<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
RAINFOREST CAFE, INC.
(Exact Name of Registrant as specified in its Charter)
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<C> <C> <C>
MINNESOTA 5812 41-1779527
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
</TABLE>
-------------------------
720 SOUTH FIFTH STREET
HOPKINS, MINNESOTA 55343
(612) 945-5400
(Address and Telephone Number of Principal Executive Offices)
KENNETH W. BRIMMER, PRESIDENT
RAINFOREST CAFE, INC.
720 SOUTH FIFTH STREET
HOPKINS, MINNESOTA 55343
(612) 945-5400
(Name, Address, and Telephone Number of Agent For Service)
Copies to:
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<C> <C>
DOUGLAS T. HOLOD, ESQ. EDWARD S. ROSENTHAL, ESQ.
Maslon Edelman Borman & Brand, Fried, Frank, Harris, Shriver & Jacobson
A Limited Liability Partnership 350 South Grand Ave., 32nd Floor
3300 Norwest Center Los Angeles, CA 90071
Minneapolis, MN 55402
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [ ].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of earlier effective registration statement for
the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C>
=====================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
% Convertible Subordinated Notes due
2003....................................... $115,000,000 $115,000,000 $33,925
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, no par value................... (2) -- --
=====================================================================================================================
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(1) Includes $15,000,000 aggregate principal amount of Convertible Notes
issuable upon exercise of the Underwriters' over-allotment option.
(2) Such indeterminable number of shares of Common Stock as may be required for
issuance upon conversion of the Convertible Notes being registered
hereunder. Pursuant to Rule 457(i), no registration fee is required for such
shares of Common Stock.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1997
$100,000,000
RAINFOREST LOGO
% CONVERTIBLE SUBORDINATED NOTES DUE 2003
The % Convertible Subordinated Notes due 2003 (the "Notes") are
convertible, at the option of the Holder (as defined herein), into common stock,
no par value (the "Common Stock"), of Rainforest Cafe, Inc. (the "Company"), at
any time following the initial issuance thereof and prior to maturity, unless
previously redeemed, at a conversion price of $ per share, subject to
adjustments in certain events. See "Description of Notes -- Conversion Rights"
for a description of events that may cause adjustments to the conversion price.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"RAIN." On December 1, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $37.25 per share. This Prospectus does not
reflect the Company's three-for-two-stock split for holders of record of Common
Stock as of December 26, 1997, effective January 15, 1998. The Company intends
to apply for listing of the Notes on the Nasdaq SmallCap Market. See "Price
Range of Common Stock and Dividend Policy."
Interest on the Notes is payable on January and July of each year,
commencing on July , 1998. The Notes are redeemable, in whole or in part, at
the option of the Company, at any time on or after January , 2001 at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the Redemption Date. If a Repurchase Event (as defined herein) occurs, each
Holder (as defined herein) of Notes will have the right, subject to certain
conditions and restrictions, to require the Company to offer to repurchase all
or any part of such Holder's Notes at 100% of their principal amount, plus
accrued and unpaid interest, if any, to the date of repurchase. See "Description
of Notes" for a more complete description of the provisions of the Indenture (as
defined herein). The Notes are general unsecured obligations, subordinated to
all existing and future Senior Indebtedness (as defined herein) of the Company
and will be effectively subordinated to all indebtedness and other obligations
of the Company's subsidiaries. At December 3, 1997, the Company had no
outstanding Senior Indebtedness. The Indenture governing the Notes does not
restrict the ability of the Company or its subsidiaries to incur additional
indebtedness, including Senior Indebtedness.
The Notes will be represented by a global note registered in the name of the
nominee of The Depository Trust Company ("DTC"), which will act as depositary.
Beneficial interests in the global note will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its direct and
indirect participants. Except as described herein, Notes in definitive form will
not be issued. The Notes will be issued in registered form in denominations of
$1,000 and integral multiples thereof. See "Description of the Notes --
Book-Entry."
SEE "RISK FACTORS" WHICH BEGIN ON PAGE 8 OF THIS PROSPECTUS, FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE NOTES OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==============================================================================================================================
Price to Underwriting Proceeds to
Public(1) Discount(2) Company(3)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................................... 100% % %
Total(4).................................................... $100,000,000 $ $
==============================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated at $400,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $15,000,000 aggregate principal amount of Notes at the Price
to Public less the Underwriting Discount, solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $115,000,000, the Underwriting Discount will total
$ , and the Proceeds to Company will total $ . See
"Underwriting."
The Notes are being offered subject to receipt and acceptance by NationsBanc
Montgomery Securities, Inc., PaineWebber Incorporated and Wessels, Arnold &
Henderson, L.L.C. (the "Underwriters") prior to sale and to the Underwriters'
right to reject any order, in whole or in part, and to withdraw, cancel or
modify the offer without notice. It is expected that delivery of the Notes will
be made through the facilities of DTC, in New York, New York on or about
, 1998, against payment therefor in immediately available funds.
------------------------
NATIONSBANC MONTGOMERY SECURITIES, INC.
PAINEWEBBER INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE
COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING TRANSACTIONS AND THE
PURCHASE OF NOTES AND COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
SUMMARY
The following is a summary of certain information contained elsewhere or
incorporated by reference in this Prospectus. This summary is not intended to be
complete and is qualified in its entirety by reference to, and should be read in
conjunction with, the detailed information, including "Risk Factors,"
consolidated financial statements, and notes thereto appearing elsewhere herein
or incorporated by reference in this Prospectus. Unless the context suggests
otherwise, (i) references in this Prospectus to the "Company" include Rainforest
Cafe, Inc. and its subsidiaries and (ii) all information in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised. This
Prospectus does not reflect the Company's three-for-two stock split for holders
of record of Common Stock as of December 26, 1997, effective January 15, 1998.
THE COMPANY
The Company owns, operates and licenses large, high volume, themed
restaurant/retail facilities under the name "Rainforest Cafe -- A Wild Place to
Shop and Eat(R)" (a "Rainforest Cafe" or "Unit"). The Company's Units are
designed to provide a visually and audibly stimulating and entertaining
rainforest environment that appeals to a broad range of customers of all ages.
Each Rainforest Cafe consists of a dining area (the "Restaurant") and a retail
area (the "Retail Village"). The Restaurant provides an attractive value to
customers by offering a full menu of high quality food and beverage items,
generous portions and excellent service in a unique and exciting environment.
The Retail Village features apparel, toys and gifts with the Rainforest Cafe
logo and eight proprietary animal characters, and other items reflecting the
rainforest theme. For the twelve months ended September 28, 1997, the Company
generated total revenues and EBITDA of approximately $93.6 million and $20.3
million, respectively.
The Company currently operates eleven Rainforest Cafes in the United States
which range in size from the approximately 15,000 square foot Mall of America
Unit located in a suburb of Minneapolis, Minnesota to the 30,000 square foot
Unit located at the Downtown Disney Marketplace at Walt Disney World in Orlando,
Florida. The Company's other Units are located in Chicago, Schaumburg and
Gurnee, Illinois; McLean, Virginia; Fort Lauderdale, Florida; Costa Mesa in
Orange County, California; Westbury, New York; Dallas, Texas and near Phoenix,
Arizona. The Company, which has signed leases for seven Units currently under
development, plans to open two additional Units in the United States during
December 1997, nine Units in 1998, including the 34,000 square foot Unit at
Disney's Animal Kingdom theme park in Orlando, and at least nine Units in 1999.
In addition to operations in the United States, the Company has been actively
pursuing international growth opportunities. The Company has entered into four
exclusive license agreements pursuant to which its licensees will develop over
the next ten years an aggregate of at least 17 Units, of which three Units are
currently open, in the United Kingdom and Ireland, Mexico, Canada, and certain
Southeast Asian countries. In each of these agreements, the Company has received
area licensing fees (other than in the licensing agreement relating to the
United Kingdom and Ireland) and will receive per Unit development fees and
royalties based on gross revenues. In addition, the Company has entered into a
letter of intent with a Hong Kong-based restaurant group to develop at least
three Units in Hong Kong, Macau, Taiwan and the Shanghai region of China over a
three year period. The first licensed Unit opened in London in June 1997,
followed by Units in Cancun and Mexico City, Mexico which opened in August and
October of 1997, respectively. The Company believes that a minimum of five Units
will be developed outside the United States in 1998.
The Company's rainforest theme is promoted by a simulated unique rainforest
environment throughout the Unit. Each Rainforest Cafe features a visually and
audibly exciting environment that includes a variety of live tropical birds,
exotic fish in large, custom-designed aquariums, animated artificial animals and
several sculpted banyan trees that create a canopy of foliage over diners and
shoppers. The dynamic rainforest atmosphere is further enhanced by simulated
thunder and lightning storms, tropical rain showers, waterfalls, mists that
emanate from extensive rock formations, and specially-developed aromatic scents.
This entertaining rainforest environment makes each Rainforest Cafe "A Wild
Place to Shop and Eat." The Company has renovated and updated its older Units to
incorporate the latest elements of the rainforest theme, including the Company's
latest animatronics.
3
<PAGE> 5
The Restaurant features an assortment of theme-titled, casual menu items
including appetizers, salads, pastas, pizzas, sandwiches, burgers and full
entree platters, all served in generous portions. Lunch and dinner entrees range
in price from $7.99 to $18.99, with an average check per person of approximately
$13.00 for the nine month period ended September 28, 1997. Each Rainforest Cafe
also features a "Mushroom Bar," which, in addition to being a full bar, offers
tropical blends of fruit and vegetable juices, and coffees. Alcoholic beverages
are primarily served to complement meals and account for approximately 10% of
total Restaurant sales. Management believes that its high quality food and
customer service, combined with its exciting and entertaining rainforest theme
concept, have resulted in a high level of repeat business.
In order to enter the Restaurant, all customers must pass through the
Unit's Retail Village. The Retail Village offers over 3,000 stock keeping units
("SKUs") and includes apparel and gifts with the Rainforest Cafe logo and other
items reflecting the rainforest theme such as toys and educational games. The
Company has also developed eight proprietary animal characters ("Animal
Characters"), each with a distinct personality, as an additional method of
merchandising its retail products. The Animal Characters appear on clothing and
gift items. By offering items featuring the Rainforest Cafe logo or an Animal
Character, the Company believes it is building "brand equity" in the Rainforest
Cafe name that will allow it to attract more customers and to enhance its
competitive retail position. For the nine month period ended September 28, 1997,
the Restaurants and the Retail Villages in the Company's operating Units
accounted for approximately 77% and 23% of the Units' total revenues,
respectively.
The Company identifies its current and planned domestic Rainforest Cafes as
either "Mall" or "Icon" Units. The Mall Unit format generally ranges in size
from approximately 15,000 to 23,000 square feet and has between 300 and 450
restaurant seats. Mall Units are located primarily in high traffic shopping
malls such as Mall of America, South Coast Plaza in Orange County, California
and Tysons Corner Center I in McLean, Virginia, a suburb of Washington D.C. The
larger Icon Units are generally in excess of 23,000 square feet and have 400 to
600 restaurant seats (although some may be slightly smaller). Icon Units are
generally located in high traffic tourist areas such as the Company's Downtown
Disney Marketplace and downtown Chicago locations. The Company is currently
developing additional Icon Units at the MGM Grand Hotel and Casino in Las Vegas,
Nevada scheduled to open in December 1997 and at Disney's Animal Kingdom theme
park scheduled to open during the second quarter of 1998.
The Company's five Mall Units that were open the entire nine month period
ended September 28, 1997, generated average revenues of $8.5 million and Unit
cash flow of $2.2 million, or 26.6% of revenues, during this nine month period.
Unit cash flow represents the Unit's operating income before depreciation and
amortization. The Company's nine Mall Units were developed at an average cost of
$6.2 million, net of landlord contributions. Additionally, the Company incurred
average pre-opening costs of approximately $650,000 and purchased an average of
$300,000 of inventory in connection with each opening. Management anticipates
that the majority of its future domestic Units will be Mall Units and that
average development cost, pre-opening cost and inventory costs will be similar
to these historical averages. The Company currently has two Icon Units, only one
of which was open the entire nine month period ended September 28, 1997. The
Company expects development costs for additional Icon Units to range from $10
million to $15 million, net of landlord contributions. In addition, the Company
anticipates pre-opening costs for each Icon Unit of approximately $1.0 million
and expects to purchase approximately $500,000 of inventory in connection with
each opening.
The Company was incorporated in 1994 under the laws of the State of
Minnesota. Its executive offices are located at 720 South Fifth Street, Hopkins,
Minnesota 55343, and its telephone number is (612) 945-5400. The Company's web
site is located at http://www.rainforestcafe.com.
4
<PAGE> 6
THE OFFERING
SECURITIES OFFERED............ $100,000,000 principal amount of %
Convertible Subordinated Notes due 2003 (the
"Notes") (plus an additional $15,000,000
principal amount of Notes if the Underwriters
over-allotment option is exercised in full).
See "Description of Notes" and "Underwriting."
INTEREST PAYMENT DATES........ January and July of each year, commencing
July , 1998.
MATURITY DATE................. , 2003
INTEREST...................... % per annum.
CONVERSION RIGHTS............. The Notes are convertible, at the option of the
Holder, at any time following the date of
initial issuance thereof and prior to maturity,
unless previously redeemed, into Common Stock
at a conversion price of $ per share,
subject to adjustments in certain events. See
"Description of Notes -- Conversion Rights."
OPTIONAL REDEMPTION........... The Notes are not redeemable by the Company
prior to , 2001. Subject to the
foregoing, the Notes will be redeemable on not
less than 30 nor more than 60 days' notice at
the option of the Company, in whole or in part,
at any time, at the redemption prices set forth
in "Description of Notes -- Optional
Redemption," in each case together with accrued
and unpaid interest.
REPURCHASE EVENTS............. Upon the occurrence of any Repurchase Event (as
defined herein) occurring prior to the maturity
of the Notes, each Holder shall have the right,
at such Holder's option, to require the Company
to purchase all or any part of such Holder's
Notes at 100% of the principal amount thereof,
subject to adjustments in certain events,
together with accrued and unpaid interest
thereon, to, but excluding, the date of the
purchase. See "Description of Notes -- Certain
Rights to Require Repurchase of Notes."
SUBORDINATION................. The Notes are general unsecured obligations,
subordinated in right of payment to all
existing and future Senior Indebtedness (as
defined herein) of the Company and will be
effectively subordinated to all indebtedness
and other obligations of the Company's
subsidiaries. At December 3, 1997, the Company
had no outstanding Senior Indebtedness. The
Indenture governing the Notes does not restrict
the ability of the Company or its subsidiaries
to incur additional indebtedness, including
Senior Indebtedness.
USE OF PROCEEDS............... The net proceeds from the issuance of the Notes
will be used principally for the development of
additional Rainforest Cafes and for general
corporate purposes, including for working
capital. See "Use of Proceeds."
LISTING....................... The Company intends to apply for listing of the
Notes on the Nasdaq SmallCap Market.
5
<PAGE> 7
COMMON STOCK.................. The Common Stock is quoted on the Nasdaq
National Market under the symbol "RAIN." See
"Common Stock Price Range and Dividend Policy."
RISK FACTORS.................. See "Risk Factors" for a discussion of factors
to be considered before purchasing the Notes
offered hereby.
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT UNIT AND PER SHARE DATA)
<TABLE>
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FEBRUARY 3, 1994 NINE MONTHS ENDED
(INCEPTION) THROUGH YEAR ENDED YEAR ENDED -----------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995(1) 1995 1996 1996 1997
------------------- ------------ ------------ ------------- -------------
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STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales............. $ 1,337 $ 9,979 $37,088 $21,638 $56,183
Retail sales................. 729 3,472 10,868 6,144 16,908
Licensing fees and
royalties................. -- -- 750 750 377
------- ------- ------- ------- -------
Total revenues............ 2,066 13,451 48,706 28,532 73,468
Income (loss) from Unit
operations and licensing..... (20) 2,166 8,889 5,552 13,547
Income (loss) before income
taxes and extraordinary
item......................... (1,628) 1,169 9,240 5,148 12,985
Income (loss) before
extraordinary item........... (1,628) 1,169 5,924 3,305 8,314
Extraordinary item(2).......... -- 1,053 -- -- --
------- ------- ------- ------- -------
Net income (loss).............. $(1,628) $ 116 $ 5,924 $ 3,305 $ 8,314
Net income (loss) per common
share before extraordinary
item......................... $ (0.46) $ 0.16 $ 0.41 $ 0.23 $ 0.47
Net income (loss) per common
share........................ $ (0.46) $ 0.02 $ 0.41 $ 0.23 $ 0.47
Weighted average shares
outstanding.................. 3,543 7,312 14,391 14,391 17,812
OPERATING DATA:
EBITDA(3)...................... $(1,302) $ 1,594 $11,294 $ 5,149 $14,123
Company owned Units open at end
of period.................... 1 2 6 4 8
Licensed Units open at end of
period....................... -- -- -- -- 2
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SEPTEMBER 28, 1997
-------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
(DOLLARS IN THOUSANDS)
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BALANCE SHEET DATA:
Working capital............................................. $ 82,912 $179,512
Total assets................................................ 240,272 340,272
Long term debt.............................................. -- 100,000
Shareholders' equity........................................ 216,392 216,392
</TABLE>
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(1) The Mall of America Unit began operations on October 3, 1994. Prior thereto,
the Company had no operating Units or revenues.
(2) On April 7, 1995, the holders of $1,222,500 of promissory notes converted
such notes into shares of Common Stock at a conversion price of $2.67 per
share. The Company recorded the conversion as an extinguishment of debt
which resulted in an extraordinary charge to earnings of $1,053,128, or
$0.14 per share, at the date of conversion.
(3) Represents earnings before extraordinary item, interest, income tax expense
and depreciation and amortization ("EBITDA"). EBITDA is not a measurement in
accordance with generally accepted accounting principles ("GAAP") and should
not be considered an alternative to, or more meaningful than, income from
operations, net income or cash flows as defined by GAAP or as a measure of
the Company's profitability or liquidity. The Company has included
information concerning EBITDA herein because management believes EBITDA
provides useful information regarding the cash flow of the Company and its
ability to service debt.
(4) As adjusted to reflect the sale by the Company of $100 million principal
amount of Notes offered hereby and the application of the net proceeds
therefrom.
7
<PAGE> 9
RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Notes offered hereby.
GROWTH FACTORS/EXPANSION STRATEGY
Future growth will depend to a substantial extent on the Company's ability
to increase the number of its Units. The Company's primary strategy is to
develop new Rainforest Cafes in shopping malls, urban entertainment centers and
Disney theme parks. Because of the relatively large size of each Rainforest Cafe
and the Company's site selection criteria, the availability of desirable
locations may be limited and the Company may be hindered in finding suitable
locations for the development of new Units. Additionally, the Company's ability
to open additional Units will depend upon a number of other factors including
the ability of the Company to negotiate leases on acceptable terms, timely
approval of local regulatory authorities, acceptance of the Rainforest Cafe
concept in new markets, and the general state of the economy.
The capital resources required to develop each new Unit are significant.
The Company estimates that the costs of developing and opening most of its
future Mall Units will range from $5.5 million to $8.5 million, net of
anticipated landlord contributions. The Company expects that it will incur
approximately $650,000 in pre-opening costs and purchase approximately $300,000
of inventory in connection with the opening of future Units. The Company also
expects to open selected Icon Units, such as its planned Units at the MGM Grand
Hotel and Casino, Disney's Animal Kingdom and Times Square, New York locations,
which will cost significantly more to develop and open.
The Company's ability to open and successfully operate additional Units
will also depend upon the hiring and training of skilled Unit management
personnel and the general ability to successfully manage growth, including
monitoring Units and controlling costs, food quality and customer service.
Accordingly, there can be no assurance that the Company will be able to open new
Units or that, if opened, those Units can be operated profitably. See "Business
- -- Expansion Plans and Site Selection."
LIMITED BASE OF OPERATIONS
The Company currently operates eleven Units domestically and plans to open
two additional Units during December 1997, nine Units in 1998 and at least nine
Units in 1999. The combination of the relatively small number of locations and
the significant investment associated with each new Unit may cause the operating
results of the Company to fluctuate significantly and adversely affect the
profitability of the Company. Due to this relatively small number of current and
planned locations, poor operating results at any one Unit or a delay in the
planned opening or nonopening of a Unit could materially affect the
profitability of the entire Company. Furthermore, the Company is expected to
derive a significant portion of its revenues from Units located in Walt Disney
World. Because of the substantial financial requirements associated with opening
new Units, the investment risk related to any one Rainforest Cafe is much larger
than that associated with most other companies' restaurant or retail revenues.
The Company's new Units typically open at maximum capacity. The Company's short
history indicates that a Unit's revenues may also decrease during such Unit's
second year of operations. Other restaurant companies opening to similarly high
per unit sales often do not show significant comparable store sales increases.
Some of the Company's Units, such as the Unit currently under development
at Palisades Center in West Nyack, New York, and the Grapevine Mills Unit near
Dallas, Texas, which opened in October 1997, have been or will be developed at
newly constructed shopping malls that have no operating history. As the Company
continues to develop Units in newly constructed shopping malls, the Company
could experience delays in openings similar to that experienced in the Palisades
Center Unit, the anticipated opening of which has been delayed for approximately
one year due to factors beyond the Company's control. The poor performance of
these malls could also negatively impact these Units and the financial
performance of the Company. Similarly, Disney's Animal Kingdom has no operating
history and the performance of this Unit and its scheduled opening are also
subject to the risks of new developments.
8
<PAGE> 10
COMPETITION
The restaurant and specialty retail businesses are highly competitive. In
the restaurant industry, competition is based primarily upon price, service,
food quality and location. There are numerous well-established competitors,
including national, regional and local restaurant chains, possessing
substantially greater financial, marketing, personnel and other resources than
the Company. The Company also competes on a general basis with a large variety
of national and regional restaurant operations, as well as with locally owned
restaurants, diners, and other establishments that offer moderately priced food.
The Company competes with other theme restaurants in the highly competitive and
developing theme restaurant market. Other restaurants and companies utilize the
rainforest or related themes. Additionally, the Company competes with a number
of well-established specialty retailers possessing substantially greater
financial, marketing, personnel and other resources than the Company. In the
retail industry, competition is based primarily upon merchandise selection,
price and customer service. There can be no assurance that the Company will be
able to respond to various competitive factors affecting the restaurant and
retail industries.
The performance of individual Units may also be affected by factors such as
traffic patterns, demographic considerations, and the type, number and location
of competing restaurants. In addition, factors such as inflation, increased
food, labor and employee benefit costs, and the availability of experienced
management and hourly employees may also adversely affect the restaurant and
retail industries in general and the Company's Units in particular. Restaurant
and retail operating costs are further affected by increases in the minimum
hourly wage, unemployment tax rates and similar matters over which the Company
has no control. See "Business -- Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company has license agreements pursuant to which its licensees will
develop Units in the United Kingdom and Ireland, Mexico, Canada and Southeast
Asia and intends to enter into other license agreements in the future. A Unit
opened in London in June 1997, in Cancun in August 1997 and in Mexico City in
October 1997. Accordingly, the Company's concept is relatively untested outside
of the United States, and no assurance can be given that any international
location will be successful. The Company's continued success is dependent to a
substantial extent on its reputation, and its reputation may be affected by the
performance of certain licensee-owned Units over which the Company will have
limited control. In addition, the Company has invested equity capital in its
London Unit and is likely to continue to invest equity capital in certain other
of its international Units. Such investments are likely to range from
approximately $400,000 to $1.5 million per Unit. Any international operations of
the Company will also be subject to certain external business risks such as
exchange rate fluctuations, political instability and a significant weakening of
a local economy in which a foreign Unit is located. In addition, it may be more
difficult to register and protect the Company's intellectual property rights in
certain foreign countries.
STOCK PRICE VOLATILITY
Since the Company's initial public offering in April 1995, the market price
of the Company's Common Stock has risen substantially. The market price of the
Common Stock has fluctuated in the past and could fluctuate substantially in the
future due to a variety of factors, including market perception of the Company's
ability to achieve successfully its planned rapid growth, quarterly operating
results of the Company or other restaurant and retail companies, the trading
volume in the Company's Common Stock, changes in general conditions in the
economy, the financial markets or the restaurant or retail industries, or other
developments affecting the Company or its competitors. In addition, the stock
market is subject to extreme price and volume fluctuations. This volatility has
had a significant effect on the market prices of securities issued by many
companies for reasons unrelated to the operating performance of these companies.
See "Price Range of Common Stock and Dividend Policy."
9
<PAGE> 11
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING
The success of the Company's operations depends to a significant extent on
a number of factors relating to discretionary consumer spending, including
economic conditions affecting disposable consumer income, the overall success of
the malls, entertainment centers and Disney theme parks in which Units are
located and the continued popularity of theme restaurants generally and the
Company's rainforest concept in particular. Theme restaurants are susceptible to
shifts in consumer preferences and may experience a decline of revenue growth or
of actual revenues as consumers tire of the related theme.
UNCERTAIN TRADEMARK PROTECTION; PROPRIETARY MARKS; TRADE DRESS; COPYRIGHTS
The Company's ability to implement successfully its Rainforest Cafe concept
will depend in part on its ability to further establish "brand equity" through
the use of its trademarks, service marks, trade dress and other proprietary
intellectual property, including its name and logos, the Animal Characters and
unique features of its rainforest theme decor. It is the Company's policy to
seek to protect and to defend vigorously its rights to this intellectual
property; any failure to do so could have a material adverse effect on the
Company's operations.
The Company's original logo incorporating "RAINFOREST CAFE" and the mark "A
WILD PLACE TO SHOP AND EAT" are federally registered service marks for the
Company's Restaurant and Retail Village. The Company also owns a federal
registration for the mark "RAINFOREST" for the Company's restaurant services.
Additionally, in June 1996 the Company filed federal trademark applications for
"RAINFOREST CAFE A WILD PLACE TO SHOP AND EAT" and the related design, which
includes the Company's new logo, illustrating six of the Company's eight
proprietary Animal Characters. The Company intends also to protect its
proprietary Animal Characters by the filing of copyright applications and, in
certain instances, trademark registration applications. There is no assurance,
however, that any such registrations, including the registration of the name and
logo, will be obtained. The denial of one of the Company's trademark
applications could lower the barriers for entry for potential competitors of the
Company.
There is also no assurance that any of the Company's rights in any of its
intellectual property will be enforceable, even if registered, against any prior
users of similar intellectual property or competitors of the Company who seek to
utilize similar intellectual property in areas where the Company operates or
intends to conduct operations. The failure to enforce any of the Company's
intellectual property rights could have the effect of reducing the Company's
ability to capitalize on its efforts to establish brand equity. The Company is
aware of trademark applications, registrations and uses that may accord to third
parties certain rights in the word "rainforest" or in certain elements of some
of the proprietary Animal Character names and illustrations with respect to
utilization of these marks on certain clothing and retail products. The
existence of any such third party rights could result in claims of infringement
against the Company with respect to its uses of "Rainforest Cafe" or its Animal
Characters in connection with its sales of clothing and other retail products.
The Company is currently involved in litigation with two entities alleging that
the Company is infringing their intellectual property rights. In one case, the
other company has a federally registered trademark that it alleges is infringed
by certain of the Company's retail products. The Company is currently engaged in
settlement negotiations with this company. The other party to the second case
alleges that the Company's restaurants infringe its trade dress rights. Although
the Company does not expect these two lawsuits to have a materially adverse
result on the Company or its business, in the event that these matters are not
successfully resolved or if the Company encounters claims from prior users of
similar intellectual property in areas where the Company operates or intends to
conduct operations, it is possible that the Company's operations could be
substantially limited or that the Company may have to pay damages to a prior
user or registrant of similar intellectual property.
LEASES
The Company has entered into long-term leases relating to each of its
existing and seven of its planned domestic Units and has entered into five
letters of intent with respect to certain of its planned domestic Units,
10
<PAGE> 12
including its Icon Unit at Times Square, New York. These leases are or will be
non-cancelable by the Company (except in limited circumstances) and have or will
have annual base rents ranging from $200,000 to $1.0 million (except for the MGM
Grand Hotel and Casino lease, which the Company expects to have an annual base
rent of $2.1 million, and the lease for the Times Square, New York location
which is expected to have an annual base rent of in excess of $2.2 million).
Additional facilities developed by the Company are likely to be subject to
similar long-term leases which are non-cancelable by the Company. If an existing
or future Unit does not perform at a profitable level, and the decision is made
to close the Unit which may be deemed a default under such Unit's lease, the
Company may nonetheless be committed to perform its obligations under the
applicable lease which would include, among other things, payment of the
respective base rent for the balance of the respective lease term. The leases
related to the Downtown Disney Marketplace and Disney's Animal Kingdom Units are
cancelable by the landlord at any time upon sixty days notice and payment of the
Company's unamortized value of leasehold improvements and an amount equal to the
net operating income generated by such Unit for the previous lease year. With
regard to certain of the Company's leases, in the event the Company fails to
achieve specified gross sales by a certain date, such leases may be terminated
by the landlord. If such a termination were to occur at these locations, the
Company would lose a Unit without necessarily receiving an adequate return on
its investment.
GOVERNMENT REGULATION
The Company's business is subject to various federal, state and local
government regulations, including those relating to the sale of food and
alcoholic beverages. While the Company to date has not experienced an inability
to obtain or maintain any necessary governmental licenses, permits or approvals,
the failure to maintain food and liquor licenses could have a material adverse
effect on the Company's operating results. In addition, a facility's operating
costs are affected by increases in the minimum hourly wage, unemployment tax
rates, sales taxes and similar costs over which the Company has no control.
Since some of the Company's Restaurant and all of the Retail Village personnel
are paid at rates based on the federal minimum wage, increases in the minimum
wage will result in an increase in the Company's labor costs. The Company is
subject in all states in which it operates Units to "dram shop" statutes which
generally provide a person injured by an intoxicated person with the right to
recover damages from an establishment that served alcoholic beverages to the
intoxicated person. Difficulties or failure in obtaining required licenses and
approvals will result in delays in, or cancellation of, the opening of new
Units. Although the Company has satisfied restaurant, liquor and retail
licensing for its existing Units, no assurance can be given that the Company
will be able to maintain existing approvals or obtain such further approvals at
other locations. In addition, Units that are located in casinos may require the
Company to be licensed by gaming regulatory authorities.
Businesses that maintain or sell animals are subject to additional levels
of state and local health and sanitation regulations. Having tropical birds as
part of the Rainforest Cafe concept requires the Company to adhere to stringent
health codes that prohibit crossover between kitchen workers and animal
handlers, and the exchange of air from the bird areas to the rest of the Unit.
The Company overcame this problem at its existing Units by installing specially
designed air exhaust hoods for the birds' perch area. Additionally, a separate
waste disposal system is provided for the birds. Although, to date, the Company
has satisfied animal-related licensing for its existing Units, no assurance can
be given that the Company will be able to maintain such approvals or obtain
similar approvals at other locations. Difficulties or failure in obtaining
required licenses and approvals may increase the cost of Units or result in
delays in, or cause the cancellation of, the opening of Units.
The Federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company could
be required to expend funds to modify its Units in order to provide service to
or make reasonable accommodations for disabled persons. The Company's Units are
currently designed to be accessible to the disabled. The Company believes it is
in substantial compliance with all current applicable regulations relating to
accommodations for the disabled.
11
<PAGE> 13
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend largely on the efforts and
abilities of the Company's senior corporate management. Since April 1997, the
Company has been operating with an interim President, Kenneth W. Brimmer, who is
also a director of the Company. Mr. Brimmer has limited restaurant and retail
experience. Although the Company is actively searching for a President, no
assurance can be given that a new President will be retained in the near future.
Lyle Berman, the Company's Chairman and Chief Executive Officer, is Chief
Executive Officer of Grand Casinos, Inc. and serves on four boards of public
companies. Mr. Berman devotes approximately 15% of his time to the Company.
SUBORDINATION
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness of the Company
and will be effectively subordinated to all indebtedness and other obligations
of the Company's subsidiaries. Under the Indenture (as defined herein), the
Notes will be subordinated to the Company's Senior Indebtedness. As a result of
such subordination, in the event of any insolvency, liquidation or
reorganization of the Company or upon acceleration of the Notes due to an Event
of Default (as defined in the Indenture), the assets of the Company will be
available to pay obligations on the Notes and any other subordinated
indebtedness of the Company only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes and any other subordinated indebtedness of the Company then
outstanding. The Indenture does not prohibit or limit the incurrence of
indebtedness, including Senior Indebtedness, by the Company or subsidiaries. The
incurrence of such indebtedness could adversely affect the Company's ability to
pay its obligations under the Notes. At December 3, 1997, the Company had no
outstanding Senior Indebtedness.
The Notes are obligations exclusively of the Company. Since much of the
operations of the Company are conducted through its subsidiaries, the cash flow
and the consequent ability to service debt, including the Notes, of the Company
are dependent upon the earnings of any such subsidiaries and the distribution of
those earnings, or upon loans or other payments of funds by those subsidiaries,
to the Company. Such subsidiaries are separate and distinct legal entities and
have no obligation, contingent or otherwise, to pay any amounts due pursuant to
the Notes or to make any funds available therefor, whether by dividends,
distributions, loans or other payments. In addition, the payment of dividends or
distributions and the making of loans and advances to the Company and any such
subsidiaries could be subject to statutory or contractual restrictions, could be
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
Any right of the Company to receive any assets of any of its subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would still
be subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company.
ABSENCE OF PUBLIC MARKET FOR THE NOTES; POSSIBLE VOLATILITY OF PRICE
The Notes are new securities for which there currently is no market.
Although the Company intends to file for listing of the Notes and the
Underwriters have informed the Company that they currently intend to make a
market in the Notes, there is no obligation to do so and any such market making
may be discontinued at any time without notice. Accordingly, there can be no
assurance that an active market for the Notes will develop or be sustained after
the offering or that the market price of the Notes will not decline. If an
active market for the Notes fails to develop or be sustained, the trading price
of such Notes could be materially adversely affected. Various factors such as
changes in prevailing interest rates or changes in perceptions of the Company's
creditworthiness could cause the market price of the Notes to fluctuate
significantly. The trading price of the Notes also could be significantly
affected by the market price of the Common Stock, which could be subject to wide
fluctuations in response to a number of factors. See "-- Stock Price
Volatility."
12
<PAGE> 14
The liquidity of, and trading market for, the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of, and prospects for, the Company.
LIMITATION ON REPURCHASE OF NOTES UPON REPURCHASE EVENT
Upon the occurrence of a Repurchase Event (as defined herein) each Holder
of Notes may require the Company to repurchase all or a portion of such Holder's
Notes. If a Repurchase Event were to occur, there could be no assurance that the
Company would have sufficient financial resources or would be able to arrange
financing to pay the repurchase price for all Notes tendered by Holders thereof.
The Company's ability to repurchase the Notes in such event may be limited by
law, the Indenture and the terms of other agreements relating to borrowings that
constitute Senior Indebtedness, as such indebtedness or agreements may be
entered into, replaced, supplemented or amended from time to time. The Company
may be required to refinance Senior Indebtedness in order to make any such
payment. If the Company is prohibited from repurchasing the Notes, such failure
would constitute an Event of Default under the Indenture, which may, in turn,
constitute a further default under certain of the Company's existing agreements
relating to borrowings and the terms of other indebtedness that the Company may
enter into from time to time. In such circumstances, the subordination
provisions in the Indenture would prohibit payments to the Holders of the Notes.
Furthermore, the Company may not have the financial ability to repurchase the
Notes in the event that maturity of Senior Indebtedness is accelerated as a
result of a default under the applicable loan or similar agreement. See
"Description of Notes -- Certain Rights to Require Repurchase of Notes."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's authorized capital consists of 50,000,000 shares of capital
stock. The Board of Directors, without any action by the Company's shareholders,
is authorized to designate and issue shares in such classes or series (including
classes or series of preferred stock) as it deems appropriate and to establish
the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights. No class other than the Common Stock is currently
designated and there is no current plan to designate or issue any such
securities. The rights of holders of preferred stock and other classes of common
stock that may be issued may be superior to the rights granted to the holders of
the existing Common Stock. Further, the ability of the Board of Directors to
designate and issue such undesignated shares could impede or deter an
unsolicited tender offer or takeover proposal regarding the Company and the
issuance of additional shares having preferential rights could adversely affect
the voting power and other rights of holders of Common Stock. Furthermore, as a
Minnesota corporation, the Company is subject to various Minnesota statutes
which may hinder or delay a change in control of the Company including: (i) a
control share acquisition statute; (ii) a business combination statute; (iii) a
fair price statute; (iv) a greenmail statute; and (v) a non-monetary factors
statute. See "Description of Capital Stock." Finally, the Indenture provides
that the Holders of Notes have the right, subject of certain restrictions
therein, to require the Company to repurchase the Notes in the event there is a
"Change of Control" of the Company (as defined in the Indenture). Such right of
repurchase could be deemed to be a deterrent to any potential acquisition of the
Company.
13
<PAGE> 15
USE OF PROCEEDS
The net proceeds of the offering will be used for the development of
additional Units. The Company intends to open nine Units in 1998 and at least
nine Units in 1999. The remaining net proceeds will be used for working capital
purposes. Pending such uses, the Company plans to invest the net proceeds of
this offering in primarily short-term, investment grade, interest-bearing
securities.
CAPITALIZATION
The following table sets forth the actual total capitalization of the
Company as of September 28, 1997, and as adjusted to reflect the $100 million
principal amount of Notes offered by the Company hereby. See "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
% Convertible Subordinated Notes due 2003................. $ -- $100,000
-------- --------
Shareholders' equity:
Common stock, no par value, 50,000,000 shares authorized;
17,421,392 shares issued and outstanding(1)............ 203,666 203,666
Retained earnings......................................... 12,726 12,726
-------- --------
Total shareholders' equity............................. 216,392 216,392
-------- --------
Total capitalization................................. $216,392 $316,392
======== ========
</TABLE>
- -------------------------
(1) Does not include: (i) 2,500,000 shares reserved for issuance under the
Company's 1995 Stock Option and Compensation Plan, of which options to
purchase 1,652,217 shares were outstanding; (ii) options to purchase 230,001
shares of Common Stock issued to an officer employee and non-officer
employee of the Company; (iii) 200,000 shares reserved for issuance under
the Company's 1997 Directors' Stock Option Plan, of which options to
purchase 25,000 shares were outstanding; (iv) options to purchase 137,500
shares of Common Stock issued to directors of the Company; and (v) 150,000
shares reserved for issuance under the Company's 1996 Employee Stock
Purchase Plan, of which 18,912 were outstanding.
14
<PAGE> 16
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "RAIN." The following table summarizes the high and low sale prices
per share of the Common Stock for the periods indicated and reflects the
Company's three-for-two stock split effective July 1, 1996, but does not reflect
the Company's three-for-two stock split for holders of record of Common Stock as
of December 26, 1997, effective January 15, 1998:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
Second Quarter (since April 7, 1995).................... $11.67 $ 3.17
Third Quarter........................................... 15.50 8.08
Fourth Quarter.......................................... 23.17 13.33
1996
First Quarter........................................... $22.67 $14.83
Second Quarter.......................................... 34.17 20.00
Third Quarter........................................... 34.25 20.00
Fourth Quarter.......................................... 36.25 22.25
1997
First Quarter........................................... $25.00 $18.75
Second Quarter.......................................... 28.25 18.25
Third Quarter........................................... 32.88 21.25
Fourth Quarter (through December 1, 1997)............... 38.13 28.00
</TABLE>
On December 1, 1997, the last reported sale price for the Common Stock on
the Nasdaq National Market was $37.25 per share.
The Company's Board of Directors has not declared any dividends on the
Company's Common Stock since its inception, and does not intend to pay out any
cash dividends on its Common Stock in the foreseeable future. The Board of
Directors presently intends to retain all earnings, if any, to finance the
development and opening of additional Units. The payment of cash dividends in
the future, if any, will be at the discretion of the Board of Directors and will
depend upon such factors as earnings levels, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors.
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
The Selected Consolidated Financial Data presented below should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this Prospectus, and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The selected financial data for the
period February 3, 1994 (Inception) through January 1, 1995 have been derived
from the financial statements of the Company audited by Lund Koehler Cox &
Company, PLLP. The selected financial data as of and for the years ended
December 31, 1995 and December 29, 1996 have been derived from the consolidated
financial statements of the Company audited by Arthur Andersen LLP. The selected
consolidated financial data for the nine months ended September 29, 1996 and
September 28, 1997 have been derived from the Company's unaudited financial
statements, which, in the opinion of the Company's management, contain all
adjustments, consisting of normal recurring adjustments necessary for a fair
presentation of the financial position and results of operations.
<TABLE>
<CAPTION>
FEBRUARY 3, 1994 YEAR ENDED NINE MONTHS ENDED
(INCEPTION) THROUGH --------------------------- -----------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales............................. $ 1,337 $ 9,979 $ 37,088 $ 21,638 $ 56,183
Retail sales................................. 729 3,472 10,868 6,144 16,908
Licensing fees and royalties................. -- -- 750 750 377
------- ------- -------- -------- --------
Total revenues............................. 2,066 13,451 48,706 28,532 73,468
------- ------- -------- -------- --------
Costs and expenses:
Food and beverage costs...................... 450 2,778 9,254 5,489 13,197
Cost of retail goods sold.................... 393 1,548 4,867 2,840 7,820
Restaurant operating expenses................ 769 5,366 18,288 10,600 27,535
Retail operating expenses.................... 404 1,003 3,558 1,959 5,348
Depreciation and amortization................ 70 475 2,331 1,196 3,710
Amortization of preopening expenses.......... -- 115 1,519 896 2,311
------- ------- -------- -------- --------
Total costs and expenses................... 2,086 11,285 39,817 22,980 59,921
------- ------- -------- -------- --------
Income from Unit operations and licensing...... (20) 2,166 8,889 5,552 13,547
------- ------- -------- -------- --------
Other (income) expense:
General, administrative and development
expenses................................... 1,354 1,265 4,688 3,235 5,399
Interest income.............................. -- (482) (5,220) (3,012) (6,782)
Write-off of development costs............... -- -- -- -- 1,935
Other........................................ 254 214 181 181 10
------- ------- -------- -------- --------
Total other (income) expense............... 1,608 997 (351) 404 562
------- ------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item........................... (1,628) 1,169 9,240 5,148 12,985
Provision for income taxes..................... -- -- 3,316 1,843 4,671
------- ------- -------- -------- --------
Income (loss) before extraordinary item........ (1,628) 1,169 5,924 3,305 8,314
Extraordinary item(1):
Extinguishment of debt....................... -- 1,053 -- -- --
------- ------- -------- -------- --------
Net income (loss).......................... $(1,628) $ 116 $ 5,924 $ 3,305 $ 8,314
======= ======= ======== ======== ========
Net income (loss) per common share:
Earnings (loss) before extraordinary item.... $ (0.46) $ 0.16 $ 0.41 $ 0.23 $ 0.47
Extraordinary item........................... -- (0.14) -- -- --
------- ------- -------- -------- --------
Net income (loss) per common share........... $ (0.46) $ 0.02 $ 0.41 $ 0.23 $ 0.47
======= ======= ======== ======== ========
Weighted average shares outstanding............ 3,543 7,312 14,391 14,391 17,812
OPERATING DATA:
Ratio of earnings to fixed charges(2).......... -- 3.4x 7.3x 7.2x 7.4x
Company-owned Units open at end of period...... 1 2 6 4 8
Licensed Units open at end of period........... -- -- -- -- 2
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital................................ $ (467) $15,490 $118,320 $162,620 $ 82,912
Total assets................................... 3,837 31,209 222,701 214,474 240,272
Long term debt................................. 1,223 -- -- -- --
Shareholders' equity........................... 1,793 26,355 203,954 201,487 216,392
</TABLE>
- -------------------------
(1) On April 7, 1995, the holders of $1,222,500 of promissory notes converted
such notes into shares of Common Stock at a conversion price of $2.67 per
share. The Company recorded the conversion as an extinguishment of debt
which resulted in an extraordinary charge to earnings of $1,053,128, or
$0.14 per share, at the date of conversion.
(2) The ratio of earnings to fixed charges is computed by dividing (i) earnings
before taxes and extraordinary items plus fixed charges by (ii) fixed
charges. Fixed charges consist of interest expense, amortization of debt
issue costs and the estimated interest component of rent expense (assumed to
be one-third of lease payments). Earnings were inadequate to cover fixed
charges by $1.9 million for the period February 3, 1994 (Inception) through
January 1, 1995.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company, founded in February 1994, owns, operates, and licenses themed
restaurant/retail facilities (each a "Unit") under the name "Rainforest Cafe --
A Wild Place to Shop and Eat(R)." As of September 28, 1997, the Company owned
and operated eight Units in the United States and licensed two Units outside of
the United States. The Company's initial Unit opened on October 3, 1994 in the
Mall of America in Bloomington, Minnesota.
As of December 3, 1997, the Company owned and operated eleven Units in the
United States and licensed three Units outside of the United States. The Company
presently plans to open two additional domestic Units in December 1997 and nine
domestic Units in 1998. Because the Company anticipates continued rapid
expansion, period to period comparisons may not be meaningful. The Company
presently intends to lease the sites for all future domestic Units and
anticipates that most of its future domestic Units will range in size from
approximately 15,000 to 23,000 square feet, with between 300 and 450 restaurant
seats and 15% to 25% of square footage dedicated to retail selling space.
However, some Units may be significantly larger, such as the existing
free-standing 30,000 square foot Downtown Disney Marketplace Unit, and the
planned free-standing Disney's Animal Kingdom Unit, which is expected to open
during the second quarter of 1998 and which will consist of approximately 34,000
square feet and have approximately 550 restaurant seats.
The Company has entered into four exclusive license agreements to develop
an aggregate of at least 17 Units, of which three are currently open, over the
next ten years in the United Kingdom and Ireland, Mexico, Canada, and certain
Southeast Asian countries including Singapore, Malaysia, Indonesia and Thailand.
The Company intends to enter into additional license agreements in the future.
In each of these agreements, the Company is entitled to receive area licensing
fees ranging from $500,000 to $750,000 (other than the license agreement
relating to the United Kingdom and Ireland which does not have an area licensing
fee) and will receive development fees of $100,000 per Unit and royalties
ranging from 3% to 10% of gross revenues. Certain agreements, such as the
agreement relating to the United Kingdom and Ireland, allow the Company to
become an equity participant of up to 20% of each Unit developed. The first
international licensed Unit opened in London in June 1997, followed by Units in
Cancun and Mexico City which opened in August and October of 1997, respectively.
The Company believes that a minimum of five Units will be developed outside the
United States in 1998. See "Business -- International License and Joint Venture
Agreements."
Components of operating expenses include operating payroll and fringe
benefits costs, occupancy costs, maintenance costs related to the bird habitat
and aquariums, and advertising and promotion costs. The majority of these costs
are variable and will increase with sales volume. Management projects that when
a new Unit opens, it will incur higher than normal levels of labor and food
costs as Unit personnel complete training. Management believes, however, that as
new staff gain experience, hourly labor schedules over the ensuing 30-60 day
period will gradually adjust because of operating efficiencies and then be
similar to those at established Units. Each of the Company's current leases
includes both fixed rate and percentage rent provisions.
The Company's current policy is to capitalize costs associated with the
opening of Units, including the cost of hiring and training the initial
workforce, travel and other direct costs, if it is determined these costs are
recoverable. These costs are then amortized over the eleven month period
following the opening of a Unit beginning the first full month of operation.
Preopening costs for Units opened in fiscal years 1995 and 1996 averaged
approximately $650,000 per Unit excluding the Downtown Disney Marketplace Unit
which incurred approximately $1.2 million of pre-opening costs. See "-- Proposed
New Accounting Standards."
General, administrative and development expenses include all corporate and
administrative functions that serve to support existing operations and provide
an infrastructure to support future growth. In addition, certain expenses
related to the recruiting and training of Unit management personnel are also
included if such expenses meet the criteria to be capitalized as preopening
expenses. Management, supervisory and staff salaries, employee benefits, travel,
information systems, training, rent and office supplies are primary items of
costs in this category.
The Company uses a 52 or 53 week fiscal year ending on the Sunday nearest
December 31.
17
<PAGE> 19
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues (except where noted) were as follows:
<TABLE>
<CAPTION>
FEBRUARY 3,
1994
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
THROUGH --------------------------- -----------------------------
JANUARY 1, DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
1995 1995 1996 1996 1997
----------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurant sales........................ 64.7% 74.2% 76.2% 75.8% 76.5%
Retail sales............................ 35.3 25.8 22.3 21.6 23.0
Licensing fees and royalties............ -- -- 1.5 2.6 0.5
----- ----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Costs and Expenses:
Food and beverage costs(1).............. 33.7 27.8 25.0 25.4 23.5
Cost of retail goods sold(2)............ 53.9 44.6 44.8 46.2 46.3
Restaurant operating expenses(1)........ 57.5 53.8 49.3 49.0 49.0
Retail operating expenses(2)............ 55.3 28.9 32.7 31.9 31.6
Depreciation and amortization(3)........ 3.4 3.5 4.8 4.3 5.1
Amortization of preopening
expenses(3)........................... -- 0.9 3.1 3.2 3.2
----- ----- ----- ----- -----
Total costs and expenses(3)........... 100.9 83.9 81.7 82.7 82.0
Income from Unit operations and
licensing........................... (0.9) 16.1 18.3 19.5 18.4
----- ----- ----- ----- -----
Other (Income) Expense:
General, administrative and development
expenses.............................. 65.6 9.4 9.6 11.4 7.3
Interest income......................... -- (2.0) (10.7) (10.6) (9.2)
Write-off of development costs.......... -- -- -- -- 2.6
Other................................... 12.3 -- 0.4 0.6 --
----- ----- ----- ----- -----
Total other (income) expense.......... 77.9 7.4 (0.7) 1.4 0.7
Income before income taxes and
extraordinary item...................... (78.8) 8.7 19.0 18.1 17.7
Provision for income taxes................ -- -- 6.8 6.5 6.4
----- ----- ----- ----- -----
Income before extraordinary item.......... (78.8) 8.7 12.2 11.6 11.3
Extraordinary item........................ -- 7.8 -- -- --
----- ----- ----- ----- -----
Net Income................................ (78.8)% 0.9% 12.2% 11.6% 11.3%
===== ===== ===== ===== =====
</TABLE>
- -------------------------
(1) Percentage of restaurant sales.
(2) Percentage of retail sales.
(3) Percentage of restaurant and retail sales.
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
29, 1996
Total revenues increased 157% to $73.5 million for the nine month period
ended September 28, 1997 ("1997 Period") from $28.5 million for the nine month
period ended September 29, 1996 ("1996 Period"). Revenue growth resulted
primarily from the addition of four Units since September 29, 1996 which
contributed revenues of $22.8 million and from a full period of operation of the
Downtown Disney Marketplace and Gurnee Mills Units which contributed an increase
in revenues of $23.0 million in the 1997 Period. This increase in revenues was
offset by a decrease in revenues of approximately $1.0 million at the Woodfield
Mall Unit. The Company's experience to date indicates that a Unit's monthly
revenues may decrease on a comparable month basis during its second year of
operations, although this has not been the case for all of the Company's Units.
Management believes that any such decreases result from the fact that the
Company's new Units typically open at or near full capacity.
Food and beverage costs increased 140% to $13.2 million for the 1997 Period
compared to $5.5 million for the 1996 Period. The increase in food and beverage
costs was due primarily to Unit expansion. Food and beverage costs as a
percentage of restaurant sales decreased to 23.5% for the 1997 Period from 25.4%
for the 1996 Period, largely due to improvements in food preparation
efficiencies, purchasing efficiencies, favorable commodity prices and upselling
of higher margin, add-on menu items.
18
<PAGE> 20
Cost of retail goods sold increased 175% to $7.8 million for the 1997
Period from $2.8 million for the 1996 Period. The increase in cost of retail
goods sold was due primarily to Unit expansion and the addition of an expanded
retail distribution center during the second half of 1996. This increase was
offset partially by savings resulting from enhanced purchasing power due to
volume and additions of less expensive vendor sources. Cost of retail goods sold
as a percentage of sales remained relatively stable.
Restaurant and retail operating expenses increased 162% to $32.9 million
for the 1997 Period from $12.6 million for the 1996 Period, primarily due to
Unit expansion. Both restaurant and retail operating expenses as a percentage of
applicable restaurant and retail sales remained relatively stable.
Depreciation and amortization increased 210% to $3.7 million for the 1997
Period from $1.2 million for the 1996 Period. Amortization of preopening
expenses increased 158% to $2.3 million for the 1997 Period from $0.9 million
for the 1996 Period. The increase in depreciation and amortization and
amortization of preopening expenses was due to Unit expansion. Depreciation and
amortization as a percentage of restaurant and retail sales increased to 5.1%
for the 1997 Period from 4.3% for the 1996 Period due to increased costs of Unit
development and the retrofitting of existing Units to incorporate the latest
elements of the rainforest theme, including the Company's latest animatronics.
General, administrative and development expenses increased 67% to $5.4
million for the 1997 Period from $3.2 million for the 1996 Period. The increase
in general, administrative and development expenses was due primarily to the
increase of senior management, corporate employees and Unit management personnel
related to the Company's growth. General, administrative and development
expenses as a percentage of revenues decreased to 7.3% for the 1997 Period from
11.4% for the 1996 Period. Management believes general, administrative and
development expenses will grow at a slower rate than total revenues over the
next four quarters resulting in a decrease in these expenses as a percentage of
total revenues.
Interest income of $6.8 million for the 1997 Period was generated primarily
by investing a portion of the proceeds from the Company's two follow-on public
offerings completed in January and September 1996. Interest income of $3.0
million for the 1996 Period was generated primarily by investing a portion of
the proceeds of the Company's January 1996 follow-on public offering.
The write-off of development costs of $1.9 million in the first quarter of
1997 was the result of the termination of planned Units at Trump Taj Mahal
(Atlantic City, New Jersey) and Stratosphere (Las Vegas, Nevada) due to
lessor-related regulatory restrictions with respect to construction and
financial problems, respectively.
The provision for income taxes in the 1997 Period is based upon the
Company's estimated effective tax rate, including tax-exempt interest income.
The provision for income taxes in the 1996 Period is based upon the Company's
effective tax rate, including the benefits of approximately $350,000 in net
operating loss carryforwards and tax exempt interest income.
Net income was $8.3 million, or $0.47 per share, for the 1997 Period
compared with $3.3 million, or $0.23 per share, for the 1996 Period.
YEAR ENDED DECEMBER 29, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Total revenues increased 262% to $48.7 million in 1996 from $13.5 million
in 1995. The increase in total revenues was primarily due to the operation of
the Woodfield Mall Unit for the entire year ($10.4 million), the addition of the
Gurnee Mills Unit ($5.6 million), the addition of the Downtown Disney
Marketplace Unit ($13.2 million), the addition of the Tysons Corner Unit ($3.0
million), the addition of the Sawgrass Mills Unit ($1.4 million), and the
addition of 85 restaurant seats at the Mall of America Unit in August 1995 ($1.2
million). Retail sales decreased as a percentage of total sales to 22.3% for the
1996 fiscal year from 25.8% for the 1995 fiscal year. The decrease in the
percentage of retail sales is primarily due to the increase in restaurant
seating at the Mall of America Unit and the addition of the Woodfield, Gurnee,
Tysons and Sawgrass Units where retail sales as a percentage of total sales
averaged approximately 20%.
19
<PAGE> 21
Food and beverage costs increased 233% to $9.3 million for fiscal 1996
compared to $2.8 million for fiscal 1995. The increase in food and beverage cost
was primarily due to Unit expansion. Food and beverage costs decreased as a
percentage of restaurant sales for 1996 compared to 1995 largely due to
improvements of food preparation, purchasing efficiencies and favorable
commodity prices.
Cost of retail goods sold increased 214% to $4.9 million in fiscal 1996
compared to $1.5 million in fiscal 1995. The increase in cost of retail goods
sold was due to Unit expansion and the addition of an expanded retail
distribution center during 1996. Cost of retail goods sold remained relatively
flat as a percentage of retail sales in 1996 and 1995.
Restaurant and retail operating expenses increased 243% to $21.8 million
for fiscal 1996 compared to $6.4 million for fiscal 1995. The increase in
restaurant and retail operating expenses was primarily due to Unit expansion.
Restaurant operating expenses decreased as a percentage of restaurant sales to
49.3% in 1996 from 53.8% in 1995. The decrease as a percentage of restaurant
sales was due to more efficient labor usage, negotiated price reductions for
restaurant supplies and lower occupancy costs as a percentage of sales for the
Company's Gurnee Mills, Tysons Corner and Sawgrass Mills Units. Retail operating
expenses as a percentage of retail sales increased to 32.7% in 1996 from 28.9%
in 1995. During August of 1996 the Company introduced new retail packaging
materials which adversely affected retail operating expenses in the later part
of the year. In addition, the increase in retail operating expenses as a
percentage of retail sales was due to the decrease in retail sales as a
percentage of total sales and increased floor coverage during peak selling
periods.
Depreciation and amortization expense increased 391% to $2.3 million in
fiscal 1996 from $475,000 in fiscal 1995. Preopening amortization increased to
$1.5 million in 1996 from $115,000 in 1995. Preopening amortization during
fiscal 1995 included two months of amortization expense for the Woodfield Mall
Unit only. The increase in depreciation and amortization and preopening
amortization expense was primarily due to unit expansion in 1996.
General, administrative and development expenses increased 271% to $4.7
million in fiscal 1996 compared to $1.3 million in fiscal 1995. The increase in
general, administrative and development expenses in fiscal 1996 was due to the
addition of senior management, corporate employees and Unit management personnel
in training.
Interest income of $5.2 million for fiscal 1996 was generated primarily by
investing the proceeds from the Company's two secondary public offerings
completed in January and September 1996. Interest income of $482,000 for fiscal
1995 was generated primarily by investing the proceeds from the exercise of the
Class A Warrants and common stock issued as part of the Company's initial public
offering ("IPO"). During fiscal 1995 the Company recorded $186,000 in interest
expense due to amortization of loan discount.
The provision for income taxes in 1996 is based upon the Company's
effective tax rate, including benefits for approximately $350,000 in net
operating loss carryforwards and approximately $800,000 in tax exempt interest
income. The Company did not record a provision for federal or state income taxes
in 1995 because net operating loss carryforwards were used to offset income tax
liabilities.
PERIOD FROM FEBRUARY 3, 1994 (INCEPTION) THROUGH JANUARY 1, 1995
The Company had no revenues for the period from February 3, 1994
(Inception) through October 2, 1994. During this period, the Company developed
the Rainforest Cafe concept and completed construction of the Mall of America
Unit during the period ended January 1, 1995.
For the period from February 3, 1994 (Inception) through January 1, 1995,
the Company reported total revenues of $2.1 million and a net loss of $1.6
million. This loss can be attributed primarily to the costs and expenses related
to the development of the Rainforest Cafe concept, the Mall of America Unit and
building the Company's operating structure. Accordingly, comparisons between
this period and the corresponding 1995 period are not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs arise from the development and
opening of new Units. In January 1996, the Company issued an aggregate of
4,140,000 shares of Common Stock pursuant to a secondary public offering at
$19.00 per share. The net proceeds to the Company, after payment of underwriting
fees and offering expenses, were approximately $73.6 million. In May 1996, the
Company received approximately
20
<PAGE> 22
$1.0 million in net proceeds from the exercise of warrants at $4.80 per share
issued to Underwriters of the Company's IPO. In September 1996, the Company
issued an aggregate of 3,225,000 shares of common stock pursuant to an
additional public offering at $31.50 per share. The net proceeds to the Company,
after payment of underwriting fees and offering expenses, were approximately
$96.0 million. On September 28, 1997, the Company had working capital of
approximately $82.9 million and long-term investments of $45.6 million,
consisting principally of investment grade, fixed income securities.
The Company generated $12.8 million in cash flow from operating activities
for the nine months ended September 28, 1997, compared to $6.7 million for the
nine months ended September 29, 1996. In addition, for the nine month period of
1997, the Company generated $1.0 million in stock options exercised, compared
with $0.3 million for the comparable period in 1996, and approximately $1.5
million cash from the sale of put options on approximately 935,000 shares of the
Company's Common Stock (at exercise prices ranging from $17.50 to $21.00 per
share). The sale of the put options was executed as part of a stock repurchase
program announced in January 1997 pursuant to which up to 1.0 million shares of
the Company's Common Stock may be repurchased. In April 1997, 10,000 shares of
Common Stock were repurchased through put option assignments. The Company
believes that it will continue to generate cash from operating activities and
earn interest income, both of which will be utilized for future development and
working capital purposes.
The average investment to open the Company's first five Mall Units was $5.5
million, net of landlord contributions which averaged $1.1 million.
Additionally, the Company averaged approximately $650,000 in preopening expenses
and purchased an average of $300,000 of inventory in connection with the
openings. Total expenditures to develop the Downtown Disney Marketplace Unit
were $11.2 million, net of $1.5 million landlord contributions. Preopening
expenses incurred for the opening of the Downtown Disney Marketplace Unit were
approximately $1.2 million and the initial inventory purchased was approximately
$600,000.
As of December 3, 1997, the Company has opened five Units during 1997 and
plans to open two additional Units in December 1997. The estimated average
investment to open the Company's Mall Units during this period was $7.1 million,
net of landlord contributions, while total expenditures to develop the free-
standing downtown Chicago Icon Unit were approximately $10.0 million. The
Company received average landlord contributions of approximately $900,000 for
the Mall Units. Additionally, the Company averaged approximately $650,000 in
preopening expenses and purchased approximately $300,000 in initial inventory
for the Mall Units. Opening of the downtown Chicago Unit resulted in preopening
expenses of approximately $750,000 and required the purchase of approximately
$300,000 in initial inventory.
During the third quarter of 1997, the Company spent approximately $9.3
million, before deducting landlord contributions related to the development of
Units to open in the fourth quarter of 1997 and early 1998.
Management anticipates that capital expenditures, net of landlord
contributions, relating to the MGM Hotel and Casino and Aventura Mall Units
(each expected to open in December 1997) will total $10.3 million and $7.0
million, respectively. The Company expects future domestic Mall Units to cost
between $5.5 million and $8.5 million to develop, net of anticipated landlord
contributions. In addition, the Company expects that it will incur approximately
$650,000 in preopening costs and purchase approximately $300,000 of inventory in
connection with the opening of these Units. The Company also expects to open
selected, larger Icon Units, such as its planned Units at the MGM Grand Hotel
and Casino, Disney's Animal Kingdom, and Times Square, New York, which may cost
significantly more. In connection with the construction of existing Units, the
Company has received landlord contributions, which reduced the cost of opening
these Units. There can be no assurance, however, that landlord contributions
will be available in the future.
The Company contemplates that the development and opening of each of its
Units from December 1997 through 1999 will be financed with existing cash on
hand and cash flow from operations. The Company may require additional equity or
debt financing for expansion beyond 1999.
It is not anticipated that the Company's business will require substantial
working capital to meet its operating requirements. Virtually all of the
Company's revenues are collected in cash or pursuant to credit card processing.
Food and beverage inventories and merchandise inventories are expected to
increase in relation to trade accounts payable.
21
<PAGE> 23
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
As a result of the substantial revenues associated with each new Unit, the
timing of new Unit openings will result in significant fluctuations in quarterly
results. The Mall Units may also have higher third or fourth quarter revenues
compared to the first two quarters as a result of seasonal traffic increases at
mall locations and seasonally stronger retail sales. Units at entertainment
centers or Disney theme parks may show fluctuations in accordance with any
overall seasonality at these locations.
The primary inflationary factors affecting the Company's operations include
food and beverage and labor costs. Management does not anticipate any
significant labor cost increases as a result of the minimum wage increases
enacted in 1996 and 1997. Units in higher cost labor markets such as California,
New York and Nevada may experience lower operating margins than units located in
lower cost labor markets. In addition, the Company's leases require the Company
to pay costs that are subject to inflationary increases, such as taxes,
maintenance, repairs and utilities. The Company believes low inflation rates
have contributed to relatively stable costs. There is no assurance, however,
that low inflation rates will continue.
PROPOSED NEW ACCOUNTING STANDARDS
The Company will adopt in the fiscal year ending December 28, 1997,
Statement of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS
No. 128), which was issued in February 1997. SFAS No. 128 requires disclosure of
basic earnings per share (EPS) and diluted EPS, which replaces the existing
primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is
computed by dividing net income by the weighted average number of shares of
Common Stock outstanding during the year. Diluted EPS is computed similarly to
EPS as previously reported provided that, when applying the treasury stock
method to common equivalent shares, the Company must use its average share price
for the period rather than the more dilutive greater of the average share price
or end-of-period share price required by APB No. 15.
In April 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued an exposure draft
entitled "Reporting on the Costs of Start-Up Activities." The proposed
accounting standard contained in this draft would require entities to expense as
incurred all start-up and preopening costs that are not otherwise capitalizable
as long-lived assets. If adopted by the AICPA, this new accounting standard
would be effective for fiscal years beginning after December 15, 1997 with
earlier application encouraged. The comment period for the exposure draft ended
in July 1997, and the AICPA is expected to issue a final pronouncement on this
standard during the first quarter of 1998.
As is currently the practice of many upscale, highly customized and "theme"
restaurant entities, the Company defers its restaurant preopening costs and
amortizes them over the eleven month period following the opening of each
respective restaurant beginning in the first full month of operation. At
December 29, 1996 and September 28, 1997, total deferred preopening costs were
$2.3 million and $2.1 million, respectively. For fiscal 1996 and the nine months
ended September 28, 1997, preopening expense amortization was approximately $1.5
million and $2.3 million, respectively. If the new accounting principle is
adopted by the AICPA, the Company will choose early implementation during fiscal
1998. This implementation will involve the recognition of the cumulative effect
of the change in accounting principle required by the new standard as a one-time
charge against earnings, net of any related income tax effect, retroactive to
the beginning of fiscal 1998.
FORWARD LOOKING DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Prospectus and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financial sources and the effects of competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and construction activities,
including delays in opening new Units, acceptance of the Rainforest Cafe
concept, the quality of the Company's restaurant and retail operations,
dependence on discretionary consumer spending, the Company's failure to defend
its intellectual property rights, dependence on existing management, general
economic conditions, changes in federal or state laws, or regulations.
22
<PAGE> 24
BUSINESS
GENERAL
The Company owns, operates and licenses large, high volume, themed
restaurant/retail facilities under the name "Rainforest Cafe -- A Wild Place to
Shop and Eat." The Company's Units are designed to provide a visually and
audibly stimulating and entertaining rainforest environment that appeals to a
broad range of customers of all ages. Each Rainforest Cafe consists of a
Restaurant and a Retail Village. The Restaurant provides an attractive value to
customers by offering a full menu of high quality food and beverage items,
generous portions and excellent service in a unique and exciting environment.
The Retail Village features apparel, toys and gifts with the Rainforest Cafe
logo and eight proprietary Animal Characters, and other items reflecting the
rainforest theme.
THE RAINFOREST CONCEPT AND STRATEGY
The Company seeks to differentiate itself by providing high quality,
freshly prepared food and proprietary retail merchandise in a themed
environment. The key factors of the Company's market positioning and operating
strategy are as follows:
Distinctive Concept. The Company's rainforest theme is promoted by a
simulated unique rainforest environment throughout the Unit. Each Rainforest
Cafe features a visually and audibly exciting environment that includes a
variety of live tropical birds, exotic saltwater fish in large custom-designed
aquariums, animated robotic animals and sculpted banyan trees that create a
canopy of foliage. The dynamic rainforest atmosphere is further enhanced by
simulated thunder and lightning storms, tropical rain showers, waterfalls, mists
that emanate from extensive rock formations, and specially-developed aromatic
scents. This entertaining rainforest environment makes each Rainforest Cafe "A
Wild Place to Shop and Eat."
Broad-Based Appeal. Management believes that the Company's Rainforest Cafe
concept has broader appeal than other theme-based restaurant concepts because it
attracts customers of all ages. The Company's distinctive concept, combined with
high quality food and retail merchandise, make the Rainforest Cafe appealing to
children, teenagers, adults, and senior citizens.
High Profile Unit Locations. In order to take maximum advantage of the
Company's broad-based appeal, the Company believes that the placement of its
Units in high profile, heavy-traffic locations is critical to its success. By
being in such locations, the Company believes its Units appeal to both
destination customers as well as passers-by who are drawn to its visually and
audibly exciting environment. The Company believes that its format, as developed
at its existing Units, can be utilized in multiple high traffic locations with
favorable demographics such as shopping malls, entertainment centers and Disney
theme parks.
High Quality Food. The Restaurant provides an attractive value to customers
by offering a moderately-priced, full menu of high quality food and beverage
items served in generous portions in a distinctive environment. The Restaurant
features a wide variety of beverages, appetizers, pastas, sandwiches, salads,
pizzas, burgers and full-platter entrees, presented in a visually appealing
manner. Menu items are prepared on-site using fresh, high quality ingredients.
Lunch and dinner entrees range in price from $7.99 to $18.99 and the average
guest check was approximately $13.00 for the nine months ended September 28,
1997. Management believes that its high quality food contributes to a
significant level of repeat business.
Commitment to Retail and Building Brand Awareness. In order to enter the
Restaurant, all customers must pass through the Unit's Retail Village. The
Retail Village offers over 3,000 SKUs and includes apparel, toys and gifts with
the Rainforest Cafe logo and other items suggesting the rainforest theme. The
Company has also developed eight proprietary Animal Characters, each with a
distinct personality, as an additional method of merchandising its retail
products. The Company utilizes each Animal Character for clothing, toys and
gifts. By offering items featuring the Rainforest Cafe logo and Animal
Characters, the Company believes it is continuing to build "brand equity" in the
Rainforest Cafe name that will allow it to attract more customers and to enhance
its competitive retail position. The Company plans to introduce future products
such as story books and games which are intended to further enhance the value of
the Company's proprietary
23
<PAGE> 25
animal characters. Furthermore, the Company is also developing other mediums for
its Animal Characters to further its efforts to build "brand equity." The Retail
Village is also intended to be educational, with displays of live exotic
tropical birds and fish and an animated talking tree that delivers environmental
messages.
Focus on Customer Satisfaction. The Company is committed to staffing each
Unit with an experienced management team and providing its customers with
prompt, friendly and efficient service. A customer's experience is also enhanced
by the attitude and attention of Unit personnel, including "tour guides"
(greeters), "safari guides" (food servers), "navigators" (bartenders),
"pathfinders" (retail staff) and tropical bird curators. The Company recognizes
that, in order to maintain a high level of repeat customers and to attract new
business through word of mouth, it must provide superior customer service.
Commitment to Attracting and Retaining Quality Employees. By providing
extensive training and attractive compensation, the Company fosters a strong
corporate culture and encourages a sense of personal commitment from its
employees. The Company believes its compensation structure and positive
corporate culture enable it to attract and retain quality employees. The Company
believes that Unit management is important for the profitability of each
Rainforest Cafe and accordingly, places particular emphasis on recruiting
Unit-level Directors of Operations that have significant restaurant and
management experience. The Company anticipates that, prior to opening a Unit, a
Director of Operations will have been trained at one or more Rainforest Cafes
for four to six months. All full-time corporate employees and certain members of
Unit management are eligible to participate in the Company's 1995 Stock Option
Plan and all full-time employees are eligible to participate in the Company's
1997 Employee Stock Purchase Plan.
RAINFOREST FEATURES
To create a simulated rainforest environment, Rainforest Cafes generally
include:
Live Exotic Birds -- Rainforest Cafes display live exotic birds such
as macaws and cockatoos in the Retail Village. The Company has curators
specifically devoted to caring for the birds and fish and for answering
guest questions. When the exotic birds are not on display they are kept and
maintained in a specially designed "habitat room."
Aquariums -- Rainforest Cafes have large aquarium systems, including
walk-through aquariums that contain many varieties of saltwater fish from
locales such as Africa and South America. Aquariums range in size from 750
to 10,000 gallons and are placed throughout each Unit to maximize
visibility to customers.
Tropical Rainstorms and Waterfalls -- Simulated lightning and
thunderstorms "sweep" across each Rainforest Cafe every 20 to 30 minutes.
Rainforest Cafes also utilize a mist system emanating from rock formations
throughout the Unit and rain showers around the perimeter of the Restaurant
and Mushroom Bar area. Other Rainforest Cafe features include cascading
waterfalls, fountains and a ventilation system emitting a light floral
aroma.
Trees, Foliage and Animated Animals -- The ceiling level of the
Restaurant and Retail Village of a Rainforest Cafe are intertwined with a
"forest" of sculpted life-like banyan trees that creates a canopy of
foliage over diners and shoppers. Each banyan tree is hand-sculpted for a
realistic presentation of its overgrown root system. The Restaurant and
Retail Village contains several rock formations, abundant foliage and
jungle-like scenes. Interspersed throughout the facility are robotic
animals such as life-size crocodiles, elephants, gorillas, dolphins,
snakes, butterflies and frogs.
Educational Commitment -- The Company makes each Rainforest Cafe an
environmentally educational experience. The Rainforest Cafe's talking
banyan tree "Tracy" delivers environmental messages to help educate and
entertain children. Each Rainforest Cafe has an on-site curator who
educates customers, including school groups, on the tropical birds and the
rainforest. The curator also makes numerous presentations at schools and
community organizations.
24
<PAGE> 26
UNIT ECONOMICS
The Company identifies its current and planned domestic Rainforest Cafes as
either "Mall" or "Icon" Units. The Mall Unit format generally ranges in size
from approximately 15,000 to 23,000 square feet and has between 300 and 450
restaurant seats. Mall Units are located primarily in high traffic shopping
malls such as Mall of America, South Coast Plaza in Orange County, California
and Tysons Corner Center I in McLean, Virginia, a suburb of Washington D.C. The
larger Icon Units are generally in excess of 23,000 square feet and have 400 to
600 restaurant seats (although some may be slightly smaller). Icon Units are
generally located in high traffic tourist areas such as the Company's Downtown
Disney Marketplace and downtown Chicago locations. The Company is currently
developing additional Icon Units at the MGM Grand Hotel and Casino in Las Vegas,
Nevada scheduled to open in December 1997 and at Disney's Animal Kingdom theme
park scheduled to open during the second quarter of 1998.
The Company's five Mall Units that were open the entire nine month period
ended September 28, 1997, generated average revenues of $8.5 million and Unit
cash flow of $2.2 million, or 26.6% of revenues, during this nine period. Unit
cash flow represents the Unit's operating income before depreciation and
amortization. The Company's nine Mall Units, were developed at an average cost
of $6.2 million, net of landlord contributions. Additionally, the Company
incurred average pre-opening costs of approximately $650,000 and purchased an
average of $300,000 of inventory in connection with each opening. Management
anticipates that the majority of its future domestic Units will be Mall Units
and that average development cost, pre-opening cost and inventory costs will be
similar to these historical averages. The Company currently has two Icon Units
only one of which was open the entire nine month period ended September 28,
1997. The Company expects development costs for additional Icon Units to range
from $10 million to $15 million, net of landlord contributions. In addition, the
Company anticipates pre-opening costs for each Icon Unit of approximately $1.0
million and expects to purchase approximately $500,000 of inventory in
connection with each opening.
Management believes that the Company's demonstrated ability to generate
high sales volumes and customer traffic at its existing Units enables it to
obtain attractive sites and negotiate favorable lease terms, including landlord
contributions.
CURRENT UNIT LOCATIONS
The following table sets forth certain information about the Company's
existing Units and international Units developed by licensees of the Company:
<TABLE>
<CAPTION>
APPROXIMATE RESTAURANT
UNIT LOCATION SQUARE FOOTAGE SEATS DATE OPENED
---- -------- -------------- ---------- -----------
<S> <C> <C> <C> <C>
Domestic
Mall of America................. Bloomington, MN 14,900 295 October 1994
Woodfield Mall.................. Schaumburg, IL 23,000 425 October 1995
Gurnee Mills.................... Gurnee, IL 20,000 300 June 1996
Downtown Disney Marketplace(1).. Orlando, FL 30,000 550 July 1996
Tysons Corner Center I.......... McLean, VA 19,500 350 October 1996
Sawgrass Mills.................. Ft. Lauderdale, FL 20,000 350 November 1996
South Coast Plaza............... Costa Mesa, CA 17,000 300 June 1997
The Source...................... Westbury, Long Island, NY 22,000 375 September 1997
Downtown Chicago(1)............. Chicago, IL 23,000 375 October 1997
Grapevine Mills................. Dallas, TX 20,000 350 October 1997
Arizona Mills................... Phoenix, AZ 20,000 350 November 1997
International
London.......................... London, England 18,000 300 June 1997
Cancun.......................... Cancun, Mexico 16,000 220 August 1997
Mexico City..................... Mexico City, Mexico 16,000 225 October 1997
</TABLE>
- -------------------------
(1) Designates Icon Units.
25
<PAGE> 27
EXPANSION PLANS AND SITE SELECTION
The following table sets forth certain information about the Company's
planned Units, all of which are subject to existing leases except where
otherwise indicated:
<TABLE>
<CAPTION>
APPROXIMATE RESTAURANT DATE PLANNED TO BE
UNIT LOCATION SQUARE FOOTAGE SEATS OPENED
---- -------- -------------- ---------- ------------------
<S> <C> <C> <C> <C>
Domestic
Aventura Mall................. Miami, FL 21,500 350 Fourth Quarter 1997
MGM Grand Hotel & Casino(1)... Las Vegas, NV 20,000 400 Fourth Quarter 1997
Palisades Center.............. West Nyack, NY 22,500 375 First Quarter 1998
Ontario Mills................. Ontario, CA 20,000 350 Second Quarter 1998
Disney's Animal Kingdom(1).... Orlando, FL 34,000 550 Second Quarter 1998
Cherry Creek Mall............. Denver, CO 23,000 375 Third Quarter 1998
Towsen Town Center(2)......... Baltimore, MD 18,000 325 Third Quarter 1998
Menlo Park Mall(2)............ Edison, NJ 20,000 350 Third Quarter 1998
Great Lakes Crossing.......... Detroit, MI 20,400 325 Fourth Quarter 1998
South Center Mall(2).......... Seattle, WA 17,000 325 Fourth Quarter 1998
Burlington Mall(2)............ Burlington, MA 17,500 325 Fourth Quarter 1998
Times Square(1)(2)............ New York, NY 30,000 600 First Quarter 1999
International
Eaton Center.................. Vancouver, Canada 18,000 325 Third Quarter 1998
Festival Walk(2).............. Hong Kong 17,500 350 Third Quarter 1998
KLLC Center(2)................ Kuala Lumpur, Malaysia 17,000 350 Third Quarter 1998
Mundo E....................... Mexico City, Mexico 14,000 250 Fourth Quarter 1998
Toronto(2).................... Toronto, Canada 17,500 325 Fourth Quarter 1998
</TABLE>
- -------------------------
(1) Designates Icon Units.
(2) The Company has executed letters of intent or is negotiating leases with
respect to these Units.
The Company's domestic site selection strategy is to locate its Units in
high profile, heavy traffic locations. A variety of factors are analyzed in the
site selection process, including local market demographics, site visibility,
business seasonality and projected Unit economics. By operating in high profile,
heavy traffic locations, the Company believes its Units appeal to both
destination customers as well as passers-by who are drawn to its visually and
audibly exciting environment. The Company believes that its format, as developed
at its existing Units, can be utilized in a number of high traffic venues with
favorable demographics such as shopping malls, entertainment centers and Disney
theme parks.
While most of the future Rainforest Cafes will be located in shopping malls
or entertainment centers, the Downtown Disney Marketplace Unit is a stand-alone
facility located in Walt Disney World near Orlando, Florida. Customers are able
to enter the Downtown Disney Marketplace Unit without having to enter Disney's
adjacent theme parks. The Rainforest Cafe at Disney's Animal Kingdom in Walt
Disney World will also be a stand-alone facility. Disney's Animal Kingdom,
scheduled to open in 1998, will be approximately five times larger than Disney's
Magic Kingdom and will feature live and simulated animal attractions. The 34,000
square foot, 550 seat Unit will be the only sit-down restaurant at Disney's
Animal Kingdom. The Rainforest Cafe will be at the entrance to Disney's Animal
Kingdom. As a result of its location, patrons must pass the Rainforest Cafe upon
entering and leaving the park.
The Company's Disney leases provide, among other things, that the Company
will not own, operate, develop or manage a restaurant: (i) within a 75 mile
radius of Downtown Disney Marketplace or Disney's Animal Kingdom or (ii) in a
theme park located anywhere in the world that is not affiliated with Disney or
its affiliates. The Company also agreed that it would not open a Unit within 50
miles of current or future theme parks owned by Disney without giving Disney the
right of first refusal with regard to such proposed Unit.
26
<PAGE> 28
Disney waived its radius restriction with respect to the Company's South Coast
Plaza and Ontario Mills Units. The Company is continuing discussions with Disney
regarding opening Rainforest Cafes at other locations; however, no assurance can
be given that other Disney sites will be developed. Additionally, the Company
has granted MGM Grand the right of first refusal, with certain exceptions, with
respect to the development of a Unit in any hotel/casino operation.
INTERNATIONAL LICENSE AND JOINT VENTURE AGREEMENTS
The Company has entered into four separate exclusive license arrangements
relating to the development of Rainforest Cafes in the United Kingdom and
Ireland, Mexico, Canada and certain countries in Southeast Asia and has entered
into a letter of intent for the development of Units in Hong Kong, Macau, Taiwan
and the Shanghai region of China. These Agreements have per Unit development
fees of at least $100,000 and royalties ranging from 3% to 10% of Unit sales.
All Agreements, with the exception of the agreement relating to the United
Kingdom and Ireland, have area licensing fees ranging from $500,000 to $750,000.
United Kingdom and Ireland. In August 1996, the Company entered into a
License and Area Development Agreement with Glendola Leisure Ltd. ("Glendola"),
an affiliate of the Foundation Group, a London-based hotel and restaurant
developer and operator, pursuant to which Glendola will develop five Units over
a ten year period in the United Kingdom and Ireland. Pursuant to this agreement,
the Company will have the option to purchase, prior to the opening of the Unit,
up to 20% of the equity interest in any Unit developed by Glendola. The Company
has purchased a 20% ownership interest in the London Unit for approximately
$400,000.
Mexico. In October 1996, the Company entered into a License and Area
Development Agreement with a subsidiary of Empresas de Comunicacion y
Entretenimiento ("ECE"), a Mexican-based restaurant owner and operator, pursuant
to which ECE will develop seven Units over a ten year period in Mexico. Pursuant
to this agreement, ECE has developed Units in Cancun and in Mexico City which
opened in August and October 1997, respectively.
Canada. In March 1997, the Company entered a joint venture and exclusive
license agreement with the Elephant and Castle Group ("E & C"), a Vancouver
based owner and operator of Elephant and Castle pubs and restaurants. E & C and
the Company agreed to develop five Rainforest Cafes in Canada over a four year
period. Under the terms of the above agreements, the Company is also entitled to
receive a warrant to purchase 600,000 shares of E & C stock at $8.00 per share
exercisable for a period of five years. In addition, the Company and E & C have
a 50% equity interest in the joint venture Canadian Rainforest Restaurants, Inc.
("CRRI"). The Company will have the option to purchase E & C's interest of CRRI
after seven years based on a predetermined formula of cash flow and investment.
CRRI intends to open its first Canadian Unit near Vancouver, British Columbia
during the third quarter of 1998.
Southeast Asia. In August 1997, the Company entered into a Master License
Agreement with Movie Dream Corporation ("MDC"), a subsidiary of Far East
Holdings International Limited, a Singapore-based holding company. Under the
terms of the agreement, MDC will develop a minimum of five Units over ten years.
Countries covered by this agreement include Singapore, Malaysia, Indonesia,
Thailand, the Philippines, Vietnam, Cambodia, Brunei and Burma. MDC has the
right to establish sub-franchisees within the territory, subject to certain
terms and conditions, which include a right of the Company to approve all
investors and all other rights in the license agreement. Pursuant to this
agreement, the Company will have the option to purchase, prior to the opening of
the Unit, up to 20% of the equity interest in any Unit developed by MDC. The
license agreement also grants MDC an option for the development rights to India,
subject to meeting future performance criteria.
Hong Kong. The Company has entered into a letter of intent with a Hong
Kong-based restaurant group pursuant to which at least three Units would be
developed in Hong Kong, Macau, Taiwan and the Shanghai region of China over a
three year period.
27
<PAGE> 29
RESTAURANT
For the nine month period ended September 28, 1997, approximately 76.5% of
the Company's total revenues were derived from Restaurant sales. The Company
believes that Rainforest Cafes enjoy a high level of repeat business and
customer diversity because of the Company's commitment to providing high quality
food and customer service in an exciting and entertaining environment. Features
of the Restaurant are as follows:
Menu. The Company considers its extensive menu selection to be an
important factor in the appeal of its Restaurant and, accordingly,
continuous attention is devoted to the development of new menu items. The
Restaurant features casual cuisine that caters to broad customer
preferences. The menu presently offers several types of appetizers such as
"Jungle Chowder," "Rainforest Pita Quesadillas" and "Caribbean Chicken
Tenders." The menu also offers different types of pastas, sandwiches,
salads, pizzas, burgers and full-platter entrees, such as "Rasta Pasta"
(bow tie pasta tossed in a garlic cream sauce with grilled chicken,
broccoli and pesto), "The Old Man and the Sea" (swordfish sauteed in cajun
spices topped with corn and shrimp salsa), and "Rumble in the Jungle"
(grilled pita bread stuffed with roasted turkey and Caesar salad). A
children's menu and complete dessert selection are also available. Portions
are generous and significant attention is placed on presentation and the
quality of preparation. Lunch and dinner entrees range in price from $7.99
to $18.99. The Restaurant's full-service bar, the "Mushroom Bar," features
a number of customized alcoholic and non-alcoholic drinks, such as the
"Don't Panic It's Organic" (carrot juice), the "Margarilla" (a margarita
blended with orange sherbet) and the "Spotted Chocolate Monkey" (fresh
banana-chocolate syrup, vanilla ice cream and banana liqueur). Alcoholic
beverages are primarily served to complement meals and accounted for
approximately 10% of total restaurant sales for the nine month period ended
September 28, 1997. The average check per person for such period was
approximately $13.00. Because the Unit's menu is not tied to any particular
type of food or beverage, the Company can introduce and eliminate items
based on local or current consumer trends without altering its rainforest
theme.
Decor. Restaurant decor is divided into distinctive dining
environments developed around the rainforest and other nature themes.
Current themes include the rainforest Atlas and waterfall, gorillas,
elephants, tropical fish and star gazing. Table decor complements the
rainforest theme through the use of brilliantly-colored tablecloths and
upholstery with patterns of animals, wildlife and plant life. In an effort
to enhance the dining experience, attempts are made to maximize restaurant
seating near aquariums, waterfalls, sculpted rock formations or one of the
Restaurant's several banyan trees. An integral part of the Restaurant is
the "Mushroom Bar," the "stem" of which consists of the bar with a "cap"
extending over the customers. Seating at the bar is provided by customized
stools designed to resemble the legs of wild animals.
Staffing. An important part of the Company's mission is to ensure that
during each visit to a Rainforest Cafe, customers receive excellent
service. To extend the adventure theme, Restaurant customers are greeted at
the entrance by "tour guides", food servers are known as "safari guides"
and the bartenders are known as "navigators." The "tour guides" at the
front desk are trained to communicate, via headsets, with the floor
management staff who greet Restaurant customers and seat them at their
tables. The Company believes that a customer's experience is enhanced by
the attitude and attention of its personnel. Customer service is based on a
team approach so that each customer is continually attended to, and
employees go through extensive ongoing training to ensure consistent
service. The Company endeavors to hire experienced chefs and invests
substantial time training kitchen employees to maintain consistent food
preparation.
RETAIL VILLAGE
For the nine month period ended September 28, 1997, approximately 23.0% of
the Company's total revenues were derived from retail sales. In order to enter
the Restaurant, all customers must pass through the Unit's Retail Village. The
Retail Village offers over 3,000 SKUs and includes apparel and gifts with the
Rainforest Cafe logo and other items with a rainforest theme such as toys and
educational games. The
28
<PAGE> 30
Company has also developed eight proprietary Animal Characters, each with a
distinct personality, including Cha! Cha!, an adventuresome tree frog; Ozzie, a
rascally orangutan; Rio, a colorful, tropical macaw; Tuki Makeeta, an
imaginative baby elephant; Nile, a proud crocodile; Maya, a regal feline; Bamba,
a gentle gorilla; and Iggy, a philosophical iguana. These Animal Characters are
designed to appeal to a broad range of customers, thereby increasing retail
sales and repeat business. The Company intends to utilize each Animal Character
for clothing and gifts. Custom designed t-shirts and sweatshirts with colorful
animals spelling out the "Rainforest Cafe" logo and Animal Characters are
signature items. By offering items featuring the Rainforest Cafe logo and Animal
Characters, the Company believes it is continuing to develop "brand equity" in
the Rainforest Cafe name that will allow it to attract more customers and to
enhance its competitive retail position. The Company is also exploring and
developing other mediums for its Animal Characters to further build "brand
equity." The Retail Village also includes a large selection of colorful rocks,
plush and animated toys and puppets, and educational and entertaining games and
puzzles. Gift items and other artifacts suggesting the rainforest theme,
including colorful animal figurines and prints, kitchen magnets, serving plates
and other tableware, handmade wood products and other unique rainforest related
home accessories, are also available. The Company varies approximately 30% of
its retail items every 60 to 90 days, which management believes provides the
Company with an increased opportunity to generate repeat customer sales. The
Company is also increasing its commitment to private label products, which the
Company expects will improve the Company's retail margins due to the lower cost
of private label products.
OPERATIONS, MANAGEMENT AND EMPLOYEES
The Company's ability to manage complex operations, including high volume
Restaurants and Retail Villages, has been, and will continue to be, central to
its overall success. The Company believes that its management must include
skilled personnel at all levels, including senior corporate management, Unit
Directors of Operations, and other Unit employees. The Company's senior
corporate management, including the Company's Chairman and Chief Executive
Officer, Lyle Berman, has significant restaurant and retail experience. Gregory
C. Carey, the Company's Senior Vice President of Operations has over 20 years of
restaurant experience. The Company's three Regional Managers, each of whom have
extensive experience in the restaurant industry and with the Company, supervise
the opening of new Units, monitor quality control and customer service, and are
responsible for the financial performance of the Units within their respective
regions. The Company believes that Unit management is important for the
profitability of each Rainforest Cafe and accordingly, places particular
emphasis on recruiting Directors of Operations that have significant restaurant
and management experience. The Company anticipates that, prior to opening a
Unit, a Director of Operations and executive chef will have been trained at one
or more Rainforest Cafes for approximately six months and three months,
respectively. All salaried Unit employees attend one week of corporate
culturalization training.
The Company strives to maintain quality and consistency in each of its
Units through the careful training and supervision of personnel and the
establishment of, and adherence to, high standards relating to personnel
performance, food and beverage preparation, and maintenance of facilities. All
managers must complete an eight-week training program during which they are
instructed in areas such as food quality and preparation, customer service, and
employee relations. New staff members participate in approximately three weeks
of training under the close supervision of Company management. The Company has
also prepared operations manuals relating to food and beverage quality and
service standards. Management strives to instill enthusiasm and dedication in
its employees, regularly solicits employee suggestions concerning Company
operations and endeavors to be responsive to employees' concerns. In addition,
the Company has extensive and varied programs designed to recognize and reward
employees for superior performance. The Company believes that it has been able
to attract high quality, experienced restaurant and retail management and
personnel with its competitive compensation and bonus programs.
In general, each Unit has between 250 and 500 employees, although staffing
levels vary according to the size of the Unit. As of the date of this
Prospectus, the Company had approximately 3,500 employees, including 84
employees at its corporate headquarters. The Company believes that its
relationship with its employees is good.
29
<PAGE> 31
PURCHASING
The Company strives to obtain consistent quality items at competitive
prices from reliable sources. In order to maximize operating efficiencies and to
provide the freshest ingredients for its food products while obtaining the
lowest possible prices for the required quality, each Restaurant's management
team includes a purchasing manager who determines the daily quantities of food
items needed and orders such quantities from major suppliers at prices often
negotiated directly with the Company's corporate office. In the nine month
period ended September 28, 1997, Alliant Foodservice, Inc. ("Alliant"), the
Company's largest supplier of food and restaurant supplies, accounted for
approximately 77% of the Company's total purchases of approximately $14.7
million. The Company has not experienced any significant delays or difficulties
in receiving restaurant or retail supplies or equipment in the past whether from
Alliant or otherwise. The Company does not believe that it is dependent on
Alliant or any other one supplier for its restaurant or retail supplies.
However, the Company has no long-term purchase or other long-term contractual
assurance of continued supply, prices, or access to its supplies. Food and
supplies are shipped directly to the Units. The Company purchases perishable
food products locally. The Company does not maintain a central food product
warehouse or commissary. With respect to retail products, the Company maintains
over 3,000 SKUs, which it purchases from several suppliers. The Company
maintains a centralized warehouse for retail product distribution. The Company
is committed to private label manufacturing, which it believes will improve the
Company's retail margins due to the lower cost of private label products. The
Company has not experienced any significant delays in receiving restaurant or
retail supplies and equipment. The Company is not dependent on any one supplier
for any of its restaurant or retail goods. The Company has formed a joint
venture to purchase wholesale clothing items, principally from foreign
suppliers. Purchases by the Company from such joint venture aggregated $1.9
million for the nine month period ended September 28, 1997.
MANAGEMENT INFORMATION SYSTEMS/ACCOUNTING
The Company uses integrated management information systems that are
designed to accommodate significant expansion in the number of Units. These
systems include a computerized restaurant point-of-sale system which facilitates
the movement of customer food and beverage orders between the customer areas and
kitchen operations, controls cash, handles credit card authorizations, keeps
track of revenues on a per employee basis and provides management with revenue
and inventory data. The point-of-sale system is accessed by service personnel
who are assigned individual identification keys and appropriate information is
printed in the kitchen and bar areas which eliminates the need to read
handwritten tickets. The Company's retail point of sale, merchandising and
distribution system allows management to track retail inventory daily. The
point-of-sale system electronically transfers data nightly to Company
headquarters. The Company also uses a computerized time management system which
determines the time worked by each employee, allows management to gather data
and schedule work hours, and produces payroll reports. Each Unit also uses
computerized systems to control and gather data with respect to food, beverage,
retail and supplies inventories.
The Company's automated Unit-level systems provide data for posting
directly to the Company's general ledger and to other accounting subsystems. The
automated general ledger system provides various management reports comparing
current and prior operating results as well as measuring performance against
predetermined operating budgets. The results are reported to and reviewed with
Company management. Such reporting includes (i) weekly reports of revenues, cost
of revenues and selected controllable Unit expenses, (ii) detailed monthly Unit
performance reports of revenues and expenses and (iii) monthly reports of Unit-
by-Unit and administrative and occupancy expense performance.
MARKETING AND PROMOTION
To date, the Company has primarily relied upon "word of mouth" advertising
to attract customers to its Rainforest Cafes. The Company also utilizes outdoor
billboards, distinctive exterior signage and limited print advertising. The
unique and dynamic environment of the Rainforest Cafe and its tropical bird
habitat have resulted in a significant amount of unsolicited positive media
publicity. Additionally, the Company has attempted to create equity in its
"Rainforest Cafe" name by offering items featuring the Rainforest Cafe logo
30
<PAGE> 32
and Animal Characters. At certain Units, the Company employs a Group Sales
Manager who is responsible for promoting and arranging corporate and other group
catering events at the Unit.
COMPETITION
The restaurant and specialty retail businesses are highly competitive. In
the restaurant industry, competition is based primarily upon price, service,
food quality and location. There are numerous well-established competitors,
including national, regional and local restaurant chains, possessing
substantially greater financial, marketing, personnel and other resources than
the Company. The Company also competes on a general basis with a large variety
of national and regional restaurant operations, as well as with locally owned
restaurants, diners, and other establishments that offer moderately priced food.
The Company competes with other theme restaurants in the highly competitive and
developing theme restaurant market. Other restaurants and companies utilize the
rainforest or related themes. Additionally, the Company competes with a number
of well-established specialty retailers possessing substantially greater
financial, marketing, personnel and other resources than the Company. In the
retail industry, competition is based primarily upon merchandise selection,
price and customer service. There can be no assurance that the Company will be
able to respond to various competitive factors affecting the restaurant and
retail industries.
The performance of individual Units may also be affected by factors such as
traffic patterns, demographic considerations, and the type, number and location
of competing restaurants. In addition, factors such as inflation, increased
food, labor and employee benefit costs, and the availability of experienced
management and hourly employees may also adversely affect the restaurant and
retail industries in general and the Company's Units in particular. Restaurant
and retail operating costs may be further affected by increases in the minimum
hourly wage, unemployment tax rates, real estate taxes and similar matters over
which the Company has no control.
REGULATION
Restaurants are subject to licensing and regulation by state and local
health, sanitation, safety, fire, and other authorities and are also subject to
state and local licensing and regulation of the sale of alcoholic beverages and
food. Additionally, businesses that maintain or sell animals are subject to
additional levels of state and local health and sanitation regulations. Having
tropical birds as part of the Rainforest Cafe concept requires the Company to
adhere to stringent health codes that prohibit crossover between kitchen workers
and animal handlers, and any exchange of air from the bird areas to the rest of
the Unit. The Company overcame this problem at its existing Units by installing
specially designed air exhaust hoods for the birds' perch area. Additionally, a
separate waste disposal system is provided for the birds. Although, to date, the
Company has satisfied animal-related licensing for its existing Units, no
assurance can be given that the Company will be able to maintain such approvals
or obtain such approvals at other locations. Difficulties or failure in
obtaining required licenses and approvals will result in delays in, or
cancellation of, the opening of Units. Retail establishments are also subject to
licensing and regulation by safety, fire and other authorities on the state and
local level.
TRADEMARKS
The Company's ability to implement successfully its Rainforest Cafe concept
will depend in part on its ability to further establish "brand equity" through
the use of its trademarks, service marks, trade dress and other proprietary
intellectual property, including its name and logos, the Animal Characters and
unique features of its rainforest theme decor. It is the Company's policy to
seek to protect and to defend vigorously its rights to this intellectual
property.
The Company's original logo incorporating "RAINFOREST CAFE" and the mark "A
WILD PLACE TO SHOP AND EAT" are federally registered service marks for the
Company's Restaurant and Retail Village. The Company also owns a federal
registration for the mark "RAINFOREST" for the Company's restaurant services.
Additionally, in June 1996 the Company filed federal trademark applications for
"RAINFOREST CAFE A WILD PLACE TO SHOP AND EAT" and the related design, which
includes
31
<PAGE> 33
the Company's new logo, illustrating six of the Company's eight proprietary
Animal Characters. The Company intends also to protect its proprietary Animal
Characters by the filing of copyright applications and, in certain instances,
trademark registration applications. There is no assurance, however, that any
such registrations, including the registration of the name and logo, will be
obtained.
There is also no assurance that any of the Company's rights in any of its
intellectual property will be enforceable, even if registered, against any prior
users of similar intellectual property or competitors of the Company who seek to
utilize similar intellectual property in areas where the Company operates or
intends to conduct operations. The failure to enforce any of the Company's
intellectual property rights could have the effect of reducing the Company's
ability to capitalize on its efforts to establish brand equity. The Company is
aware of trademark applications, registrations and uses that may accord to third
parties certain rights in the word "rainforest" or in certain elements of some
of the proprietary Animal Character names and illustrations with respect to
utilization of these marks on certain clothing and retail products. The
existence of any such third party rights could result in claims of infringement
against the Company with respect to its uses of "Rainforest Cafe" or its Animal
Characters in connection with its sales of clothing and other retail products.
The Company is currently involved in litigation with two entities alleging that
the Company is infringing their intellectual property rights. In one case, the
other company has a federally registered trademark that it alleges is infringed
by certain of the Company's retail products. The Company is currently engaged in
settlement negotiations with this company. The other party to the second case
alleges that the Company's restaurants infringe its trade dress rights. Although
the Company does not expect these two lawsuits to have a materially adverse
result on the Company or its business, in the event that these matters are not
successfully resolved or if the Company encounters claims from prior users of
similar intellectual property in areas where the Company operates or intends to
conduct operations, it is possible that the Company's operations could be
substantially limited or that the Company may have to pay damages to a prior
user or registrant of similar intellectual property.
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<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth certain information with respect to each person
who is a director or executive officer of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Lyle Berman........................ 56 Chairman of the Board and Chief Executive Officer
Kenneth W. Brimmer................. 42 President, Treasurer and Director
Steven W. Schussler................ 42 Executive Vice President-Development and Director
Ercu Ucan.......................... 41 Executive Vice President-Retail and Director
Mark S. Robinow.................... 41 Senior Vice President and Chief Financial Officer
Gregory C. Carey................... 45 Senior Vice President-Operations
Mark Bartholomay................... 37 Senior Vice President-International Development
Stephen Cohen...................... 40 General Counsel and Vice President of Real Estate
David L. Rogers.................... 54 Director
Joel N. Waller..................... 58 Director
</TABLE>
Mr. Berman has been Chairman of the Board and Chief Executive Officer of
the Company since its inception in February 1994. Mr. Berman has been Chief
Executive Officer and Chairman of the Board of Grand Casinos, Inc. and its
predecessor since October 1990. Mr. Berman is also a director of G-III Apparel
Group, Innovative Gaming Corporation of America, New Horizons Kids Quest, Inc.,
and Wilsons-The Leather Experts, Inc. ("Wilsons"). Mr. Berman was Chief
Executive Officer and Chairman of Stratosphere Corporation from July 1996
through July 1997. Stratosphere Corporation filed for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in January 1997.
Mr. Brimmer has been President of the Company since April 1997, Treasurer
since September 1995 and involved with the Company in various capacities since
its inception. Mr. Brimmer has been employed by Grand Casinos, Inc. and its
predecessor since October 1990 as Special Assistant to the Chairman and Chief
Executive Officer, Lyle Berman.
Mr. Schussler has been Executive Vice President-Development of the Company
since its inception and a director of the Company since January 1995. From 1983
to February 1992, Mr. Schussler was an officer of Juke Box Saturday Night of
Minneapolis, Inc. ("JBSN"), a 1950's and 1960's theme restaurant and nightclub.
Mr. Ucan has been Executive Vice President-Retail of the Company since its
inception and a director of the Company since January 1995. From September 1992
until December 1993, Mr. Ucan served as President of the Orjin Textile Group in
Istanbul, Turkey, a garment factory employing approximately 150 persons. From
January 1989 until August 1992, Mr. Ucan served as Director of Trend
Merchandising and Director of Product Development for Wilsons.
Mr. Robinow has been Senior Vice President and Chief Financial Officer
since November 1995. From August 1993 to June 1995, Mr. Robinow served as Senior
Vice President and Chief Financial Officer of Edina Realty, Inc., the country's
fourth largest residential real estate brokerage company. From December 1986 to
August 1993, Mr. Robinow served as Chief Financial Officer, Secretary and
Treasurer of Ringer Corporation, a publicly held manufacturer of natural lawn
and garden products for the consumer market. Mr. Robinow is a certified public
accountant.
Mr. Carey has been Senior Vice President-Operations since August 1996. From
May 1996 to August 1996, Mr. Carey served as Director of Operations at the
Company's Downtown Disney Marketplace Unit. From June 1994 to May 1996, Mr.
Carey served as Director of Operations at the Company's Mall of America Unit.
From July 1989 to June 1994, Mr. Carey served as Senior General Manager at
Restaurants Unlimited, Inc., an upscale restaurant operating company. From
November 1987 to July 1989, Mr. Carey served as Regional Manager at General
Mills Restaurants, Inc.
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<PAGE> 35
Mr. Bartholomay has been Senior Vice President-International Development
and Operations of the Company since February 1997. From May 1995 to February
1997 Mr. Bartholomay served as a Vice President and research analyst of Dain
Bosworth Incorporated, an investment banking firm. From April 1993 to May 1995,
Mr. Bartholomay was Senior Vice President and Regional Director of Corporate
Finance for Principal Financial Securities, Inc. From February 1992 to April
1993, Mr. Bartholomay was Vice President and Chief Financial Officer for
Universal International, Inc. Prior to that, Mr. Bartholomay worked in
investment banking from December 1985 to February 1992.
Mr. Cohen has been General Counsel and Vice President of Real Estate since
August 1997. From October 1987 to July 1997, Mr. Cohen served in various
capacities at the Musicland Group, Inc., including Leasing Manager and as
Associate General Counsel.
Mr. Rogers has been a director of the Company since January 1995. Since
November 1988, Mr. Rogers has been Executive Vice President and Chief Operating
Officer of Wilsons. Mr. Rogers held positions of increasing responsibility at
Bermans Specialty Stores, Inc. from 1980 until November 1988, when Bermans was
acquired by Wilsons. Mr. Rogers is a director of Grand Casinos, Inc.
Mr. Waller has been a director of the Company since January 1995. Mr.
Waller has been President of Wilsons since 1983 and Chairman of Wilsons since
1992. Mr. Waller is also a director of Grand Casinos, Inc. and Damark
International, Inc.
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<PAGE> 36
DESCRIPTION OF NOTES
The Notes will be issued under an indenture dated as of January , 1998
(the "Indenture") between the Company and First Trust National Association, as
trustee (the "Trustee"), a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries of certain provisions of the Indenture do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all of
the provisions of the Indenture, including the definition therein of certain
terms. Wherever particular sections or defined terms of the Indenture are
referred to, such sections or defined terms are incorporated herein by
reference. As used in this "Description of Notes," the Company refers to
Rainforest Cafe, Inc. and does not include any subsidiary thereof.
GENERAL
The Notes will be general unsecured subordinated obligations of the
Company, will be limited to $115,000,000 in aggregate principal amount
(including the Notes issuable under the Underwriters' over-allotment option) and
will mature on , 2003 ("Maturity"). The Notes will bear interest
at the rate per annum shown on the front cover of this Prospectus from the date
of initial issuance of Notes pursuant to the Indenture, or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on January and July of each year, commencing July , 1998 to
the Person in whose name the Notes (or any predecessor Notes) are registered
(individually, a "Holder" and collectively, the "Holders") at the close of
business on the preceding January or July , as the case may be (whether or
not a Business Day). Interest on the Notes will be paid on the basis of a
360-day year consisting of twelve 30-day months.
Principal of, and premium, if any, and interest on the Notes will be
payable (i) in respect of Notes held of record by DTC or its nominee, in same
day funds on or prior to the respective payment dates and (ii) in respect of
Notes held of record by Holders other than DTC or its nominee, in same day
funds, at the office of the Trustee in New York, New York, and the Notes may be
surrendered for transfer, exchange or conversion at the office of the Trustee in
New York, New York. In addition, with respect to Notes held of record by holders
other than DTC or its nominee, payment of interest may be made at the option of
the Company by check mailed to the address of the persons entitled thereto as it
appears in the Register for the Notes on the Regular Record Date for such
interest.
The Notes will be issued only in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. No service charge will
be made for any transfer or exchange of the Notes, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge and
any other expenses (including the fees and expenses of the Trustee) payable in
connection therewith. The Company is not required (i) to issue or register the
transfer of or exchange of any Notes during a period beginning at the opening of
business 15 days before the day of the mailing of a notice of redemption and
ending at the close of business on the day of such mailing, (ii) to register the
transfer of or exchange of any Note selected for redemption in whole or in part,
except the unredeemed portion of Notes being redeemed in part or (iii) to
register the transfer or exchange of any Notes surrendered for conversion or
repurchase upon the occurrence of a Repurchase Event.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of, and premium, if any, and interest on any Note which
remain unclaimed for two years after such principal, premium, or interest
becomes due and payable may be repaid to the Company. Thereafter, the Holder of
such Note may, as an unsecured general creditor, look only to the Company for
payment thereof.
The Indenture does not contain any provisions that would afford protection
to Holders of the Notes against a sudden and dramatic decline in the credit
quality of the Company resulting from any takeover, recapitalization or similar
restructuring, except as described below under "Certain Rights to Require
Repurchase of Notes."
35
<PAGE> 37
CONVERSION RIGHTS
The Notes are convertible, at the option of the Holder, into Common Stock
following the date of initial issuance and prior to redemption or maturity,
initially at the conversion price of $ per share (does not reflect the
Company's three-for-two stock split for holders of record of Common Stock as of
December 26, 1997, effective January 15, 1998). The right to convert Notes which
have been called for redemption will terminate at the close of business on the
second business day preceding the Redemption Date, unless the Company defaults
on a redemption payment. See "Optional Redemption" below.
The conversion price will be subject to adjustments upon the occurrence of
any of the following events: (i) the subdivision, combination or
reclassification of outstanding shares of Common Stock; (ii) the payment of a
dividend or distribution on Common Stock exclusively in shares of Common Stock
or the payment of a dividend or distribution on any class of capital stock of
the Company in shares of Common Stock; (iii) the issuance of rights or warrants
to all holders of Common Stock entitling them to acquire shares of Common Stock
(or securities convertible into Common Stock) at a price per share less than the
Current Market Price; (iv) the distribution to all holders of Common Stock of
shares of capital stock (other than Common Stock), evidences of indebtedness,
cash or assets (including securities, but excluding dividends or distributions
in connection with the liquidation, dissolution or winding up of the Company or
paid exclusively in cash and dividends, distributions, rights and warrants
referred to above); (v) the distribution to all or substantially all holders of
Common Stock of rights or warrants to subscribe for its securities (other than
those referred to in (iii) above); (vi) a distribution consisting exclusively of
cash (excluding any cash distributions referred to in (iv) above) to all holders
of Common Stock in an aggregate amount that, together with (A) all other cash
distributions (excluding any cash distributions referred to in (iv) above) made
within the 12 months preceding the date fixed for determining the stockholders
entitled to such distribution in respect of which no adjustment has previously
been made and (B) any cash and the fair market value of other consideration
payable in respect of any tender offer by the Company or a subsidiary of the
Company for the Common Stock consummated within the 12 months preceding such
date of determination, exceeds the greater of (A) 10% of the Company's market
capitalization (being the product of the Current Market Price times the number
of shares of Common Stock then outstanding) on such date of determination
entitled to such distribution or (B) the Company's retained earnings on the date
of determination entitled to such distribution; (vii) the consummation of a
tender offer made by the Company or any subsidiary of the Company for all or any
portion of the Common Stock which involves an aggregate consideration that,
together with (X) any cash and the fair market value of other consideration
payable in respect of any tender offer by the Company or a subsidiary of the
Company for the Common Stock consummated within the 12 months preceding the
consummation of such tender offer in respect of which no adjustment has been
previously made and (Y) the aggregate amount of all cash distributions
(excluding any cash distributions referred to in (iv) above) to all holders of
the Common Stock within the 12 months preceding the consummation of such tender
offer in respect of which no adjustment has been previously made, exceeds the
greater of (A) 10% of the product of the Current Market Price immediately prior
to the date of consummation of such tender offer times the number of shares of
Common Stock outstanding at the date of consummation of such tender offer or (B)
the Company's retained earnings on the date of consummation of the tender offer,
and (viii) payment in respect of a tender offer or exchange offer by a person
other than the Company or any subsidiary of the Company in which, as of the
closing date of the offer, the Board of Directors is not recommending rejection
of the offer. The adjustment referred to in clause (viii) will only be made if
the tender offer or exchange is for an amount which increases the offeror's
ownership of Common Stock to more than 25% of the total shares of Common Stock
outstanding, and if the cash and value of any other consideration included in
such payment per share of Common Stock exceeds the current market price per
share of Common Stock on the business day next succeeding the last date on which
tenders or exchanges may be made pursuant to such tender or exchange offer. The
adjustment referred to in clause (viii) will generally not be made, however, if,
as of the closing of the offer, the offering documents with respect to such
offer disclose a plan or an intention to cause the Company to engage in a
consolidation or merger of the Company or a sale of all or substantially all of
the Company's assets. No adjustment of the conversion price will be required to
be made until cumulative adjustments amount to at least one percent of the
conversion price, as last adjusted. Any adjustments that would not otherwise be
36
<PAGE> 38
sufficient to require a change to be made pursuant to the immediately preceding
sentence shall be carried forward and taken into account in any subsequent
adjustment.
In addition to the foregoing adjustments, the Company will be permitted to
reduce the conversion price as it considers to be advisable in order that any
event treated for federal income tax purposes as a dividend of stock or stock
rights will not be taxable to the holders of the Common Stock or, if that is not
possible, to diminish any income taxes that are otherwise payable because of
such event.
In the case of any consolidation or merger of the Company with any other
corporation (other than one in which no change is made in the Common Stock), or
any sale or transfer of all or substantially all of the assets of the Company,
the Holder of any Note then outstanding will, with certain exceptions, have the
right thereafter to convert such Note only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares of Common Stock into which
such Note might have been converted immediately prior to such consolidation,
merger, sale or transfer; and adjustments will be provided for events subsequent
thereto that are as nearly equivalent as practical to the conversion price
adjustments described above.
Fractional shares of Common Stock will not be issued upon conversion, but,
in lieu thereof, the Company will pay a cash adjustment based upon the then
Closing Price at the close of business on the day of conversion (or, if such day
is not a Trading Day, on the Trading Day immediately preceding such day). If any
Notes are surrendered for conversion during the period from the opening of
business on any Regular Record Date through and including the next succeeding
Interest Payment Date (except any such Notes called for redemption), such Notes
when surrendered for conversion must instead be accompanied by payment of an
amount equal to the interest thereon which the registered Holder on such Regular
Record Date is to receive; provided however that the Notes or portions thereof
which have been called for redemption and the conversion rights of which
terminate during such period must be accompanied by payment of an amount equal
to the interest which would have accrued on the principal amount of the Notes
being surrendered for conversion for the period from the conversion date to such
Interest Payment Date. Except as described in the preceding sentence, no
interest will be payable by the Company on converted Notes with respect to any
Interest Payment Date subsequent to the date of conversion. No other payment or
adjustments for interest or dividends is to be made upon conversion.
SUBORDINATION
The payment of the principal of, and premium, if any, and interest on the
Notes will, to the extent set forth in the Indenture, be subordinated in right
of payment to the prior payment in full of all Senior Indebtedness. If there is
a payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshaling of assets or any bankruptcy, insolvency or similar
proceedings of the Company, the holders of all Senior Indebtedness will be
entitled to receive payment in full of all amounts due or to become due thereon
or provision for such payment in money or money's worth before the Holders of
the Notes will be entitled to receive any payment in respect of the principal
of, or premium, if any, and interest on the Notes. In the event of the
acceleration of the Maturity of the Notes, the holders of all Senior
Indebtedness then outstanding will first be entitled to receive payment in full
in cash of all amounts due thereon or provision for such payment in money or
money's worth before the Holders of the Notes will be entitled to receive any
payment for the principal of, or premium, if any, and interest on the Notes. The
Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) to the Holders upon or in respect of the
Notes if (i) a default in the payment of the principal of, or premium, if any,
or interest on any Designated Senior Indebtedness (a "Payment Default") occurs
or (ii) any other default occurs and is continuing with respect to any
Designated Senior Indebtedness which permits holders of Designated Senior
Indebtedness as to which that default relates to accelerate its maturity (a
"Nonpayment Default") and the Trustee receives notice of that default (a
"Payment Blockage Notice") from the Company or other person permitted to give
such notice under the Indenture. The payments on or in respect of the Notes
shall be resumed (i) in the case of a Payment Default respecting Designated
Senior Indebtedness, on the date on which that default is cured or waived and
(ii) in the case of a Nonpayment Default respecting Designated Senior
Indebtedness, the earliest of (a) the date on which that Nonpayment Default is
cured or waived, (b) the date the applicable Payment Blockage Notice is
37
<PAGE> 39
retracted by written notice to the Trustee from a representative of the holders
of the Designated Senior Indebtedness which have given that Payment Blockage
Notice or (c) 179 days after the date on which the applicable Payment Blockage
Notice is received by the Trustee, unless any Payment Default has occurred and
is continuing or an Event of Default of the type referred to in clause (g) of
the first sentence under "-- Events of Default" has occurred. No Nonpayment
Default which existed or was continuing on the date of any Payment Blockage
Notice may be made the basis for giving a second Payment Blockage Notice and
only one such Payment Blockage Notice with respect to a Nonpayment Default may
be given in any 365-day period.
"Senior Indebtedness" is defined in the Indenture as (a) all indebtedness
of the Company for money borrowed under the Company's credit facilities and any
predecessor or successor credit facilities thereto, whether outstanding on the
date of execution of the Indenture or thereafter created, incurred or assumed,
(b) indebtedness of the Company for money borrowed, whether outstanding on the
date of execution of the Indenture or thereafter created, incurred or assumed,
except any such other indebtedness that by the terms of the instrument or
instruments by which such indebtedness was created or incurred expressly
provides that it (i) is junior in right of payment to the Notes or (ii) ranks
pari passu in right of payment with the Notes, and (c) any amendments, renewals,
extensions, modifications, refinancings and refundings of any of the foregoing.
The term "indebtedness for money borrowed" when used with respect to the Company
is defined to mean (i) any obligation of or any obligation guaranteed by, the
Company for the repayment of borrowed money (including without limitation fees,
penalties and other obligations in respect thereof), whether or not evidenced by
bonds, notes or other written instruments, (ii) any deferred payment obligation
of, or any such obligation guaranteed by, the Company for the payment of the
purchase price of property or assets evidenced by a note or similar instrument
and (iii) any obligation of, or any such obligation guaranteed by, the Company
for the payment of rent or other amounts under a lease of property or assets
which obligation is required to be classified and accounted for as a capitalized
lease on the balance sheet of the Company, under generally accepted accounting
principles. As used in the Indenture, "Designated Senior Indebtedness" means
principal, interest, premiums, fees, indemnifications, reimbursements, damages
and other liabilities payable under the documentation governing any indebtedness
(a) under any debt facility with banks or other lenders which provides for
revolving credit loans, term loans, receivables financing (including through the
sale of receivables) or letters of credit to the Company or any of its
subsidiaries and (b) any other Senior Indebtedness the principal amount of which
is $5.0 million or more and that has been designated by the Company as
"Designated Senior Indebtedness."
The Indenture does not limit or prohibit the incurrence of indebtedness,
including Senior Indebtedness, by the Company or its subsidiaries. At December
3, 1997, the Company had no outstanding Senior Indebtedness. The Company may
incur Senior Indebtedness from time to time in the future.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes will be redeemable, at the Company's option, in whole or from
time to time in part, at any time on or after January , 2001, upon not less
than 30 nor more than 60 days' notice mailed to each Holder of Notes to be
redeemed at its address appearing in the Security Register and prior to Maturity
at the following Redemption Prices (expressed as percentages of the principal
amount) plus accrued interest to the Redemption Date (subject to the right of
Holders of record on the relevant Regular Record Date to receive interest due on
an Interest Payment Date that is on or prior to the Redemption Date).
If redeemed during the period beginning January (January , if in the
year 2001), in the year indicated and ending on the succeeding January , the
redemption price shall be:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001..............................
2002..............................
2003.............................. 100%
</TABLE>
in each case together with accrued and unpaid interest up to but not including
the date of redemption. No sinking fund is provided for the Notes.
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<PAGE> 40
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with or merge into any other Person or
convey, transfer or lease its properties and assets substantially as an entirety
to any Person, and the Company will not permit any Person to consolidate with or
merge into the Company unless: (a) the Person formed by such consolidation or
into which the Company is merged or the Person or corporation which acquires the
properties and assets of the Company substantially as an entirety is a
corporation, partnership or trust organized and validly existing under the laws
of the United States or any state thereof or the District of Columbia and
expressly assumes payment of the principal of and premium, if any, and interest
on the Notes and performance and observance of each obligation of the Company
under the Indenture; (b) after consummating such consolidation, merger, transfer
or lease, no Default or Event of Default will occur and be continuing, (c) such
consolidation, merger, conveyance, transfer or lease does not adversely affect
the validity or enforceability of the Notes and (d) the Company or Successor
Person has delivered to the Trustee an Officer's Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, conveyance, transfer or
lease complies with the provisions of the Indenture. Notwithstanding the
foregoing, nothing shall prevent the transfer of the Company's properties or
assets by and among the Company and any subsidiary of the Company.
CERTAIN RIGHTS TO REQUIRE REPURCHASE OF NOTES
In the event of any Repurchase Event occurring after the date of issuance
of the Notes and on or prior to Maturity, each Holder of Notes will have the
right, at the Holder's option, to require the Company to repurchase all or any
part of the Holder's Notes on the date (the "Repurchase Date") that is 30 days
after the date the Company gives notice of the Repurchase Event as described
below at a price (the "Repurchase Price") equal to 100% of the principal amount
thereof, together with accrued and unpaid interest to the Repurchase Date. On or
prior to the Repurchase Date, the Company shall deposit with the Trustee or a
Paying Agent an amount of money in same day funds sufficient to pay the
Repurchase Price of the Notes which are to be repaid on or promptly following
the Repurchase Date.
Failure by the Company to provide timely notice of a Repurchase Event, as
provided for below, or to repurchase the Notes when required under the preceding
paragraph will result in an Event of Default under the Indenture whether or not
such repurchase is permitted by the subordination provisions of the Indenture.
On or before the 15th day after the occurrence of a Repurchase Event, the
Company is obligated to mail to all Holders of Notes a notice of the occurrence
of such Repurchase Event and identifying the Repurchase Event, the Repurchase
Date, the date by which the repurchase right must be exercised, the Repurchase
Price for Notes (which shall equal 100% of the principal amount thereof,
together with accrued and unpaid interest) and the procedures which the Holder
must follow to exercise this right. To exercise the repurchase right, the Holder
of a Note must deliver, on or before the close of business on the Repurchase
Date, written notice to the Company (or an agent designated by the Company for
such purpose) and to the Trustee of the Holder's exercise of such right,
together with the certificates evidencing the Notes with respect to which the
right is being exercised, duly endorsed for transfer.
A "Repurchase Event" shall have occurred upon the occurrence of a Change in
Control (as defined below) or a Termination of Trading (as defined below).
A "Change in Control" shall occur when: (i) all or substantially all of the
Company's assets are sold as an entirety to any person or related group of
persons (other than a sale or transfer among the Company and its subsidiaries or
among wholly-owned subsidiaries); (ii) there shall be consummated any
consolidation or merger of the Company (A) in which the Company is not the
continuing or surviving corporation (other than a consolidation or merger with a
wholly owned subsidiary of the Company in which all shares of Common Stock
outstanding immediately prior to the effectiveness thereof are changed into or
exchanged for the same consideration) or (B) pursuant to which the Common Stock
would be converted into cash, securities or other property, in each case, other
than a consolidation or merger of the Company in which the holders of the Common
Stock immediately prior to the consolidation or merger have, directly or
indirectly, at least a majority of the total voting power of all classes of
capital stock entitled to vote generally in the election of directors of the
continuing or surviving corporation immediately after such consolidation or
merger in
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<PAGE> 41
substantially the same relative proportion as their ownership of Common Stock
immediately before such transaction; (iii) any person, or any persons acting
together which would constitute a "group" for purposes of Section 13(d) of the
Exchange Act, together with any affiliates thereof, shall beneficially own (as
defined in Rule 13d-3 under the Exchange Act) at least 50% of the total voting
power of all classes of capital stock of the Company entitled to vote generally
in the election of directors of the Company; (iv) at any time during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of the Company was approved by a vote of 66 2/3% of
the directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office; or (v) the Company is liquidated or
dissolved or adopts a plan of liquidation or dissolution.
A "Termination of Trading" shall occur if the Common Stock (or other common
stock into which the Notes are then convertible) is neither listed for trading
on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
If a Repurchase Event were to occur, there can be no assurance that the
Company would have sufficient funds to repurchase the Notes tendered by the
Holders thereof. The Company's Senior Indebtedness may provide that a change in
control of the Company would constitute an event of default thereunder, the
occurrence of which would cause any repurchase of the Notes, absent a waiver, to
be blocked by the subordination provisions of the Notes. In addition, even if
such event of default did not occur or was waived, the right to require the
Company to repurchase Notes as a result of the occurrence of a Repurchase Event
could create an event of default under Senior Indebtedness of the Company, as a
result of which any repurchase could, absent a waiver, be blocked by the
subordination provisions of the Notes. See "--Subordination." The Company's
ability to pay cash to the Holders of Notes upon a Repurchase Event may be
limited by certain financial covenants contained in the Company's Senior
Indebtedness. Failure by the Company to repurchase the Notes when required will
result in an Event of Default with respect to the Notes whether or not such
repurchase is permitted by the subordination provisions thereof.
In the event a Repurchase Event occurs and the Holders exercise their
rights to require the Company to repurchase Notes, the Company intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
and 14e-1, as then in effect, with respect to any such purchase.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving the
Company that may adversely affect Holders. In addition, the foregoing provisions
may discourage open market purchases of the Common Stock or a non-negotiated
tender or exchange offer for such stock and, accordingly, may limit a
stockholder's ability to realize a premium over the market price of the Common
Stock in connection with any such transaction.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
Notes: (a) default in the payment of the principal of, or the premium, if any,
on any Note when due (even if such payment is prohibited by the subordination
provisions of the Indenture); (b) default in the payment of any interest on any
Note when due, which default continues for 30 days (even if such payment is
prohibited by the subordination provisions of the Indenture); (c) failure to
provide timely notice of a Repurchase Event as required by the Indenture; (d)
default in the payment of the Repurchase Price in respect of any Note on the
Repurchase Date therefor (even if such payment is prohibited by the
subordination provisions of the Indenture); (e) default in the performance, or
breach, of any other covenant or warranty of the Company in the Indenture which
continues for 60 days after written notice as provided in the Indenture; (f)
default under one or more bonds, notes or other evidences of indebtedness for
money borrowed by the Company or any subsidiary of the Company or under one or
more mortgages, indentures or instruments under which there may be issued or by
which there may be secured or evidenced any indebtedness for money borrowed by
the Company or any subsidiary of the Company, whether such indebtedness now
exists or shall hereafter be created, which default
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<PAGE> 42
individually or in the aggregate shall constitute a failure to pay the principal
of indebtedness in excess of $10,000,000 when due and payable after the
expiration of any applicable grace period with respect thereto or shall have
resulted in indebtedness in excess of $10,000,000 becoming or being declared due
and payable prior to the date on which it would otherwise have become due and
payable, without such indebtedness having been discharged, or such acceleration
having been rescinded or annulled, within a period of 30 days after there shall
have been given to the Company by the Trustee or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of the Outstanding
Notes (as defined in the Indenture) a written notice specifying such default and
requiring the Company to cause such indebtedness to be discharged or cause such
acceleration to be rescinded or annulled; and (g) certain events of bankruptcy,
insolvency or reorganization of the Company or any subsidiary of the Company.
If an Event of Default with respect to the Notes (other than as specified
in clause (g) in the immediately preceding paragraph) shall occur and be
continuing, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Outstanding Notes may declare the principal of, and
premium, if any, on all such Notes to be due and payable immediately, but if the
Company cures all Events of Default and has paid or deposited with the Trustee a
sum sufficient to pay all interest on, premium, if any, and principal of Notes
then due and certain other conditions are met, such declaration may be canceled
and past defaults may be waived by the holders of a majority in principal amount
of Outstanding Notes. If an Event of Default shall occur as a result of an event
of bankruptcy, insolvency or reorganization of the Company or any subsidiary of
the Company, the aggregate principal of, and premium, if any, and any accrued
and unpaid interest on the Notes shall automatically become due and payable. The
Company is required to furnish to the Trustee annually a statement as to the
performance by the Company of certain of its obligations under the Indenture and
as to any default in such performance. The Indenture provides that the Trustee
may withhold notice to the Holders of the Notes of any continuing default
(except in the payment of the principal of, or premium, if any, or interest on
any Notes) if the Trustee considers it in the interest of Holders of the Notes
to do so.
PAYMENT OF PRINCIPAL AND INTEREST
Principal of, and premium, if any, and interest on the Notes will be
payable (i) in respect of Notes held of record by DTC or its nominee, in same
day funds on or prior to the respective payment dates and (ii) in respect of
Notes held of record by Holders other than DTC or its nominee, in same day
funds, at the office of the Trustee in New York, New York, and the Notes may be
surrendered for transfer, exchange or conversion at the office of the Trustee in
New York, New York. In addition, with respect to Notes held of record by holders
other than DTC or its nominee, payment of interest may be made at the option of
the Company by check mailed to the address of the persons entitled thereto as it
appears in the Register for the Notes on the Regular Record Date for such
interest.
MODIFICATION, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of Outstanding Notes; provided, however, that no such
modification or amendment may without consent of the Holder of each Outstanding
Note affected thereby (i) change the maturity of the principal of, or any
installment of interest on, any Note; (ii) reduce the principal amount of, or
the premium or interest on, any Note; (iii) change the place of payment where,
or currency in which, any Note or any premium or interest thereof is payable;
(iv) impair the right of a Holder to institute suit for the enforcement of any
payment on or with respect to any Note; (v) change the currency in which the
Notes are payable; (vi) adversely affect the right to convert the Notes; (vii)
adversely affect the right to cause the Company to repurchase the Notes; (viii)
modify the subordination provisions in a manner adverse to the Holders of the
Notes; or (ix) reduce the above stated percentage of aggregate principal amount
of Outstanding Notes necessary for waiver or compliance with certain provisions
of the Indenture or for waiver of certain defaults.
The Holders of a majority in aggregate principal amount of Outstanding
Notes may waive compliance by the Company with certain restrictive provisions of
the Indenture. The Holders of a majority in aggregate principal amount of
Outstanding Notes may waive any past default or right under the Indenture,
except (i) a
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default in payment of principal, premium or interest, (ii) the right of a Holder
to redeem or convert the Note, or (iii) with respect to any covenant or
provision of the Indenture that requires the consent of the Holder of each
Outstanding Note affected.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture, other than
its obligation to pay the principal of and interest on the Notes and certain
other obligations (including its obligation to deliver shares of Common Stock
upon conversion of the Notes), while Notes remain Outstanding if (a) all
Outstanding Notes have become due and payable or will become due and payable at
their scheduled maturity within one year, or (b) all Outstanding Notes are
scheduled for redemption within one year or are delivered to the Trustee for
conversion in accordance with the Indenture, and in either case the Company has
irrevocably deposited with the Trustee an amount sufficient to pay and discharge
all Outstanding Notes on the date of their scheduled maturity or the scheduled
date of redemption.
GOVERNING LAW
The Indenture and, except as may otherwise be required by mandatory
provisions of law, Notes will be governed by and construed in accordance with
the laws of the State of New York, without giving effect to such state's
conflicts of laws principles.
THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee, in
the event it becomes a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest
(as defined), it must eliminate such conflict or resign.
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders of
Notes, unless they shall have offered to the Trustee reasonable security or
indemnity.
BOOK-ENTRY
The Notes will be issued in the form of a global note or notes (together,
the "Global Note") deposited with, or on behalf of, The Depository Trust Company
("DTC") and registered in the name of Cede & Co. as DTC's nominee. Owners of
beneficial interests in the Notes represented by the Global Note will hold such
interests pursuant to the procedures and practices of DTC and must exercise any
rights in respect of their interests (including any right to convert or require
repurchase of their interests) in accordance with those procedures and
practices. Such beneficial owners will not be Holders, and will not be entitled
to any rights under the Global Note or the Indenture, with respect to the Global
Note and the Company and the Trustee, and any of their respective agents, may
treat DTC as the sole Holder and owner of the Global Note.
DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities that its participants
deposit with DTC. DTC also facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movements of securities certificates.
Direct participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations, and certain other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the
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American Stock Exchange, Inc., and the National Association of Securities
Dealers, Inc. Access to the DTC system is also available to others such as
securities brokers and dealers, banks, and trust companies that clear through or
maintain a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.
Unless and until they are exchanged in whole or in part for certified Notes
in definitive form as set forth below, the Global Note may not be transferred
except as a whole by DTC to a nominee of DTC, or by a nominee of DTC to DTC or
another nominee of DTC.
The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if (i) DTC is at any time unwilling, unable or
ineligible to continue as depositary or (ii) there shall have occurred and be
continuing an Event of Default with respect to the Notes represented by the
Global Note, the Company will issue individual Notes in definitive form in
exchange for the Global Note. In addition, the Company may at any time and in
its sole discretion determine not to have a Global Note, and, in such event,
will issue individual Notes in definitive form in exchange for the Global Note
previously representing all such Notes. In such instances, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery of
Notes in definitive form equal in principal amount to such beneficial interest
and to have such Notes registered in its name. Individual Notes so issued in
definitive form will be issued in denominations of $1,000 and any larger amount
that is an integral multiple of $1,000 and will be issued in registered form
only, without coupons.
Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global Note
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will credit
the accounts of the related participants with payment in amounts proportionate
to their respective holdings in principal amount of beneficial interest in the
Global Note as shown on the records of DTC. The Company also expects that
payments by participants to owners of beneficial interests in the Global Note
will be governed by standing customer instructions and customary practices, as
is now the case with securities held for the accounts of customers in bearer
form or registered in "street name," and will be the responsibility of such
participants.
So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
Holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with its
procedures on a form required by DTC and provided to participants. In order to
ensure that DTC's nominee will timely exercise a right to repayment, or the
right of conversion, with respect to a particular Note, the beneficial owner of
such Notes must instruct the broker or other participant through which it holds
an interest in such Notes to notify DTC of its desire to exercise a right to
repayment, or the right of conversion. Different firms have different cut-off
times for accepting instructions from their customers and, accordingly, each
beneficial owner should consult the broker or other participant through which it
holds an interest in a Note in order to ascertain the cut-off time by which such
an instruction must be given in order for timely notice to be delivered to DTC.
The Company will not be liable for any delay in delivery of such notice to DTC.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED SHARES
The Company's authorized capital stock consists of 50,000,000 undesignated
shares, no par value per share in the case of Common Stock, and a par value as
determined by the Board of Directors in the case of Preferred Stock.
COMMON STOCK
At December 1, 1997, there were 17,567,512 shares of Common Stock issued
and outstanding and 2,220,816 shares reserved for issuance upon exercise of
outstanding options. The rights of holders of the shares of Common Stock may
become subject in the future to prior and superior rights and preferences in the
event the Board of Directors establishes one or more additional classes of
Common Stock, or one or more series of Preferred Stock. The Board of Directors
has no present plan to establish any such additional class or series. See "Risk
Factors -- Effect of Certain Anti-Takeover Provisions." Holders of the Common
Stock are entitled to receive such dividends as may be declared by the Board of
Directors out of assets legally available therefore, and to share ratably in the
assets of the Company available upon liquidation.
Each share of Common Stock is entitled to one vote for all purposes.
Accordingly, the holders of more than fifty percent of all of the outstanding
shares of Common Stock can elect all of the directors. Significant corporate
transactions such as mergers, sales of assets and dissolution or liquidation
require approval by the affirmative vote of the majority of the outstanding
shares of Common Stock. Other matters to be voted upon by the holders of Common
Stock normally require the affirmative vote of a majority of the shares present
or represented by proxy at the particular shareholders' meeting.
PREFERRED STOCK
None of the shares of Preferred Stock are presently outstanding. The Board
of Directors has the authority, without any further vote or action by the
shareholders, to issue shares of Preferred Stock in one or more series and to
fix the number of shares, designations of such series, dividend rates, relative
rights (including voting rights), preferences and limitations of such series to
the full extent now or hereafter permitted by Minnesota law.
The rights of the holders of Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. It is not possible to state the actual effect of the
authorization and issuance of series of shares of Preferred Stock upon the
rights of holders of shares of Common Stock unless and until the Board of
Directors determines the attributes of the series and the specific rights of its
holders. Such effects might include, however, (i) restrictions on dividends on
shares of Common Stock if dividends on shares of Preferred Stock have not been
paid; (ii) dilution of the voting power of shares of Common Stock to the extent
that the shares of Preferred Stock have voting rights, or to the extent that any
series of shares of Preferred Stock is convertible into shares of Common Stock;
(iii) dilution of the equity interest of holders of shares of Common Stock
unless the shares of Preferred Stock are subsequently redeemed by the Company;
and (iv) limitation on the right of holders of shares of Common Stock to share
in the Company's assets upon liquidation until satisfaction of any liquidation
preference granted to holders of shares of Preferred Stock. Issuance of a new
series of Preferred Stock, while providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, a majority of the outstanding voting stock of the
Company. The Company has no present intention to issue any shares of Preferred
Stock.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A., is the transfer agent and registrar for the
Common Stock.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain United States federal income
tax considerations relating to an investment in the Notes and the Common Stock
issuable upon conversion thereof as of the date hereof. This discussion is based
on existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations promulgated thereunder, judicial decisions now in
effect and administrative rulings, all of which are subject to change or
alternative construction, possibly with retroactive effect. This summary does
not discuss other federal taxes (such as federal estate and gift taxes) that may
be important to Holders of the Notes or any state, local or foreign tax
considerations, nor does it purport to address all federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules in light of their personal circumstances, such as life
insurance companies, tax-exempt organizations, dealers in securities or
currency, banks or other financial institutions, investors whose functional
currency is not the U.S. dollar, or investors that hold the Notes as part of a
hedge, straddle or conversion transaction. In addition, this summary deals only
with Notes and Common Stock into which the Notes are convertible which are held
as "capital assets" within the meaning of Section 1221 of the Code and that are
purchased by investors upon initial issuance at the initial offering price. The
Company will not seek a ruling from the Internal Revenue Service (the "IRS")
with regard to the United States federal income tax treatment relating to an
investment in the Notes (or the Common Stock into which the Notes are
convertible) and, therefore, there can be no assurance that the IRS will agree
with the conclusions set forth below.
For purposes of this summary, the term "U.S. Holder" means a beneficial
owner of a Note or Common Stock that is (i) a citizen or resident of the United
States, (ii) except to the extent otherwise provided in Treasury regulations
with a partnership, a corporation or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source, and (iv) a trust if (a) a U.S. court is able
to exercise primary supervision over the trust's administration and (b) one or
more U.S. fiduciaries have the authority to control all of the trust's
substantial decisions. The term "Non-U.S. Holder" shall mean the beneficial
owner of a Note or Common Stock other than a U.S. Holder.
PERSONS CONSIDERING THE PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE APPLICATION OF UNITED STATES FEDERAL TAX LAWS, AS WELL
AS THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR
PARTICIPATION IN THE OFFERING, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING
CONVERSION OF THE NOTES, AND THE EFFECT THAT THEIR PARTICULAR SITUATIONS MAY
HAVE ON SUCH TAX CONSIDERATIONS. THIS SUMMARY DOES NOT PURPORT TO ADDRESS ALL
ASPECTS OF FEDERAL, STATE, LOCAL OR FOREIGN TAXATION THAT MAY BE RELEVANT TO AN
INVESTOR'S DECISION TO PURCHASE THE NOTES.
TAXATION OF U.S. HOLDERS
Conversion of a Note into Common Stock. In general, a U.S. Holder will not
recognize gain or loss on conversion of a Note solely into Common Stock of the
Company pursuant to the terms of the conversion right of the Notes, except with
respect to cash received in lieu of a fractional share. The holding period of
the Common Stock received by the U.S. Holder upon conversion of a Note generally
will include the period during which the Note was held prior to the conversion.
The U.S. Holder's aggregate tax basis in the Common Stock received upon
conversion of a Note generally will equal the U.S. Holder's aggregate tax basis
in the Note exchanged (reduced by the portion allocable to cash received in lieu
of a fractional share). A U.S. Holder generally will recognize capital gain or
loss in connection with any cash received in lieu of a fractional share in an
amount equal to the difference between the amount of cash received and the U.S.
Holder's tax basis in the fractional share. U.S. Holders should consult their
own tax advisors regarding the tax consequences of converting the Notes into
Common Stock, in particular in the case of the conversion of a Note into Common
Stock after a record date for the payment of interest but prior to the next
succeeding interest payment date.
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Adjustments to Conversion Price. The Indenture provides that the conversion
price will be adjusted upon the occurrence of certain circumstances. Section 305
of the Code treats as a distribution taxable as a dividend (to the extent of the
Company's current or accumulated earnings and profits) certain actual or
constructive distributions of stock with respect to stock and convertible
securities. Applicable Treasury regulations treat holders of convertible
debentures as having received such a constructive distribution where the
conversion price is adjusted to reflect certain distributions with respect to
the stock into which such debentures are convertible. Thus, under certain
circumstances, an adjustment in the conversion price of the Common Stock may be
taxable to the U.S. Holders as a dividend distribution. In such a case, U.S.
Holders may recognize income as a result of an event pursuant to which they
receive no cash or property that could be used to pay the related income tax.
Generally, a holder's tax basis in a Note will be increased by the amount of any
such constructive dividend. Holders of the Notes are advised to consult their
tax advisors with respect the potential of taxable constructive dividend
distributions upon such conversion price modifications.
Payments of Interest. The payment of stated interest on the Notes will be
taxable to a U.S. Holder as ordinary interest income at the time it accrues or
is received in accordance with the holder's usual method of accounting for
federal income tax purposes.
Disposition of Notes or Common Stock. A U.S. Holder of a Note (or the
Common Stock into which it was converted) generally will recognize capital gain
or loss upon the sale, exchange, retirement or other disposition of the Note (or
the Common Stock) measured by the difference between (i) the amount realized
(except to the extent the amount is attributable to accrued interest income,
which will generally be taxable as ordinary income) and (ii) the U.S. Holder's
tax basis in the Note (or the Common Stock). The gain or loss on such
disposition will be taken into account in determining the amount of the U.S.
Holder's net capital gain which is taxed at a rate of 20% if the Note (or the
Common Stock) has been held for more than 18 months at the time of such
disposition or mid-term gain or loss (net mid-term gain being taxed at a rate of
28%) if the Note (or Common Stock) has been held for more than one year but not
more than 18 months at the time of such disposition.
Market Discount. The resale of Notes may be affected by the "market
discount" provisions of the Code. For this purpose, the market discount on a
Note will generally be equal to the amount, if any, by which the stated
redemption price at maturity of the Note immediately after its acquisition
exceeds the holder's tax basis in the Note. Subject to a de minimis exception,
these provisions generally require a holder of a Note acquired at a market
discount to treat as ordinary income any gain recognized on the disposition of
such Note to the extent of the "accrued market discount" on such Note at the
time of disposition. In general, market discount on a Note will be treated as
accruing on a straight-line basis over the term of such Note, or, at the
election of the holder, under a constant yield method. A holder of a Note
acquired at a market discount may be required to defer the deduction of a
portion of the interest on any indebtedness incurred or maintained to purchase
or carry the Note until the Note is disposed of in a taxable transaction, unless
the holder elects to include accrued market discount in income currently.
Distributions with Respect to Common Stock. In general, distributions made
by the Company with respect to Common Stock will constitute dividends for
federal income tax purposes and will be taxable to a holder as ordinary income
to the extent of the Company's undistributed current or accumulated earnings and
profits (as determined for federal income tax purposes). Distributions in excess
of the Company's current or accumulated earnings and profits will be treated
first as a nontaxable return of capital, which reduces the U.S. Holder's tax
basis in the Common Stock, thus increasing the amount of any gain (or reducing
the amount of any loss) which might be realized by such holder upon the future
sale, exchange or redemption of such Common Stock. Any such distributions in
excess of the U.S. Holder's tax basis in the Common Stock will be treated as
capital gain to the U.S. Holder (provided the Common Stock is held as a capital
asset), and will be either more-than-18-month, mid-term or short-term capital
gain depending upon the holder's federal income tax holding period for the
Common Stock.
Subject to certain limitations, to the extent that distributions made by
the Company are treated as dividends, a U.S. Holder of Common Stock that is
taxed as a domestic corporation and that meets the applicable holding period and
taxable income requirements of the Code may be entitled to a deduction under
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Section 243 of the Code equal in amount to 70% of the dividends paid out of such
earnings and profits (the "Dividends Received Deduction"). With respect to
Common Stock considered to be "portfolio stock" as defined in Section 246A of
the Code, the Dividends Received Deduction will be reduced to the extent that
the Common Stock constitutes "debt financed portfolio stock." In addition, under
certain circumstances, the receipt of a dividend on the Common Stock determined
to be an "extraordinary dividend" may cause the holder's tax basis in the Common
Stock to be reduced by the untaxed portion of the dividend and could result in
gain recognition pursuant to Section 1059 of the Code.
TAXATION OF NON-U.S. HOLDERS
Payments of Interest. The payment of stated interest on a Note by the
Company or any paying agent to a Non-U.S. Holder will qualify for the "portfolio
interest exemption" and, therefore, will not be subject to United States federal
income tax or withholding tax, provided that such interest income is not taxable
as effectively connected with a United States trade or business of the Non-U.S.
Holder and provided that the Non-U.S. Holder (i) does not actually or
constructively own 10% or more of the combined voting power of all classes of
stock of the Company entitled to vote, (ii) is not a controlled foreign
corporation related to the Company actually or constructively through stock
ownership, (iii) is not a bank receiving interest on a loan entered into in the
ordinary course of business, and (iv) either (a) provides a Form W-8 (or
suitable substitute form) signed under penalties of perjury that includes its
name and address and certifies as to its non-United States status in compliance
with applicable law and regulations, or (b) deposits the Note with a securities
clearing organization, bank or financial institution that holds customers'
securities in the ordinary course of its trade or business and which holds the
Note and provides a statement to the Company or its agent under penalties of
perjury in which it certifies that such a Form W-8 (or a suitable substitute)
has been received by it from the Non-U.S. Holder or qualifying intermediary and
furnishes the Company or its agent with a copy thereof. For purposes of
determining whether a Non-U.S. Holder constructively owns more than 10% of the
Company's combined voting power, the Non-U.S. Holder will be treated as owning
the number of shares of Common Stock that he would acquire if he converted all
of his Notes.
Recently finalized Treasury regulations (the "Regulations") provide
alternative methods for satisfying the certification requirement described in
clause (iv) above. These Regulations also generally will require, in the case of
Notes held by a foreign partnership, that (a) the certification described in
clause (iv) above be provided by the partners rather than by the foreign
partnership, and (b) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule will apply in
the case of tiered partnerships. These Regulations generally will be effective
January 1, 1999. Non-U.S. Holders of the Notes are advised to consult their tax
advisors with respect to their qualification for the portfolio interest
exemption and the steps necessary to comply with such exemption.
Except to the extent otherwise provided under an applicable tax treaty, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest on a Note if such interest income is effectively connected
with a United States trade or business of the Non-U.S. Holder. Effectively
connected interest received by a corporate Non-U.S. Holder may also, under
certain circumstances, be subject to an additional "branch profits tax" at a 30%
rate (or, if applicable, a lower treaty rate). A Non-U.S. Holder may be required
to satisfy certain certification requirements in order to claim a reduction of
or exemption from withholding under the foregoing rules. Non-U.S. Holders should
consult their respective tax advisers regarding any applicable income tax
treaties, which may provide different rules.
Interest income of a Non-U.S. Holder that is not effectively connected with
a United States trade or business and that does not qualify for the portfolio
interest exemption described above generally will be subject to a withholding
tax at a 30% rate (or, if applicable, a lower treaty rate).
Conversion of a Note into Common Stock In general, no United States federal
income tax or withholding tax will be imposed upon the conversion of a Note into
Common Stock by a Non-U.S. Holder except, with respect to the receipt of cash in
lieu of fractional shares by Non-U.S. Holders upon conversion of a Note, where
any one of the four exceptions described below under "-- Disposition of Notes or
Common Stock" is applicable. In addition, under certain circumstances, the
extent to which the fair market value of the Common
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Stock received upon conversion is attributable to accrued interest will be
treated as ordinary interest income taxable as described above under "--
Payments of Interest."
Disposition of Notes or Common Stock. A Non-U.S. Holder of the Note (or the
Common Stock into which it was converted) generally will not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale, exchange, retirement or other disposition of the Note (including the
receipt of cash in lieu of fractional shares upon conversion of the Note to
Common Stock), unless (i) the gain is effectively connected with a United States
trade or business of the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder
who is an individual, such holder is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of the
disposition, and either such holder has a "tax home" in the United States or the
disposition is attributable to an office or other fixed place of business
maintained by such holder in the United States, (iii) the Non-U.S. Holder is
subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates, or (iv) the Company is a United States real property
holding corporation. The Company does not believe that it is, or is likely to
become, a United States real property holding corporation.
Distributions with Respect to Common Stock. To the extent distributions
made by the Company are treated as dividends (as described above under "Taxation
of U.S. Holders -- Distributions with Respect to Common Stock"), a Non-U.S.
Holder will be subject to United States federal withholding tax at a 30% rate
(or lower rate provided under an applicable income tax treaty) on dividends paid
(or deemed paid, as described above under "Taxation of U.S. Holders --
Adjustment to Conversion Price") on Common Stock, unless the dividends are
taxable as effectively connected with the conduct of a trade or business in the
United States and the Non-U.S. Holder delivers IRS Form 4224 to the payer.
Except to the extent otherwise provided under an applicable tax treaty, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder on
dividends paid (or deemed paid) that are effectively connected with the conduct
of a trade or business in the United States by the Non-U.S. Holder. If such
Non-U.S. Holder is a foreign corporation, it may also be subject to a United
States branch profits tax on such effectively connected income at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payer has knowledge to the contrary) for purposes of the withholding rules
discussed below and, under the current interpretation of Treasury Regulations,
for purposes of determining the applicability of a tax treaty rate. Under the
Regulations effective January 1, 1999, however, a Non-U.S. Holder of Common
Stock who wishes to claim the benefit of an applicable treaty rate would be
required to satisfy applicable certification requirements. In addition, under
these Regulations, in the case of Common Stock held by a foreign partnership,
the certification requirement generally would be applied to the partners of the
partnership and the partnership would be required to provide certain
information, including a United States taxpayer identification number. These
Regulations also will provide look-through rules for tiered partnerships.
BACKUP WITHHOLDING AND INFORMATION REPORTING
U.S. Holders. Under current United States federal income tax law, U.S.
Holders of Notes or Common Stock will be subject to information reporting and,
under certain circumstances, may be subject to "backup withholding" at the rate
of 31% in respect to payments of principal, interest and dividends made to, and
the proceeds of disposition of Notes or Common Stock by, certain noncorporate
U.S. Holders. Generally, the backup withholding rules will apply only if the
U.S. Holder (i) fails to furnish its taxpayer identification number ("TIN") to
the payer, (ii) furnishes such payer with an incorrect TIN, (iii) is notified by
the IRS that it has failed to report properly interest, dividends or other
"reportable payments" as defined by the Code, or (iv) under certain
circumstances, fails to provide such payor or the U.S. Holder's securities
broker with a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that the U.S. Holder is not subject to backup
withholding. Backup withholding will not apply with respect to payments made to
certain U.S. Holders of the Notes, including payments to certain exempt
recipients (such as corporations and exempt organizations). The amount of backup
withholding from a payment to a holder will
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be allowed as a credit against the holder's federal income tax liability and may
entitle such holder to a refund provided the required information is furnished
to the IRS.
Non-U.S. Holders. The Company must report annually to the IRS and to each
Non-U.S. Holder any interest or dividend that is subject to withholding, or that
is exempt from U.S. withholding tax (pursuant to a tax treaty or the exceptions
described above).
Backup withholding at a rate of 31% and information reporting generally may
apply to payments of principal and interest if the payee fails to certify under
penalties of perjury that it is not a U.S. person, provided the payor does not
have actual knowledge that the holder is a United States person. Dividends paid
to Non-U.S. Holders that are subject to the 30% withholding tax described above
or that are subject to treaty reduction generally will be exempt from United
States backup withholding tax.
Payment of the proceeds of the sale or other disposition of Notes or Common
Stock to or through a United States office of a broker, U.S. or foreign, will be
subject to information reporting and possible backup withholding at a rate of
31% unless the owner certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption (provided the broker does not have
actual knowledge that the holder is a U.S. Person or that the conditions of any
other exemption are not, in fact, satisfied). Payment of the proceeds on the
sale of Notes or Common Stock to or through a foreign office of a foreign broker
that is not a "U.S. related person" generally will not be subject to information
reporting or backup withholding tax. For this purpose, a "U.S. related person"
is (i) a "controlled foreign corporation" for United States federal income tax
purposes or (ii) a foreign person 50% or more of whose gross income from all
sources for a specified period is derived from activities that are effectively
connected with the conduct of a United States trade or business. In the case of
the payment of proceeds from the disposition of Notes to or through a foreign
office of a broker that is either a United States person or a related person,
information reporting is required on the payment unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder and the
broker has no actual knowledge to the contrary.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's United States federal income tax, provided that the required
information is furnished to the IRS.
The backup withholding and information reporting rules would also be
changed by the Regulations. These regulations will provide that proceeds from
the disposition of Common Stock after December 31, 1998 will be exempt from
backup withholding and information reporting only if the Non-U.S. Holder
complies with certain certification requirements or otherwise establishes an
exemption.
Holders of Notes should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
THE FOREGOING SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL
INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, PROSPECTIVE HOLDERS SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE COMMON STOCK INTO
WHICH THE NOTES ARE CONVERTIBLE (INCLUDING THE APPLICABILITY AND EFFECT OF
STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
49
<PAGE> 51
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions of the underwriting agreement (the "Underwriting Agreement"), to
purchase from the Company the respective principal amounts of Notes set forth
opposite their names below, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters to pay
for and accept delivery of the Notes are subject to certain conditions
precedent, and that the Underwriters are committed to purchase all of the Notes
if they purchase any.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITERS AMOUNT OF NOTES
- ------------ ---------------
<S> <C>
NationsBanc Montgomery Securities, Inc. .................... $
PaineWebber Incorporated....................................
Wessels, Arnold & Henderson, L.L.C. ........................
------------
Total..................................................... $100,000,000
============
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the Notes to the public on the terms set forth on the cover page of this
Prospectus. The Underwriters may allow selected dealers a concession of not more
than % of the principal amount of Notes, and the Underwriters may allow,
and such dealers may reallow, a discount of not more than % of the
principal amount of the Notes to other dealers. The public offering price and
the concession and discount to dealers may be changed by the Underwriters after
the initial public offering of the Notes. The Notes are offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.
The Company has granted the Underwriters an option for 30 days to purchase
up to an additional $15,000,000 principal amount of Notes solely to cover
over-allotments, if any, at the same price per Note as the initial $100,000,000
principal amount of Notes to be purchased by the Underwriters. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed to
purchase such additional Notes in approximately the same proportion as set forth
in the above table.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Notes are a new issue of securities for which there is currently no
public market. The Underwriters have advised the Company that they presently
intend to make a market in the Notes as permitted by applicable laws and
regulations. The Underwriters are not obligated, however, to make a market in
the Notes and any such market making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for the Notes. The Company intends to apply for
listing of the Notes on the Nasdaq SmallCap Market.
The Underwriters have engaged in transactions with and performed various
investment banking and other services for the Company in the past, and may do so
from time to time in the future.
All of the Company's executive officers and directors have agreed that, for
a period of 90 days after the date of this Prospectus, they will not, without
the prior written consent of NationsBanc Montgomery Securities, Inc., directly
or indirectly sell, offer, contract or grant any option to sell, pledge,
transfer, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock. In addition, the
Company has agreed that, for a period of 90 days after the date of this
Prospectus, it will not, without the prior written consent of NationsBanc
Montgomery Securities, Inc., directly or indirectly issue, sell, offer, contract
or grant any option to sell, pledge, transfer, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable or exercisable for or convertible into shares of Common
Stock other than (i) the shares of Common Stock issuable upon conversion of the
Notes
50
<PAGE> 52
offered by the Company hereby or (ii) shares of Common Stock issued pursuant to
the exercise of stock options outstanding as of the date of this Prospectus or
(iii) additional options under the 1995 Employee Stock Option and Compensation
Plan and the 1997 Director Stock Option Plan consistent with past practices.
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise prevail in the open market.
Such transactions may include stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting any purchase for the purpose of pegging, fixing or
maintaining the price of the Notes and the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting syndicate
or the effecting of any purchase to reduce a short position created in
connection with the offering. The Underwriters may also elect to reduce any
short position by exercising all or part of the over-allotment options described
above. A penalty bid means an arrangement that permits the Underwriters to
reclaim a selling concession from a syndicate member in connection with the
offering when securities sold by the syndicate member are purchased in syndicate
covering transactions. Such transactions may be effected on the Nasdaq National
Market, on the Nasdaq SmallCap Market, in the over-the-counter market, or
otherwise.
In general, the purchase of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchase. Neither the Company nor any of
the Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Notes or the Common Stock. In addition, neither the Company nor any
of the Underwriters makes any representation that the Underwriters will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
LEGAL MATTERS
The validity of the Notes and certain legal matters in connection with this
offering will be passed upon for the Company by Maslon Edelman Borman & Brand, a
Limited Liability Partnership, Minneapolis, Minnesota and the Underwriters by
Fried, Frank, Harris, Shriver & Jacobson, a partnership including professional
corporations, Los Angeles, California. The validity of the shares of Common
Stock issuable upon conversion of the Notes will be passed upon for the Company
by Maslon Edelman Borman & Brand, a Limited Liability Partnership, Minneapolis,
Minnesota.
EXPERTS
The consolidated financial statements as of December 31, 1995 and December
29, 1996 and for the years then ended included in this Prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements as of January 1, 1995 and for the
period from February 3, 1994 (inception) through January 1, 1995 included in
this Prospectus have been audited by Lund Koehler Cox & Company, PLLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
On November 10, 1995, the Company, with the approval of its Board of
Directors and Audit Committee, engaged Arthur Andersen LLP as the independent
public accountants for Rainforest Cafe. Prior to the engagement of Arthur
Andersen LLP, Lund Koehler Cox & Company, PLLP had served as the independent
public accountants for the Company. The report prepared by Lund Koehler Cox &
Company, PLLP as of January 1, 1995 and for the period February 3, 1994
(Inception) through January 1, 1995 contained no adverse opinion or disclaimer
of opinion and was not qualified or modified as to uncertainty of audit scope or
accounting principles. In connection with the audit as of January 1, 1995, and
through November 10, 1995, there were no disagreements with Lund Koehler Cox &
Company, PLLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Lund Koehler Cox & Company, PLLP, would have
caused Lund Koehler Cox & Company, PLLP to make reference to the subject matter
of the disagreements in its reports.
51
<PAGE> 53
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information incorporated by reference into this Prospectus,
can be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the following regional offices: 14th Floor, Seven
World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can also be obtained from
the Public Reference Section of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or from the
Commission's Internal web site at http://www.sec.gov. The Company's Common Stock
is traded on the Nasdaq National Market. The foregoing material also should be
available for inspection at the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has also filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information, reference
is made to the Registration Statement, copies of which may be obtained from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
27366) pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 29, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 30, June 29 and September 28, 1997;
3. The Company's Proxy Statement relating to the Special Meeting of
Shareholders held September 29, 1997;
4. The Registration Statement on Form 8-A with respect to the
Company's Common Stock dated December 7, 1995; and
5. All other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination of the offering made hereby.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the request of any such person, a copy of any
or all of the documents which have been incorporated herein by reference, other
than exhibits to such documents (unless such exhibits are specifically
incorporated by reference into such documents). Requests for such documents
should be directed to Rainforest Cafe, Inc., 720 South Fifth Street, Hopkins,
Minnesota 55343, Attention: Mark S. Robinow, telephone (612) 945-5400.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
52
<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Public Accountants................... F-2
Consolidated Balance Sheets at December 31, 1995, December
29, 1996 and September 28, 1997 (unaudited)............... F-4
Consolidated Statements of Operations for the period from
February 3, 1994 (Inception) through January 1, 1995, the
fiscal years ended December 31, 1995 and December 29,
1996, and the nine months ended September 29, 1996
(unaudited) and September 28, 1997 (unaudited)............ F-5
Consolidated Statements of Shareholders' Equity for the
period from February 3, 1994 (Inception) through January
1, 1995, the fiscal years ended December 31, 1995 and
December 29, 1996, and the nine months ended September 28,
1997 (unaudited).......................................... F-6
Consolidated Statements of Cash Flows for the period from
February 3, 1994 (Inception) through January 1, 1995, the
fiscal years ended December 31, 1995 and December 29,
1996, and the nine months ended September 29, 1996
(unaudited) and September 28, 1997 (unaudited)............ F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rainforest Cafe, Inc.:
We have audited the accompanying consolidated balance sheets of Rainforest
Cafe, Inc. (a Minnesota corporation) as of December 31, 1995 and December 29,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the years then ended. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Rainforest
Cafe, Inc. as of December 31, 1995 and December 29, 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 14, 1997
F-2
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To Rainforest Cafe, Inc.:
We have audited the accompanying balance sheet of Rainforest Cafe, Inc. (a
Minnesota corporation) as of January 1, 1995, and the related statements of
operations, shareholders' equity and cash flows for the period from February 3,
1994 (inception) through January 1, 1995. 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 audit.
We conduced our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rainforest Cafe, Inc. as of
January 1, 1995, and the results of its operations and its cash flows for the
period from February 3, 1994 (inception) through January 1, 1995, in conformity
with generally accepted accounting principles.
LUND KOEHLER COX & COMPANY, PLLP
Minneapolis, Minnesota,
February 17, 1995
F-3
<PAGE> 57
RAINFOREST CAFE, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $16,323 $ 83,894 $ 56,822
Short-term investments................................ -- 35,934 26,473
Accounts receivable and other......................... 1,448 5,072 9,194
Inventories........................................... 1,076 2,865 5,793
Preopening expenses................................... 514 2,302 2,071
------- -------- --------
Total current assets............................. 19,361 130,067 100,353
LONG-TERM INVESTMENTS................................... -- 42,274 45,554
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET..... 11,848 48,351 91,192
DEFERRED INCOME TAXES................................... -- 2,009 2,009
OTHER ASSETS............................................ -- -- 1,164
------- -------- --------
$31,209 $222,701 $240,272
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 3,213 $ 6,237 $ 11,225
Accrued liabilities --
Payroll and payroll taxes.......................... 289 466 2,909
Other.............................................. 369 843 2,821
Income taxes payable.................................. -- 4,201 486
------- -------- --------
Total current liabilities........................ 3,871 11,747 17,441
DEFERRED RENT........................................... 983 7,000 6,439
------- -------- --------
Total liabilities................................ 4,854 18,747 23,880
------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common stock, no par value, 50,000,000 shares
authorized; 9,484,347, 17,186,506 and 17,421,392
shares issued and outstanding...................... 27,867 199,542 203,666
Retained earnings (deficit)........................... (1,512) 4,412 12,726
------- -------- --------
Total shareholders equity........................ 26,355 203,954 216,392
------- -------- --------
$31,209 $222,701 $240,272
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 58
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FEBRUARY 3, 1994 NINE MONTHS ENDED
(INCEPTION) YEAR ENDED -----------------------------
THROUGH YEAR ENDED DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
JANUARY 1, 1995 DECEMBER 31, 1995 1996 1996 1997
---------------- ----------------- ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Restaurant sales................... $ 1,337 $ 9,979 $37,088 $21,638 $56,183
Retail sales....................... 729 3,472 10,868 6,144 16,908
Licensing fees and royalties....... -- -- 750 750 377
---------- --------- --------- ---------- ----------
Total revenues................... 2,066 13,451 48,706 28,532 73,468
---------- --------- --------- ---------- ----------
COSTS AND EXPENSES:
Food and beverage costs............ 450 2,778 9,254 5,489 13,197
Cost of retail goods sold.......... 393 1,548 4,867 2,840 7,820
Restaurant operating expenses...... 769 5,366 18,288 10,600 27,535
Retail operating expenses.......... 404 1,003 3,558 1,959 5,348
Depreciation and amortization...... 70 475 2,331 1,196 3,710
Amortization of preopening
expenses......................... -- 115 1,519 896 2,311
---------- --------- --------- ---------- ----------
Total costs and expenses......... 2,086 11,285 39,817 22,980 59,921
---------- --------- --------- ---------- ----------
INCOME (LOSS) FROM UNIT OPERATIONS
AND LICENSING...................... (20) 2,166 8,889 5,552 13,547
---------- --------- --------- ---------- ----------
OTHER (INCOME) EXPENSE:
General, administrative and
development expenses............. 1,354 1,265 4,688 3,235 5,399
Interest income.................... -- (482) (5,220) (3,012) (6,782)
Write-off of development costs..... -- -- -- -- 1,935
Other.............................. 254 214 181 181 10
---------- --------- --------- ---------- ----------
Total other (income) expense..... 1,608 997 (351) 404 562
---------- --------- --------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM................. (1,628) 1,169 9,240 5,148 12,985
PROVISION FOR INCOME TAXES........... -- -- 3,316 1,843 4,671
---------- --------- --------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM............................... (1,628) 1,169 5,924 3,305 8,314
EXTRAORDINARY ITEM -- EXTINGUISHMENT
OF DEBT............................ -- 1,053 -- -- --
========== ========= ========= ========== ==========
Net income (loss).................. $(1,628) $ 116 $ 5,924 $3,305 $ 8,314
========== ========= ========= ========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Earnings (loss) before
extraordinary item............... $(0.46) $0.16 $0.41 $0.23 $0.47
Extraordinary item................. -- (0.14) -- -- --
---------- --------- --------- ---------- ----------
Net income (loss) per common
share.......................... $(0.46) $0.02 $0.41 $0.23 $0.47
========== ========= ========= ========== ==========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 3,543,134 7,312,379 14,391,307 14,391,307 17,811,851
========== ========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 59
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
---------------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
---------- -------- --------- --------
<S> <C> <C> <C> <C>
BALANCE, February 3, 1994 (inception)............... -- $ -- $ -- $ --
Issuance of common stock.......................... 2,969,400 1,969 -- 1,969
Issuance of common stock in connection with
issuance of debt............................... 871,500 1,453 -- 1,453
Net loss.......................................... -- -- (1,628) (1,628)
---------- -------- ------- --------
BALANCE, January 1, 1995............................ 3,840,900 3,422 (1,628) 1,794
Conversion of debt to common stock at $4.00 per
share.......................................... 458,438 1,222 -- 1,222
Initial public offering, net...................... 2,587,500 9,025 -- 9,025
Common stock issued upon exercise of warrants..... 2,585,010 14,198 -- 14,198
Stock options exercised........................... 12,500 -- -- --
Net income........................................ -- -- 116 116
---------- -------- ------- --------
BALANCE, December 31, 1995.......................... 9,484,347 27,867 (1,512) 26,355
Common stock issued upon exercise of warrants..... 225,000 1,061 -- 1,061
Sale of common stock.............................. 7,365,000 169,510 -- 169,510
Stock options exercised, net of tax effect........ 109,507 1,033 -- 1,033
Employee stock purchases.......................... 2,701 71 -- 71
Shares retired upon stock split................... (49) -- -- --
Net income........................................ -- -- 5,924 5,924
---------- -------- ------- --------
BALANCE, December 29, 1996.......................... 17,186,506 199,542 4,412 203,954
Stock options exercised, net of tax effect
(unaudited).................................... 228,675 2,476 -- 2,476
Employee stock purchases (unaudited).............. 16,211 284 -- 284
Sale of written put options (unaudited)........... -- 1,558 -- 1,558
Common stock repurchased (unaudited).............. (10,000) (194) -- (194)
Net income (unaudited)............................ -- -- 8,314 8,314
---------- -------- ------- --------
BALANCE, September 28, 1997 (unaudited)............. 17,421,392 $203,666 $12,726 $216,392
========== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 60
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 3, 1994
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED YEAR ENDED ---------------------------------------
JANUARY 1, 1995 DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
---------------- ----------------- ----------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)............ $(1,628) $ 116 $ 5,924 $ 3,305 $ 8,314
Adjustments to reconcile net
loss to cash flows provided
by (used in) operating
activities --
Depreciation and
amortization........... 72 693 7,093 2,832 5,973
Amortization of long-term
debt discount.......... 213 186 -- -- --
Write-off of discontinued
development costs...... -- -- -- -- 1,935
Loss on extinguishment of
debt................... -- 1,053 -- -- --
Loss on disposal of
equipment.............. -- 27 181 -- --
Deferred income tax
benefit................ -- -- (2,021) -- --
Expenses paid with note
payable................ 280 -- -- -- --
Change in assets and
liabilities:
Accounts receivable and
other................ (106) (942) (3,090) (1,591) (5,649)
Inventories............ (440) (636) (1,789) (1,056) (2,928)
Preopening expenses.... -- (629) (3,282) (2,256) (2,078)
Accounts payable....... 890 2,323 3,024 1,945 4,988
Accrued liabilities.... 273 385 5,662 3,568 2,211
------- ------- --------- -------- --------
Net cash provided by
(used in) operating
activities........... (446) 2,576 11,702 6,747 12,766
------- ------- --------- -------- --------
INVESTING ACTIVITIES:
Purchases of short-term
investments, net........... -- -- (35,934) -- 9,461
Purchases of long-term
investments, net........... -- -- (42,274) -- (3,280)
Purchases of furniture,
equipment and leasehold
improvements, net.......... (2,819) (9,532) (39,937) (32,894) (49,253)
Purchases of other assets.... -- -- -- -- (910)
------- ------- --------- -------- --------
Net cash used in
investing
activities........... (2,819) (9,532) (118,145) (32,894) (43,982)
------- ------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from the issuance of
debt to shareholders....... 1,262 100 -- -- --
Payments on long-term debt to
shareholders............... -- (510) -- -- --
Proceeds from the sale of
common stock, net.......... 1,969 9,025 169,510 169,820 2,811
Proceeds from the exercise of
warrants, net.............. -- 14,198 1,061 1,061 --
Repurchase of common stock... -- -- -- -- (194)
Proceeds from stock options
exercised.................. -- -- 293 -- --
Tenant allowances
collected.................. 500 -- 3,150 2,750 1,527
------- ------- --------- -------- --------
Net cash provided by
financing
activities........... 3,731 22,813 174,014 173,631 4,144
------- ------- --------- -------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS.................. 466 15,857 67,571 147,484 (27,072)
CASH AND CASH EQUIVALENTS,
beginning of period.......... -- 466 16,323 16,323 83,894
------- ------- --------- -------- --------
CASH AND CASH EQUIVALENTS, end
of period.................... $ 466 $16,323 $ 83,894 $163,807 $ 56,822
======= ======= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the period
for --
Interest................. $ -- $ 86 $ -- $ -- $ --
Income taxes............. -- -- 195 45 7,147
Noncash investing and
financing activities --
Conversion of debt to
common stock........... -- 1,222 -- -- --
Common stock issued in
connection with debt... 1,453 -- -- -- --
Decoration and birds
purchased with note
payable................ 90 -- -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 61
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Rainforest Cafe, Inc. (the Company) was incorporated
in the state of Minnesota on February 3, 1994. The Company currently owns and
operates eleven Rainforest Cafe restaurant and retail stores and intends to open
two additional Units during December 1997. The first unit opened on October 3,
1994 in the Mall of America in Bloomington, Minnesota, a suburb of Minneapolis.
Prior to the opening of this unit, the Company was in its development stage.
FISCAL YEAR -- The Company has adopted a 52-53-week year ending on the
Sunday nearest December 31 of each year. All references herein to "1996" and
"1995" represent the 52-week fiscal years ended December 29, 1996 and December
31, 1995, respectively.
INTERIM FINANCIAL STATEMENTS -- The unaudited consolidated financial
information for the nine months ended September 29, 1996 and September 28, 1997
has been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, includes all adjustments
(consisting only of normal recurring adjustments) necessary to state fairly the
financial information set forth therein.
CASH AND CASH EQUIVALENTS -- The Company includes as cash equivalents all
highly liquid investments with original maturities of three months or less when
purchased, which are recorded at the lower of cost or market. At December 31,
1995, certain marketable securities, consisting of a money market fund, a
government securities fund and corporate debt obligations carried at market
value, were recorded as cash equivalents in the accompanying balance sheet.
INVENTORIES -- Inventories consist primarily of retail goods for resale and
food and beverages used in restaurant operations and are recorded at the lower
of cost or market value as determined by the retail inventory method on the
first-in, first-out (FIFO) basis for retail goods and average cost for food and
beverages. Inventories consisted of the following as of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Retail goods.............................. $ 989 $2,661 $5,584
Food and beverage......................... 87 204 209
------ ------ ------
$1,076 $2,865 $5,793
====== ====== ======
</TABLE>
PREOPENING EXPENSES -- It is the Company's policy to capitalize the direct
and incremental costs associated with opening a new unit, which consist
primarily of hiring and training the initial work force, mock service and other
direct costs. These costs are amortized over the 11 months of each unit's
operations beginning in the first full month of operation, if the recoverability
of such costs can be reasonably assured. Expenses incurred prior to opening the
Mall of America location were charged to operations when incurred due to the
developmental nature of the first unit.
INVESTMENTS -- The Company determines the appropriate classification of
investment securities at the time of purchase and reevaluates such designation
as of each balance sheet date. The Company classifies investments with original
maturities of more than three months and less than one year on their acquisition
date as short-term investments and investments with original maturities of more
than one year as long-term investments. All investment securities held by the
Company at December 29, 1996 and September 28, 1997, have been classified as
available-for-sale. Available-for-sale securities are stated at fair value, with
the unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity, if significant. The amortized cost of debt securities is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and accretion, along with interest and dividends earned and
realized gains and
F-8
<PAGE> 62
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
losses, are included in interest income. The cost of securities sold is based on
the specific identification method.
The Company's investments consisted of the following as of December 29,
1996 (in thousands, there were no significant differences between amortized cost
and estimated fair value):
<TABLE>
<S> <C>
U.S. Treasury and agency securities......................... $ 57,246
Municipal debt securities................................... 44,715
Mutual funds................................................ 42,453
Equity securities........................................... 10,149
Other debt securities....................................... 4,264
U.S. corporate debt securities.............................. 935
--------
$159,762
Less: Cash equivalents...................................... (81,554)
--------
$ 78,208
========
</TABLE>
The estimated fair value of debt and marketable equity securities at
December 29, 1996 was $117,488,000 due in one year or less, $35,984,000 due in
one to three years and $6,290,000 due after three years.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -- Property, equipment and
leasehold improvements are recorded at cost. Improvements are capitalized, while
repair and maintenance costs are charged to operations when incurred. Furniture,
fixtures and equipment are depreciated using the straight-line method over their
estimated useful lives of 5 to 15 years. Leasehold improvements are amortized
using the straight-line method over the shorter of their estimated useful lives
or the initial lease term.
Property and equipment consisted of the following as of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Live birds................................ $ 30 $ 67 $ 71
Furniture, fixtures and equipment......... 3,370 11,465 14,121
Leasehold improvements.................... 7,167 33,718 33,522
Construction in progress.................. 1,825 6,518 51,340
------- ------- -------
12,392 51,768 99,340
Accumulated depreciation and
amortization............................ (544) (3,417) (7,862)
------- ------- -------
$11,848 $48,351 $91,192
======= ======= =======
</TABLE>
LICENSING FEES -- During 1996, the Company entered into an exclusive
license agreement which allows a Mexican company to develop seven units in
Mexico over a ten-year period. Under the terms of the agreement, the Company
receives a non refundable, upfront licensing fee, per unit licensing fees and
royalties based on a percentage of sales. The Company has entered into three
additional international licensing agreements with similar terms.
INCOME TAXES -- The Company and its subsidiaries file a consolidated
federal income tax return and separate state returns. Deferred income taxes are
provided for differences between the financial reporting basis and tax basis of
the Company's assets and liabilities at currently enacted tax rates.
NET INCOME (LOSS) PER COMMON SHARE -- Net income (loss) per common share is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding and dilutive
F-9
<PAGE> 63
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
common equivalent shares assumed to be outstanding during each period. Common
equivalent shares consist of dilutive options and warrants to purchase common
stock. However, pursuant to rules of the Securities and Exchange Commission, the
calculation also includes equity securities, including options and warrants,
issued within one year of an initial public offering with an issue price less
than the initial public offering price, even if the effect is antidilutive. The
treasury stock method was used in determining the dilutive effect of such
issuances.
USE OF ESTIMATES -- 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. Ultimate results could differ from those estimates.
2. EXTINGUISHMENT OF DEBT
In April 1995, the holders of $1,222,500 of promissory notes made an
irrevocable election, effective upon the effective date of an initial public
offering, to convert their notes into shares of the Company's common stock at a
conversion price of $2.67 per share. The Company recorded the conversion as an
extinguishment of debt, which resulted in an extraordinary charge to operations
of $1,053,128 at the date of conversion.
3. SHAREHOLDERS' EQUITY
INITIAL PUBLIC STOCK OFFERING -- In April 1995, the Company consummated an
initial public offering of 2,587,500 units at an offering price of $4.00 per
unit, including 337,500 units from the exercise of the underwriters'
overallotment option which occurred in May 1995. Each unit consisted of one
share of common stock and one Redeemable Class A Warrant. The Company received
net proceeds of $9.0 million after the payment of $1.3 million in related
underwriting discount and offering costs.
EXERCISE OF WARRANTS -- In August 1995, the holders of 2,585,010 of the
Redeemable Class A Warrants (the Warrants) discussed above exercised the
Warrants at an exercise price of $5.50. A total of 2,490 warrants were not
exercised, and the Company redeemed those 2,490 warrants at $.01 per warrant.
The Company received net proceeds of $14.2 million.
SECONDARY PUBLIC OFFERINGS -- In January 1996, the Company consummated a
public offering of 4,140,000 shares of common stock at an offering price of
$19.00 per share. The Company received proceeds of $73.6 million, net of
approximately $5.1 million in offering costs.
In September 1996, the Company consummated a public offering of 3,450,000
shares of common stock at an offering price of $31.50 per share. Of the
3,450,000 shares sold, 225,000 shares were sold by selling shareholders. The
Company received proceeds of $96.0 million, net of approximately $5.6 million in
offering costs.
STOCK SPLIT -- In May 1996, the Company's board of directors approved a
three-for-two stock split in the form of a 50% stock dividend on its no par
value common stock. The split was payable to shareholders of record as of June
21, 1996 and was effective July 2, 1996. All references to earnings per share,
number of shares and share amounts prior to July 1996 have been retroactively
restated throughout the accompanying financial statements to reflect the stock
split.
STOCK REPURCHASE PROGRAM -- During January 1997, the board of directors
authorized, subject to certain business and market conditions, the purchase of
up to 1,000,000 shares of the Company's common stock. As of September 28, 1997,
the number of shares purchased under this authorization was 10,000. The Company
is utilizing options as a part of its stock repurchase program and has sold put
options on approximately 935,000 shares of its common stock (ranging from
$17.50-$21.00 per share).
F-10
<PAGE> 64
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. INCOME TAXES
The Company has recorded the following net deferred income taxes as of (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 29,
1996
------------
<S> <C>
Current deferred income tax benefits........................ $ 166
Current deferred income taxes............................... (154)
------
Net current deferred income tax benefits.................. 12
------
Noncurrent deferred income tax benefits..................... 2,398
Noncurrent deferred income taxes............................ (389)
------
Net noncurrent deferred income tax benefits................. 2,009
------
Net deferred income taxes................................... $2,021
======
</TABLE>
The tax effect of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29,
1995 1996
------------ ------------
<S> <C> <C>
Preopening costs...................................... $(191) $ (118)
Accelerated depreciation.............................. (49) (272)
Landlord inducements.................................. 175 2,398
Net operating loss carryforwards...................... 139 --
Other................................................. 27 13
Valuation allowance................................... (101) --
----- ------
Net deferred taxes.................................... $ -- $2,021
===== ======
</TABLE>
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
CURRENT:
Federal................................................... $ 4,489
State..................................................... 848
Deferred.................................................. (2,021)
-------
Provision for income taxes................................ $ 3,316
=======
</TABLE>
The differences between the effective tax rate and income taxes computed
using the federal statutory rate were as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Federal statutory rate...................................... 34.0%
State income taxes, net of federal tax benefit.............. 6.2
Tax exempt income........................................... (3.3)
Other, net.................................................. (1.0)
----
35.9%
====
</TABLE>
F-11
<PAGE> 65
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
5. STOCK OPTIONS
STOCK OPTION AND COMPENSATION PLAN -- The Company has a Stock Option and
Compensation Plan as Amended (the Plan), pursuant to which options and other
awards to acquire an aggregate of 1,500,000 shares of the Company's common stock
may be granted to full-time employees of the Company. Stock options, stock
appreciation rights, restricted stock, other stock and cash awards may be
granted under the Plan. The Plan is administered by the Company's compensation
committee which has the discretion to determine the number and purchase price of
shares subject to stock options, which may not be below 100% of the fair market
value of the common stock on the date granted, the term of each option, and the
time or times during its term when the option becomes exercisable. The Company
has granted options on 1,094,994 shares through December 29, 1996.
During September 1997, the shareholders approved an increase to the
eligible shares to be granted under the Plan to 2,500,000 shares. During the
nine months ended September 28, 1997, the Company granted options on 759,500
shares.
OTHER STOCK OPTIONS -- As of its inception (February 3, 1994), the Company
granted options to acquire an aggregate of 300,000 shares of common stock with
an exercise price of $.01 per share to two of its employees. Of the options
granted, 262,500 are to an employee who is an officer and director of the
Company. These options vest on a pro rata basis on the first, second and third
anniversaries of the grant and are exercisable for a period of ten years from
the date of grant. The Company has granted options on 275,001 shares through
December 29, 1996.
During 1995, the Company adopted the Directors' Stock Option Plan, whereby
stock options are granted to the Company's outside directors. These options vest
on a pro rata basis over three years and are exercisable for a period of ten
years from the date of grant. The Company has granted options on 137,500 shares
through December 29, 1996.
During September 1997, the Company adopted the 1997 Directors' Stock Option
Plan, whereby stock options are granted to the Company's outside directors to
acquire an aggregate of 200,000 shares of the Company's common stock. The
Company has granted options on 25,000 shares.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and income per share would have been decreased to the following pro forma
amounts:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
NET INCOME
As Reported.............................................. $ 116 $5,924
Pro Forma................................................ (86) 5,283
PRIMARY EPS
As Reported.............................................. 0.02 0.41
Pro Forma................................................ (0.01) 0.37
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
F-12
<PAGE> 66
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of the status of the Company's various stock option plans as of
December 31, 1995, December 29, 1996 and September 28, 1997, with changes during
the period, is presented in the table and narrative below:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 DECEMBER 29, 1996 SEPTEMBER 28, 1997
----------------------------- ----------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period................... 300,000 $ .01 1,108,000 $ 3.35 1,507,495 $ 9.20
Granted.................... 822,000 4.52 567,500 19.90 912,500 29.26
Exercised.................. 12,500 .01 109,505 5.01 228,675 4.76
Forfeited.................. 1,500 3.40 58,500 13.76 146,602 6.59
Expired.................... -- -- -- -- -- --
---------- ----- ---------- ------ --------- ------
Outstanding, end of
period................... 1,108,000 $3.35 1,507,495 $ 9.20 2,044,718 $19.10
========== ===== ========== ====== ========= ======
Exercisable, end of
period................... 149,900 $2.40 361,895 $ 2.67 532,857 6.44
========== ===== ========== ====== ========= ======
Weighted average fair value
of options granted....... $ 2.33 $ 9.43
========== ==========
</TABLE>
At December 29, 1996, 977,495 of the 1,507,495 options outstanding have
exercise prices between $.01 and $13.60, with a weighted average exercise price
of $3.38 and a weighted average remaining contractual life of 8 years. The
remaining 530,000 options have exercise prices between $13.67 and $32.75, with a
weighted average exercise price of $19.93 and a weighted average remaining
contractual life of 9 years. None of these options are exercisable.
The fair value of each option grant is estimated on the date of grant using
the Cox Rubenstein option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: risk-free interest
rates of 6.0% and 5.5%; no expected dividend yields; expected lives of 6 and 5
years; and expected volatility of 40% and 50%.
EMPLOYEE STOCK PURCHASE PLAN -- During 1996, the Company adopted the 1996
Employee Stock Purchase Plan (the 1996 Plan) which allows employees to set aside
up to 15% of their earnings for the purchase of the Company's common stock.
Shares are purchased quarterly under the 1996 Plan at a price equal to 85% of
the lessor of the market price on either the first or last day of the quarter.
During 1996, 2,701 shares were issued under the 1996 Plan and, at December 29,
1996, 147,299 shares were available for future issuance. During the nine months
ended September 28, 1997, 16,211 shares were issued under the 1996 Plan.
WARRANTS -- In connection with its initial public offering in April 1995,
the Company issued a warrant to the underwriters to purchase 225,000 shares of
common stock at $4.80 per share. The warrant became exercisable on April 7, 1996
and is exercisable until April 2000. During 1996, 225,000 shares of common stock
were issued upon exercise of the outstanding warrants.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES -- The Company has entered into various operating leases
for its existing and future units which typically have an initial lease term of
ten to fifteen years with an option for renewal. All of these leases contain
provisions for contingent rentals based on a percentage of gross revenues, as
defined, and contain renewal options and provisions for payments of real estate
taxes, insurance and common area costs. In addition, certain of these leases
provide for tenant inducements and rent abatement. Total rent expense, including
common area costs, real estate taxes and percentage rent, was $260,000,
$1,382,000, $5,067,000, $2,824,000 and $7,917,000 for the period from February
3, 1994 (inception) through January 1, 1995, for the years ended December 31,
1995 and December 29, 1996 and for the nine months ended September 29, 1996 and
September 28, 1997, respectively.
F-13
<PAGE> 67
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Future minimum rental payments (including nine units which are not yet open
and excluding percentage rents) are as follows as of September 28, 1997 (in
thousands):
<TABLE>
<S> <C>
1997 (fourth quarter)....................................... $ 1,759
1998........................................................ 10,452
1999........................................................ 10,452
2000........................................................ 10,368
2001........................................................ 10,250
2002........................................................ 10,250
Thereafter.................................................. 50,325
--------
Total.................................................. $103,856
========
</TABLE>
EMPLOYMENT AGREEMENTS -- The Company entered into employment agreements
with two of its officers which require the payment of annual compensation of
$140,000 and $175,000 per year for up to three years and include bonus
provisions. If terminated by the Company during this period without good cause,
the employees are entitled to up to one year's base compensation.
7. QUARTERLY DATA (UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of consolidated results of operations for each
calendar quarter for the years ended December 31, 1995 and December 29, 1996 and
the first three quarters for the year ending December 28, 1997:
<TABLE>
<CAPTION>
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31,
FISCAL YEAR 1995 1995 1995 1995 1995
- ---------------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues......................................... $ 1,991 $ 2,503 $ 3,128 $ 5,829
Income from unit operations and licensing........ 120 496 751 799
Net income (loss)................................ (281) (770) 535 632
Net income (loss) per common share............... (0.11) (0.18) 0.09 0.09
<CAPTION>
MARCH 31, JUNE 30, SEPTEMBER 29, DECEMBER 29,
FISCAL YEAR 1996 1996 1996 1996 1996
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues......................................... $ 5,744 $ 7,070 $15,718 $20,174
Income from unit operations and licensing........ 858 1,319 2,626 4,086
Net income....................................... 548 833 1,924 2,619
Net income per common share...................... 0.06 0.06 0.13 0.15
<CAPTION>
MARCH 30, JUNE 30, SEPTEMBER 28,
FISCAL YEAR 1997 1997 1997 1997
- ---------------- ------- ------- -------
<S> <C> <C> <C>
Revenues......................................... $21,869 $23,591 $28,008
Income from unit operations and licensing........ 3,814 4,150 5,583
Net income....................................... 1,606 2,955 3,753
Net income per common share...................... 0.09 0.17 0.21
</TABLE>
8. SUBSEQUENT EVENTS (UNAUDITED)
TERMINATION OF PLANNED UNITS -- On March 3, 1997, the Company announced
that it would write off development costs related to previously planned units at
Trump Taj Mahal (Atlantic City, New Jersey) and Stratosphere (Las Vegas,
Nevada). Subsequent to December 29, 1996 the Company determined that future
negotiations for Trump Taj Mahal would not result in a mutually agreeable space
by both parties for the planned unit. The Company also determined that, due to
Stratosphere's announcement that it was seeking a
F-14
<PAGE> 68
RAINFOREST CAFE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
bankruptcy reorganization, the required space for the unit would not be
delivered according to the required timeline. The nonrecurring, pre-tax charge
to earnings of approximately $1.9 million has been recorded during the first
quarter of fiscal 1997.
STOCK SPLIT -- On November 18, 1997, the Company's board of directors
approved a three-for-two stock split in the form of a fifty percent stock
dividend on its no par value common stock. The split will be payable to
shareholders of record as of December 26, 1997 and will be effective January 15,
1998. This stock split has not been reflected in the accompanying consolidated
financial statements.
F-15
<PAGE> 69
======================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any of the
Underwriters. This Prospectus does not constitute an offer to sell or
solicitation of an offer to buy any security other than the registered
securities to which this Prospectus relates or any offer to any person in any
jurisdiction where such an offer would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time subsequent
to the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................. 3
Risk Factors............................ 8
Use of Proceeds......................... 14
Capitalization.......................... 14
Price Range of Common Stock and
Dividend Policy....................... 15
Selected Consolidated Financial Data.... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 17
Business................................ 23
Management.............................. 33
Description of Notes.................... 35
Description of Capital Stock............ 44
Certain Federal Income Tax
Considerations........................ 45
Underwriting............................ 50
Legal Matters........................... 51
Experts................................. 51
Available Information................... 52
Incorporation of Certain Documents by
Reference............................. 52
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
======================================================
======================================================
$100,000,000
RAINFOREST LOGO
% CONVERTIBLE
SUBORDINATED NOTES
DUE 2003
------------------------
PROSPECTUS
------------------------
NATIONSBANC MONTGOMERY
SECURITIES, INC.
PAINEWEBBER INCORPORATED
WESSELS, ARNOLD & HENDERSON
, 1998
======================================================
<PAGE> 70
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby other than underwriting discounts and fees, are
set forth in the following table:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 33,925
NASD filing fee............................................. 12,000
Nasdaq listing fee.......................................... 17,500
Legal fees and expenses..................................... 125,000
Accounting fees and expenses................................ 50,000
Blue Sky fees and expenses.................................. 15,000
Transfer agent fees and expenses............................ 10,000
Printing and engraving expenses............................. 125,000
Miscellaneous............................................... 11,575
--------
Total:................................................. $400,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person
made or threatened to be made a party to any proceeding by reason of the former
or present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation. Subdivision 4 of Section 302A.521 of the Minnesota Statutes
provides that a company's articles of incorporation or bylaws may prohibit such
indemnification or place limits upon the same. The Company's articles and bylaws
do not include any such prohibition or limitation. As a result, the Company is
bound by the indemnification provisions set forth in Section 302A.521 of the
Minnesota Statutes.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law. The Underwriting
Agreement contains provisions under which the Company, on the one hand, and the
Underwriters, on the other hand, have agreed to indemnify each other (including
officers and directors of the Company and the Underwriters, and any person who
may be deemed to control the Company or the Underwriters) against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
3.1 Articles of Incorporation, as amended.(2)
3.2 By-laws.(2)
</TABLE>
II-1
<PAGE> 71
<TABLE>
<C> <S>
4.1 Form of Indenture between the Registrant and First Trust National Association.(1)
4.2 Specimen Note (included in pages to of the Indenture filed as Exhibit 4.1)(1)
5 Opinion of Maslon Edelman Borman & Brand, a Professional Limited Liability Partnership.(1)
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Lund Koehler Cox & Company, PLLP.
23.3 Consent of Maslon Edelman Borman & Brand, a Limited Liability Partnership. (See Exhibit No. 5)(1)
25.1 Powers of Attorney. (See II-4)
25.2 Statement of Eligibility of Trustee on Form T-1.
</TABLE>
- -------------------------
(1) To be filed by Amendment.
(2) Previously filed with Registration Statement on Form SB-2, File No.
33-89256C.
ITEM 17. UNDERTAKINGS.
The undersigned Company hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act each filing of the registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Exchange Act) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(2) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(3) That, for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant under Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(4) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Minneapolis, State of
Minnesota, on December 3, 1997.
RAINFOREST CAFE, INC.
Registrant
By:
/s/ KENNETH W. BRIMMER
------------------------------------
Name: Kenneth W. Brimmer
Title: President
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Mark S. Robinow and Kenneth W. Brimmer, each or
either of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and to file
the same with all exhibits thereto, and other documents in connection therewith
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitutes,
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 3rd day of December, 1997 by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ LYLE BERMAN Chairman of the Board, Chief Executive
- ----------------------------------------------------- Officer, and Secretary (principal executive
Lyle Berman officer)
/s/ KENNETH W. BRIMMER President, Treasurer and Director
- -----------------------------------------------------
Kenneth W. Brimmer
/s/ STEVEN W. SCHUSSLER Executive Vice President and Director
- -----------------------------------------------------
Steven W. Schussler
/s/ ERCUMET UCAN Executive Vice President and Director
- -----------------------------------------------------
Ercu Ucan
/s/ DAVID L. ROGERS Director
- -----------------------------------------------------
David L. Rogers
/s/ JOEL N. WALLER Director
- -----------------------------------------------------
Joel N. Waller
/s/ MARK S. ROBINOW Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial officer and
Mark S. Robinow accounting officer)
</TABLE>
II-3
<PAGE> 73
EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
<C> <S> <C>
12.1 Statement of Computation of Rates of Earnings to Fixed
Charges
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Lund Koehler Cox & Company, PLLP.
25.2 Statement of Eligibility of Trustee on Form T-1
</TABLE>
II-4
<PAGE> 1
EXHIBIT 12.1
RAINFOREST CAFE, INC. AND SUBSIDIARIES
COMPUTATION OF RATION OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
FEBRUARY 3, 1994 --------------------------- -----------------------------
(INCEPTION) THROUGH DECEMBER 31, DECEMBER 29, SEPTEMBER 29, SEPTEMBER 28,
JANUARY 1, 1995 1995 1996 1996 1997
------------------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Earnings before income
taxes and extraordinary
item..................... $(1,628) $1,169 $ 9,240 $5,148 $12,987
------- ------ ------- ------ -------
Fixed charges:
Interest expense
(including
amortization of
deferred financing
costs)................ 254 214 181 181 0
One-third of the rent
expense from operating
leases................ 41 264 1,287 655 2,035
------- ------ ------- ------ -------
Total fixed
charges.......... 295 478 1,468 836 2,035
------- ------ ------- ------ -------
Earnings (loss), as
defined.......... $(1,333) $1,647 $10,708 $5,984 $15,022
======= ====== ======= ====== =======
Ratio of earnings to fixed
charges.................. -- 3.4x 7.3x 7.2x 7.4x
======= ====== ======= ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in or made a part of this registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
December 3, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our firm included in or made a part of this
Registration Statement of Rainforest Cafe, Inc. on Form S-3.
LUND KOEHLER COX AND COMPANY, PLLP
Minneapolis, Minnesota
December 3, 1997
<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
FIRST TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
First Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
RAINFOREST CAFE, INC.
(Exact name of Registrant as specified in its charter)
Minnesota 41-1779527
(State of Incorporation) (I.R.S. Employer
Identification No.)
720 South Fifth Street
Hopkins, Minnesota 55343
(Address of Principal Executive Offices) (Zip Code)
% CONVERTIBLE SUBORDINATED NOTES DUE 2003
(Title of the Indenture Securities)
<PAGE> 2
GENERAL
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this
statement of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published pursuant
to law or the requirements of its supervising or examining authority is
incorporated by reference to Registration Number 333-34585.
* Incorporated by reference to Registration Number 22-27000.
<PAGE> 3
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee
has no reason to doubt the accuracy of any such information, it cannot accept
any responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, First Trust National Association, an Association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested,
all in the City of Saint Paul and State of Minnesota on the 2nd day of
December, 1997.
FIRST TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
--------------------------------
Richard H. Prokosch
Assistant Vice President
/s/ Kathe M. Barrett
- --------------------
Kathe M. Barrett
Assistant Secretary
<PAGE> 4
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, FIRST TRUST NATIONAL ASSOCIATION hereby consents that reports of
examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: December 2, 1997
FIRST TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
-------------------------
Richard H. Prokosch
Assistant Vice President
