company granted certain rights to Trolley Barn so that it can continue to use
certain of the company's licensed trademarks and tradenames for two of Trolley
Barn's existing restaurants located in Atlanta, Georgia and Charlotte, North
Carolina for a specified period of time. These trademarks and tradenames include
Rock Bottom Restaurant & Brewery and Sing Sing. See Note 5 of Notes to
Consolidated Financial Statements. Proceeds from this transaction were used to
pay down the company's credit facility.
<PAGE>
Development Strategy
From January 1995 through March 1999, the company opened 49
restaurants, including 28 Old Chicago restaurants and 21 brewery restaurants.
During 1998, the company closed three Old Chicago restaurants and three brewery
restaurants opened previously (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview"), and as of March 26,
1999, the company operated 39 Old Chicago restaurants and 23 brewery
restaurants.
During July 1997, the company announced a plan to reduce its 1998
restaurant expansion by opening fewer brewery restaurants than in previous
years, and opening no new Old Chicago restaurants. This strategy allowed the
company to focus on opening a fewer number of total restaurants during 1998,
place greater emphasis on improving the quality and standards of its management
training program, and address sales and profits concerns in certain restaurants,
particularly the Old Chicago restaurants. Management believes the company
benefited from this strategy as indicated by the improved operating performance
for the Old Chicago restaurants during 1998 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Fiscal 1998
Compared to Fiscal 1997").
During 1999, the company anticipates opening four brewery restaurants
and resuming expansion for the Old Chicago concept with two new restaurants.
Such expansion will focus on building out existing markets for both concepts,
and entering Arizona with a suburban brewery restaurant. New restaurant
locations currently planned for 1999 and the estimated opening dates are as
follows:
1999 Planned Restaurant Openings
Location Estimated Opening Date
-------- ----------------------
Rock Bottom Restaurant & Brewery:
Bellevue, WA (a) Opened March 8, 1999
Phoenix, AZ (a) April 1999
San Diego, CA (b) July 1999
Arlington, VA August 1999
Old Chicago:
Omaha, NE July 1999
Wheatridge, CO August 1999
(a) The company planned to open both restaurants during the third
quarter of 1998, however, delays in the developers' construction
timeline resulted in rescheduling these openings to 1999.
(b) The company plans on opening an additional Sing Sing nightclub to
be operated by this restaurant during the fourth quarter of 1999.
The company expects to complete its expansion during the third quarter
of 1999. Thereafter, since the brewery restaurant concept will undergo reduced
expansion and a focus on quality and profitability, the company does not
anticipate opening any new brewery restaurants until the third quarter of 2000.
This strategy will provide greater management focus toward improving current
systems and procedures, which procedures range from continued efforts to
streamline kitchen labor as a result of the menu reengineering process to
planning and developing sophisticated local restaurant marketing plans.
The company is evaluating new markets for possible expansion in the
future, and the brewery restaurant or Old Chicago restaurant concept may not 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 may not 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, delays from real
estate developers, 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. The company may not be able
to open its planned restaurants in a timely or cost effective manner, if at all.
<PAGE>
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 senior vice
president of operations for each restaurant division, five regional managers for
the brewery restaurant 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 the profitability of
the restaurant. Restaurant managers are also reviewed for compensation
adjustments and promotions based on the advancement and growth of their
subordinates, 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 frequent sales meetings, department meetings, "brew-chats"
and employee roundtable focus groups, the company involves each employee in the
evaluation and improvement of restaurant operations. The company seeks to
continually refine its performance measurement system in order to provide better
feedback to its employees and 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 to
manage the recruitment and training of management personnel for the company's
restaurants, including a vice president of training, a director of training and
two recruiting managers. During the fourth quarter of 1998, the company
established a program for training all new restaurant management for both
concepts in restaurants designated solely as training restaurants. Two
additional managers are responsible for coordinating such training. Management
believes that this program increases a trainee's knowledge of their daily
responsibilities and the company's expectations of performance, resulting in a
more consistent execution of the concept and reduced employee turnover. All
managers are also expected to complete a five-day management leadership course,
and obtain certification from a nationally recognized agency with respect to
food safety and sanitation.
In addition, as the staff is a key factor in the company's operations,
substantial resources are devoted to recruiting, hiring and training these
individuals. 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 seeking to provide an exceptional dining experience and enhancing the
friendly atmosphere of the company's restaurants. Currently, the company employs
five training managers responsible 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 also 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 its sales and labor information on a daily
basis through utilization of point-of-sale terminals. The brewery restaurants
also have sophisticated computer payroll scheduling systems that allow
management to more efficiently manage and control labor costs. 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 to prepare more easily
consolidated or other selected management reports. Cash receipts are controlled
either through daily deposits of sales proceeds into the company's principal
depository account, maintained in Colorado, or through daily deposits into
centralized depository accounts maintained outside of Colorado. Deposits in
out of state accounts are transferred two to three times a week into the
Colorado depository account. Cash disbursements are controlled thorough
centralized purchasing and processing of payables.
<PAGE>
Brewing Operations
The company's breweries are typically designed to produce between 1,600
and 3,000 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 brewery restaurant employs a head
brewer and in most cases one or more apprentice brewers. Quality control over
the brewing process in all restaurants is performed by seven brewers, five of
whom also serve as head brewers. The company also employs two directors of
brewing operations responsible for designing and installing brewing systems in
new restaurants and for developing and testing new beer recipes.
All of the company's brewers strive to ensure that every batch of beer
brewed is of high 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.
During the second quarter of 1998, the company began a process to
re-bid its single largest food supplier contract, and in December 1998 awarded
this contract to Distributor Marketing Alliance, Inc. ("DMA"). The change in
suppliers is expected to streamline the number of distribution warehouses
thereby reducing freight costs, and improve overall menu quality through greater
adherence to the company's purchasing specifications and guidelines. The
agreement with this supplier is terminable within 30 days' notice by either
party, and the company believes that food and beverage products are readily
available from alternate suppliers. Prior to December 1998, the company's single
largest food supplier, Nobel Sysco, Inc., accounted for approximately 81% of
food and certain supplies purchased in 1998 by the company.
Competition
The restaurant industry is intensely competitive. The 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 the company.
<PAGE>
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 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 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. The company's failure
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
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 brewery restaurants planned for 1999.
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 1998, the company was
able to take advantage of a $335,291 credit from the production of 30,481
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 also 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
As of December 27, 1998, the company had 4,766 employees, of which 106
served in administrative capacities (including home office, administrative and
executive personnel), 362 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, and the Old Chicago Fresh Pasta & Pizza
design. The company also owns a number of trademarks and service marks
registered in certain states including the "Denver ChopHouse & BreweryTM" in
Colorado and the "Cleveland ChopHouse & BreweryTM" in Ohio. 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 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.
ITEM 2: Properties
As of December 27, 1998, the company operated 61 restaurants, including
22 brewery restaurants and 39 Old Chicago restaurants. The following table sets
forth the locations of these restaurants. See "Business-Expansion Strategy" for
a discussion of planned restaurant openings in 1999:
<TABLE>
<CAPTION>
Existing Restaurant Locations as of December 27, 1998
Brewery Restaurants Old Chicago
Restaurants Total
<S> <C> <C> <C>
Arizona - 1 1
California 4 - 4
Colorado 4 16 20
District of Columbia 1 - 1
Idaho - 2 2
Illinois 2 1 3
Indiana 1 - 1
Iowa 1 1 2
Kansas - 3 3
Maryland 1 - 1
Minnesota 1 7 8
Missouri - 1 1
Nebraska - 3 3
Ohio 3 - 3
Oregon 1 2 3
Texas 1 1 2
Washington 1 - 1
Wisconsin 1 1 2
-- -- --
Total restaurants 22 39 61
== == ==
</TABLE>
The company owns the furnishings, fixtures and equipment in each of
its restaurants. Generally, each building lease entered into by the company is
conditioned upon the ability of the company to obtain the permits and licenses
<PAGE>
necessary to operate the restaurant identified for such site. Existing
restaurant building leases have expiration dates ranging from July 1999 to
January 2038 (excluding existing renewal options). The company does not
anticipate any difficulties in renewing its existing leases as they expire;
however, the company may not be able to renew such leases. See Note 11 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 Old Chicago restaurants
located in Greeley, Longmont and Grand Junction, Colorado; Addison, Texas and
Salem, Oregon, and for Rock Bottom Restaurant & Brewery restaurants located in
Chicago, Illinois; Addison; Texas, Warrenville, Illinois, and Phoenix, Arizona
(opening April 1999). The property owned in Chicago is encumbered by a long-term
mortgage (see Note 7 of Notes to Consolidated Financial Statements). The company
also leases approximately 23,000 square feet of office space in Louisville,
Colorado. Subsequent to December 27, 1998, the company entered into negotiations
to sell the land and building located in Colorado, Oregon and Warrenville,
Illinois. All transactions, except for the sale of the Old Chicago restaurant in
Oregon, would involve the company executing long-term lease agreements
simultaneous with the closing of each transaction (see "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources").
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.
Additionally, on February 2, 1999, an action was brought in the
District Court, County of Denver, State of Colorado, entitled Wohlman v. Day,
et. al., as a class action on behalf of the public shareholders of the company
against the company's directors individually and the company. The plaintiffs
alleged, among other things, a breach of fiduciary duties in connection with the
proposed transactions between the company and RB Capital and sought to enjoin
any such transaction. In addition to injuctive relief, the action sought damages
in an unspecified amount. The company has reached an agreement in principle with
the plaintiffs in the case, and anticipates that any settlement of this class
litigation 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, 1999, was $8.75 per share.
High Low
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
1998
First quarter $ 6.63 $ 5.06
Second quarter 7.56 5.50
Third quarter 6.88 4.63
Fourth quarter 6.50 4.88
As of March 26, 1999, there were 250 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.
<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 27, 1998, 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.
<TABLE>
<CAPTION>
Years Ended
December 25, December 31, December 29, December 28, December 27,
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants $22,201 $40,499 $58,328 $ 73,117 $ 74,131
Brewery restaurants 16,652 33,465 50,902 77,131 85,971
------- ------- ------- ------- -------
Total revenues 38,853 73,964 109,230 150,248 160,102
------- ------- ------- ------- -------
Operating Expenses:
Cost of sales 9,785 18,509 27,100 37,672 40,625
Restaurant salaries and benefits 12,727 24,739 35,552 51,086 53,632
Operating expenses 8,044 15,135 23,529 30,627 31,906
Selling expenses 1,272 2,855 4,272 5,773 5,099
General and administrative 2,468 4,577 5,620 9,073 9,818
Depreciation and amortization 1,325 4,200 7,802 12,136 8,615
Start-up costs (1) -- -- -- -- 1,809
Restructuring charges and other, net -- -- -- 9,707 (138)
------- ------- ------- ------- -------
Total operating expenses 35,621 70,015 103,875 156,074 151,366
------- ------- ------- ------- -------
Income (Loss) From Operations 3,232 3,949 5,355 (5,826) 8,736
Equity in joint venture earnings -- -- 223 330 688
Gain on sale of investment in joint venture -- -- -- -- 728
Interest income (expense), net (106) 831 (74) (1,763) (2,378)
Other income (expense), net 8 40 (1) -- --
------- ------- ------- ------- -------
Income (Loss) Before Taxes 3,134 4,820 5,503 (7,259) 7,774
Income (Loss) Before Cumulative Effect
of Accounting Change (1) 1,924 3,270 4,025 (4,691) 5,248
Net Income (Loss) (1) (2) $ 1,924 $ 3,270 $ 4,025 $ (4,691) $ 3,998
======= ======= ======= ======= =======
Diluted Net Income (Loss) Per Share:
Income (loss) before cumulative effect of
accounting change $ .47 $ .45 $ .52 $ (.58) $ 0.65
Cumulative effect of accounting change -- -- -- -- (0.15)
------- ------- ------- ------- ------
Diluted Net Income (Loss) per Share $ .47 $ .45 $ .52 $ (.58) $ .50
======= ======= ======= ======= ======
Diluted Weighted Average
Shares Outstanding (3) 4,072 7,264 7,725 8,027 8,056
======= ======= ======= ======= ======
Balance Sheet Data (at end of period):
Working capital (deficit) $ 1,113 $ 9,335 $ (732) $ (5,567) $ (26,747)
Total assets 26,359 64,169 84,948 107,413 102,497
Long-term debt (including current
portion) 706 641 11,564 28,940 21,425
Obligations under capital leases
(including current portion) 1,794 1,667 1,372 2,079 2,481
Stockholders' equity 17,924 55,341 65,337 61,219 65,423
</TABLE>
(1) The company adopted Statement of Position No. 98-5 "Reporting on the
Costs of Start-up Activities" effective December 29, 1997. Adoption of
this standard resulted in a charge of approximately $1.3 million, net
of taxes, for the cumulative effect of an accounting change. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview" and Note 2 of Notes to Consolidated
Financial Statements.
(2) 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.
(3) Weighted average common shares outstanding for the year ended December
25, 1994 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 1999 and 2000;
-Estimated capital expenditures in 1999;
-Estimated average construction cost for new restaurants opening
during 1999;
-Ability of the company to improve operations in the brewery
restaurants;
-Ability of the company to renew existing leases;
-Ability to complete timely transactions for the sale and
subsequent lease of certain brewery and Old Chicago restaurants
and realize related reductions in interest expense;
-Anticipated cost savings and quality improvement resulting from
the company's change in primary food supplier;
-Availability of food and beverage products from alternate
suppliers;
-Ability of the company to compete effectively within the
restaurant industry;
-Impact on operations of 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;
-Estimated amounts accrued for restaurant closings;
-Ability of the company to attain Year 2000 compliance;
-Ability to generate sufficient cash from operations to complete
financing of 1999 restaurant expansion;
-Impact of SOP 98-5 on future quarterly earnings.
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 and 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; 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 addition to the foregoing, certain statements contained in this
report with respect to the proposed transaction with RB Capital 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. Such statements include statements regarding the anticipated
date for the stockholders meeting, settlement of any class action lawsuit and
its anticipated impact, and the impact on G&A expense during the first quarter
of 1999. Factors that could cause actual results to differ materially include,
among others, delays in receiving required regulatory and other approvals,
unsatisfactory completion of the plaintiffs' discovery, if any, in the class
action lawsuit or the failure to reach a court-approved settlement in such suit,
adverse economic or market conditions, the ability of RB Capital to obtain
funding necessary to consummate the proposed transaction, and failure of
stockholders to approve the merger.
Due to 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 27, 1998, the company operated 22 brewery restaurants
and 39 Old Chicago restaurants, a decrease of two restaurants from the end of
the preceding fiscal year. The following table lists the quarterly activity
relating to the number of restaurants operating during 1998:
<TABLE>
<CAPTION>
Summary of Restaurants Operating
Qtr. Qtr. Qtr. Qtr.
Ended Ended Ended Ended Total
3/29/98 6/28/98 9/27/98 12/27/98 1998
<S> <C> <C> <C> <C> <C>
Old Chicago restaurants
Open at beginning of period 42 40 40 39 42
New openings during period - - - - -
Restaurant closures during period (2) - (1) - (3)
-- -- -- -- --
Open at end of period 40 40 39 39 39
-- -- -- -- --
Brewery restaurants
Open at beginning of period 21 19 21 21 21
New openings during period (a) - 2 1 1 4
Restaurant closures during period (2) - (1) - (3)
-- -- -- -- --
Open at end of period 19 21 21 22 22
-- -- -- -- --
Total restaurants 59 61 60 61 61
== == == == ==
</TABLE>
(a) New restaurants are located in La Jolla, California; Cleveland,
Ohio; Irvine, California and Warrenville, Illinois, respectively.
Restaurant openings planned for 1999 include four Rock Bottom
Restaurant & Brewery restaurants (two of which were originally scheduled to open
during the fourth quarter of 1998) and two Old Chicago restaurants. All leases
for these new restaurants are either signed or in the final stages of
negotiation. 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. Future operating results may also be adversely
affected by costs associated with developing a large 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. Restaurant salaries
and benefits and preopening costs are two examples of these increased costs.
Restaurant closures during the first quarter of 1998 were located in
Evergreen, Colorado and Gladstone, Missouri for the Old Chicago group and
Houston, Texas and Overland Park, Kansas for the brewery restaurant group.
Estimated costs to close these four restaurants were accrued as of December 28,
1997. During the second quarter of 1998 the company executed a lease settlement
agreement with the owner of the Gladstone, Missouri restaurant, and during the
third quarter of 1998 executed an agreement with a new owner of the company's
leased property in Evergreen, Colorado. As a result of these two transactions,
the company has no further obligations under these previously executed lease
agreements and recognized income of approximately $171,000 during 1998. During
the third quarter of 1998, the company began subleasing its brewery restaurant
in Houston, Texas. The sublease term runs from July 1998 to June 2001, with
renewal options through August 2009. Pursuant to this agreement, the company
revised its previous estimate of accrued restructuring costs and recognized
additional income during 1998 of approximately $177,000. Management believes
that the remaining accrued restructuring charges for the Houston and Overland
Park restaurants are sufficient to cover the related costs associated with the
ultimate disposition of all assets and obligations related to these properties.
See Note 8 of Notes to Consolidated Financial Statements.
During the third quarter of 1998, the company closed two additional
restaurants in Fresno, California and Salem, Oregon. Certain assets located at
the California brewery restaurant, including substantially all leasehold
improvements, furniture and equipment, were sold during the fourth quarter of
1998 to an unaffiliated third party, and the company's rights and obligations
under the lease were assigned to this party for $2.1 million. The company
recognized a gain on sale from this transaction of approximately $451,000 and
used net proceeds to pay down the company's credit facility. During the first
quarter of 1999, the company entered into a letter of intent for sale of the
land, building and certain equipment for the Old Chicago restaurant located in
Salem, Oregon. Assets related to this property of approximately $1.2 million are
classified as Assets Held for Disposition in the accompanying Consolidated
Balance Sheet, and such amount approximates net realizable value. See Note 6 of
Notes to Consolidated Financial Statements.
During the fourth quarter of 1998, the company made a change in
accounting principle by electing early adoption of the American Institute of
Certified Public Accountants' Statement of Position 98-5, "Reporting the Costs
of Start-Up Activities" ("SOP 98-5"), that requires the company to expense
start-up and preopening costs as they are incurred. Prior to adoption of SOP
98-5, the company, like most other casual dining restaurant companies, deferred
these costs and amortized them over the 12 months following the opening of each
restaurant. Adoption of SOP 98-5 was made retroactive to the first quarter of
1998 which resulted in a one-time cumulative effect (charge) of $1.3 million,
net of taxes, or $0.15 per share, to expense preopening costs incurred in 1997
but deferred into fiscal 1998. Adoption of SOP 98-5 did not require restatement
of prior year fiscal periods. Future quarterly earnings will fluctuate due to
the timing of new restaurant openings and the corresponding impact from adoption
of SOP 98-5.
The company operates on a 52 or 53 week fiscal year ending the last
Sunday in December. Fiscal years 1996, 1997 and 1998 each contained 52 weeks.
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the
percentage relationship to restaurant revenues of certain income statement data
and certain restaurant data:
<TABLE>
<CAPTION>
Percentage of Revenues
Years Ended
December 29, December 28, December 27,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income Statement Data:
Revenues:
Old Chicago restaurants 53.4% 48.7% 46.3%
Brewery restaurants 46.6 51.3 53.7
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
Operating Expenses:
Cost of sales 24.8 25.1 25.4
Restaurant salaries and benefits 32.6 34.0 33.5
Operating expenses 21.5 20.4 19.9
Selling expenses 3.9 3.8 3.2
General and administrative 5.1 6.0 6.1
Depreciation and amortization 7.2 8.1 5.4
Start-up costs -- -- 1.1
Restructuring charges and other, net -- 6.4 (0.1)
----- ----- -----
Total operating expenses 95.1 103.8 94.5
----- ----- -----
Income (Loss) From Operations 4.9 (3.8) 5.5
Equity in joint venture earnings 0.2 0.2 0.4
Gain on sale of investment in joint venture -- -- 0.5
Interest income 0.2 -- 0.0
Interest expense (0.3) (1.2) (1.5)
----- ----- -----
Income (Loss) Before Taxes 5.0 (4.8) 4.9
Income (Loss) Before Cumulative Effect
of Accounting Change 5.0 (4.8) 3.3
Net Income (Loss) 3.7% (3.1)% 2.5%
===== ===== =====
Restaurant Data:
Restaurants open (end of period):
Old Chicago restaurants 35 42 39
Brewery restaurants 14 21 22
--- --- ---
Total 49 63 61
=== === ===
Restaurant operating weeks:
Old Chicago restaurants 1,541 2,058 2,054
Brewery restaurants 588 949 1,081
----- ----- -----
Total 2,129 3,007 3,135
===== ===== =====
Average sales per restaurant (open for full period)
(in thousands):
Old Chicago restaurants $1,902 $1,834 $ 1,872
Brewery restaurants 4,466 4,393 4,247
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Revenues. Revenues increased $9.9 million (6.6%) to $160.1 million in
fiscal 1998 from $150.2 million in fiscal 1997. Revenues from the four new
restaurants which opened during 1998 accounted for $7.3 million (74.4%) of the
increase. As comparable restaurant sales for the year ended December 27, 1998
were flat, the balance of the increase primarily resulted from the 14
restaurants opened during 1997 contributing a full year of sales in 1998, offset
by a decrease in sales resulting from the six restaurants closed during 1998.
When computing comparable restaurant sales, restaurants open for at least six
full quarters are compared from year to year.
Revenues from the company's brewery restaurants, as a percentage of
total revenues, increased to 53.7% in 1998 from 51.3% in 1997 because four new
brewery restaurants were opened during the year (and no new Old Chicago
<PAGE>
restaurants were opened) and brewery restaurants generate greater average weekly
sales. The company expects that the percentage of revenues contributed by the
brewery restaurants will continue to increase as the company anticipates opening
more brewery restaurants than Old Chicago restaurants in fiscal 1999.
Average weekly sales for the Old Chicago restaurants during 1998 were
$36,091 as compared to $35,528 during fiscal 1997 (an increase of 1.6%). During
1998 and 1997, alcoholic beverages accounted for approximately 43% of Old
Chicago restaurant sales, with beer constituting approximately 78% of alcoholic
beverage sales according to company estimates. Comparable restaurant sales for
the Old Chicago restaurants were also up 1.6% for the year ended December 27,
1998. 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 average
weekly sales in certain restaurants while achieving more consistent
profitability. This analysis covered essentially 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 realize
some benefits from focusing on these areas as indicated by the increase in
average weekly sales and comparable restaurant sales trends during 1998 as
compared to 1997.
Average weekly sales for the brewery restaurants during 1998 were
$79,529 as compared to $81,277 during fiscal 1997 (a decrease of 2.2%).
Alcoholic beverages accounted for approximately 39% of brewery restaurant sales
during 1998 as compared to 41% during 1997, with beer constituting approximately
58% of total alcoholic beverage sales during 1998 as compared to 61% during
1997. Comparable restaurant sales for the brewery restaurants decreased by 2.6%
for the year ended December 27, 1998. Although down from 1997, average weekly
sales and comparable restaurant sales trends improved later in fiscal 1998. The
decline in sales measurements reflect the increasingly competitive conditions in
some of the company's key markets, and difficulties retaining market share due
to poor execution of the concept in some other markets. Efforts being made to
improve sales trends include ongoing menu revisions as part of the "best
practices" initiative (see "Cost of Sales"), reassessing the beer program to
capitalize on consumers' interest in microbrewed beers, and completing an
in-depth evaluation of the concept's positioning using focus groups and
quantitative data gathering methods. As part of its effort to achieve these
goals, management anticipates deferring continued expansion of the brewery
restaurant concept until the third quarter of 2000.
Cost of Sales. Cost of sales, which consists of food, beverage and
merchandise costs, increased $3.0 million (7.8%) to $40.6 million in fiscal 1998
from $37.7 million in fiscal 1997. Cost of sales as a percentage of revenues
increased to 25.4% in fiscal 1998 from 25.1% in fiscal 1997 primarily due to two
factors. First, during the first quarter of 1998, the company utilized
assistance from an outside consultant to perform an assessment of operating
policies and procedures in the company's kitchens. The "best practices"
developed from this assessment were implemented during the second and third
quarters of 1998 and focused on streamlining food preparation procedures and
introducing higher margin menu items in both concepts. During this period,
several new menu items were added, and substantially all other menu items were
reengineered. As this process resulted in changes to numerous recipes, the
related inefficiencies in yields and waste resulted in a temporary increase in
food costs during the first nine months of 1998. The second primary factor is
due to greater food sales as a percentage of total sales. As the cost of sales
for food is greater than the cost of sales for beverage alcohol, an increase in
the food portion of the sales mix results in an increase in cost of sales. Other
increases in 1998 as compared to 1997 resulted from certain non-recurring
purchasing benefits received during the third quarter of 1997, and from
increased costs in cheese during the third and fourth quarters of 1998 as
compared to 1997.
Restaurant Salaries and Benefits. Restaurant salaries and benefits,
which consist of restaurant management and hourly employee wages, payroll taxes,
and group health insurance, increased $2.5 million (5.0%) to $53.6 million in
fiscal 1998 from $51.1 million in fiscal 1997. Restaurant salaries and benefits
as a percentage of revenues decreased to 33.5% in 1998 from 34.0% in 1997,
primarily due to lower kitchen and floor labor costs in both restaurant
concepts. This decrease is partially due to a reduction in kitchen labor hours
as a result of the company's best practices initiative. Additional decreases in
labor costs were due to the brewery restaurants opened in the prior 18 months
achieving operational efficiencies. Cost savings in these areas were offset by
increased training costs associated with the company's efforts to improve the
quality and standards of its management training program.
Although the company did not experience an increase to minimum wage
rates during 1998 as a result of federal legislation, certain state legislation
increased the minimum wage rates in Oregon and California during the first
quarter of 1998. Laws in these states do not provide for the Federal tip credit,
<PAGE>
therefore such legislation increased the minimum wage paid to tipped employees.
Although the company did not implement a menu price increase to specifically
offset these increased wage rates, the introduction of higher margin menu items
as a result of the company's best practices initiative mitigated the effect of
such increased costs.
Operating Expenses. Operating expenses, which include occupancy costs,
utilities, repairs, maintenance and linen, increased $1.3 million (4.2%) to
$31.9 million in fiscal 1998 from $30.6 million for fiscal 1997. As a percentage
of revenues, such expenses decreased to 19.9% in 1998 from 20.4% in 1997. The
decrease in operating expenses as a percentage of revenues is due primarily to
lower overall operating costs resulting from management's focus on its best
practices initiative. Additional costs savings are due to a reduction in 1998
insurance premium rates, particularly workmen's compensation insurance. These
cost savings were offset by greater expenses during the third and fourth
quarters of 1998 for repairs and maintenance as the company has undertaken a
comprehensive program to repair and upgrade existing assets. Such program may
result in slight increases to operating expenses during 1999.
Selling Expenses. Selling expenses decreased $0.7 million (11.7%) to
$5.1 million in fiscal 1998 from $5.8 million for fiscal 1997. As a percentage
of revenues, such expenses decreased to 3.2% in 1998 from 3.8% in 1997. This
decrease is primarily due to a reduction in the amount of food and beverages
discounted to customers. Although discounting is one of the company's primary
forms of word-of-mouth advertising, increased staff training and education have
reduced use of this program to more appropriate levels. Additional decreases are
due to an increased use of lower cost local restaurant marketing promotions as
compared to more expensive company wide promotions that utilize extensive radio
and print media.
General and Administrative ("G&A"). G&A expenses increased $0.7 million
(8.2%) to $9.8 million in fiscal 1998 from $9.1 million in fiscal 1997, and
increased as a percentage of revenues from 6.0% in fiscal 1997 to 6.1% in fiscal
1998. Excluding approximately $1.3 million for certain non-recurring charges
incurred during the fourth quarter of 1997, 1998 G&A expense increased $2.0
million as compared to fiscal 1997. Due to the company's reduced expansion
plans, less G&A costs were allocated to the company's development program
resulting in an increase to G&A expense. Additionally, the company incurred
increased spending during 1998 related to its best practices initiative,
additional personnel in the training, accounting, human resources and
information systems departments, and costs associated with attaining Year 2000
compliance.
On January 27, 1999, the company announced that it had received three
separate indications of interest to acquire the company, including a proposal by
RB Capital (see "Proposed Transaction with RB Capital"). The company appointed a
Special Committee of independent directors to, among other things, evaluate such
proposals as well future third-party indications of interest. As a result of the
Special Committee's activities, the company expects G&A expense to increase
significantly during the first quarter of 1999.
Depreciation and Amortization, and Start-up Costs. Depreciation,
amortization and start-up costs, decreased $1.7 million (14.1%) to $10.4 million
for fiscal 1998 from $12.1 million in fiscal 1997. As a percentage of revenues,
depreciation expense and amortization of intangible assets, other than
amortization of preopening costs, was 5.4% during 1998 as compared to 5.1% in
1997. Such increase is due primarily to a decrease in AWS for the brewery
restaurants, greater depreciation expense for the Old Chicago restaurants
resulting from a significant investment for restaurant remodels over the last 12
months, and increased depreciation expense associated with a greater number of
corporate assets.
Amortization of preopening costs and start-up costs was 1.1% during
1998 as compared to 2.9% during 1997. Preopening expense incurred as a
percentage of revenues fluctuates with the number and type of restaurant (Old
Chicago or brewery restaurant) opened in any given period. Due to the
company's reduced expansion plans in fiscal 1998, preopening costs were incurred
for fewer restaurants than in fiscal 1997.
Restructuring Charges and Other, net. The company incurred a pre-tax
restructuring charge during 1997 of approximately $9.7 million related primarily
to write-downs of certain assets to their net realizable value, and accruing
estimated costs associated with closing four restaurants during the first
quarter of 1998. During 1998, the company either settled its lease obligations
or subleased the related property for three of these four restaurants resulting
in an adjustment of previously accrued restructuring charges, or income of
approximately $348,000 (see Note 8 of Notes to Consolidated Financial
Statements). Additionally, the company's gain associated with closing its
restaurant in Fresno, California during the fourth quarter of 1998 resulted in
additional income of approximately $451,000. Income from these transactions was
offset by costs relating to the disposition of other operating fixed assets.
<PAGE>
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. The increase is due to an increase in Trolley's Barn's revenues as
the total number of restaurants operated by Trolley Barn increased from six
restaurants operating at the end of fiscal 1997 to nine restaurants operating at
the end of fiscal 1998. In November 1998, the company closed on the sale of its
investment in Trolley Barn, and recognized a pre-tax gain of approximately $0.7
million. See Note 5 of Notes to Consolidated Financial Statements
Interest Expense / Interest Income. Interest expense for the year ended
December 27, 1998 increased $0.6 million from 1997, excluding approximately
$274,000 of interest expense capitalized to construction costs. The increase in
interest expense is primarily due to an increase in the average balance
outstanding under the company's credit facility to $26.6 million during fiscal
1998 from $22.0 million during fiscal 1997. As of December 27, 1998, borrowings
outstanding under the company's credit facility were reduced to $19.1 million as
a result of repayments with proceeds from the sale of certain assets including
the investment in Trolley Barn (see Note 7 of Notes to Consolidated Financial
Statements). As the company anticipates closing on several real estate financing
transactions during the second quarter of 1999, interest expense should decrease
beginning in the third quarter of 1999 (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources").
Income Tax Expense (Benefit). The effective tax rate associated with
the income tax provision in 1998 was 32.5% as compared to the effective tax rate
for the income tax benefit in 1997 of 35.4%. 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 improved restaurant
operating performance during fiscal 1998, the company recorded a valuation
allowance for 22% of the FICA tax credits generated, as compared to fiscal 1997
when the company recorded a valuation allowance for approximately 100% of tax
credits generated. Such reduction in the company's 1998 effective rate was
offset by additional taxes associated with the company's sale of its investment
in Trolley Barn. See Note 9 of Notes to Consolidated Financial Statements.
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.
Revenues from the company's 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.
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
began 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.
<PAGE>
AWS for the 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.
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.
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.
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.
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.
<PAGE>
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 brewery restaurant) opened in any given period. During 1997,
preopening expense was amortized for a larger number of brewery restaurants than
in 1996, resulting in the increase to preopening expense amortization as a
percentage of revenues.
Restructuring Charges and Other, net. 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 8 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 7 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.
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:
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Income Tax Expense (Benefit). The effective tax rate associated with
the income tax benefit in 1997 was 35.4% as compared to the effective tax rate
for income tax expense 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 9 of Notes to
Consolidated Financial Statements.
<PAGE>
Liquidity and Capital Resources
The company requires capital principally for the development and
construction of new restaurants and for capital expenditures at existing
restaurants. The company has financed its expansion over the last three years
principally through cash flow from operations, borrowings under its credit
facility and capital lease obligations. As is common in the restaurant industry,
the company has generally operated with negative working capital as it receives
trade credit based upon negotiated terms for purchasing food and supplies, and
does not have significant receivables or inventory. The following table presents
a summary of the company's cash flows for fiscal year 1996, 1997, and 1998:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------- ---------------- ---------------
December 29, December 28, December 27,
1996 1997 1998
----------------- ---------------- ---------------
<S> <C> <C> <C>
Net cash provided by operating activities $ 6,827,645 $ 13,275,857 $ 14,968,349
Net cash used in investing activities (21,525,687) (29,831,473) (9,027,608)
Net cash provided by (used in) financing 11,142,701 18,178,153 (7,113,782)
activities
(Decrease) increase in cash and cash equivalents (3,555,341) 1,622,537 (1,173,041)
</TABLE>
Net cash used in investing activities during 1996, 1997 and 1998
included capital expenditures of $29.0 million, $30.6 million and $19.1 million,
respectively, for the construction of new restaurants, routine expenditures and
remodels of existing restaurants, and leasehold improvements, furniture and
equipment in the corporate office. The decrease in capital spending during 1998
was a result of the company opening only four restaurants during this period as
compared to 14 restaurants during 1997 and 16 restaurants during 1996. 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:
<TABLE>
<CAPTION>
Average Cash Investment per Restaurant
1996 1997 1998
-------------------------- -------------------------- ------------------------
#of #of #of
restaurants Average restaurants Average restaurants Average
opened Investment opened Investment opened Investment
<S> <C> <C> <C> <C> <C> <C>
Old Chicago restaurants 12 $1,017,000 7 $1,025,000 -- --
Brewery restaurants 4 $2,900,000 7 $2,633,000 4 $2,422,000
</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, however, landlord contributions may not be available
in the future. Net cash used in investing activities during 1998 also includes
$7.0 million received from the company's sale of its investment in Trolley Barn,
and $2.1 million received from the sale of substantially all assets located at
the brewery restaurant in Fresno, California.
Although the company has historically leased its facilities, during
1997 and 1998, the company purchased undeveloped land for the brewery
restaurants in Englewood, Colorado, Des Moines, Iowa, Warrenville, Illinois and
Phoenix, Arizona (opening April 1999), and constructed build-to-suit restaurants
using the company's prototype design. The company sold the land and buildings
for the Englewood, Colorado restaurant during the third quarter of 1997 and the
Des Moines restaurant during the first quarter of 1998 to a partnership in which
one of the Company's directors has a beneficial interest. The properties were
then leased back by the Company. Proceeds allocable to the land for each
transaction were reported as a sale and included in cash flows from investing
activities for the respective periods. Proceeds allocable to the buildings were
accounted for as a financing. Cash flows from financing activities include $1.2
million and $1.1 million for 1997 and 1998, respectively, which are reported as
long-term obligations. The company expects to complete a similar sale and lease
transaction for the Warrenville and Phoenix restaurants during the second
quarter of 1999, and using the net proceeds from such sales to pay down the
credit facility.
<PAGE>
Subsequent to December 27, 1998, the company began negotiations to
execute sale-leaseback transactions for three Old Chicago restaurants located in
Greeley, Longmont and Grand Junction, Colorado, and entered into a contract to
sell the owned property located in Salem, Oregon. The company anticipates
closing on these transactions during the second quarter of 1999, and using the
net proceeds from such sale transactions to pay down the credit facility.
Cash flows from financing activities primarily represent borrowings and
repayments under the company's $40 million bank revolving credit facility (the
"Credit Facility"), as amended through June 1998, and financing obligations for
two prototype brewery restaurants opened during 1997. As of December 27,
1998, $19.1 million was outstanding under the amended Credit Facility, and is
included in current liabilities in the accompanying Consolidated Balance Sheet
as the Credit Facility matures on July 27, 1999. During the first quarter of
1999, the company began negotiations with the Credit Facility lender to exercise
its right to extend the maturity date for a period of one year to July 2000.
Although approval by the lender is required prior to receiving this extension,
management is not aware of any circumstances or conditions that would warrant
such approval not being granted.
The company estimates that total capital expenditures for 1999,
excluding preopening costs and excluding proceeds from the sale of the land and
building for the Warrenville and Phoenix properties , will be approximately
$17.9 million. This estimate includes $12.4 million in estimated total costs for
the four new brewery restaurants, one of which will be a prototype and three of
which will be converted from existing properties, and $1.5 million in estimated
costs for the two new Old Chicago restaurants. The decrease in the average
investment cost for new Old Chicago restaurants in 1999 as compared to 1997 is
due primarily to the redeployment of certain assets from the three Old Chicago
restaurants closed during 1998. These estimated capital expenditures may not be
sufficient for completion of current development plans or may increase in the
future.
Proposed Transaction with RB Capital
On March 19, 1999, the company announced that it had entered into an
Agreement and Plan of Merger, dated as of March 18, 1999, with RB Capital, Inc.,
a Delaware corporation, and RBR Acquisition Corp., a Delaware corporation, and a
wholly-owned subsidiary of RB Capital ("Merger Sub"), providing for the merger
of Merger Sub with and into the company, with the company being the surviving
corporation, subject to the terms and conditions set forth in the merger
agreement. RB Capital is a newly-formed corporation organized by Mr. Frank B.
Day, the company's Chairman of the Board, President and Chief Executive Officer,
who is also one of the company's co-founders and is a significant stockholder of
the company. Concurrent with the execution of the merger agreement, the company,
RB Capital, Merger Sub, Mr. Day and Messrs. Robert D. Greenlee, Arthur Wong and
David M. Lux, each a stockholder and a director of the company, executed a
Voting Agreement, dated as of March 18, 1999, pursuant to which, among other
things, RB Capital, Merger Sub and such stockholders agree to vote certain
shares of common stock, of the company beneficially owned by such persons in
favor of the merger and each of the other transactions contemplated by the
merger agreement at any meeting of the company's stockholders in connection with
the merger (or otherwise to consent in writing thereto, as the case may be). The
company expects to close such transaction during the third quarter of 1999.
Closing of the proposed transaction, however, is subject to stockholder approval
at a special meeting anticipated to be held during the third quarter of 1999,
the receipt by RB Capital of funding sufficient to consummate the merger, and
other customary conditions and regulatory approvals.
Year 2000 Compliance
The Year 2000 will have an impact on the abilities of certain computer
systems to accurately process information. This impact is a result of computer
programs being written using two digits rather than four to define the
applicable year, therefore time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.
During 1997, the company began a review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue. As the
company's information technology ("IT") systems primarily consist of either
third-party software programs purchased by the company or use of outside vendors
to process financial information, the company is relying on the abilities of
these third parties to attain Year 2000 compliance with their systems. The
company has obtained representation of Year 2000 compliance from vendors for
approximately 40% of these systems, including the accounting and point-of-sale
<PAGE>
systems. For the remaining 60% of the IT systems, the company anticipates that
it will either receive representation from such vendors that the systems are
Year 2000 compliant, upgrade or modify the systems with Year 2000 compatible
programs, or seek replacement systems. The company is currently in the process
of evaluating its various options for its non-compliant Year 2000 IT systems,
and expects to complete such evaluation by the second quarter of 1999. The
company believes it has identified its mission-critical systems, and has either
received representation from vendors that such systems are Year 2000 compliant,
or is taking the appropriate action necessary to achieve Year 2000 compliance.
Additionally, the company has completed its assessment and remediation for all
office computer hardware in the restaurants and the corporate office.
The company has also begun an investigation and assessment of its
non-IT systems (i.e. embedded technology such as microprocessors in kitchen
equipment, elevators, etc.), and of the Year 2000 readiness of its critical
suppliers. For non-IT systems, the company expects to complete the assessment by
the second quarter of 1999, and then to make a determination as to the process
for testing, verifying and remedying any non-compliant systems. To assess the
readiness of its suppliers, the company is in the process of sending
informational questionnaires to critical vendors, and will review responses to
obtain assurance that such vendors have achieved Year 2000 readiness, or have
developed plans to do so. To the extent that these vendors are unable to provide
sufficient evidence of Year 2000 compliance by the second quarter of 1999, the
company will seek to obtain replacement vendors.
Costs incurred to date related to Year 2000 compliance have not had a
material impact on the company's financial condition or results of operations.
Management does not have an estimate for future costs that may be incurred to
achieve Year 2000 compliance. Management expects, but makes no assurance, that
future Year 2000 costs will not have a material adverse effect on the company's
financial condition or results of operations. Such expectation does not consider
any costs that may be incurred by the company for failure of third-party
software vendors, suppliers, or other third parties, including providers of
public utilities or services, to achieve Year 2000 compliance in a timely
manner.
Although certain systems have been identified that can be remedied with
manual processes, a comprehensive contingency plan has not yet been formulated
in the event that non-compliant IT and non-IT systems (or their replacements),
critical suppliers or other third parties do not become year 2000 compliant. The
company plans to formulate a contingency plan during the first and second
quarters of 1999 to address the possibility that its non-compliant IT and non-IT
systems may not achieve Year 2000 compliance, and anticipates that such steps
will mitigate the risk of business interruption. Such contingency plan may not
eliminate all risks of business interruption. Additionally, the company is
unable to predict with certainty whether the consequences associated with the
failure of its suppliers, third-party software vendors, or other third parties
to achieve Year 2000 readiness will have a material adverse impact on its
financial condition, results of operations or liquidity.
Seasonality and Quarterly Results
The company's sales and earnings fluctuate seasonally. Historically,
the company's highest earnings have occurred in the second and third quarters,
and are more susceptible to adverse weather conditions in the first and fourth
quarters. In addition, quarterly results have been and, in the future are likely
to be, substantially affected by the timing of new restaurant openings. Because
of the seasonality of the company's business and the impact of new restaurant
openings, results 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 13 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>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires disclosure
of operating segments, which as defined, are components of an enterprise about
which separate financial information is available and is evaluated regularly by
the chief operating decision makers in deciding how to allocate resources and in
assessing performance. See Note 12 of Notes to Consolidated Financial
Statements.
In the first quarter of 1998, the company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The company's net income equaled its comprehensive income
during the 1996, 1997 and 1998 fiscal years, therefore adoption of this
statement had no impact.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the cost of such software. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The company does not expect that
the adoption of SOP 98-1 during fiscal 1999 will have a material adverse effect
on its financial condition or results of operations.
<PAGE>
ITEM 8: Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
<S> <C>
Report of Independent Public Accountants 24
Consolidated Balance Sheets as of December 28, 1997 and December 27, 1998 25
Consolidated Statements of Operations for the Years Ended December 29, 1996,
December 28, 1997, and December 27, 1998 26
Consolidated Statements of Stockholders' Equity for the Years Ended
December 29, 1996, December 28, 1997, and December 27, 1998 27
Consolidated Statements of Cash Flows for the Years Ended December 29, 1996,
December 28, 1997, and December 27, 1998 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 28, 1997 and December
27, 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
27, 1998. 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 28, 1997 and December
27, 1998 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 27, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 11, 1999 (except with respect to the matters
discussed in Note 1, as to which the date is March 18, 1999).
<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 28 and 27,
1997 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,622,537 $ 449,496
Accounts receivable 938,932 605,823
Accounts receivable--affiliates 116,543 --
Income taxes receivable 869,810 89,392
Preopening costs, net (Note 2) 1,520,253 --
Inventories 2,726,983 2,532,074
Prepaids and other current assets 743,564 740,516
Current deferred income taxes, net (Note 9) 219,214 689,744
----------- -----------
Total current assets 8,757,836 5,107,045
PROPERTY AND EQUIPMENT, net (Notes 2 and 4) 90,032,182 94,432,216
INVESTMENT IN JOINT VENTURE, net (Note 5) 5,552,632 --
ASSETS HELD FOR DISPOSITION (Note 6) -- 1,542,127
OTHER ASSETS 735,936 210,139
DEFERRED INCOME TAXES, net (Note 9) 2,334,809 1,205,334
----------- -----------
TOTAL ASSETS $ 107,413,395 $ 102,496,861
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable:
Trade $ 4,341,074 $ 4,187,581
Construction projects 1,023,151 1,551,036
Accrued payroll and payroll taxes 2,311,990 2,451,729
Accrued taxes other than income tax 1,023,893 819,628
Other accrued expenses 2,534,299 2,958,702
Current portion of accrued restructuring charges (Note 8) 2,447,260 430,978
Current portion of long-term debt (Note 7) 115,308 179,184
Current portion of obligations under capital leases (Note 7) 527,396 224,825
Revolving line of credit (Note 7) -- 19,050,000
---------- ----------
Total current liabilities 14,324,371 31,853,663
REVOLVING LINE OF CREDIT (Note 7) 26,450,000 --
LONG-TERM DEBT (Note 7) 2,374,533 2,195,349
OBLIGATIONS UNDER CAPITAL LEASES (Note 7) 1,551,808 2,255,905
ACCRUED RESTRUCTURING CHARGES (Note 8) 1,493,610 769,227
---------- ----------
Total liabilities 46,194,322 37,074,144
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1, 8 and 11)
STOCKHOLDERS' EQUITY (Note 10):
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,
8,059,506 and 8,056,085 shares issued and outstanding, respectively 80,595 80,560
Additional paid-in capital 58,320,330 58,287,943
Retained earnings 3,791,586 7,789,248
Deferred compensation (973,438) (735,034)
---------- ----------
Total stockholders' equity 61,219,073 65,422,717
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 107,413,395 $ 102,496,861
=========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated balance sheets.
<PAGE>
<TABLE>
<CAPTION>
ROCK BOTTOM RESTAURANTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 29, 28 and 27,
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Old Chicago restaurants $ 58,328,162 $ 73,116,613 $ 74,131,129
Brewery restaurants 50,901,983 77,131,617 85,970,461
----------- ----------- -----------
Total revenues 109,230,145 150,248,230 160,101,590
----------- ----------- -----------
OPERATING EXPENSES:
Cost of sales 27,099,911 37,671,802 40,624,728
Restaurant salaries and benefits 35,552,068 51,085,653 53,632,285
Operating expenses 23,529,265 30,627,422 31,906,221
Selling expenses 4,272,132 5,773,094 5,098,896
General and administrative 5,619,612 9,073,514 9,818,376
Depreciation and amortization (Note 2) 7,802,033 12,136,018 8,615,070
Start-up costs (Note 2) -- -- 1,808,496
Restructuring charges and other, net (Note 8) 1,364 9,706,536 (138,441)
----------- ----------- -----------
Total operating expenses 103,876,385 156,074,039 151,365,631
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 5,353,760 (5,825,809) 8,735,959
Equity in joint venture earnings (Note 5) 222,941 330,000 688,064
Gain on sale of investment in joint venture (Note 5) -- -- 728,194
Interest income 227,235 9,507 26,717
Interest expense (300,544) (1,772,592) (2,404,714)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 5,503,392 (7,258,894) 7,774,220
Income tax expense (benefit) 1,478,309 (2,567,550) 2,526,521
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,025,083 (4,691,344) 5,247,699
Cumulative effect of change in accounting for start-up
costs, net of income taxes of $764,532 (Note 2) -- -- (1,250,037)
----------- ----------- -----------
$ 4,025,083 $ (4,691,344) $ 3,997,662
=========== =========== ===========
BASIC NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting
change $ .53 $ (.58) $ .65
Cumulative effect of accounting change -- -- (.15)
----------- ----------- -----------
Basic net income (loss) per share $ .53 $ (.58) $ .50
=========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 7,626,000 8,027,000 8,056,085
=========== =========== ===========
DILUTED NET INCOME (LOSS) PER SHARE:
Income (loss) before cumulative effect of accounting
change $ .52 $ (.58) $ .65
Cumulative effect of accounting change -- -- (.15)
----------- ----------- -----------
Diluted net income (loss) per share $ .52 $ (.58) $ .50
=========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 7,725,000 8,027,000 8,056,085
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these
consolidated statements.
<PAGE>
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Total
Number of Paid-in Retained Deferred Sockholders'
Shares Amount Capital Earnings Compensation Equity
-------- ------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 10) 169,145 1,691 1,762,815 -- (1,764,506) --
Amortization of deferred
compensation on restricted stock -- -- -- -- 321,235 321,235
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
Issuance of restricted stock 2,038 20 19,555 -- -- 19,575
Amortization of deferred
compensation on restricted stock -- -- -- -- 203,740 203,740
Cancellation of restricted stock (5,459) (55) (51,942) -- 34,664 (17,333)
Net income -- -- -- 3,997,662 -- 3,997,662
---------- --------- ---------- ---------- ---------- ----------
BALANCES, December 27, 1998 8,056,085 $ 80,560 $ 58,287,943 $ 7,789,248 $ (735,034) $ 65,422,717
========== ========= ========== ========== ========== ==========
</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 29, 28 and 27,
----------------------------------------------------
1996 1997 1998
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,025,083 $ (4,691,344) $ 3,997,662
Adjustments to reconcile net income (loss)
to net cash provided by operating activities--
Cumulative effect of accounting change -- -- 2,014,569
Equity in joint venture earnings (222,941) (330,000) (688,064)
Depreciation and amortization 7,802,033 12,136,018 8,615,070
Amortization of deferred compensation, net of cancellations -- 221,068 186,407
Deferred income tax expense (benefit) 218,732 (3,425,765) 658,945
Tax benefit from exercise of stock options 104,937 34,227 --
Gain on sale of investment in joint venture -- -- (728,194)
Net gain on disposition of assets -- -- (684)
Non-cash portion of restructuring charge -- 9,409,879 (348,056)
(Increase) decrease in accounts receivable (266,304) (191,170) 333,109
(Increase) decrease in income taxes receivable 74,353 (570,189) 780,418
Expenditures for capitalized preopening costs (3,522,152) (3,430,442) --
(Increase) decrease in inventories (727,566) (630,708) 194,909
(Increase) decrease in prepaids and other assets (608,312) (695,740) 50,092
(Decrease) increase in accounts payable (806,114) 3,167,154 374,392
Increase in accrued expenses 755,896 2,272,869 359,877
Decrease in accrued restructuring charges -- -- (832,103)
----------- ----------- -----------
Net cash provided by operating activities 6,827,645 13,275,857 14,968,349
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (29,046,644) (30,582,096) (19,131,972)
Proceeds from sale of investment in joint venture -- -- 6,974,068
Proceeds from sale of property and equipment -- 775,307 3,129,149
(Advances) repayments to/from officers and affiliates, net (77,357) (24,684) 1,147
Sales of short-term investments, net 7,790,442 -- --
Joint venture acquisition costs (192,128) -- --
----------- ----------- -----------
Net cash used in investing activities (21,525,687) (29,831,473) (9,027,608)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 8,500,000 59,000,000 29,050,000
Repayments of line of credit -- (41,050,000) (36,450,000)
Borrowings under long-term debt 2,500,000 -- --
Repayments of long-term debt (77,095) (573,778) (115,308)
Borrowings under other financing (Note 7) -- 1,200,000 1,100,000
Repayments of capital lease and other financing obligations (645,872) (716,459) (698,474)
Issuance of common stock 865,668 318,390 --
----------- ----------- -----------
Net cash provided by (used in) financing activities 11,142,701 18,178,153 (7,113,782)
----------- ----------- -----------
(DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (3,555,341) 1,622,537 (1,173,041)
CASH AND CASH EQUIVALENTS, beginning of year 3,555,341 -- 1,622,537
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ -- $ 1,622,537 $ 449,496
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES: See Note 2.
</TABLE>
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 29, 1996, DECEMBER 28, 1997 AND DECEMBER 27, 1998
(1) ORGANIZATION AND NATURE OF BUSINESS
Rock Bottom Restaurants, Inc. ("Rock Bottom" or the "Company")
is a Delaware corporation incorporated in April 1994.
As of December 27, 1998, the Company owned and operated 39 Old Chicago
restaurants and 22 "Brewery" restaurants, comprised of 17 Rock Bottom Restaurant
& Brewery restaurants, two Walnut Brewery restaurants and three ChopHouse &
Brewery restaurants, as well as two Sing Sing piano bars which are operated by
two separate 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. 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.
On March 18, 1999, the company entered into an Agreement and Plan of
Merger with RB Capital, Inc., a newly formed corporation organized by the
company's Chairman of the Board, President and Chief Executive Officer, and RBR
Acquisition Corp., a wholly-owned subsidiary of RB Capital, whereby RB Capital,
through RBR Acquisition, will acquire the company in a cash merger with the
company as the surviving corporation. The proposed merger requires approval by
the holders of a majority of all outstanding shares of the company, and is
expected to be voted upon by the company's stockholders at a special meeting
anticipated be held during the third quarter of 1999. Closing of the proposed
transaction, however, is subject to stockholder approval at a special meeting
anticipated to be held during the third quarter of 1999, the receipt by RB
Capital of funding sufficient to consummate the merger, and other customary
conditions and regulatory approvals.
Additionally, on February 2, 1999, an action was brought in the
District Court, County of Denver, State of Colorado, entitled Wohlman v. Day,
et. al., as a class action on behalf of the public shareholders of the company
against the company's directors individually and the company. The plaintiffs
alleged, among other things, a breach of fiduciary duties in connection with the
proposed transactions between the company and RB Capital and sought to enjoin
any such transaction. In addition to injuctive relief, the action sought damages
in an unspecified amount. The company has reached an agreement in principle with
the plaintiffs in the case, and anticipates that any settlement of this class
litigation will not have a material adverse effect on the company's financial
condition, results of operations or liquidity.
(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.
The Company operates on a 52 or 53 week fiscal year ending the last
Sunday in December. Fiscal years 1996, 1997 and 1998 each contain 52 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.
<PAGE>
Preopening and Start-Up Costs
During the fourth quarter of 1998, the Company elected to adopt early
the provisions of a new accounting standard, AICPA Statement of Position No.
98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"), which
requires the Company to expense preopening and other start-up expenses when
incurred. The adoption of SOP 98-5 was required to be made retroactive to the
beginning of fiscal 1998, with a $2,014,569 (excluding income taxes of $764,532)
write-off of previously capitalized preopening costs of $1,520,253 and other
capitalized start-up costs of $494,316. The impact from this write-off is shown
as the cumulative effect of accounting change in the accompanying consolidated
statement of operations for the year ended December 27, 1998. SOP 98-5 did not
require restatement of prior fiscal periods.
Prior to fiscal 1998, direct incremental costs incurred prior to the
opening of new restaurants were capitalized and amortized over a period of one
year after the restaurant commenced operations. These costs consisted primarily
of payroll, employee recruiting and training, and initial opening expenses.
Related amortization expense of $2,989,251 and $4,421,666 in 1996 and 1997,
respectively, is included in depreciation and amortization in the accompanying
consolidated statements of operations.
As a result of the change, net income for fiscal 1998 was approximately
$1.0 million (or $.12 per diluted share) lower than it would have been had the
change not been made.
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 and leasehold 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.
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest, including the amount
capitalized, was $385,540, $2,150,629 and $2,727,044 in 1996, 1997 and 1998,
respectively, and cash paid for income taxes was $1,485,458, $1,787,885 and
$301,519 in 1996, 1997 and 1998, respectively. The Company acquired equipment of
$350,536 and $169,711 in 1996 and 1997, respectively, under capital lease
<PAGE>
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). During 1998, a
portion of accrued restructuring charges established in 1997 (see Note 8) was
utilized to write-off property and equipment in an amount equal to $1,560,506,
as a result of disposing of certain assets located at closed restaurants.
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 and 1998, asset impairment charges
totaling $5.5 million and $100,000, respectively, are included in restructuring
charges and other in the accompanying consolidated statement of operations (see
Note 8).
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"). The Company has 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.
Earnings Per Share
Net income (loss) per share is calculated in accordance with SFAS No.
128, "Earnings Per Share" ("SFAS 128"). Under the provisions of SFAS 128, basic
net income (loss) per share is computed by dividing net income (loss) available
to common shareholders for the period by the weighted average number of common
shares outstanding for the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) for the period by the weighted
average number of common shares and potential common shares outstanding during
the period if the effect of the potential common shares is dilutive (utilizing
the treasury stock method). The Company's only potentially dilutive security is
stock options. During 1996, 1997 and 1998, options totaling 475,895, 973,819 and
1,010,559, respectively, were excluded from the calculation of diluted net
income (loss) per share since the result would have been anti-dilutive.
Comprehensive Income
Effective at the beginning of fiscal 1998, the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 establishes standards for reporting comprehensive income and its components
in financial statements. Comprehensive income, as defined, includes all changes
in equity (net assets) during a period from non-owner sources. For the fiscal
years ended 1996, 1997 and 1998, the Company's net income (loss) equaled its
comprehensive income (loss).
<PAGE>
Recently Issued Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the cost of such software. SOP 98-1 is effective for
fiscal years beginning after December 15, 1998. The Company does not expect that
the adoption of SOP 98-1 during fiscal 1999 will have a material effect on its
financial statements.
(3) RELATED PARTY TRANSACTIONS
The Company leases land and building space and certain equipment,
furniture and improvements for four Old Chicago restaurants, and three Brewery
restaurants located in Englewood, Colorado, Des Moines, Iowa and Boulder,
Colorado from partnerships or corporations in which certain directors,
stockholders or the President 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. The Company incurred related expense of $603,695, $634,332 and
$1,100,254, which included additional rents of $153,845, $95,686 and $134,530,
during 1996, 1997 and 1998, 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, including
the President of 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 $231,011 during 1996. Premiums paid to Concept for
health insurance coverage of administrative and supervisory staff were included
in general and administrative expenses, and totaled $96,528 during 1996. In
August 1996, the Company began administering its own self-funded employee health
insurance plan (see Note 11).
During 1996 and 1997, the Company paid $100,000 to a corporation owned
by a stockholder, also a director and current President of the Company, for
consulting services performed relating to site selection and design for the
Company's new restaurants. 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 1996, 1997 and 1998, the Company paid approximately $601,000,
$464,000 and $132,000, respectively, to a company owned by a stockholder, also a
director and current President of the Company, 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 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 Brewery restaurants. Fees paid to the
former company totaling $71,688 and $24,413, respectively, are included in
general and administrative expenses and fees paid to the latter totaling $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 28, 1997 and December 27, 1998 is
as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Land $ 5,885,711 $ 5,527,087
Buildings and leasehold improvements 54,903,150 60,318,706
Furniture, fixtures and equipment 43,919,404 47,101,540
Construction-in-progress 2,719,135 5,624,740
Less: Accumulated depreciation and amortization (17,395,218) (24,139,857)
---------- ----------
$90,032,182 $94,432,216
========== ==========
</TABLE>
<PAGE>
(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 accounted for its investment in Trolley
Barn 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, representing goodwill which was being
amortized over 35 years.
In connection with the acquisition, the Company agreed to certain
licensing and development arrangements whereby Trolley Barn was able to develop
restaurants throughout the southeastern United States under the names Rock
Bottom Restaurant & Brewery, Sing Sing and Old Chicago.
During November 1998, the Company sold its equity interest in Trolley
Barn to Trolley Barn for $7 million. In connection therewith, Trolley Barn's
rights to develop restaurants throughout the southeastern United States were
terminated and the Company was released from its guarantee of Trolley Barn's
debt. However, the Company did grant certain license rights to Trolley Barn
whereby Trolley Barn can continue to use certain licensed trademarks and
tradenames owned by the Company for two existing restaurant locations, such use
limited to the duration of the remaining lease terms, including option renewal
periods.
Goodwill amortization expense of $66,340, $135,139 and $110,218 during
1996, 1997 and 1998, respectively, is netted against the investment balance.
The Company recorded a $728,194 gain on sale of its investment in
Trolley Barn during the year ended December 27, 1998, based on the excess of the
selling price over the Company's recorded investment balance, less transaction
and certain other costs.
(6) ASSETS HELD FOR DISPOSITION
Assets held for disposition represents the net book value of property
and equipment held for sale or disposition and no longer used in operations.
Included in this amount is $1,234,482 related to land, building and improvements
for the Old Chicago restaurant in Salem, Oregon, which was closed in July 1998
and is under contract for sale. Additionally, $307,645 is included for an owned
parking lot located in Houston, Texas, currently listed for sale. The net book
value of all assets held for disposition approximates the estimated net
realizable value.
In October 1998, the Company sold certain assets located at its Rock
Bottom Restaurant & Brewery restaurant in Fresno, California (which commenced
operations during 1997), including substantially all leasehold improvements,
furniture and equipment, and assigned to the buyer its rights and obligations
under the lease. The Company received proceeds of $2.1 million from this
transaction and recorded a gain on sale of $451,055, included in restructuring
charges and other for the year ended December 27, 1998.
The Company recorded income (loss) from operations for the restaurant
located in Salem of $68,144, $59,116 and $18,663 and Fresno of $0, $(58,093) and
$(33,523) during fiscal 1996, 1997 and 1998, respectively.
<PAGE>
(7) LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Long-term debt as of December 28, 1997 and December 27, 1998 is as
follows:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<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. $ 2,381,866 $ 2,288,790
Note payable to landlord, interest at 12.5%, principal and interest
payable in quarterly installments, fully prepaid in January 1999. 107,975 85,743
---------- ----------
2,489,841 2,374,533
Less--current portion (115,308) (179,184)
---------- ----------
$ 2,374,533 $ 2,195,349
========== ==========
</TABLE>
The Company has a $40 million bank revolving credit facility, as
amended (the "Credit Facility"), secured by substantially all assets of the
Company, which matures on July 27, 1999. Interest accrues on the average
outstanding balance at either the prime rate or at the Company's election, at
LIBOR plus 1.5% to 2.5%, and is paid quarterly in arrears (weighted average
interest rate of 7.48% and 8.07% during 1997 and 1998, respectively, and a
weighted average rate of 7.58% and 7.76% at December 28, 1997 and December 27,
1998, respectively). These interest rates are adjustable depending on the
Company's ratio of total debt to cash flow, as defined. 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. During the first quarter of 1999, the Company began negotiations
with the lender to extend the Credit Facility maturity date to July 2000.
The minimum and maximum borrowings outstanding under the Credit
Facility during 1997 were $8.5 million and $27.7 million, respectively, and
during 1998 were $18.6 million and $29.1 million, respectively.
During 1996, 1997 and 1998, interest expense of approximately
$195,000, $378,000 and $274,000, respectively, was capitalized in total
construction costs of new restaurants.
Principal payments due on the outstanding balance of long-term debt and
the Credit Facility as of December 27, 1998, including the prepayment of the
note payable to landlord during January 1999, are as follows:
1999 $ 19,237,710
2000 110,708
2001 2,076,115
----------
Total $ 21,424,533
==========
The Company has entered into capital lease and other financing
obligations for land, buildings and improvements, and for certain computer
hardware and software used in the corporate office. Future minimum lease
payments required under these obligations, 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 27, 1998:
1999 $ 501,452
2000 312,792
2001 312,792
2002 328,080
2003 371,396
Thereafter 3,382,531
----------
Minimum lease payments 5,209,043
Less: Amount representing interest (2,728,313)
----------
Present value of net minimum lease payments 2,480,730
Less: Current portion (224,825)
----------
$ 2,255,905
==========
<PAGE>
The Company sold the land and buildings for the Englewood, Colorado
restaurant during the third quarter of 1997 and the Des Moines, Iowa restaurant
during the first quarter of 1998 to two separate partnerships in which one of
the Company's directors has a beneficial interest. The properties were then
leased back by the Company. Proceeds allocable to the land for each transaction
were reported as a sale and included in cash flows from investing activities for
the respective periods. Proceeds allocable to the buildings were accounted for
as a financing. Cash flows from financing activities include $1.2 million and
$1.1 million for 1997 and 1998, respectively, which are reported as long-term
obligations. Rental payments made are allocated to interest expense and
reduction of these obligations. The table of future minimum lease commitments
above includes payments related to the long-term obligations. The cost of the
buildings remains in property, plant and equipment and is being depreciated over
the terms of the leases. As of December 28, 1997 and December 27, 1998, the
related amount recorded as financing totaled $1,196,370 and $2,283,355,
respectively.
(8) RESTRUCTURING CHARGES
During 1997, the Company approved a plan to reduce restaurant
expansion, suspend development of new Old Chicago restaurants and close two Rock
Bottom Restaurant & Brewery restaurants and two Old Chicago restaurants during
early 1998. Such steps were part of an overall restructuring effort to improve
restaurant operating profit. As a result of these decisions, the Company
incurred a pre-tax restructuring charge of approximately $9.7 million. Such
charge included 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.
During early 1998, 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 $862,000
and $1.0 million during fiscal 1996 and 1997, respectively.
During the second quarter of 1998, the Company settled its lease
obligation for the Old Chicago restaurant located in Gladstone, Missouri, which
was closed in January 1998, and has no further obligations under the Gladstone
lease. As the cost of this settlement together with all other exit costs was
less than the previously accrued amount, income of approximately $14,000 is
included in restructuring charges and other in the accompanying 1998
consolidated statement of operations.
During the third quarter of 1998, the Company executed a sublease
agreement for its Rock Bottom Restaurant & Brewery restaurant in Houston, Texas,
which was closed in February 1998. The sublease term runs from July 1998 to June
2001, with renewal options through August 2009. Substantially all other
provisions of the sublease agreement are similar to the Company's obligations
under its existing lease agreement, which lease agreement expires August 2009.
The Company also conveyed certain assets to the sub-lessee in exchange for
$100,000. Based on the terms of this agreement, the Company revised its
estimated costs to close this restaurant. As such estimate was less than the
previously accrued restructuring charge liability, income of approximately
$177,000 is included in restructuring charges and other in the accompanying 1998
consolidated statement of operations.
During the fourth quarter of 1998, the Company executed an agreement
with the new owner ("Owner") of the property leased by the Company for its Old
Chicago restaurant in Evergreen, Colorado. The agreement provided for a full
release of the Company's obligations under the existing lease agreement, with
certain assets owned by the Company conveyed to the Owner. As the cost of this
settlement together will all other exit costs was less than the previously
accrued amount, income of approximately $157,000 is included in restructuring
charges and other in the accompanying consolidated statement of operations.
Management believes that the remaining accrued restructuring charges
applicable to restaurants closed during the first quarter of 1998 are sufficient
to cover the related costs associated with the ultimate disposition of all
assets and obligations related to these locations.
<PAGE>
(9) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ----------- ----------
<S> <C> <C> <C>
Federal $ 1,197,386 $ (2,118,577) $ 2,005,357
State 280,923 (448,973) 521,164
--------- ---------- ---------
1,478,309 (2,567,550) 2,526,521
Cumulative effect item -- -- (764,532)
--------- ---------- ---------
Total $ 1,478,309 $(2,567,550) $ 1,761,989
========= ========== =========
Current $ 1,259,577 $ 895,208 $ 1,103,044
Deferred 218,732 (3,462,758) 1,423,477
--------- ---------- ---------
1,478,309 (2,567,550) 2,526,521
Cumulative effect item (all deferred) -- -- (764,532)
--------- ---------- ---------
Total $ 1,478,309 $(2,567,550) $ 1,761,989
========= ========== =========
</TABLE>
Deferred tax assets and liabilities as of December 28, 1997
and December 27, 1998 consist of the following primary components:
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Current deferred tax assets (liabilities):
Preopening costs $ (448,490) $ --
Accrued restructuring costs 332,281 51,328
Deferred insurance and self-insurance 68,773 284,279
Capitalized inventory costs and other 266,650 354,137
------- -------
Net current deferred tax assets $ 219,214 $ 689,744
======= =======
Long-term deferred tax assets (liabilities):
FICA and rehabilitation tax credits $ 2,478,765 $ 3,519,188
Valuation allowance against tax credits (1,254,257) (1,549,564)
AMT tax credit 277,774 466,282
Accrued restructuring costs 566,974 292,000
Property, equipment and other 220,406 (1,671,426)
Restricted stock 45,147 148,854
---------- ---------
Net long-term deferred tax assets $ 2,334,809 $ 1,205,334
========== =========
</TABLE>
At December 27, 1998, the Company had federal FICA and rehabilitation
tax credit carryforwards of $3,519,188. 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. If the acquisition
transaction (see Note 1) is completed, the Company's utilization of tax credit
carryforwards existing immediately prior to the acquisition transaction will be
subject to certain limitations.
The following table reconciles the federal statutory income tax rate
to the Company's effective income tax rate applicable to income (loss) before
income taxes and cumulative effect of accounting change:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) for income taxes at federal statutory rate 34.0% (34.0)% 34.0%
Permanent differences and other 2.9 2.2 3.3
Tax credits (20.4) (12.7) (17.4)
Valuation allowance against tax credits 6.0 12.7 3.8
Tax vs. book difference in basis of investment in joint venture at sale -- -- 4.1
State income taxes, net of federal benefit 4.4 (3.6) 4.7
---- ---- ----
Effective income tax rate 26.9% (35.4)% 32.5%
==== ==== ====
</TABLE>
<PAGE>
(10) STOCKHOLDERS' EQUITY
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, all restrictions on these shares lapse.
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 lapse immediately.
During 1997, 1998 and subsequent to year end, the Company canceled
54,423, 5,459 and 10,289 restricted shares, respectively, issued to executives
pursuant to these bonus plans as such individuals were no longer employees 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 June 1996, May 1997
and May 1998, to increase the total number of shares of the Company's common
stock authorized for issuance from 1,000,000 shares to 1,800,000 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 27, 1998, 155,752
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 Compensation Committee of the Board ("Committee"), or its
designee, 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.
On January 23, 1998, the Company exchanged 508,868 newly granted
options for 616,817 of its then 853,785 outstanding options under the Employees'
Plan, with all new options priced at a $7.00 exercise price. All other terms
(vesting, expiration, etc.) of the exchanged options were unchanged. Options
received from the exchange were cancelled and had exercise prices ranging from
$8.00 to $25.75. The quantity of newly granted options was based on each
participant maintaining the total fair value (based on the Black-Scholes option
pricing model using assumptions existing at the exchange date) of options held
immediately before the exchange. Options not exchanged pertained to individuals
no longer employed by the Company.
<PAGE>
A summary of the status of the Employees' Plan as of December 29, 1996,
December 28, 1997 and December 27,1998, and the changes during those periods is
as follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of period 936,218 860,154 897,319
Granted for exchange -- -- 508,868
Other grants 155,200 224,650 305,162
Exercised (100,396) (39,333) --
Canceled for exchange -- -- (616,817)
Forfeited (130,868) (148,152) (161,000)
------- ------- -------
Outstanding at end of period 860,154 897,319 933,532
======= ======= =======
Exercisable at end of period 319,041 487,548 480,271
======= ======= =======
Range of exercise prices, at end of period $8.00-$30.47 $8.00-$25.75 $7.00 - $20.55
============ ============= ==============
Weighted average exercise prices:
At beginning of period $ 12.35 $ 12.70 $ 11.88
At end of period 12.70 11.88 7.67
Exercisable at end of period 11.88 11.39 8.28
Options granted (exchange & other) 11.78 10.93 7.00
Options exercised 8.02 8.09 N/A
Options canceled N/A N/A 12.15
Options forfeited 12.73 16.22 10.08
Weighted average end of period
remaining contractual life (in years) 8.14 7.62 7.43
Weighted average fair value of options $ 6.20 $ 4.97 $3.99
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>
1996 1997 1998
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Range of exercise prices
------------------------
Weighted average exercise price
for options outstanding:
$ 5.00-$ 7.99 N/A N/A N/A N/A 784,198 $ 7.00
$ 8.00-$ 9.99 304,288 $ 8.03 264,955 $ 8.02 106,002 8.00
$10.00-$13.99 369,300 12.88 504,466 12.29 N/A N/A
$14.00-$17.99 78,566 15.36 66,566 15.31 N/A N/A
$18.00-$25.75 108,000 $23.30 61,332 $21.35 43,332 $20.55
Weighted average exercise price for options exercisable:
$ 5.00-$ 7.99 N/A N/A N/A N/A 330,937 $ 7.00
$ 8.00-$ 9.99 173,544 $ 8.03 264,955 $ 8.02 106,002 8.00
$10.00-$13.99 87,878 13.68 128,871 12.86 N/A N/A
$14.00-$17.99 19,619 15.57 37,390 15.38 N/A N/A
$18.00-$25.75 38,000 $23.43 56,332 $21.23 43,332 $20.55
Weighted average remaining
contractual life (in years): Shares Life Shares Life Shares Life
------ ---- ------ ---- ------ ----
$ 5.00-$ 7.99 N/A N/A N/A N/A 784,198 7.77
$ 8.00-$ 9.99 304,288 7.56 264,955 6.56 106,002 5.56
$10.00-$13.99 369,300 9.05 504,466 8.40 N/A N/A
$14.00-$17.99 78,566 7.37 66,566 6.14 N/A N/A
$18.00-$25.75 108,000 7.25 61,332 7.37 43,332 6.34
</TABLE>
The weighted average fair value of each option grant (including
exchanges) has been estimated as of the date of grant using the Black-Scholes
option-pricing model and the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Dividend rate 0 % 0 % 0 %
Expected volatility 73 % 54 % 66 %
Risk-free interest rate 5.85 % 5.85 % 4.55 %
Expected life (in years):
$ 5.00-$ 7.99 N/A N/A 1.5-3
$ 8.00-$ 9.99 3.5 N/A 3
$10.00-$13.99 4.0 5 N/A
$14.00-$17.99 4.5 N/A N/A
$18.00-$30.47 N/A N/A 3
</TABLE>
Rock Bottom has also adopted the Non-employee 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.
On January 23, 1998, the Company exchanged 62,027 newly granted options
for all of the 76,500 outstanding options under the Directors' Plan, with all
new options priced at a $7.00 exercise price. All other terms (vesting,
expiration, etc.) of the exchanged options were unchanged. Options received from
the exchange were cancelled and had exercise prices ranging from $8.875 to
$25.75. The quantity of newly granted options was based on each participant
maintaining the total fair value (based on the Black-Scholes option pricing
model using assumptions existing at the exchange date) of options held
immediately before the exchange.
<PAGE>
A summary of the status of the Company's Directors' Plan as of December
29, 1996, December 28, 1997 and December 27, 1998, and the changes during those
periods is as follows.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Outstanding at beginning of period 39,000 58,500 76,500
Granted for exchange -- -- 62,027
Other grants 27,000 18,000 15,000
Exercised (7,500) -- --
Cancelled for exchange -- -- (76,500)
------ ------ ------
Outstanding at end of period 58,500 76,500 77,027
====== ====== ======
Exercisable at end of period 27,750 51,000 62,027
====== ====== ======
Range of exercise prices, at end
of period $8.88 - $25.75 $8.88 - $25.75 $5.23-$7.00
============== ============== ===========
Weighted average exercise prices:
At beginning of period $13.89 $13.74 $12.79
At end of period 13.74 12.79 6.79
Exercisable at end of period 14.58 14.07 7.00
Options granted (exchange & other) 11.92 9.71 6.79
Options exercised 8.00 N/A N/A
Options cancelled N/A N/A 12.79
Weighted average end of period
remaining contractual life (in years) 8.10 7.67 7.10
Weighted average fair value of options
granted during the period $ 6.11 $ 3.93 $ 3.24
</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>
1996 1997 1998
---- ---- ----
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Range of exercise prices
------------------------
Weighted average exercise
price for options outstanding:
$ 5.00 - $ 7.99 N/A N/A N/A N/A 77,027 $6.79
$ 8.00 - $ 9.99 7,500 $ 8.88 19,500 $ 9.12 N/A N/A
$ 10.00 - $13.99 27,000 11.14 33,000 11.04 N/A N/A
$ 14.00 - $17.99 13,500 15.16 13,500 15.16 N/A N/A
$ 18.00 - $25.75 10,500 22.04 10,500 22.04 N/A N/A
<PAGE>
Weighted average exercise
price for options exercisable:
$ 5.00 - $ 7.99 N/A N/A N/A N/A 62,027 $7.00
$ 8.00 - $ 9.99 N/A N/A 3,750 $ 8.88 N/A N/A
$ 10.00 - $13.99 15,000 10.08 27,000 11.14 N/A N/A
$ 14.00 - $17.99 6,000 16.52 9,750 15.58 N/A N/A
$ 18.00 - $25.75 6,750 22.86 10,500 22.04 N/A N/A
Weighted average remaining
contractual life (in years): Shares Life Shares Life Shares Life
------ ---- ------ ---- ------ ----
$ 5.00 - $ 7.99 N/A N/A N/A N/A 77,027 7.10
$ 8.00 - $ 9.99 7,500 9.16 19,500 9.08 N/A N/A
$ 10.00 - $13.99 27,000 8.54 33,000 7.85 N/A N/A
$ 14.00 - $17.99 13,500 6.41 13,500 5.41 N/A N/A
$ 18.00 - $25.75 10,500 8.37 10,500 7.37 N/A N/A
</TABLE>
The weighted average fair value of each option grant (including
exchanges) has been estimated as of the date of grant using the Black-Scholes
option-pricing model and the following assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Dividend rate 0 % 0 % 0 %
Expected volatility 73 % 54 % 66 %
Risk-free interest rate 5.85 % 5.85 % 5.85 %
Expected life (in years):
$ 5.00 - $ 7.99 N/A N/A 1.5-3.0
$ 8.00 - $ 9.99 3.0 - 4.0 3.0 N/A
$10.00 - $ 13.99 3.0 - 4.0 3.0 N/A
$14.00 - $ 17.99 3.0 - 4.0 N/A N/A
$18.00 - $ 25.75 3.0 - 4.0 N/A 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 or greater than the fair market value of
the Company's common stock on the date of grant. The Company has 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
1996, 1997 and 1998 was estimated to be approximately $1,128,000, $1,188,000 and
$1,785,542, 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 (loss) and diluted net income (loss)
per share would have been as follows for the years ended December 29, 1996,
December 28, 1997 and December 27, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ 4,025,083 $ (4,691,344) $3,997,662
Pro forma $ 2,745,745 $ (5,739,389) $2,862,255
Basic net income (loss) per share:
As reported $ .53 $ (.58) $ .50
Pro forma $ .36 $ (.72) $ .36
Diluted net income (loss) per share: $ .52 $ (.58) $ .50
As reported $ .36 $ (.72) $ .36
Pro forma
</TABLE>
<PAGE>
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.
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) the 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.
On March 18, 1999, the company, pursuant to resolutions adopted by
the Board of Directors on such date, gave its prior approval to RB Capital, RBR
Acquisition Corp. and certain affiliates of the company for purposes of the
Rights Plan, in connection with the execution and delivery by the company and
such persons of the merger agreement and the voting agreement and the
consummation of the transactions contemplated thereby.
(11) 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 $5,387,774, $ 7,602,314 and
$7,476,149 in 1996, 1997 and 1998, respectively, including additional rent of
$1,080,911, $1,267,431 and $1,316,030, respectively.
Aggregate future minimum lease payments required under noncancelable
operating leases at December 27, 1998 (which include commitments for four
restaurants opening in 1999) are as follows:
Total
---------
1999 $ 7,086,135
2000 7,201,414
2001 7,077,506
2002 7,209,627
2003 7,352,389
Thereafter 52,526,598
----------
Total future minimum lease payments required $ 88,453,669
==========
The above amounts include the commitment for the Houston property, for
which the Company has entered into a noncancelable sublease agreement (see Note
8) which provides for future minimum sublease payments of $214,500, $224,252 and
$130,813 during fiscal 1999, 2000 and 2001, respectively.
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, not to exceed an annual aggregate payment
limitation ($1,041,650 for the plan year ended July 31, 1998, with an estimated
similar limitation for the 1999 plan year), 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
<PAGE>
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.
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.
(12) SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires disclosure
of operating segments, which as defined, are components of an enterprise about
which separate financial information is available and is evaluated regularly by
the chief operating decision makers in deciding how to allocate resources and in
assessing performance.
The Company operates in two segments: Brewery and Old Chicago
restaurant segments. Management has chosen to organize the Company around these
segments based on differences in the menus, production element (micro-brewed
beer) associated with the Brewery, operating margins, and expected return on
investment.
The Company's accounting policies for segments are the same as those
described in Note 2. Management evaluates segment performance based on segment
sales and net operating contribution. The following provides information on the
Company's segments as of and for each of the three years in the period ended
December 27, 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- ---------------------------- ---------------------------
Brewery Old Chicago Brewery Old Chicago Brewery Old Chicago
------------- ------------- -------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 50,901,983 $ 58,328,162 $ 77,131,618 $ 73,116,612 $ 85,970,461 $ 74,131,129
Start up costs (Note 2) $ -- $ -- $ -- $ -- $ 1,808,496 $ --
Depreciation and amortization $ 3,889,987 $ 3,661,900 $ 6,750,959 $ 4,899,944 $ 4,338,659 $ 3,580,194
Restructuring charges and other,
net (Note 8) $ -- $ -- $ 8,522,646 $ 701,607 $ (212,829) $ 74,388
Net operating contribution $ 4,855,516 $ 6,368,002 $ (1,869,464) $ 6,084,585 $ 10,959,970 $ 8,290,582
Expenditures for property and equipment $ 13,600,905 $ 14,848,720 $ 20,599,507 $ 8,459,154 $ 16,571,823 $ 1,844,589
Identifiable assets $ 43,027,299 $ 32,117,312 $ 55,910,797 $ 37,052,266 $ 61,864,568 $ 33,359,907
</TABLE>
Net operating contribution represents sales less all direct and
indirect operating expenses, including depreciation and amortization and
excluding corporate overhead and corporate activities.
The following is a reconciliation of segment information to
consolidated information:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
Segment depreciation and amortization $ 7,551,887 $ 11,650,903 $ 7,918,853
Corporate depreciation and amortization 250,146 485,115 696,217
---------- ---------- ----------
Consolidated depreciation and amortization $ 7,802,033 $ 12,136,018 $ 8,615,070
========== ========== ==========
Segment restructuring charges and other, net $ -- $ 9,224,253 $ (138,441)
Corporate restructuring charges and other, net 1,364 482,283 --
---------- ---------- ----------
Consolidated restructuring charges and other,
net $ 1,364 $ 9,706,536 $ (138,441)
========== ========== ==========
Segment net operating contribution $11,223,518 $ 4,215,121 $ 19,250,552
Corporate depreciation and amortization (250,146) (485,115) (696,217)
Corporate general and administrative (5,619,612) (9,073,514) (9,818,376)
Corporate restructuring charges and other, net -- (482,301) --
---------- ---------- ----------
Consolidated income (loss) from operations $ 5,353,760 $ (5,825,809) $ 8,735,959
========== ========== ==========
<PAGE>
Segment expenditures for property and
equipment $28,449,625 $ 29,058,661 $ 18,416,412
Corporate expenditures for property and
equipment 597,019 1,523,435 715,560
---------- ---------- ----------
Consolidated expenditures for property and
equipment $29,046,644 $ 30,582,096 $ 19,131,972
========== ========== ==========
Segment identifiable assets $75,144,611 $ 92,963,063 $ 95,224,475
Corporate assets 9,803,328 $ 14,450,332 $ 7,272,386
---------- ----------- -----------
Consolidated total assets $84,947,939 $107,413,395 $102,496,861
========== =========== ===========
</TABLE>
From July 1996 to November 1998, the Company had an indirect 50% equity
interest in Trolley Barn accounted for under the equity method of accounting
(see Note 5). During the years ended December 29, 1996, December 28, 1997 and
December 27, 1998, the Company recorded $221,941, $330,000 and $688,064 of
equity in earnings of Trolley Barn. The Company recorded amortization expense of
$66,340, $135,139 and $110,218 during the years ended December 29, 1996,
December 28, 1997 and December 27, 1998, respectively, included in depreciation
and amortization in the accompanying consolidated statements of operations.
Also, the Company recorded a gain on sale of its investment in Trolley Barn of
$728,194 during the year ended December 27, 1998.
(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
The following table presents selected 1997 and 1998 quarterly financial
data:
1997 March 30 June 29 September 28 December 28
- ---- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $32,692,139 $37,431,711 $40,730,974 $39,393,406
Income (loss) from operations 1,391,645 1,647,482 (3,100,475) (5,764,479)
Income (loss) 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 per share $ .11 $ .12 $ (.28) $ (.52)
1998 March 28 June 28 September 27 December 27
- ---- ----------- ---------- ------------ -----------
Revenues $38,594,255 $40,043,577 $41,228,910 $40,234,848
Income from operations 1,807,981 2,305,002 2,400,201 2,222,775
Income before taxes and cumulative effect 1,399,861 1,704,885 2,042,261 2,627,213
Cumulative effect of accounting change 1,250,037 -- -- --
Net (loss) income (305,131) 1,150,797 1,378,526 1,773,470
Diluted net (loss) income per share $ (.04) $ .14 $ .17 $ .22
</TABLE>
Loss from operations during the fourth quarter of 1997 was impacted by
a restructuring charge of $4.5 million (see Note 8), and incremental general and
administrative expenses totaling $1.3 million for executive severance pay and
costs associated with the Company's exploration of strategic alternatives.
During the fourth quarter of 1998, the Company adopted the provisions
of SOP 98-5 effective the beginning of fiscal 1998 (see Note 2). Consequently,
the results of operations for the first three quarters of 1998 reported on Form
10-Q have been restated to reflect the adoption of SOP 98-5 as if occurring in
the first quarter of 1998. As a result, income from operations and net income
have been restated from the previously reported amounts for the first, second
and third quarters of 1998 as follows:
<TABLE>
<CAPTION>
March 28 June 28 September 27
-------- ------- ------------
<S> <C> <C> <C>
Income (loss) from operations:
Previously reported $ 1,182,877 $ 2,273,516 $ 2,448,506
Restated 1,807,981 2,305,002 2,400,201
---------- ---------- ----------
Change $ 625,104 $ 31,486 $ (48,305)
========== ========== ==========
Net income (loss):
Previously reported $ 522,976 $ 1,129,552 $ 1,411,151
Restated (305,131) 1,150,797 1,378,526
---------- ---------- ----------
Change $ (828,107) $ 21,245 $ (32,625)
========== ========== ==========
Income (loss) per diluted share:
Previously reported $ .06 $ .14 $ .18
Restated (.04) .14 .17
---- ---- ----
Change $ (.10) $ -- $ (.01)
==== ===== ====
</TABLE>
<PAGE>
ITEM 9: Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None
PART III
ITEM 10: Directors and Executive Officers of the Registrant
The following table sets forth the names, ages and positions of the
company's directors and executive officers:
<TABLE>
<CAPTION>
Class and Year
in Which Term
Name Age Position Will Expire
---- --- -------- ------------
<S> <C> <C> <C>
Frank B. Day 66 Chairman of the Board, President and Chief Executive Class III/2001
Officer
Duncan H. Cocroft 55 Director Class III/2001
Robert D. Greenlee 57 Director and Secretary Class II/2000
Mary C. Hacking 51 Director Class I/1999
Gerald A. Hornbeck 52 Director Class I/1999
David M. Lux 48 Director Class II/2000
Arthur Wong 66 Director Class II/2000
William S. Hoppe 54 Executive Vice President, Chief Financial Officer, N/A
and Chief Administrative Officer
Ned R. Lidvall 45 Executive Vice President and Chief Operating Officer N/A
Theresa D. Shelton 36 Vice President - Finance , Treasurer and Assistant N/A
Secretary
- ----------------------
</TABLE>
All executive officers hold office at the discretion of the Board of
Directors.
Frank B. Day. Mr. Day created the Rock Bottom Restaurant & Brewery
and Old Chicago concepts and has supervised the operation of the company since
the opening of the first Old Chicago restaurant in Boulder, Colorado in 1976.
Mr. Day has served as the company's Chairman of the Board since the company's
inception. In December 1997, Mr. Day was re-elected President and Chief
Executive Officer, having previously served as Chief Executive Officer from the
company's inception to December 1995. Mr. Day has more than 25 years of
entrepreneurial experience in the restaurant and hospitality industry. In
addition to the company's 62 restaurants, Mr. Day has ownership interests in 14
restaurants, two hotels and two casinos. Mr. Day serves as a director and
officer of Black Hawk Gaming and Development, Inc. ("Black Hawk"), a public
company that operates a casino in Black Hawk, Colorado. Mr. Day holds a B.A. and
an M.B.A. from Harvard University.
Duncan H. Cocroft. Mr. Cocroft has been a director of the company
since February 1996. Since September 1997, Mr. Cocroft has served as Senior Vice
President and Chief Administrative Officer of Kos Pharmaceuticals, Inc. From
1990 to 1997, Mr. Cocroft was Vice President of Finance and Chief Financial
Officer of International Multifoods Corporation. From 1987 to 1990, Mr. Cocroft
was Vice President and Treasurer of Smithkline Beckman (now Smithkline Beecham),
a large pharmaceutical company. Mr. Cocroft received a B.S. in economics from
the University of Pennsylvania, Wharton School of Finance and Commerce.
Robert D. Greenlee. Mr. Greenlee has been Secretary and a director of
the company since inception, and served as the Mayor of Boulder, Colorado from
November 1997 to September 1998. Since 1988, Mr. Greenlee has served as
President of Centennial Investment & Management Company, Inc., a private
investment and consulting firm and, since 1991, has served as Chairman of the
Board, Chief Executive Officer and President of Black Hawk. From 1975 to 1988,
Mr. Greenlee owned and was Chief Executive Officer of Centennial Wireless, Inc.,
operator of KBCO (FM), Boulder, Colorado. Mr. Greenlee holds a B.A. in radio and
television broadcasting and an M.A. in journalism and mass communications from
Iowa State University, and was a candidate in November 1998 for the U.S.
Congress in Colorado's Second District.
<PAGE>
Mary C. Hacking. Ms. Hacking has been a director of the company
since September 1994. Since March 1995, Ms. Hacking has served as President and
owner of Think Marketing, L.L.C., a full service marketing firm. Ms. Hacking
served as President of Barnhart Advertising, Marketing and Public Relations,
Inc. from 1990 to February 1995. From 1984 to 1990, Ms. Hacking was Vice
President Marketing for VICORP Restaurants, Inc. Ms. Hacking holds a B.A. from
the University of Wisconsin (Madison) and an M.A. from Fordham University.
Gerald A. Hornbeck. Mr. Hornbeck has been a director of the company
since September 1994. Mr. Hornbeck has over 25 years of restaurant management
experience, including the responsibility for and opening of over 70 specialty
restaurants. Mr. Hornbeck founded Concept Management, Inc., a strategic planning
and organizational development consulting company in 1990 and serves as its
President. In 1984, Mr. Hornbeck founded the Cooker Restaurant concept and
served as Executive Vice President and director of Cooker Corporation, an
operator of casual dining restaurants, from 1984 to 1989.
David M. Lux. Mr. Lux is a founder and developer, with Mr. Day, of
the Old Chicago concept, and has been a director of the company since inception.
Since 1982, Mr. Lux has been a director and executive officer of Concept
Restaurant Management C.S., Inc., a restaurant management services company that
operates three restaurants in Colorado Springs, Colorado. Mr. Lux holds a B.S.
in business administration from the University of Colorado.
Arthur Wong. Mr. Wong was one of the founders of the company, and
has been a director of the company since April 1995. Mr. Wong is also a
principal in numerous private companies, which include computer software,
hospitality, real estate, health care, retail, recreation and financial
services. He received his B.A. from Ripon College.
William S. Hoppe. Mr. Hoppe was elected Chief Administrative
Officer in December 1997 in addition to his positions of Executive Vice
President and Chief Financial Officer. Mr. Hoppe joined the company in May 1996
as Chief Financial Officer, Vice President and Treasurer, and was subsequently
named Executive Vice President in November 1996. From 1993 to 1996, Mr. Hoppe
was Executive Vice President and Chief Financial Officer for ZuZu, Inc., a
restaurant chain specializing in quick service mexican food. From 1983 to 1993,
Mr. Hoppe was founder and managing partner of Hoppe, Watson, and Company, a
certified public accounting and consulting firm. During that time, Mr. Hoppe
served as President of Chili's Beverage Company, a Brinker International
affiliate, and President of Sfuzzi Beverage Company. Previously, Mr. Hoppe
served as Controller and Chief Accounting Officer for Hunt International
Resources Corporation, then franchisor of Shakey's Pizza Parlors. Mr. Hoppe is a
Certified Public Accountant and holds a B.S. in accounting from Southern
Illinois University and an M.B.A from Pepperdine University. Mr. Hoppe serves on
the Executive Committee of the Board of Directors of the Colorado Restaurant
Association.
Ned R. Lidvall. Mr. Lidvall was elected Executive Vice President
and Chief Operating Officer in December 1997. Mr. Lidvall served as Executive
Vice President - Brewery Operations from November 1996 to November 1997, and
from October 1995 to October 1996, Mr. Lidvall served as the company's Vice
President - Operations. From May 1994 until September 1995, Mr. Lidvall was Vice
President of Operations for On the Border Cafes Corporation, a division of
Brinker International. From September 1991 until April 1994, Mr. Lidvall was
President and Chief Operating Officer of On The Border Cafes Corporation, which
was sold to Brinker International in May 1994. From January 1991 to September
1991, Mr. Lidvall served as Vice President of Food & Beverage / Purchasing for
Chi-Chi's Mexican Restaurants. From 1988 to 1991, Mr. Lidvall was Vice President
of Operations at Western Sizzlin, Inc. From 1980 to 1988, Mr. Lidvall moved from
Mid-Atlantic Director of Service and Beverage to Vice President of Franchise
Operations for Chi-Chi's Mexican Restaurants. Mr. Lidvall attended the
University of Kentucky.
Theresa D. Shelton. Ms. Shelton was elected Treasurer in December
1997 in addition to her positions of Vice President - Finance and Assistant
Secretary. Ms. Shelton joined the company in October 1994 as Controller, and was
elected Vice President - Finance in June 1996. From September 1985 to September
1994, Ms. Shelton was an audit manager with Arthur Andersen LLP, where she
specialized in the hospitality, real estate and oil and gas industries. Ms.
Shelton is a Certified Public Accountant and holds a B.S. in accounting from
Colorado State University. She is a member of the American Institute of
Certified Public Accountants and the Colorado Society of Certified Public
Accountants.
<PAGE>
Compliance with Section 16(a) of the Securities and Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and persons who
beneficially own greater than 10% of a registered class of the Company's equity
securities to file initial reports of ownership and changes in ownership with
the Commission and The Nasdaq Stock MarketSM. Based solely upon its review of
copies of the Section 16(a) reports and the written representations the Company
has received, the Company believes that during its fiscal year ended December
27, 1998, all of its directors, executive officers and greater than 10%
beneficial owners were in compliance with their filing requirements, except for
the following. A Form 5 report was filed late by each of the following
individuals relating to options granted to them by the company and options
repriced by the company during the fiscal year ended December 27, 1998: Mr.
David Lux, Ms. Mary C. Hacking, Mr. Gerald A. Hornbeck, Mr. Duncan H. Cocroft,
Mr. Frank B. Day, Mr. Arthur Wong, Mr. Ned R. Lidvall, Ms. Theresa D. Shelton,
Mr. Robert D. Greenlee, and Mr. William S. Hoppe.
<PAGE>
ITEM 11: Executive Compensation
The following table sets forth the compensation paid by the company to
its Chief Executive Officer and the four most highly compensated executive
officers, other than the Chief Executive Officer, whose individual salary and
bonus exceeded $100,000 during the fiscal year ended December 27, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation Awards
----------------------------------------- -----------------------
Other Restricted Securities
Annual Stock Underlying All Other
Compensation Award(s) Options Compen-
Name and Principal Position Year Salary($) Bonus($) ($)(1) ($)(2)(3)(4) (#)(5) sation
- --------------------------- ---- --------- -------- ------ --------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C>
Frank B. Day .................. 1998 200,000 (6) --- --- --- 64,420 ---
President, Chief Executive 1997 100,000 (6) --- --- --- 23,000 ---
Officer, and Chairman of the 1996 100,000 (6) --- --- 97,116 32,500 ---
Board
William S. Hoppe ............. 1998 155,000 --- --- --- 62,270 ---
Executive Vice President, Chief 1997 145,000 --- --- 253,000 20,000 ---
Financial Officer and Chief 1996 83,077 --- 56,967 101,289 40,000 ---
Administrative Officer
Ned R. Lidvall ................ 1998 155,000 --- --- --- 58,100 ---
Executive Vice President and 1997 130,000 --- 43,287 253,000 20,000 ---
Chief Operating Officer 1996 135,000 --- --- 98,430 --- ---
Theresa D. Shelton ............ 1998 114,159 13,606 --- --- 37,759 ---
Vice President Finance, Treasurer 1997 96,000 24,625 --- --- 5,000 ---
and Assistant Secretary 1996 89,712 5,750 --- --- 15,000 ---
William R. Edmiston(7)......... 1998 155,000 --- --- --- 73,402 183,000
Executive Vice President and 1997 145,000 --- --- 253,000 20,000 ---
Chief Development Officer 1996 135,000 --- --- 95,173 --- ---
</TABLE>
- ---------------------------
(1) Other Annual Compensation includes $47,425 and $29,219 for
reimbursement of Mr. Hoppe's and Mr. Lidvall's relocation expenses,
respectively, and $12,390 for Mr. Lidvall's car allowance.
(2) Fiscal 1997 includes restricted stock awards made pursuant to a Long Term
Incentive Plan agreement (see below): Mr. Hoppe - 23,000 shares, Mr.
Lidvall - 23,000 shares and Mr. Edmiston - 23,000 shares. The closing sale
price for a share of Common Stock on the date of grant was $11.00 per
share.
(3) Fiscal 1996 includes restricted stock awards made in February 1997 but
earned in 1996 pursuant to the 1996 Executive Bonus Plan (see below): Mr.
Day - 10,499 shares, Mr. Hoppe - 9,921 shares, Mr. Lidvall - 9,554 shares
and Mr. Edmiston - 10,289 shares. The closing sale price for a share of
Common Stock on the date of grant was $9.25 per share.
(4) The total number of restricted stock awards outstanding, valued as of
December 27, 1998, was: Mr. Day - 10,499 shares valued at $56,432, Mr.
Hoppe - 32,921 shares valued at $176,950, Mr. Lidvall - 32,554 shares
valued at $174,978 and Mr. Edmiston - 33,289 shares valued at $178,928.
Holders of restricted stock are eligible to receive dividends, if any.
(5) Fiscal 1998 includes stock options issued in exchange for options
with a higher exercise price (see below): Mr. Day - 44,420 options, Mr.
Hoppe - 52,270 options, Mr. Lidvall - 48,100 options, Ms. Shelton - 30,259
options and Mr. Edmiston - 63,402 options.
(6) Amounts represent payments to FBD Management Corp. for consulting
services during 1996 and 1997, and for compensation as chief executive
officer during 1998.
(7) All Other Compensation includes severance amount payable to Mr. Edmiston
who resigned his positions with the company effective January 15, 1999.
<PAGE>
Restricted Stock Awards
The company's 1996 bonus program for executive officers ("Executive
Bonus Plan") was designed to provide direct financial incentives in the form of
restricted stock to executives to achieve specified company goals. Under the
Executive Bonus Plan, the Compensation Committee, based on recommendations from
the Chief Executive Officer, established target financial goals. The company
achieved the target financial goals during 1996, and in February 1997 awarded
40,263 shares of restricted stock to the named executive officers. 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. Restricted shares granted to Mr.
Edmiston totaling 10,289 were cancelled effective with his resignation.
During 1997, the company executed Long-Term Incentive Plan agreements
with Messrs. Hoppe and Lidvall. The agreements provide for restricted stock
grants as an incentive to continually improve the financial performance of the
company. The restricted shares vest on December 31, 2006 provided the executive
continues to be an employee of the company. Vesting on such shares may be
accelerated to December 31, 1999 if cumulative target financial goals for the
three years ending December 31, 1999 are achieved. The company also executed a
Long-Term Incentive Plan agreement with Mr. Edmiston which terminates on July
15, 1999, as a result of his resignation (see "Executive Compensation -
Severance Agreement").
In the event of a change of control, as defined by the provisions in
the respective restricted stock agreements, restrictions on 100% and 50% of the
shares awarded pursuant to the Executive Bonus Plan and the Long-Term Incentive
Plan, respectively, shall lapse immediately. Additionally, the transactions
contemplated by the merger with RB Capital are deemed to be a change of control
pursuant to the terms of the merger agreement (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Proposed Merger with
RB Capital").
Management Employment Agreements
The company has management employment agreements (the "Management
Agreements") with Messrs. Hoppe and Lidvall that were entered into in July 1997
and amended in January 1998. The Management Agreements provide for, among other
things, initial base salaries, plus such salary increases approved by the Board
of Directors or the Compensation Committee, and annual cash bonuses. If an
employee is terminated without cause, as defined, the Management Agreements
provide for continued base salary payments for twelve months. If an employee is
terminated following a change of control, as defined, the number of periods for
which base salary continues increases to 18 months. The Management Agreements
expire on June 30, 1998, unless terminated earlier, and are automatically
renewed for successive one-year periods unless the employee or the company
notifies the other party in writing. The transactions contemplated by the merger
with RB Capital are deemed to be a change of control pursuant to the terms of
the merger agreement (see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Proposed Merger with RB Capital"). The
company also had a Management Agreement with Mr. Edmiston that was cancelled
effective with his resignation (see "Executive Compensation - Severance
Agreement").
Severance Agreement
Effective January 15, 1999, Mr. Edmiston resigned his positions with
the company. In connection with his resignation, Mr. Edmiston is deemed to be an
employee through July 15, 1999 but with no specific duties or responsibilities.
He is also eligible for certain other fringe benefits during this period
including continued vesting of his stock options and rights to 23,000 shares of
restricted stock granted pursuant to the Long-Term Incentive Plan agreement. Mr.
Edmiston forfeited his rights to 10,289 shares of restricted stock, and received
the right to severance payments totaling $183,000.
Equity Incentive Plan
The purpose of the Rock Bottom Restaurants, Inc., Equity Incentive Plan
is to enable the company to attract, retain and motivate its employees and to
enable employees to participate in the long-term growth of the company by
providing for or increasing the proprietary interest of such employees in the
company. Grants to executive officers under the Equity Plan are designed to
align a portion of the executive's compensation with the long-term interests of
the company's stockholders. The Equity Plan became effective upon consummation
of the company's initial public offering in July 1994 and terminates June 3,
2004. The Equity Plan currently provides for the issuance of 1,955,752 shares of
common stock. The Equity Plan also provides that the number of shares authorized
for issuance automatically increase each year by an amount equal to the number
of shares equal to one-half of one percent of the company's then issued and
outstanding shares (cumulative increases of 155,752 shares as of March 26,
1999).
<PAGE>
The Equity Plan is administered by the Compensation Committee with
respect to grants to executive officers, and by Mr. Day for all other grants.
Subject to the terms of the Equity Plan, the Compensation Committee or Mr. Day
determines the persons to whom awards are granted, the type of award granted,
the number of shares granted, the vesting schedule, the type of consideration to
be paid to the company upon exercise of options and the terms of any option. The
Equity Plan also provides that in the event of a change of control, as defined,
options outstanding under the Equity Plan become fully vested. The transactions
contemplated by the merger with RB Capital are deemed to be a change of control
pursuant to the terms of the merger agreement
Under the restricted stock component of the Equity Plan, the company
may, in selected cases, issue to a plan participant a given number of shares of
restricted stock. Restricted stock under the Equity Plan is Common Stock
restricted as to sale, pending fulfillment of such vesting schedule and
employment requirements as the Compensation Committee determines. Prior to the
lapsing of the restrictions, the participant is entitled to receive
distributions in liquidation and dividends on, and to vote the shares of, the
restricted stock.
In January 1998, the Board of Directors, upon recommendation of the
Compensation Committee, offered all current employees and directors the
opportunity to exchange all of their outstanding options for a lesser number of
new options with a $7.00 exercise price. The value of the new options obtainable
in the exchange was the same as the value of the outstanding options based on a
Black-Sholes option valuation model. Thus, each option holder had the ability to
obtain a reduced number of options with the same value, based on the
Black-Sholes model, in exchange for all of the holder's outstanding options.
Substantially all option holders agreed to exchange their options and to forego
exercising any options for six months. The Compensation Committee and the Board
believed the offer to exchange options was necessary to serve the plans'
objectives in light of average option exercise prices significantly exceeding
market prices, and that the offer to exchange options of equal value with
previously granted options was in the best interests of the company and its
stockholders.
On March 18, 1999, the company executed an amendment to the Equity Plan
providing for the ability of the Compensation Committee to exercise certain
discretionary authority in the event of a change of control.
<PAGE>
The following table sets forth information as to the stock options
granted to the named executive officers during the 1998 fiscal year. No stock
appreciation rights were awarded during fiscal 1998.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Number of Percentage of Potential Realized Value
Securities Total Options at Assumed Annual
Underlying Granted to Exercise Rates of Stock Price
Options Employees in Price Expiration Appreciation ($)(1)
Name Granted(#) Fiscal Year ($ / share) Date for Option Term
----------- ---------- ------------ ----------- ---- -----------------
5% 10%
--- ---
<S> <C> <C> <C> <C> <C> <C>
Frank B. Day 20,000 (2) 2.4% 7.00 3/18/2003 57,520 174,517
18,773 (3) 2.2% 7.00 6/24/2001 7,203 31,080
5,830 (3) 0.7% 7.00 7/22/2001 2,398 10,022
2,766 (3) 0.3% 7.00 7/28/2002 2,180 7,208
17,051 (3) 2.0% 7.00 4/28/2007 48,079 138,238
William S. Hoppe 10,000 (2) 1.2% 7.00 3/18/2008 28,760 87,259
9,936 (3) 1.2% 7.00 4/10/2006 23,147 66,268
24,839 (3) 3.0% 7.00 4/10/2006 57,866 165,665
8,684 (3) 1.0% 7.00 12/28/2006 23,118 66,324
8,811 (3) 1.0% 7.00 4/28/2007 24,844 71,434
Ned R. Lidvall 10,000 (2) 1.2% 7.00 3/18/2008 28,760 87,259
14,121 (3) 1.7% 7.00 12/26/2005 31,061 88,960
16,484 (3) 2.0% 7.00 12/26/2005 36,258 103,846
8,684 (3) 1.0% 7.00 12/28/2006 23,118 66,324
8,811 (3) 1.0% 7.00 4/28/2007 24,844 71,434
Theresa D. Shelton 7,500 (2) 0.9% 7.00 3/18/2008 21,570 65,444
11,667 (3) 1.4% 7.00 9/30/2004 19,383 56,261
1,445 (3) 0.2% 7.00 10/3/2005 3,030 8,686
6,574 (3) 0.8% 7.00 8/7/2006 16,298 46,682
6,231 (3) 0.7% 7.00 8/7/2006 15,448 44,246
4,342 (3) 0.5% 7.00 12/28/2006 11,559 33,162
William R. Edmiston 10,000 (2)(4) 1.2% 7.00 3/18/2008 28,760 87,259
16,484 (3)(4) 2.0% 7.00 12/26/2005 36,258 103,846
29,423 (3)(4) 3.5% 7.00 12/26/2005 64,719 185,360
8,684 (3)(4) 1.0% 7.00 12/28/2006 23,118 66,324
8,811 (3)(4) 1.0% 7.00 4/28/2007 24,844 71,434
- --------------
</TABLE>
(1) Assumed annual appreciation rates are set by the Commission and are not a
forecast of future appreciation. The amounts shown are pre-tax and assume
the options will be held throughout the entire term. Actual gains, if any,
are dependent upon the future performance of the Common Stock as well as
continued employment of the option holder through the vesting period.
(2) Options granted are exercisable in three equal annual installments.
All options have a 10 year term, except for Mr. Day's options which have
a five year term.
(3) Options granted were pursuant to an option exchange program approved by
the Company's Board in January 1998 (see "Equity Incentive Plan").
(4) Mr. Edmiston resigned his positions with the company effective January 15,
1998. Pursuant to Mr. Edmiston's severance agreement, all unvested options
continue to vest under their existing schedules until July 15, 1999 at
which time any remaining unvested options are immediately cancelled. All
vested options remain exercisable for 90 days beginning July 16, 1999.
<PAGE>
The following information is furnished for the company's 1998 fiscal
year with respect to the named executive officers for stock option exercises
which occurred during fiscal 1998:
<TABLE>
<CAPTION>
Aggregated Option Exercises In Last
Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired on Value Options at Fiscal Year End(#) Fiscal Year-End($)(1)
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- ----------- ------------ -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Frank B. Day 0 0 26,796 37,624 0 0
William S. Hoppe 0 0 29,016 33,254 0 0
Ned R. Lidvall 0 0 26,236 31,864 0 0
Theresa D. Shelton 0 0 23,097 14,662 0 0
William R. Edmiston (2) 0 0 36,438 39,964 0 0
- -----------------
</TABLE>
(1) Based on the difference between the option exercise price ($7.00) and the
closing sale price ($5.375) of a share of Common Stock as reported on the
The Nasdaq Stock Market on December 24, 1998, the last trading day prior to
the close of the company's 1998 fiscal year.
(2) Mr. Edmiston resigned his positions with the company effective January 15,
1998. Pursuant to Mr. Edmiston's severance agreement, all unvested options
continue to vest under their existing schedules until July 15, 1999 at
which time any remaining unvested options are immediately cancelled. All
vested options remain exercisable for 90 days beginning July 16, 1999.
Compensation of Directors
The company has adopted compensation and incentive benefit plans to
enhance its ability to continue to attract, retain and motivate qualified
persons to serve as nonemployee directors of the company. The company has six
nonemployee directors. The company pays its nonemployee directors $1,000 for
each meeting attended and reimburses each nonemployee director for reasonable
expenses in attending company meetings. Under the Nonemployee Directors' Stock
Option Plan (the "Directors' Plan"), nonemployee directors of the company
receive stock options. Only directors who are not also employees of the company
or any of its subsidiaries are eligible to participate in the Directors' Plan.
The Directors' Plan provides for an automatic grant of an option to
purchase 7,500 shares of Common Stock to each nonemployee director at the
commencement of his or her initial term of service on the Board, which option
will become exercisable at the rate of 3,750 shares on the first anniversary and
3,750 shares on the second anniversary of the initial date of grant. In
addition, each nonemployee director will receive an automatic grant of an option
to purchase 3,000 shares of Common Stock on each anniversary of the commencement
of his or her initial term of service on the Board, which options vest one year
from the date of grant. Upon the termination of a director's status following a
change in control of the company, options outstanding under the Directors' Plan
will immediately become fully vested and exercisable for a period of three
months.
Each option granted under the Directors' Plan expires ten years from
the date of grant. The option exercise price must be equal to 100% of the fair
market value of the Common Stock on the date of grant of the option. Options
granted to directors under the Directors' Plan will be treated as non-statutory
stock options under the Internal Revenue Code of 1986, as amended. As of March
26, 1999, the company had granted options to purchase 80,027 shares of Common
Stock under the Directors' Plan at a weighted average exercise price of $6.85
per share.
The Board of Directors may amend the Directors' Plan at any time or may
terminate such plan without the approval of the stockholders. However,
stockholder approval is required for any amendment which materially increases
the number of shares for which options may be granted, or changes in any
material respect the benefits accruing to participants or the requirements as to
eligibility in the plan.
<PAGE>
Compensation Committee Interlocks and Insider Participation
The company's Compensation Committee comprises David M. Lux, Duncan H.
Cocroft, and Arthur Wong.
The company leases the Old Chicago restaurants located on Tejon Street
and Commerce Drive in Colorado Springs, Colorado from partnerships owned in part
by Mr. Lux. The company also leases the Old Chicago restaurants in Fort Collins,
Colorado, and Bettendorf, Iowa, and the brewery restaurants in Englewood,
Colorado and Des Moines, Iowa, from corporations owned in part by Mr. Wong
and/or his affiliates. Pursuant to these leases, the company paid $296,123 and
$517,319, respectively, in the year ended December 27, 1998. See "Certain
Relationships And Related Transactions - Affiliated Leases".
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding beneficial
ownership the company's of common stock as of March 26, 1999, except as
otherwise indicated: (i) by each person known by the company to own beneficially
5% or more of the outstanding shares of common stock, (ii) each executive
officer named in the Summary Compensation Table and each director, and (iii) all
directors and executive officers of the company as a group.
<TABLE>
<CAPTION>
Number of Percentage of
Name Shares Common Stock (%)
<S> <C> <C>
ICM Asset Management, Inc. (1)............................ 952,350 11.8%
601 W. Main Ave., Suite 600
Spokane, WA 99201
Dimensional Fund Advisors (1)............................. 466,500 5.8%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Frank B. Day (2)(3)....................................... 1,372,919 17.0%
Duncan H. Cocroft (4)..................................... 12,564 *
Robert D. Greenlee (2)(4)................................. 533,041 6.6%
Mary C. Hacking (4)....................................... 13,591 *
Gerald A. Hornbeck (4).................................... 30,022 *
David M. Lux (2)(5)....................................... 187,871 2.3%
Arthur Wong (2)(4)........................................ 228,976 2.8%
William S. Hoppe (4)(6)................................... 83,646 1.0%
Ned R. Lidvall (4)(6)..................................... 79,244 1.0%
Theresa D. Shelton (4).................................... 29,244 *
William R. Edmiston (4)(6)................................ 83,905 1.0%
All directors and executive officers as a group 2,655,023 31.8%
(11 persons) (7)..........................................
- --------------------------
</TABLE>
*Amount is less than one percent.
(1) Ownership interests are as of December 31, 1998.
(2) The Voting Agreement executed by Messrs. Day, Greenlee, Lux and Wong in
connection with the proposed merger with RB Capital granted the Special
Committee, on behalf of the company, an irrevocable proxy to vote such
shares. By virtue of the Voting Agreement, each of Messrs. Day, Greenlee,
Lux and Wong, together with RB Capital, have joined in the filing of a
Schedule 13-D which indicates shared voting power over an aggregate of
2,354,080 shares.
(3) Includes 680,635 shares held in trusts of which Mr. Day is trustee, 10,499
shares of restricted stock and 39,147 shares subject to stock options
exercisable currently or within 60 days
(4) Includes shares subject to stock options exercisable currently or within 60
days: Mr. Cocroft - 12,564 shares, Mr. Greenlee- 13,905 shares, Ms. Hacking
- 13,591 shares, Mr. Hornbeck - 30,022 shares, Mr. Wong - 12,776 shares,
Mr. Hoppe - 49,773 shares, Mr. Lidvall - 45,603 shares, Ms. Shelton- 27,044
shares and Mr. Edmiston - 60,905 shares.
(5) Includes 8,850 shares held in the David M. Lux Irrevocable Grantor Trust of
which Mr. Lux is trustee, 3,000 shares held by DT Lux Ltd. of which Mr. Lux
is the general partner, and 6,806 shares subject to stock options
exercisable currently or within 60 days.
(6) Includes the following restricted stock awards: Mr. Hoppe - 32,921 shares,
Mr. Lidvall -32,554 shares and Mr. Edmiston - 23,000 shares.
(7) Includes a total of 246,294 shares subject to stock options exercisable
currently or within 60 days, and 98,974 shares of restricted stock.
<PAGE>
Change of Control
The Company entered into an Agreement and Plan of Merger with RB
Capital, a newly-formed corporation organized by Mr. Frank B. Day, the company's
Chairman of the Board, President and Chief Executive Officer, whereby RB Capital
will acquire the company in a cash merger. Concurrent with the execution of the
merger agreement, Mr. Day and Messrs. Greenlee, Wong and Lux, each a stockholder
and a director of the company, executed a Voting Agreement, dated as of March
18, 1999. The parties agreed, among other things, to vote certain shares of
common stock of the company beneficially owned by such persons in favor of the
merger and each of the other transactions contemplated by the merger agreement
at any meeting of the company's stockholders in connection with the merger (or
otherwise to consent in writing thereto, as the case may be). See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
ITEM 13: Certain Relationships and Related Transactions
Set forth below is a description of transactions entered into during
the last fiscal year between the company and certain of its stockholders,
officers and directors, and corporations or other organizations affiliated with
such stockholders, officers and directors.
Affiliated Leases
The company leases the Old Chicago restaurant in Fort Collins, Colorado
from C. B. Partnership, a partnership that is 50% owned by 141 College
Partnership. Messrs. Wong and Day own 12% and 10%, respectively, of 141 College
Partnership. The lease term was renewed in June 1997 and will expire in May
2012. The annual base rent for 1998 was $97,400 and increases $2,400 annually.
The company pays additional rent based on the difference between the base rent
and 6% of gross sales. Pursuant to this lease, the company paid $136,849 (which
included additional rent of $39,449) in the year ended December 27, 1998.
The company subleases the Old Chicago restaurant on Tejon Street,
Colorado Springs, Colorado from Old Chicago Colorado Springs Limited
Partnership, a partnership owned by Messrs. Day, Wong and Lux. The restaurant
sublease, which was renewed on April 1, 1995 and amended on September 1, 1997,
expires in March 2005. The initial base rent for years one through four under
the sublease, as amended, is $147,600, and increases to $158,352 for years five
through ten of the sublease. The company pays additional rent based on the
difference between the base rent and 6% of gross sales. Pursuant to this lease,
the company paid $156,363 (which included additional rent of $8,763) in the year
ended December 27, 1998.
The company leases the Old Chicago restaurant on Commerce Center Drive
in Colorado Springs, Colorado from Lux/Day Northport Ltd., a partnership that is
94% owned by Messrs. Day and Lux. The lease term commenced in 1986, terminates
in 2006 and provides for a monthly payment of $11,000 or 6% of sales, whichever
is higher. Pursuant to this lease, the company paid $139,760 (which included
additional rent of $7,760) in the year ended December 27, 1998.
The company leases the Old Chicago restaurant in Bettendorf, Iowa, from
Dulcet, LLC, an Iowa limited liability corporation in which Mr. Wong and his
wife have a 33% ownership interest. The lease commenced in June 1996, terminates
in 2011 and provides for a monthly payment of $6,250. The monthly payment
increases to $7,078 in years six through ten and to $8,016 in years ten through
fifteen. Pursuant to this lease, the company paid $75,000 in the year ended
December 27, 1998.
The company leases the brewery restaurant in Boulder, Colorado, from
The 1123 Walnut Corporation, a corporation owned by Messrs. Greenlee and Day.
The lease will expire in 1999 and provides for an annual base rent of $84,000.
The company also pays additional rent based on the difference between the base
rent and 6% of gross restaurant sales. Pursuant to the lease, the company paid
$160,958 (which included additional rent of $76,958) in the year ended December
27, 1998.
The company leases the brewery restaurant in Englewood, Colorado, from
Zymotic, LLC, a Colorado limited liability company in which Mr. Wong and/or his
affiliates own 34%. The lease commenced in July 1997, and terminates in June
2012, with the option to renew for four terms of 60 months each. The initial
base rent for years one through five under the lease is $230,775, increases to
$261,353 for years six through ten, and increases to $295,982 for years eleven
through fifteen. Pursuant to this lease, the company paid $230,775 in the year
ended December 27, 1998.
The company leases the brewery restaurant in Des Moines, Iowa from
B.W.C. Farms, Inc., an Iowa corporation in which Mr. Wong and/or his affiliates
own 12.5%. The lease commenced in February 1998, and terminates in February
2013, with the option to renew for four terms of 60 months each. The initial
base rent for years one through five under the lease is $230,775, increases to
$261,353 for years six through ten, and increases to $295,982 for years eleven
through fifteen. Pursuant to this lease, the company paid $211,544 in the year
ended December 27, 1998.
<PAGE>
Management believes the terms of these leases are no less favorable to
the company than those that could be obtained from unaffiliated third parties.
All transactions with affiliated lessors or any other affiliate are subject to
the approval of the company's disinterested directors and are on terms believed
by such directors to be no less favorable to the company than those available
from unaffiliated third parties.
Other Arrangements with Affiliates
The company purchases certain of its pasta products used in the Old
Chicago restaurants from Pasta Fresca Inc., a Colorado corporation owned 39% by
Mr. Day. During 1998, the company paid approximately $132,000 to this company
for such products.
Additionally, RB Capital, an organization formed by Mr. Frank B. Day,
and its wholly-owned subsidiary, has entered into a merger agreement with the
company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
Conflicts of Interest
Certain of the above transactions will continue in effect and may
result in conflicts of interest between the company and such individuals. In
addition, Mr. Day, the company's President and Chief Executive Officer, owns
interests in 14 other casual dining restaurants, two hotels and two casinos and
serves in various capacities with other companies. Mr. Lux, a director of the
company, owns interests in several of the restaurants in which Mr. Day owns an
interest. The restaurants in which Mssrs. Day and Lux own interests may be
considered to compete with the company's restaurants. The company's conflicts of
interest policy, revised in May 1997, requires that all directors who are
presented with an opportunity that is in the same line of business as that of
the company may pursue such opportunity only after it is offered to the company,
and the disinterested directors conclude that the company should not pursue such
opportunity. Although Messrs. Day and Lux may owe fiduciary duties to the
company and its stockholders, conflicts of interest may not always be resolved
in a manner favorable to the company. In addition, under certain circumstances,
the company is obligated to indemnify its officers and directors.
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 28, 1997 and
December 27, 1998
Consolidated Statements of Operations for the Years
Ended December 29, 1996, December 28, 1997, and
December 27, 1998
Consolidated Statements of Stockholders' Equity for
the Years Ended December 29, 1996, December 28,
1997, and December 27, 1998
Consolidated Statements of Cash Flows for the Years
Ended December 29, 1996, December 28, 1997, and
December 27, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
All financial statement schedules are omitted as
they are not applicable to the company.
3. Exhibits.
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
<S> <C> <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.
2.1 -- Agreement and Plan of Merger, dated as of March 18, 1999, by and among Rock Bottom Restaurants
Inc., RB Capital, Inc. and RBR Acquisition Corp., filed as Exhibit No. 2.1 to the company's Form
8-K dated March 18, 1999, 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, as amended, filed as Exhibit No. 3(ii).
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 incorporated herein by reference.
4.2 -- Voting Agreement, dated as of March 18, 1999, by and among Rock Bottom Restaurants, Inc., RB Capital,
Inc., RBR Acquisition Corp. and certain stockholders of Rock Bottom Restaurants, Inc. signatory thereto,
filed as Exhibit No. 4.1 to the company's Form 8-K dated March 18, 1999, and incorporated herein by
reference.
10.1 -- Amendment to Rock Bottom Restaurants, Inc. Equity Incentive Plan, dated March 18, 1999, filed as
Exhibit No. 10.1, and Rock Bottom Restaurants, Inc. Equity Incentive Plan, as amended through
January 23, 1998, filed as Appendix B to the company's 1998 Proxy Statement pursuant to Section
14(a), 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 -- Amended and Restated Executive Bonus Plan, filed as Exhibit No. 10.2 to the company's Form 10-Q
for the quarterly period ended March 29, 1998, 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.
<PAGE>
Exhibit
No. Description of Exhibit
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 -- Third Amendment to Loan Agreement for $40,000,000 Revolving Line of Credit from Norwest Bank
Colorado, National Association, First Security Bank, N.A., U.S. Bank and Suntrust Bank, Central
Florida, N.A. to Rock Bottom Restaurants, Inc., dated June 29, 1998, filed as Exhibit No. 10 to
the company's Form 10-Q for the quarterly period ended September 27, 1998, and incorporated
herein by reference.
10.14 -- 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.
10.15 -- 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.
10.16 -- 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.
10.17 -- 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.
10.18 -- Form of Amendment to Management Employment Agreement, filed as Exhibit No. 10.3 to the
company's Form 10-Q for the quarterly period ended March 29, 1998, and incorporated herein by
reference.
10.19 -- 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.
10.20 -- 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.
10.21 -- Form of Amendment to Long Term Incentive Agreement, filed as Exhibit No. 10.4 to the company's
Form 10-Q for the quarterly period ended March 29, 1998, and incorporated herein by reference.
10.22 -- Consulting Agreement, dated January 1, 1997, between Rock Bottom Restaurants, Inc. and FBD
Management Corp., filed as Exhibit No. 10.19, and incorporated herein by reference.
<PAGE>
Exhibit
No. Description of Exhibit
10.23 -- Service and Consulting Agreement, dated January 1, 1997, between Rock Bottom Restaurants, Inc.
and Concept Management, Inc., filed as Exhibit No. 10.20, and incorporated herein by reference.
10.24 -- License Agreement, dated July 12, 1997, by and between Rock Bottom Restaurants, Inc., and Frank
B. Day, filed as Exhibit No. 10.21, and incorporated herein by reference.
10.25 -- Lease Agreement, dated February 9, 1998, between Rock Bottom Restaurants, Inc. and B.W.C.
Farms, Inc., filed as Exhibit No. 10.1 to the company's Form 10-Q for the quarterly period
ended March 29, 1998, and incorporated herein by reference.
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;
Old Chicago Franchising, Inc.
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 November 17, 1998, was filed to announce the company's sale
of its 50% joint venture interest in Trolley Barn Brewery, Inc.
(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, 1999 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, 1999
Chief Executive Officer, and Director
(Principal Executive Officer)
/s/ WILLIAM S. HOPPE
William S. Hoppe Executive Vice President, Chief March 26, 1999
Financial Officer, and Chief Administrative
Officer
(Principal Financial Officer)
/s/ THERESA D. SHELTON
Theresa D. Shelton Vice President Finance, Treasurer and March 26, 1999
Assistant Secretary
(Principal Accounting Officer)
/s/ ROBERT D. GREENLEE
Robert D. Greenlee Secretary and Director March 26, 1999
/s/ DAVID M. LUX
David M. Lux Director March 26, 1999
/s/ GERALD A. HORNBECK
Gerald A. Hornbeck Director March 26, 1999
/s/ MARY C. HACKING
Mary C. Hacking Director March 26, 1999
/s/ ARTHUR WONG
Arthur Wong Director March 26, 1999
/s/ DUNCAN H. COCROFT
Duncan H. Cocroft Director March 26, 1999
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
----- ----------------------
<S> <C> <C>
3(ii) -- Bylaws of the company, as amended, filed as Exhibit No. 3(ii).
10.1 -- Amendment to Rock Bottom Restaurants, Inc. Equity Incentive Plan, dated March 18, 1999.
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule
</TABLE>
DGS-173446.2
March 26, 1999 12:33 PM
ROCK BOTTOM RESTAURANTS, INC.
BYLAWS
Article I
OFFICES
The registered office of Rock Bottom Restaurants, Inc. (the "Corporation")
in the State of Delaware shall be in the City of Wilmington, County of New
Castle, State of Delaware. The Corporation shall have offices at such other
places as the board of directors, in its discretion, may from time to time
determine.
Article II
STOCKHOLDERS
Section 1. Annual Meetings.
The annual meeting of stockholders for the election of directors and for
the transaction of such other business as may properly come before the meeting
shall be held on the third Tuesday of May in each year, or on such date as the
board of directors shall each year fix. Each such annual meeting shall be held
at such place, within or without the State of Delaware, and hour as shall be
determined by the board of directors. The day, place and hour of each annual
meeting shall be specified in the notice of such annual meeting. Any annual
meeting of stockholders may be adjourned from time to time and place to place
until its business is completed.
Section 2. Business Conducted at Meetings.
At an annual meeting of stockholders, only such business shall be conducted
as shall have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the board of
directors, (b) otherwise properly brought before the meeting by or at the
direction of the board of directors, or (c) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before a
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely with respect to an
annual meeting, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation, not less than
120 in advance of the date of the Corporation's proxy statement released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been changed by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement, a
proposal shall be received by the Corporation a reasonable time before the
solicitation is made. To be timely with respect to any meeting other than an
annual meeting, a stockholder's notice must be delivered to or mailed and
received at the principal executive offices of the Corporation a reasonable time
before the solicitation is made. A stockholder's notice to the secretary shall
set forth as to each matter the stockholder proposes to bring before the meeting
(a) a brief description of the business desired to be brought before the
meeting, (b) the name and address, as they appear on the Corporation's books, of
the stockholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the stockholder, and (d) any
material interest of the stockholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 2. The
presiding officer at a meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 2, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
Section 3. Special Meetings.
Except as otherwise required by law or by the Certificate of Incorporation
and subject to the rights of the holders of any class or series of stock having
a preference over the common stock, special meetings of stockholders may be
called only by the chairman of the board, the chief executive officer, the
president, the executive vice president or the board of directors pursuant to a
resolution approved by a majority of the entire board of directors. The term
"entire board of directors," as used in these Bylaws, means the total number of
directors which the Corporation would have if there were no vacancies.
Section 4. Stockholder Action: How Taken.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
stockholders and may be effected without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by stockholders holding not less than two-thirds of the voting
power of the outstanding stock entitled to vote. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
Section 5. Notice of Meeting.
Written notice stating the place, date and hour of the meeting and, in case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than ten nor more than sixty days before the date of the
meeting, except as otherwise required by statute or the Certificate of
Incorporation, either personally or by mail, prepaid telegram, telex, facsimile
transmission, cablegram, or radiogram, to each stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his address as it appears on the stock records of the
Corporation. If given personally or otherwise than by mail, such notice shall be
deemed to be given when either handed to the stockholder or delivered to the
stockholder's address as it appears on the stock records of the Corporation.
Section 6. Waiver.
Attendance of a stockholder of the Corporation, either in person or by
proxy, at any meeting, whether annual or special, shall constitute a waiver of
notice of such meeting, except where a stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. A written waiver of notice of any such meeting signed by a stockholder
or stockholders entitled to such notice, whether before, at or after the time
for notice or the time of the meeting, shall be equivalent to notice. Neither
the business to be transacted at, nor the purposes of, any meeting need be
specified in any written waiver of notice.
Section 7. Voting List.
The secretary shall prepare and make available, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order and showing the address and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the place of the meeting during the whole time thereof and
may be inspected by any stockholder who is present.
Section 8. Quorum.
Except as otherwise required by law, the Certificate of Incorporation or
these Bylaws, the holders of not less than one-third of the shares entitled to
vote at any meeting of the stockholders, present in person or by proxy, shall
constitute a quorum, and the act of the majority of such quorum shall be deemed
the act of the stockholders. If a quorum shall fail to attend any meeting, the
chairman of the meeting may adjourn the meeting from time to time, without
notice if the time and place are announced at the meeting, until a quorum shall
be present. At such adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the original meeting. If
the adjournment is for more than thirty days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then, notwithstanding the prior paragraph and
except as otherwise required by law, those present at such adjourned meeting
shall constitute a quorum, and all matters shall be determined by a majority of
votes cast at such meeting.
Section 9. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting, or at any adjournment of a meeting of
stockholders; or entitled to receive payment of any dividend or other
distribution or allotment of any rights; or entitled to exercise any rights in
respect of any change, conversion, or exchange of stock; or for the purpose of
any other lawful action; the board of directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors. The record date for
determining the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournments thereof shall not be more than sixty nor less
than ten days before the date of such meeting. The record date for any other
action shall not be more than sixty days prior to such action. If no record date
is fixed, (i) the record date for determining stockholders entitled to notice of
or to vote at any meeting shall be the close of business on the day next
preceding the day on which notice is given or, if notice is waived by all
stockholders, at the close of business on the day next preceding the day on
which the meeting is held; and (ii) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
board of directors adopts the resolution relating to such other purpose. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
Section 10. Procedure.
The order of business and all other matters of procedure at every meeting
of the stockholders may be determined by the presiding officer.
Article III
DIRECTORS
Section 1. Number.
Except as otherwise fixed pursuant to the provisions of the Certificate of
Incorporation, including Article 4 relating to the rights of the holders of any
class or series of stock having a preference over the common stock, the number
of directors shall be fixed from time to time exclusively by resolutions adopted
by the board of directors; provided, however, that the number of directors shall
at no time be less than three nor greater than eleven and further provided that
no decrease in the number of directors constituting the board of directors shall
shorten the term of any incumbent director.
Section 2. Election and Terms.
The directors shall be divided into three classes as determined by the
board of directors, designated as Class I, Class II and Class III. Each class
shall consist, as nearly as may be possible, of one-third of the total number of
directors constituting the entire board of directors. At the next annual meeting
of stockholders, Class I directors shall be elected for a one-year term, Class
II directors shall be elected for a two-year term and Class III directors for a
three-year term. At each succeeding annual meeting of stockholders thereafter,
successors to the class of directors whose terms expire at that annual meeting
shall be elected for a three-year term. If the number of directors has changed,
any increase or decrease shall be apportioned among the classes so as to
maintain the number of directors in each class as nearly equal as possible, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which his term expires and until his successor shall be elected and
qualified, subject, however, to such director's prior death, resignation,
retirement, disqualification or removal from office.
Subject to the rights of holders of any class or series of stock having a
preference over the common stock, nominations for the election of directors may
be made by the board of directors or a committee appointed by the board of
directors or by any stockholder entitled to vote in the election of directors
generally. However, any stockholder entitled to vote in the election of
directors generally may nominate one or more persons for election as directors
at a meeting only if written notice of such stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid, to the secretary of the Corporation no
later than (i) with respect to an election to be held at an annual meeting of
stockholders, ninety days prior to the anniversary date of the immediately
preceding annual meeting, and (ii) with respect to an election to be held at a
special meeting of stockholders for the election of directors, the close of
business on the tenth day following the date on which notice of such meeting is
first given to stockholders. Each such notice shall set forth: (a) the name and
address of the stockholder who intends to make the nomination and of the person
or persons to be nominated; (b) representation that the stockholder is a holder
of record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (e) the consent of each nominee to serve
as a director of the Corporation if so elected. The presiding officer of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.
Section 3. Newly Created Directorships and Vacancies.
Except as otherwise fixed pursuant to the provisions of Certificate of
Incorporation, including Article 4 relating to the rights of the holders of any
class or series of stock having a preference over the common stock, newly
created directorships resulting from any increase in the number of directors and
any vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other cause shall be filled solely by the
affirmative vote of a majority of the remaining directors then in office or a
sole remaining director, even though less than a quorum of the board of
directors. Any director elected in accordance with the preceding sentence shall
hold office for the remainder of the full term of the new directorship which was
created or in which the vacancy occurred and until such director's successor
shall have been elected and qualified.
Section 4. Regular Meetings.
The first meeting of each newly elected board of directors elected at the
annual meeting of stockholders shall be held immediately after and at the same
place as, the annual meeting of the stockholders, provided a quorum is present,
and no notice of such meeting shall be necessary in order to legally constitute
the meeting. Regular meetings of the board of directors shall be held at such
times and places as the board of directors may from time to time determine.
Section 5. Special Meetings.
Special meetings of the board of directors may be called at any time, at
any place and for any purpose by the chairman of the executive committee, the
chairman of the board, the chief executive officer, or by any officer of the
Corporation upon the request of a majority of the entire board of directors.
Section 6. Notice of Meetings.
Notice of regular meetings of the board of directors need not be given.
Notice of every special meeting of the board of directors shall be given to
each director at his usual place of business or at such other address as shall
have been furnished by him for such purpose. Such notice shall be properly and
timely given if it is (a) deposited in the United States mail not later than the
third calendar day preceding the date of the meeting or (b) personally
delivered, telegraphed, sent by facsimile transmission or communicated by
telephone at least twenty-four hours before the time of the meeting. Such notice
need not include a statement of the business to be transacted at, or the purpose
of, any such meeting.
Section 7. Waiver.
Attendance of a director at a meeting of the board of directors shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. A written waiver of notice signed by a director or directors entitled
to such notice, whether before, at, or after the time for notice or the time of
the meeting, shall be equivalent to the giving of such notice.
Section 8. Quorum.
Except as may be otherwise provided by law, in the Certificate of
Incorporation, or in these Bylaws, the presence of a majority of the entire
board of directors shall be necessary and sufficient to constitute a quorum for
the transaction of business at any meeting of the board of directors, and the
act of a majority of the directors present at a meeting at which a quorum is
present shall be deemed the act of the board of directors. Less than a quorum
may adjourn any meeting of the board of directors from time to time without
notice.
Notwithstanding the foregoing, so long as that certain Agreement
and Plan of Merger, dated as of March 18, 1999, has not been terminated, at all
times prior to the effective time of the merger described therein (a) any
material matter or transaction not previously approved by the board of directors
or disclosed in any report filed by the Corporation with the Securities and
Exchange Commission prior to March 18, 1999, between the Corporation and any of
RB Capital, Inc., a Delaware corporation, RBR Acquisition Corp., a Delaware
corporation, Frank B. Day, Robert D. Greenlee, Arthur Wong or David M. Lux, each
an individual and a director of the Corporation, or any of their respective
affiliates (as such term is defined under Rule 12b-2 of the General Rules and
Regulations of the Securities Exchange Act of 1934, as amended) not expressly
contemplated by the Agreement and Plan of Merger referenced above or that
certain Voting Agreement, dated as of March 18, 1999, executed by the
Corporation and certain of the foregoing persons, (b) any amendment to any
resolution of the board of directors relating to the formation of or delegation
of authority to the special committee of the board of directors formed by
resolution of the board of directors dated November 24, 1998, and (c) any action
proposed to be taken by the board of directors which would or would be
reasonably likely to result in the breach of any covenant of the Corporation
under the Agreement and Plan of Merger or the Voting Agreement referenced above,
shall be presented to the above-referenced special committee for action or, if
action by the board of directors thereon is otherwise required by law, shall be
presented to the board of directors and, in such case, shall require the act of
two-thirds (2/3) of the entire board of directors.
Section 9. Participation in Meetings by Telephone.
Members of the board of directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 10. Powers.
The business, property and affairs of the Corporation shall be managed by
or under the direction of its board of directors, which shall have and may
exercise all the powers of the Corporation to do all such lawful acts and things
as are not by law, by the Certificate of Incorporation, or by these Bylaws,
directed or required to be exercised or done by the stockholders.
Section 11. Compensation of Directors.
Directors shall receive such compensation for their services as shall be
determined by a majority of the entire board of directors, provided that
directors who are serving the Corporation as officers or employees and who
receive compensation for their services as such officers or employees shall not
receive any salary or other compensation for their services as directors.
Section 12. Action without a Meeting.
Unless otherwise restricted by the Certificate of Incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors or any committee thereof may be taken without a meeting if written
consent thereto is signed by all members of the board of directors or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the board or committee. Any such consent may be in
counterparts and shall be effective on the date of the last signature thereon
unless otherwise provided therein.
Article IV
COMMITTEES
Section 1. Designation of Committees.
The board of directors may establish committees for the performance of
delegated or designated functions to the extent permitted by law, each committee
to consist of one or more directors of the Corporation. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of such absent or disqualified
member.
Section 2. Committee Powers and Authority.
The board of directors may provide, by resolution or by amendment to these
Bylaws, that a committee may exercise all the power and authority of the board
of directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; provided, however, that a committee may not exercise the power
or authority of the board of directors in reference to amending the Certificate
of Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors, pursuant to Article 4 of the Certificate of
Incorporation, fix the designations and any of the preferences or rights of
shares of preferred stock relating to dividends, redemption, dissolution, any
distribution of property or assets of the Corporation, or the conversion into,
or the exchange of shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease, or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution, or amending these Bylaws; and, unless the resolution expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
Section 3. Committee Procedures.
To the extent the board of directors or the committee does not establish
other procedures for the committee, each committee shall be governed by the
procedures established in Article III, Section 4 (except as they relate to an
annual meeting of the board of directors) and Article III, Sections 5, 6, 7, 9,
10, and 12 of these Bylaws, as if the committee were the board of directors.
Article V
OFFICERS
Section 1. Number.
The officers of the Corporation shall be appointed or elected by the board
of directors. The officers shall be a chief executive officer, a president and a
chief operating officer, such number of executive vice presidents as the board
of directors may from time to time determine, such number of vice presidents as
the board of directors may from time to time determine, a secretary, such number
of assistant secretaries as the board of directors may from time to time
determine, and a treasurer. Any person may hold two or more offices at the same
time.
Section 2. Additional Officers.
The board of directors may appoint such other officers as it shall deem
appropriate.
Section 3. Term of Office, Resignation.
All officers, agents and employees of the Corporation shall hold their
respective offices or positions at the pleasure of the board of directors and
may be removed at any time by the board of directors with or without cause. Any
officer may resign at any time by giving written notice of his resignation to
the chief executive officer, the president or to the secretary, and acceptance
of such resignation shall not be necessary to make it effective unless the
notice so provides. Any vacancy occurring in any office shall be filled by the
board of directors.
Section 4. Duties.
The officers of the Corporation shall perform the duties and exercise the
powers as may be assigned to them from time to time by the board of directors or
the president and chief executive officer. In the absence of such assignment,
the officers shall have the duties and powers described in Sections 5 through 10
of this Article V.
Section 5. Chairman of the Board and Chief Executive Officer.
The chairman of the board and chief executive officer shall be the chairman
of the board and chief executive officer of the Corporation and, subject to the
direction and control of the board of directors, shall manage the business of
the Corporation. The chairman of the board and chief executive officer may
execute contracts, deeds and other instruments on behalf of the Corporation. As
chairman of the board, he shall preside at all meetings of the stockholders and
directors at which he may be present and shall have such other duties, powers
and authority as may be prescribed elsewhere in these Bylaws. The board of
directors may delegate such other authority and assign such additional duties to
the chairman of the board, other than those conferred by law exclusively upon
the president, as it may from time to time determine. The chairman of the board
and chief executive officer shall have full authority on behalf of the
Corporation to attend any meeting, give any waiver, cast any vote, grant any
discretionary or directed proxy to any person, and exercise any other rights of
ownership with respect to any shares of capital stock or other securities held
by the Corporation and issued by any other corporation or with respect to any
partnership, trust or similar interest held by the Corporation.
Section 6. President and Chief Operating Officer.
The president and chief operating officer shall be the chief operating
officer of the Corporation and, subject to the direction and control of the
board of directors and the chairman of the board and chief executive officer,
shall manage the business of the Corporation. The president and chief operating
officer may execute contracts, deeds and other instruments on behalf of the
Corporation. In the absence of the chairman of the board and chief executive
officer or in the event of his disability, inability or refusal to act, the
president and chief operating officer shall perform the duties and exercise the
power of the chairman of the board and chief executive officer. The president
and chief operating officer shall have full authority on behalf of the
Corporation to attend any meeting, give any waiver, cast any vote, grant any
discretionary or directed proxy to any person, and exercise any other rights of
ownership with respect to any shares of capital stock or other securities held
by the Corporation and issued by any other corporation or with respect to any
partnership, trust or similar interest held by the Corporation.
Section 7. Executive Vice President.
Each executive vice president, if any, shall perform such functions as may
be prescribed by the board of directors, the chairman of the board and chief
executive officer or the president and chief operating officer. Each executive
vice president may execute contracts, deeds and other instruments on behalf of
the Corporation. Each executive vice president shall have full authority on
behalf of the Corporation to attend any meeting, give any waiver, cast any vote,
grant any discretionary or directed proxy to any person, and exercise any other
rights of ownership with respect to any shares of capital stock or other
securities held by the Corporation and issued by any other corporation or with
respect to any partnership, trust or similar interest held by the Corporation.
Upon the death, disability or absence of the chief operating officer, the
executive vice president (or if more than one holds office, the executive vice
president among those present who has held such office for the longest
continuous period, unless another method of selection has been established by
resolution of the board of directors) shall perform the duties and exercise the
powers of the president and chief executive officer. Each executive vice
president shall perform such other duties as the board, the chairman of the
board and chief executive officer or the president and chief operating officer
may from time to time prescribe or delegate to him.
Section 8. Vice President.
Each vice president, if any, shall perform such functions as may be
prescribed by the board of directors, the chairman of the board and the chief
executive officer, the president and chief operating officer, or any executive
vice president. Each vice president may execute contracts, deeds and other
instruments on behalf of the Corporation. The vice president shall have full
authority on behalf of the Corporation to attend any meeting, give any waiver,
cast any vote, grant any discretionary or directed proxy to any person, and
exercise any other rights of ownership with respect to any shares of capital
stock or other securities held by the Corporation and issued by any other
corporation or with respect to any partnership, trust or similar interest held
by the Corporation. Upon the death, disability or absence of the executive vice
president, the vice president (or if more than one holds office, the vice
president among those present who has held such office for the longest
continuous period, unless another method of selection has been established by
resolution of the board of directors) shall perform the duties and exercise the
powers of the executive vice president. Each vice president shall perform such
other duties as the board, the chairman of the board and chief executive
officer, the president and chief operating officer, or any executive vice
president may from time to time prescribe or delegate to him.
Section 9. Secretary.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and, upon the request of a person entitled to call a special
meeting of the board of directors, he shall give notice of any such special
meeting. He shall keep the minutes of all meetings of the stockholders, the
board of directors, or any committee established by the board of directors. The
secretary shall be responsible for the maintenance of all records of the
Corporation and may attest documents on behalf of the Corporation. The secretary
shall perform such other duties as the board, the chairman of the board and
chief executive officer, the president and chief operating officer or any vice
president may from time to time prescribe or delegate to him.
Section 10. Treasurer.
The treasurer shall be responsible for the control of the funds of the
Corporation and the custody of all securities owned by the Corporation. The
treasurer shall perform such other duties as the board, the chairman of the
board and chief executive officer, the president and chief operating officer or
any vice president may from time to time prescribe or delegate to him.
Section 11. Compensation.
Officers shall receive such compensation, if any, for their services as may
be authorized or ratified by the board of directors. Election or appointment as
an officer shall not of itself create a right to compensation for services
performed as such officer.
Article VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Section 1. Directors and Officers.
Subject to the Certificate of Incorporation and the other sections of this
Article VI, the Corporation shall indemnify, to the fullest extent permitted by,
and in the manner permissible under, the laws of the State of Delaware in effect
on the date hereof and as amended from time to time, any person who was or is
threatened to be made, a party to any threatened, pending or completed action,
suit, or proceeding, whether criminal, civil, administrative, or investigative,
by reason of the fact that he, is or was a director or officer of the
Corporation, or, is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, association, or other enterprise, against expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties, and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding, including any action, suit or proceeding by or
in the right of the Corporation (a "Proceeding"). The Corporation shall advance
all reasonable expenses incurred by or on behalf of any such person in
connection with any Proceeding within ten days after the receipt by the
Corporation of a statement or statements from such person requesting such
advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the expenses incurred by such person and, if such person is an officer
or director of the Corporation, shall include or be preceded or accompanied by
an undertaking by or on behalf of such person to repay any expenses advanced if
it shall ultimately be determined that such person is not entitled to be
indemnified against such expenses. Costs, charges or expenses of investigating
or defending Proceedings for which indemnity shall be sought hereunder may be
incurred without the Corporation's consent; provided that no settlement of any
such Proceeding may be made without the Corporation's consent, which consent
shall not be unreasonably withheld.
Section 2. Determination of Right to Indemnification.
(a) Any indemnification requested by any person under Section 1 of this
Article VI shall be made no later than forty-five (45) days after receipt of the
written request of such person, unless a determination is made within said
forty-five (45) day period (i) by a majority vote of directors who are not
parties to such Proceedings, or (ii) in the event a quorum of non-involved
directors is not obtainable, at the election of the Corporation, by independent
legal counsel in a written opinion, that such person is not entitled to
indemnification hereunder.
(b) Notwithstanding a determination under Section 2(a) above that any
person is not entitled to indemnification with respect to a Proceeding, such
person shall have the right to apply to any court of competent jurisdiction for
the purpose of enforcing such person's right to indemnification pursuant to
these Bylaws. Neither the failure of the Corporation (including its board of
directors or independent legal counsel) to have made a determination prior to
the commencement of such action that such person is entitled to indemnification
hereunder, nor an actual determination by the Corporation (including its board
of directors or independent legal counsel) that such person is not entitled to
indemnification hereunder, shall be a defense to the action or create any
presumption that such person is not entitled to indemnification hereunder.
(c) The Corporation shall indemnify any person against all expenses
incurred in connection with any hearing or Proceeding under this Section 2 if
such person prevails on the merits or otherwise in such Proceeding.
Section 3. Subrogation.
In the event of payment under these Bylaws, the indemnifying party or
parties shall be subrogated to the extent of such payment to all of the rights
of recovery of the indemnified person therefor, and such indemnified person
shall execute all papers required and shall do everything that may be necessary
to secure such rights, including the execution of such documents necessary to
enable the indemnifying party or parties to effectively bring suit to enforce
such rights.
Section 4. Presumptions and Effect of Certain Proceedings.
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that such person is entitled to indemnification
under this Article, and the Corporation shall have the burden of proof to
overcome that presumption in connection with the making by any person, persons
or entity of any determination contrary to that presumption.
(b) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of nolo
contendere or its equivalent, shall not (except as otherwise expressly provided
in these Bylaws) of itself adversely affect the right of any person to
indemnification or create a presumption that such person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation or, with respect to any criminal
Proceeding, that such person had reasonable cause to believe that his conduct
was unlawful.
Section 5. Exception to Right of Indemnification or Advancement of Expenses.
Notwithstanding any other provision of these Bylaws, no person shall be
entitled to indemnification or advancement of expenses under these Bylaws with
respect to any Proceeding brought by such person, unless the bringing of such
Proceeding or making of such claim shall have been approved by the board of
directors.
Section 6. Contract.
The foregoing provisions of this Article VI shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any
Proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
The foregoing rights of indemnification shall not be deemed exclusive of
any other rights to which any director or officer may be entitled apart from the
provisions of this Article VI.
Section 7. Surviving Corporation.
The board of directors may provide by resolution that references to "the
Corporation" in this Article VI shall include, in addition to this Corporation,
all constituent corporations absorbed in a merger with this Corporation so that
any person who was a director or officer of such a constituent corporation or is
or was serving at the request of such constituent corporation as a director,
employee, or agent of another corporation, partnership, joint venture, trust,
association, or other entity shall stand in the same position under the
provisions of this Article VI with respect to this Corporation as he would if he
had served this Corporation in the same capacity or is or was so serving such
other entity at the request of this Corporation, as the case may be.
Section 8. Inurement.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VI shall continue as to a person who has ceased to be
a director or officer and shall inure to the benefit of the heirs, executors,
and administrators of such person.
Section 9. Employees and Agents.
To the same extent as it may do for a director or officer, the Corporation
may indemnify and advance expenses to a person who is not and was not a director
or officer of the Corporation but who is or was an employee or agent of the
Corporation.
Article VII
CAPITAL STOCK
Section 1. Certificates.
Each stockholder of the Corporation shall be entitled to a certificate or
certificates signed by or in the name of the Corporation by the chairman of the
board and chief executive officer, the president or a vice president, and by the
treasurer, an assistant treasurer, the secretary or an assistant secretary,
certifying the number of shares of stock of the Corporation owned by such
stockholder. Any or all the signatures on the certificate may be a facsimile.
Section 2. Facsimile Signatures.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he, she or it was
such officer, transfer agent or registrar at the date of issue.
Section 3. Registered Stockholders.
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock of the Corporation as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it has actual or other notice thereof, except as provided by law.
Section 4. Cancellation of Certificates.
All certificates surrendered to the Corporation shall be cancelled and,
except in the case of lost, stolen or destroyed certificates, no new
certificates shall be issued until the former certificate or certificates for
the same number of shares of the same class of stock have been surrendered and
cancelled.
Section 5. Lost, Stolen or Destroyed Certificates.
The board of directors may direct a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate or certificates
to be lost, stolen or destroyed. In its discretion, and as a condition precedent
to the issuance of any such new certificate or certificates, the board of
directors may require that the owner of such lost, stolen or destroyed
certificate or certificates, or such person's legal representative, give the
Corporation and its transfer agent or agents, registrar or registrars a bond in
such form and amount as the board of directors may direct as indemnity against
any claim that may be made against the Corporation and its transfer agent or
agents, registrar or registrars on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
Section 6. Transfer of Shares.
Shares of stock shall be transferable on the books of the Corporation by
the holder thereof, in person or by duly authorized attorney, upon the surrender
of the certificate or certificates representing the shares to be transferred,
properly endorsed, with such proof or guarantee of the authenticity of the
signature as the Corporation or its agents may reasonably require.
Section 7. Transfer Agents and Registrars.
The Corporation may have one or more transfer agents and one or more
registrars of its stock, whose respective duties the board of directors may,
from time to time, define. No certificate of stock shall be valid until
countersigned by a transfer agent, if the Corporation shall have a transfer
agent, or until registered by the registrar, if the Corporation shall have a
registrar. The duties of transfer agent and registrar may be combined.
Article VIII
SEAL
The board of directors may adopt and provide a seal which shall be circular
in form and shall bear the name of the Corporation and the words "Seal" and
"Delaware," and which, when adopted shall constitute the corporate seal of the
Corporation.
Article IX
FISCAL YEAR
The fiscal year for the Corporation shall close on the fifty-second Sunday
of each year.
Article X
AMENDMENTS
Subject to the provisions of the Certificate of Incorporation, these Bylaws
may be altered, amended or repealed at any regular meeting of the stockholders
(or at any special meeting thereof duly called for that purpose) by a majority
vote of the shares represented and entitled to vote at such meeting; provided
that in the notice of such special meeting, notice of such purpose shall be
given. Subject to the laws of the State of Delaware, the Certificate of
Incorporation and these Bylaws, the board of directors may, by majority vote of
those present at any meeting at which a quorum is present, amend these Bylaws,
or enact such other Bylaws as in their judgment may be advisable for the
regulation of the conduct of the affairs of the Corporation; provided that any
amendment to the third sentence of Article III, Section 8 of these Bylaws or any
amendment to any other provision of these Bylaws inconsistent therewith shall
require the act of two-thirds (2/3) of the entire board of directors."
AMENDMENT TO
ROCK BOTTOM RESTAURANTS, INC.
EQUITY INCENTIVE PLAN
WHEREAS, the Equity Incentive Plan (the "Plan") of Rock Bottom
Restaurants, Inc. (the "Company") was amended on January 23, 1998 to provide for
full and automatic vesting upon a Change in Control (as defined in the Plan);
WHEREAS, in amending the Plan, certain provisions regarding the
discretionary authority of the Compensation Committee (the "Committee") of the
Board of Directors of the Company (the "Board") were deleted; and
WHEREAS, by resolution dated March 18, 1999, the Board approved an
amendment to the Plan to reinstate the discretionary authority of the Committee
with respect to certain matters in connection with the Plan.
NOW, THEREFORE, pursuant to the authority granted to the Board under
Section 14 of the Plan to amend the Plan, the Plan is hereby amended to clarify
the discretionary rights of the Committee upon a Change in Control effective as
of January 23, 1998, by adding the following sentence to the end of subsection
10.1:
"In the event of a Change in Control, the Committee may, in
its sole discretion, without obtaining stockholder approval, pay cash
to any or all Option Holders in exchange for the cancellation of any or
all of their outstanding Options in an amount equal to the difference
between (x) the Option Price of such Options and (y) the greater of (I)
the Fair Market Value of the Stock on the date of the cancellation of
the Option, or (II) the consideration paid in such transaction for the
Company's shares; or provide that any or all outstanding Options held
by any or all Option Holders will be exchanged or converted into
options for or other equity securities of the surviving corporation or
of the acquiring corporation or any affiliate thereof."
IN WITNESS WHEREOF, as referenced above, this Amendment was approved by
resolution of the Board by resolution dated March 18, 1999, and is effective as
provided herein upon execution by an authorized officer of the Company as of
this 18th day of March, 1999.
By: /s/ William S. Hoppe
Its: Executive Vice President,
Chief Administrative Officer and
Chief Financial Officer
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated February 11, 1999 (except with respect to
matters discussed in Note 1, as to which the date is March 18, 1999) included in
this 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, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 27,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-END> DEC-27-1998
<CASH> 449,496
<SECURITIES> 0
<RECEIVABLES> 635,823
<ALLOWANCES> 30,000
<INVENTORY> 2,532,074
<CURRENT-ASSETS> 5,107,045
<PP&E> 118,572,073
<DEPRECIATION> (24,139,857)
<TOTAL-ASSETS> 102,496,861
<CURRENT-LIABILITIES> 31,853,663
<BONDS> 21,424,533
0
0
<COMMON> 80,560
<OTHER-SE> 65,342,157
<TOTAL-LIABILITY-AND-EQUITY> 102,496,861
<SALES> 160,101,590
<TOTAL-REVENUES> 160,101,590
<CGS> 40,624,728
<TOTAL-COSTS> 151,365,631
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,404,714
<INCOME-PRETAX> 7,774,220
<INCOME-TAX> 2,526,521
<INCOME-CONTINUING> 3,997,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,250,037
<NET-INCOME> 3,997,662
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
