<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
--- ---
COMMISSION FILE NUMBER 0-27366
RAINFOREST CAFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1779527
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
720 South Fifth Street
Hopkins, MN 55343
(Address of principal executives offices, including zip code)
(612) 945-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Number of shares of Common Stock, no par value per share outstanding as of
November 9, 1998:
24,750,613
<PAGE> 2
RAINFOREST CAFE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page number
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
October 4, 1998 and December 28, 1997.....................................................2
Consolidated Statements of Operations for the thirteen and
forty weeks ended October 4, 1998 and thirteen and
thirty-nine weeks ended September 28, 1997................................................3
Consolidated Statements of Cash Flows for the forty
weeks ended October 4, 1998 and thirty-nine weeks
ended September 28, 1997..................................................................4
Condensed Notes to Consolidated Financial Statements......................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................................7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................15
Item 6. Exhibits and Reports on Form 8K.........................................................15
Signature Page.....................................................................................16
</TABLE>
<PAGE> 3
RAINFOREST CAFE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 4, December 28,
(In Thousands, Except Share Data) 1998 1997
----------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,591 $ 53,621
Short-term investments 18,974 16,963
Accounts receivable and other 21,091 9,893
Inventories 12,082 6,705
Preopening expenses -- 4,546
--------- ---------
Total current assets 67,738 91,728
Long-Term Investments 24,656 39,948
Furniture, Equipment and Leasehold Improvements, net 153,890 112,695
Other Assets 5,118 1,729
--------- ---------
Total Assets $ 251,402 $ 246,100
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,626 $ 7,135
Accrued liabilities-
Payroll and payroll taxes 3,081 3,318
Other 4,319 3,543
Income taxes payable 1,976 --
--------- ---------
Total current liabilities 16,002 13,996
Long-Term Liabilities 21,616 8,214
Deferred Income Taxes 908 908
--------- ---------
Total liabilities 38,526 23,118
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Common stock, no par value, 50,000,000 shares authorized;
24,786,713 and 26,351,268 issued and outstanding 188,220 206,277
Retained earnings 24,725 16,705
Cumulative Loss on Currency Translation (69) --
--------- ---------
Total shareholders' equity 212,876 222,982
--------- ---------
Total Liabilities and Shareholders' Equity $ 251,402 $ 246,100
========= =========
</TABLE>
2
<PAGE> 4
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Forty Thirty-nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 4, September 28, October 4, September 28,
(In Thousands, Except Share Data) 1998 1997 1998 1997
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 43,150 $ 21,455 $ 118,934 $ 56,183
Retail sales 12,265 6,431 34,356 16,908
Licensing fees and royalties 596 122 1,211 377
-------------- --------------- -------------- ---------------
Total revenues 56,011 28,008 154,501 73,468
-------------- --------------- -------------- ---------------
Costs and Expenses:
Food and beverage costs 10,103 5,034 28,026 13,197
Cost of retail goods sold 5,666 2,919 15,572 7,820
Restaurant operating expenses 22,224 10,456 61,593 27,535
Retail operating expenses 4,089 2,004 11,185 5,348
Depreciation and amortization 3,177 1,327 8,827 3,710
Preopening expenses 2,995 685 6,867 2,311
-------------- --------------- -------------- ---------------
Total costs and expenses 48,254 22,425 132,070 59,921
-------------- --------------- -------------- ---------------
Income from Unit Operations and Licensing 7,757 5,583 22,431 13,547
-------------- --------------- -------------- ---------------
Other (Income) Expense:
General, administrative and development expenses 3,159 2,022 9,155 5,397
Interest income (1,152) (2,306) (5,053) (6,782)
Loss on disposal 62 -- 62 --
Write-off of development and debt offering costs -- -- -- 1,935
Equity in earnings of unconsolidated subsidiaries (5) -- 183 10
-------------- --------------- -------------- ---------------
Total other (income) expense 2,064 (284) 4,347 560
-------------- --------------- -------------- ---------------
Income before Income Taxes and Cumulative Effect of
Change in Accounting Principle 5,693 5,867 18,084 12,987
Provision for Income Taxes 1,936 2,112 6,148 4,671
-------------- --------------- -------------- ---------------
Income before Cumulative Effect of Change in
Accounting Principle 3,757 3,755 11,936 8,316
Cumulative Effect of Change in Accounting Principle
Related to Start-Up Costs (net of income taxes of $2,202) -- -- 3,916 --
-------------- --------------- -------------- ---------------
Net Income $ 3,757 $ 3,755 $ 8,020 $ 8,316
============== =============== ============== ===============
BASIC EARNINGS PER SHARE
Basic Earnings Per Common Share before Change in
Accounting Principle $ 0.15 $ 0.14 $ 0.46 $ 0.32
Cumulative Effect of Change in Accounting Principle -- -- 0.15 --
-------------- --------------- -------------- ---------------
Basic Earnings Per Common Share $ 0.15 $ 0.14 $ 0.31 $ 0.32
============== =============== ============== ===============
Basic Weighted Average Shares Outstanding 25,287,827 26,000,907 25,581,169 25,895,824
============== =============== ============== ===============
DILUTED EARNINGS PER SHARE
Diluted Earnings Per Common Share before Change
in Accounting Principle $ 0.15 $ 0.14 $ 0.46 $ 0.31
Cumulative Effect of Change in Accounting Principle -- -- 0.15 --
-------------- --------------- -------------- ---------------
Diluted Earnings Per Common Share $ 0.15 $ 0.14 $ 0.31 $ 0.31
============== =============== ============== ===============
Diluted Weighted Average Shares Outstanding 25,684,079 26,783,253 25,917,562 26,717,776
============== =============== ============== ===============
</TABLE>
3
<PAGE> 5
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Forty Thirty-nine
Weeks Ended Weeks Ended
October 4, September 28,
(In Thousands) 1998 1997
----------- -------------
<S> <C> <C>
Operating Activities:
Net income $ 8,020 $ 8,316
Adjustments to reconcile net income to net cash
flows from operating activities-
Depreciation and amortization 27,508 5,973
Change in accounting principle 3,916 --
Write-off of discontinued development costs -- 1,935
Change in operating assets and liabilities-
Accounts receivable and other (11,810) (5,649)
Inventories (5,377) (2,928)
Preopening expenses (3,242) (2,080)
Accounts payable (509) 4,988
Accrued liabilities 2,620 2,211
-------- --------
Net cash provided by operating activities 21,126 12,766
-------- --------
Investing Activities:
(Purchases) sales of short-term investments, net (2,011) 9,461
(Purchases) sales of long-term investments, net 15,292 (3,280)
Purchases of furniture, equipment and leasehold
improvements, net (51,429) (49,253)
Purchases of other assets (1,417) (910)
-------- --------
Net cash used in investing activities (39,565) (43,982)
-------- --------
Financing Activities:
Proceeds from the sale of common stock and put options, net 2,717 2,811
Repurchase of common stock (20,879) (194)
Tenant allowances collected 612 1,527
-------- --------
Net cash provided by (used in) financing activities (17,550) 4,144
-------- --------
Effect of Currency Translation Loss (69) --
Decrease in Cash and Cash Equivalents (38,030) (27,072)
Cash and Cash Equivalents, beginning of period 53,621 83,894
-------- --------
Cash and Cash Equivalents, end of period $ 15,591 $ 56,822
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ -- $ --
Income taxes 1,836 7,147
</TABLE>
4
<PAGE> 6
RAINFOREST CAFE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 4, 1998
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include all accounts of Rainforest Cafe,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
Company). All significant intercompany balances and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure, normally
included in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the accompanying disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim financial statements be read in conjunction with the Company's
most recent audited financial statements and notes thereto. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented have been made.
Operating results for the thirteen and forty weeks ended October 4, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 3, 1999.
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income", effective beginning in fiscal 1998, establishes standards
of disclosure and financial statement display for reporting total comprehensive
income and the individual components thereof. The adoption of SFAS No. 130 did
not have a material impact on the Company's financial position or results of
operations as comprehensive income and net income were the same for all periods
presented.
During April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accounts (AICPA) issued Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires
companies to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. The Company elected to adopt the
accounting standard during the second quarter of 1998. The effect of this
accounting change was a charge to operations of $3.9 million, net of $2.2
million of related tax benefit for the unamortized balance of preopening costs
and other start-up expenses as of December 28, 1997. Also, $2.4 million of
preopening costs capitalized during the first quarter of 1998 were expensed
during the first quarter of 1998 as preopening costs in the accompanying
statements of operations for the forty week period ended October 4, 1998.
5
<PAGE> 7
(3) EARNINGS PER COMMON SHARE
The Company adopted in fiscal 1997, SFAS No. 128 "Earnings per Share" which
requires disclosure of basic earnings per share (EPS) and diluted EPS, which
replace 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 period. Diluted EPS is computed
similarly to primary EPS as previously reported provided that, when applying the
treasury stock method to common equivalent shares (consisting solely of
outstanding stock options), the Company must use its average share price for
that period rather than the more dilutive greater of the average share price or
end-of-period share price required by APB No. 15.
As a result of the adoption of SFAS No. 128, the Company's reported earnings per
share for the thirteen and thirty-nine weeks ended September 28, 1997 did not
change.
6
<PAGE> 8
ITEM 2. 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 November 9, 1998, the Company owned and
operated 19 Units in the United States and licensed five Units outside of the
United States. Rainforest Cafe Units range in size from the Company's initial
Unit opened on October 3, 1994 in the Mall of America in Bloomington, Minnesota,
which is approximately 15,000 square feet, to the 34,000 square foot Unit
located at Disney's Animal Kingdom at Walt Disney World(R) in Orlando, Florida.
The Company's other domestic Units are located in Chicago, Schaumburg and
Gurnee, Illinois; McLean, Virginia; Miami, Fort Lauderdale and Downtown Disney
Marketplace at Walt Disney World(R) in Orlando, Florida; Ontario and Costa Mesa
in Orange County, California; Westbury and West Nyack, New York; Edison, New
Jersey; Burlington, Massachusetts; Denver, Colorado; Dallas, Texas; Tempe,
Arizona; and at the MGM Grand Hotel and Casino in Las Vegas, Nevada.
The Company presently plans to open two additional domestic Units during the
fourth quarter of 1998. Because the Company anticipates continued 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 14,000
to 20,000 square feet, with between 275 and 450 restaurant seats and 10% 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 Market Place Unit and the free-standing 34,000 square foot
Disney's Animal Kingdom Unit, both of which contain approximately 550 restaurant
seats.
In addition to operations in the United States, the Company has pursued
international growth opportunities through licensing arrangements. The Company
has entered into six exclusive license agreements to develop up to 25 Units, of
which five are currently open, over the next ten years in the United Kingdom and
Ireland, Mexico, Canada, France and certain Asian countries. The Company intends
to enter into additional license agreements in the future. Pursuant to these
agreements, the Company is entitled to receive area licensing fees in excess of
$500,000 for multi-Unit territories (other than the license agreement relating
to the United Kingdom and Ireland which does not have an area licensing fee) and
is entitled to receive a development fee 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 20%-50% of each Unit developed. The agreement for the Canadian
development is a 50/50 joint venture with the Elephant and Castle Group located
in Vancouver, Canada. The first international licensed Unit opened in London in
June, 1997, followed by Units in Cancun and Mexico City, Mexico, Vancouver,
Canada and Manchester, United Kingdom, which opened in August and October 1997
and June and September 1998, respectively. The Company believes two additional
Units will be opened outside the United States for the remaining quarter of
1998.
7
<PAGE> 9
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. Historically when a new Unit
opens, it incurs 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
of established Units. Each of the Company's current leases includes both fixed
rate and percentage rent provisions.
General, administrative and new 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. Management, supervisory and staff salaries, employee benefits, travel,
information systems, marketing, rent and office expenses are primary items of
cost in this category.
The Company uses a 52- or 53- week fiscal year ending on the Sunday nearest
December 31.
8
<PAGE> 10
RESULTS OF OPERATIONS FOR THE THIRTEEN AND FORTY WEEKS ENDEd OCTOBER 4, 1998,
COMPARED TO THE THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1997.
The operating results of the Company expressed as a percentage of total revenues
(except where noted) were as follows:
<TABLE>
<CAPTION>
Thirteen Thirteen Forty Thirty-nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 4, September 28, October 4, September 28,
1998 1997 1998 1997
------------ ------------ ----------- ------------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales 77.0 % 76.6 % 77.0 % 76.5 %
Retail sales 21.9 23.0 22.2 23.0
Licensing fees and royalties 1.1 .4 .8 .5
============ ============ =========== ============
Total revenues 100.0 100.0 100.0 100.0
============ ============ =========== ============
Costs and Expenses:
Food and beverage costs (1) 23.4 23.5 23.6 23.5
Cost of retail goods sold (2) 46.2 45.4 45.3 46.3
Restaurant operating expenses (1) 51.5 48.7 51.8 49.0
Retail operating expenses (2) 33.3 31.2 32.6 31.6
Depreciation and amortization (3) 5.7 4.8 5.8 5.1
Preopening expenses (3) 5.4 2.5 4.5 3.2
Total costs and expenses (3) 87.1 80.4 86.2 82.0
Income from Unit Operations and Licensing 13.8 19.9 14.5 18.4
------------ ------------ ----------- ------------
Other (Income) Expense:
General, administrative and development 5.6 7.2 5.9 7.3
Interest Income (2.1) (8.2) (3.3) (9.2)
Loss on disposal .1 -- -- --
Write-off of development costs -- -- -- 2.6
Equity in earnings of unconsolidated subsidiaries -- -- .1 --
------------ ------------ ----------- ------------
Total other (income) expense 3.7 (1.0) 2.8 .7
------------ ------------ ----------- ------------
Income before Income Taxes and Cumulative Effect
of Change in Accounting Principle 10.2 20.9 11.7 17.7
Provision for income taxes 3.5 7.5 4.0 6.4
------------ ------------ ----------- ------------
Income before Cumulative Effect of Change in
Accounting Principle 6.7 13.4 7.7 11.3
Cumulative Effect of Change in Accounting
Principle -- -- 2.5 --
------------ ------------ ----------- ------------
Net Income 6.7 % 13.4 % 5.2 % 11.3 %
============ ============ =========== ============
</TABLE>
(1) Percentage of restaurant sales
9
<PAGE> 11
(2) Percentage of retail sales
(3) Percentage of unit sales
Results of operations for the quarter ended October 4,1998, reflect the
operations of fourteen mall Units and four free-standing Units open for the
third quarter.
Total revenues increased 100% to $56.0 million for the thirteen week period
ended October 4, 1998 and 110% to $154.5 million for the forty weeks of 1998
from $28.0 million for the thirteen weeks ended September 28, 1997 and $73.5
million for the thirty-nine weeks of 1997. The increase in revenues is
primarily due to the addition of ten domestic Rainforest Cafe Units which
contributed $29.9 million for the third quarter of 1998 and $73.9 million for
the nine months of 1998 and $2.8 million generated from the additional week
during the first quarter of 1998. The increase in revenues was partially
offset by a decrease in sales of the comparable store sales base consisting of
six Units open more than 18 months. These Units experienced a decrease in
sales of $3.8 million for the third quarter of 1998 compared to the third
quarter of 1997 and $5.3 million for the nine months of 1998 compared with the
nine months of 1997. The Company's experience to date indicates that a Unit's
revenues may decrease on a comparable basis after the first year of
operations. The comparable store sales base decreased 15.7% in the third
quarter of 1998 and decreased 7.7% for the first nine months of 1998.
Management believes that such decreases result from the fact that the
Company's new Units typically open at or near full capacity. Local market
conditions and competition may also impact Unit sales.
Retail sales decreased as a percentage of total revenues from 23.0% for the
third quarter in 1997 to 21.9% for the comparable period in 1998 and decreased
as a percentage of total revenues from 23.0% for the nine months of 1997 to
22.2% for the nine months of 1998. The decrease in the percentage of retail
sales in the third quarter is primarily due to a decrease in retail sales at
the Downtown Disney Marketplace and Woodfield Mall Units.
Food and beverage costs increased 101% to $10.1 million for the third quarter
of 1998 and 112% to $28.0 million for the nine months of 1998 compared to $5.0
million and $13.2 million for the comparable periods of 1997. The increase in
food and beverage costs was primarily due to Unit expansion. Food and beverage
costs remained relatively stable as a percentage of sales.
Cost of retail goods sold increased 94% to $5.7 million for the third quarter
of 1998 compared to $2.9 million for the third quarter of 1997, and 99% to
$15.6 million for the nine months of 1998 from $7.8 million for the comparable
period in 1997. The increase in cost of retail goods sold was primarily due to
Unit expansion. Cost of retail goods sold increased as a percentage of retail
sales from 45.4% in the third quarter of 1997 to 46.2% for the comparable
period in 1998 and decreased from 46.3% for the nine months of 1997 to 45.3%
for the nine months of 1998. The increase in the third quarter is due to
higher markdown percentages and increased costs of product distribution.
Restaurant and retail operating expenses increased 113% and 104% respectively
from the third quarter of 1997, and 124% and 109%, respectively from the nine
months of 1997 to the comparable periods in 1998. The increase in restaurant
and retail operating expenses was primarily due to Unit expansion. Restaurant
operating expenses increased as a percentage of restaurant sales from 48.7% in
the third quarter of 1997 to 51.5% in the third quarter of 1998 and from 49.0%
in the nine months of 1997 to 51.8% in the nine months of 1998. The increase
in restaurant operating expenses for both comparable periods as a percentage
of restaurant sales is primarily due to increased expenditures on repairs and
10
<PAGE> 12
maintenance, sales and marketing and increased costs of labor. The labor
increase is predominantly due to the payment of higher union wage rates at the
Company's Unit at MGM Grand Hotel and Casino and reduced utilization of fixed
management salaries at several Units which experienced sales declines over the
comparable period from the prior year. Expenditures on advertising and
marketing increased at most Units and the initial investment in Corporate
sales teams in Las Vegas, South Florida, Orlando and Chicago contributed to
the higher costs. A high level of operating expenses at the Aventura Mall Unit
due to low sales volume contributed to the increase in restaurant operating
expenses as a percentage of restaurant sales for both of the 1998 periods.
Retail operating expenses as a percentage of retail sales increased from 31.2%
in the third quarter of 1997 to 33.3% in the third quarter of 1998 and
increased from 31.6% in the nine months of 1997 to 32.6% in the nine months of
1998. The increase in retail operating expenses in the third quarter and nine
months of 1998 as a percentage of retail sales is due to the same factors
which affected restaurant expenses as noted above.
Depreciation and amortization increased 139% to $3.2 million in the third
quarter of 1998 compared to $1.3 million for the comparable period in 1997 and
138% to $8.8 million for the nine months of 1998 from $3.7 million in 1997.
Preopening expenses increased 337% from $0.7 million in the third quarter of
1997 to $3.0 million in the same period of 1998 and 197% from $2.3 million for
the nine months of 1997 to $6.9 million for the nine months of 1998. The
increase in depreciation and amortization was primarily due to Unit expansion.
Depreciation and amortization as a percentage of restaurant and retail sales
increased to 5.7% for the third quarter of 1998 from 4.8% for the same period
in 1997 and to 5.8% for the nine months of 1998 from 5.1% for the nine months
of 1997. The increase in these expenses as a percentage of sales is due to
increased costs of new Unit development and capital improvements in existing
Units and decreased comparable store sales in certain Units. Preopening
expenses increased as a percentage of restaurant and retail sales from 2.5%
for the third quarter of 1997 to 5.4% for the third quarter of 1998 and from
3.2% for the nine months in 1997 to 4.5% for the nine months of 1998. The
increase as a percentage of sales is primarily due to five new Units which
opened during 1998, whose preopening costs were primarily expensed during the
first nine months of 1998 due to the change in accounting principle.
General, administrative and development expenses increased 56.2% to $3.2
million and 69.6% to $9.2 million for the third quarter and nine months of
1998 respectively, compared to $2.0 million and $5.4 million for the
comparable periods of 1997. The increase in general administrative and
development expenses was due primarily to the increases in regional Unit
management, corporate employees and development of marketing and advertising
programs. General, administrative and development expenses as a percentage of
revenues decreased to 5.6% in the third quarter from 7.2% for the same period
in 1997 and decreased to 5.9% for the nine months of 1998 from 7.3% for the
comparable period in 1997. Management believes general, administrative and
development expenses will continue to grow at a slower rate than total
revenues over the next year resulting in a continual decrease in these
expenses as a percentage of total revenues.
Interest income of $1.2 million and $5.1 million for the third quarter and
nine months of 1998 was generated primarily by investing the proceeds from the
Company's two follow-on public offerings completed in January and September
1996 and capital gains on investments realized during the first quarter of
1998. Interest income of $2.3 million and $6.8 million for the third quarter
and nine months of 1997 was generated primarily by investing the proceeds of
the Company's two 1996 follow-on public offerings.
11
<PAGE> 13
The write-off of development costs of $1.9 million in the first nine months of
1997 was the result of the termination of planned Units at Trump Taj Mahal
(Atlantic City, New Jersey) and Stratosphere (Las Vegas, Nevada).
The provision for income taxes in the 1998 and 1997 periods are both based
upon the Company's estimated effective tax rate, including tax exempt interest
income. The effective tax rate for 1998 was reduced to 34% from 36% in 1997,
reflecting the addition of more Units in lower tax states such as Nevada and
Florida.
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 6,210,000
shares of Common Stock pursuant to a secondary public offering at $12.67 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 $1.0 million in net proceeds from the exercise of
warrants at $3.20 per share issued to Underwriters of the Company's IPO. In
September 1996, the Company issued an aggregate of 4,837,500 shares of Common
Stock pursuant to an additional public offering at $21.00 per share. The net
proceeds to the Company, after payment of underwriting fees and offering
expenses, were approximately $96.0 million. On October 4, 1998 the Company had
working capital of approximately $51.7 million and long-term investments of
$24.7 million, consisting principally of investment grade, fixed income
securities.
The Company generated cash flow from operating activities of $21.1 million for
the nine months of 1998 compared to $12.8 million for the nine months of 1997.
Additionally, during the first nine months of 1998 the Company generated
$450,000 from stock options exercised, compared with $1.0 million for the
comparable period in 1997. During the first nine months of 1998 the Company
generated approximately $1.8 million from the sale of put options compared to
approximately $1.5 million for the same period in 1997. At October 4, 1998,
put options which may require the purchase of approximately 521,500 shares of
the Company's Common Stock (at exercise prices ranging from $5.00 to $15.00
per share) were outstanding. The sale of the put options was executed as a
part of a stock repurchase program announced in January 1997 and amended in
January 1998 pursuant to which up to 1.5 million shares and 3.0 million
shares, respectively, of the Company's Common Stock may be repurchased over a
one year period. In the first nine months of 1998 approximately 1,653,000
shares of Common Stock were repurchased through put option assignments and
open market purchases at a cost of $20.9 million compared with 10,000 shares
in the first nine months of 1997 at a cost of $194,000. 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
12
<PAGE> 14
Downtown Disney Marketplace Unit were approximately $1.2 million and the
initial inventory purchased was approximately $600,000. Total expenditures to
develop the Disney's Animal Kingdom Unit were $14.5 million, net of $1.8
million landlord contributions. Preopening expenses incurred for the opening
of the Disney's Animal Kingdom Unit were approximately $1.6 million and the
initial inventory purchased was approximately $700,000.
The estimated average investment to open the Company's five Mall Units during
1997 was $7.1 million, net of landlord contributions. The Company received
average landlord contributions of approximately $900,000 for the Mall Units.
Additionally, the Company averaged approximately $730,000 in preopening
expenses and purchased approximately $300,000 in initial inventory for the
1997 Mall Units. Total expenditures to develop the free-standing downtown
Chicago Icon Unit were approximately $10.8 million. Total expenditures to
develop the MGM Grand Hotel and Casino Icon Unit were approximately $11.1
million, net of $750,000 landlord contribution. The opening of the downtown
Chicago Unit resulted in preopening expenses of approximately $750,000 and the
opening of the MGM Grand Hotel and Casino Unit resulted in preopening expenses
of approximately $1.3 million. Both Units required the purchase of
approximately $300,000 in initial inventory.
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 $750,000 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 Unit at Disney's Animal Kingdom at
Walt Disney World(R). 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
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.
NEW ACCOUNTING PRONOUNCEMENT
During April 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accounts (AICPA) issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5
requires companies to expense as incurred all start-up and preopening costs
that are not otherwise capitalizable as long-lived assets. The Company elected
to adopt the accounting standard during the second quarter of 1998. The effect
of this accounting change was a charge to operations of $3.9 million, net of
$2.2 million of related tax benefit for the unamortized balance of preopening
costs and other start-up expenses as of December 28, 1997. Also, $2.4 million
of preopening costs capitalized during the first quarter of 1998 were expensed
during the first quarter of 1998 as preopening costs in the accompanying
statements of operations.
13
<PAGE> 15
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
As a result of the substantial revenues associated with each new Unit, the
timing of new Unit openings may result in significant fluctuations in
quarterly results. 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, beverage and labor costs. Management does not anticipate any significant
labor cost increases as a result of the minimum wage increases enacted in 1997
and 1998. 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 base rent, 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.
YEAR 2000 UPDATE
State of Readiness
In order to operate its business, the Company relies upon many third party
information technology systems ("IT"), including its point of sale systems,
table seating, electronic mail, inventory management, credit card processing,
payroll, accounts payable, and general ledger systems. The Company does not
maintain any proprietary IT systems and has not made any modifications to any
of the IT systems provided to it by its IT vendors.
As of October 4, 1998, the Company continued its assessment to identify and
evaluate the risks of the Year 2000 issue with respect to its business. The
Company's Year 2000 assessment as of October 4, 1998 focused on the
following: (1) the Company's internal business information and accounting
systems, including (a) the Company's point of sale systems, (b) financial and
accounting software and (c) computer hardware; and (2) the Company's vendors
and suppliers of food, beverage and retail products and other third party
product and service providers. To implement its assessment, the Company
established an internal review team to monitor and facilitate efficient Year
2000 Compliance. The Company has also engaged a third-party consultant to
assist in its evaluation of Year 2000 readiness.
First, with respect to the Company's internal business information, including
the Company's point of sale systems and accounting systems, the Company has
reviewed its financial reporting systems, IT based and otherwise, to ensure
that they are Year 2000 compliant. The Company has requested that each of the
vendors providing hardware and software to run these systems complete a Year
2000 compliance questionnaire. The Company's software vendors have made
assurances pursuant to such questionnaires that their software is either Year
2000 compliant or that timely updates will be made to ensure that such
software will be Year 2000 compliant. In the process of reviewing the
Company's internal business information and accounting systems, the Company
has determined that some of its personal computers utilized by its corporate
staff may not be Year 2000 compliant and may have to be replaced. If required,
the Company presently anticipates that it will replace such computers by
mid-1999.
Second, the Company is in the process of seeking to obtain assurances from its
material vendors and suppliers to determine the extent to which the Company is
vulnerable to Year 2000 issues because such vendor or supplier is or may not
be Year 2000 compliant.
Contingency Plans
The Company has not yet seen the need to develop any widespread contingency
plans for the Year 2000 issue, but this will continuously be monitored as the
Company gains more information about the compliance programs of its vendors,
suppliers and other third party product and service providers. The Company
does not believe that it can develop a contingency plan that will totally
shield the Company from risks that are beyond the control of the Company
should others fail to resolve their own Year 2000 problems.
Cost
Based on the Company's current assessment, the costs of addressing potential
Year 2000 problems are not expected to be material or have a material adverse
impact on the Company's financial position. The current estimated cost of
replacing the Company's corporate-level personal computers, if any, which are
not Year 2000 compliant would not exceed $10,000. However, the estimated costs
relating to the resolution of the Company's Year 2000 compliance issues cannot
be fully and finally determined at this time.
Risks
While the Company fully anticipates achieving Year 2000 compliance well in
advance of January 1, 2000, there are certain risks which exist with respect
to the Company's business and the Year 2000. Those risks range from slight
delays and inefficiencies in processing data and carrying out accounting and
financial functions to the most reasonably likely worst case scenario, the
extensive and costly inability to process data, provide vital accounting
functions and communicate with suppliers. Furthermore, if significant vendors
identify Year 2000 issues in the future and are unable to resolve such issues
in a timely manner, it could result in material financial risks to the
Company.
FORWARD-LOOKING DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor"
for forward-looking statements. Certain information included in this report
and other materials filed by the Company with 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, including 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 in addition to
expenses related to any Company litigation, the Company's expectations as to
when it will complete the remediation and testing phases of the Company's Year
2000 readiness and the cost of achieving Year 2000 readiness. 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 are
indicated in the Company's Form 10-K for fiscal 1997 and 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 and the future Unit performance, 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,
the Company's inability to identify and resolve all material Year 2000
problems in a timely and cost effective manner, dependence on existing
management, general economic conditions, changes in federal or state laws or
regulations and unanticipated results of litigation.
14
<PAGE> 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
SHAREHOLDER CLASS ACTION LITIGATION
The Company and certain executive officers of the Company are named as
defendants in a purported class action complaint, In Re: Rainforest Cafe, Inc.
Securities Litigation, alleging violations by the Company and such executive
officers of certain Federal securities laws. The complaint was filed on July
31, 1998 and is a consolidation of seven separate actions which were all filed
in the United States District Court for the District of Minnesota. The
complaint alleges that the defendants violated Federal securities laws by
making misrepresentations and omissions regarding the Company's performance
and future prospects during the class period while individually selling the
Company's Common Stock. The complaint purports to seek relief on behalf of a
class of plaintiffs who purchased the Company's Common Stock during the period
between October 20, 1997 and January 6, 1998. The Company believes these
claims are without merit and intends to defend these claims vigorously. The
Company has moved to dismiss the complaint. The motion was heard by the Court
on October 30, 1998 and it is currently under advisement by the Court.
SHAREHOLDER DERIVATIVE LITIGATION
Luis San Andres, derivatively on behalf of Rainforest Cafe, Inc. vs.
Kenneth W. Brimmer, et al was filed on February 10, 1998 in the United States
District Court for the District of Minnesota. The Luis San Andres complaint
purports to seek relief on behalf of the Company against Kenneth W. Brimmer,
Mark Bartholomay, Gregory C. Carey, Mark S. Robinow, Ercu Ucan, Steven W.
Schussler and Lyle Berman and the Company as a nominal defendant. The
complaint alleges that the defendants breached their respective fiduciary
duties to the Company and were unjustly enriched as a result of certain
trading activity. The individual defendants have moved to dismiss the
complaint. The motion was heard on October 30, 1998 and it is currently under
advisement by the Court.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits:
27.1 Financial Data Schedule
B. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
quarter ended October 4, 1998.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAINFOREST CAFE, INC.
Date: November 19, 1998 /s/ Kenneth Brimmer
---------------------------------------
Kenneth Brimmer
President
Date: November 19, 1998 /s/ Mark S. Robinow
---------------------------------------
Mark S. Robinow
Chief Financial Officer
(Principal Financial Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
OCTOBER 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH 10Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> OCT-04-1998
<CASH> 15,591
<SECURITIES> 43,630
<RECEIVABLES> 21,091
<ALLOWANCES> 0
<INVENTORY> 12,082
<CURRENT-ASSETS> 67,738
<PP&E> 153,890
<DEPRECIATION> 0
<TOTAL-ASSETS> 251,402
<CURRENT-LIABILITIES> 16,002
<BONDS> 0
0
0
<COMMON> 188,220
<OTHER-SE> 24,656
<TOTAL-LIABILITY-AND-EQUITY> 251,402
<SALES> 153,290
<TOTAL-REVENUES> 154,501
<CGS> 43,598
<TOTAL-COSTS> 132,070
<OTHER-EXPENSES> 4,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 18,084
<INCOME-TAX> 6,148
<INCOME-CONTINUING> 11,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 3,916
<NET-INCOME> 8,020
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
