<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 4, 1999
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, $.01 par value per share outstanding as
of August 13, 1999:
24,196,387
<PAGE> 2
RAINFOREST CAFE, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page number
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
July 4, 1999 and January 3, 1999................................................2
Consolidated Statements of Operations for the thirteen and
twenty-six weeks ended July 4, 1999 and thirteen and
twenty-seven weeks ended July 5, 1998...........................................3
Consolidated Statements of Cash Flows for the thirteen and
twenty-six weeks ended July 4, 1999 and thirteen and
twenty-seven weeks ended July 5, 1998...........................................4
Condensed Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................6
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................18
Item 4. Submission of Matters to a Vote of Security Holders............................18
Item 6. Exhibits and Reports on Form 8-K...............................................18
Signature Page..........................................................................19
</TABLE>
1
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RAINFOREST CAFE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
July 4, January 3,
(In Thousands) 1999 1999
---------- -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,347 $ 16,863
Short-term investments 9,635 13,567
Accounts receivable 10,822 15,679
Inventories 10,290 11,191
Deferred income taxes 3,799 3,766
Prepaid expenses and other 4,780 3,563
--------- ---------
Total current assets 53,673 64,629
Long-Term Investments 19,983 15,915
Furniture, Equipment and Leasehold Improvements, net 181,475 168,982
Other Assets 5,644 6,001
--------- ---------
Total Assets $ 260,775 $ 255,527
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,157 $ 6,897
Accrued liabilities-
Payroll and payroll taxes 4,487 2,831
Other 6,878 5,165
Income tax payable 1,614 -
--------- ---------
Total current liabilities 17,136 14,893
Deferred Occupancy Costs 22,016 23,498
Deferred Income Tax 4,107 4,074
--------- ---------
Total liabilities 43,259 42,465
Commitments and Contingencies
Shareholders' Equity:
Common stock, no par value, 50,000 shares authorized;
24,237 and 24,651 issued and outstanding 184,855 186,764
Retained earnings 34,130 27,443
Cumulative other comprehensive loss (1,469) (1,145)
--------- ---------
Total shareholders' equity 217,516 213,062
--------- ---------
Total Liabilities and Shareholders' Equity $ 260,775 $ 255,527
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-six Twenty-seven
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 4, July 5, July 4, July 5,
(In Thousands, Except Per Share Data) 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales $ 53,542 $ 40,777 $ 99,618 $ 75,784
Retail sales 13,135 12,779 25,902 22,091
Licensing fees and royalties 858 308 1,777 615
--------- --------- --------- ---------
Total revenues 67,535 53,864 127,297 98,490
--------- --------- --------- ---------
Costs and Expenses:
Food and beverage costs 12,644 9,592 23,293 17,923
Cost of retail goods sold 5,870 5,554 12,226 9,907
Restaurant operating expenses 29,252 21,438 55,010 39,368
Retail operating expenses 4,717 3,973 9,390 7,097
Depreciation and amortization 4,504 3,096 8,841 5,650
Preopening expenses 1,194 1,441 2,134 3,872
--------- --------- --------- ---------
Total costs and expenses 58,181 45,094 110,894 83,817
--------- --------- --------- ---------
Income from Unit Operations and Licensing 9,354 8,770 16,403 14,673
--------- --------- --------- ---------
Other (Income) Expense:
General, administrative and development expenses 4,088 3,221 7,722 5,996
Interest income (885) (1,693) (1,743) (3,901)
Other, net 176 188 339 188
--------- --------- --------- ---------
Total other (income) expense 3,379 1,716 6,318 2,283
--------- --------- --------- ---------
Income before Income Taxes and Cumulative Effect of
Change in Accounting Principle 5,975 7,054 10,085 12,390
Provision for Income Taxes 2,091 2,398 3,489 4,212
--------- --------- --------- ---------
Income before Cumulative Effect of Change in
Accounting Principle 3,884 4,656 6,596 8,178
Cumulative Effect of Change in Accounting Principle
Related to Start-Up Costs (net of income taxes of $2,202) - - - 3,916
--------- --------- --------- ---------
Net Income $ 3,884 $ 4,656 $ 6,596 $ 4,262
========= ========= ========= =========
Basic Earnings Per Share
Basic Earnings Per Common Share before Change in
Accounting Principle: $ 0.16 $ 0.18 $ 0.27 $ 0.32
Cumulative Effect of Change in Accounting Principle: - - - 0.15
--------- --------- --------- ---------
Basic Earnings Per Common Share: $ 0.16 $ 0.18 $ 0.27 $ 0.17
--------- --------- --------- ---------
Basic Weighted Average Shares Outstanding: 24,461 25,469 24,522 25,728
========= ========= ========= =========
Diluted Earnings Per Share
Diluted Earnings Per Common Share before Change
in Accounting Principle: $ 0.16 $ 0.18 $ 0.27 $ 0.31
Cumulative Effect of Change in Accounting Principle: - - - 0.15
--------- --------- --------- ---------
Diluted Earnings Per Common Share: $ 0.16 $ 0.18 $ 0.27 $ 0.16
--------- --------- --------- ---------
Diluted Weighted Average Shares Outstanding: 24,789 26,031 24,865 26,034
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-six Twenty-seven
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 4, July 5, July 4, July 5,
(In Thousands) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Activities:
Net income $ 3,884 $ 4,656 $ 6,596 $ 4,262
Adjustments to reconcile net income to net cash
flows from operating activities-
Depreciation and amortization 4,873 3,322 9,494 6,054
Change in accounting principle - - - 3,916
Amortization of deferred occupancy costs and other (48) 7,873 (16) 9,899
Change in operating assets and liabilities-
Accounts receivable and other 2,564 (2,795) 509 (6,658)
Inventories 770 (3,298) 901 (2,202)
Preopening expenses - (996) - (3,242)
Prepaid expenses and other (216) - (1,217)
Accounts payable (2,519) (499) (2,740) 419
Accrued liabilities 1,242 1,556 3,369 2,166
Income tax payable 1,614 - 1,614 -
-------- -------- -------- --------
Net cash provided by operating activities 12,164 9,819 18,510 14,614
-------- -------- -------- --------
Investing Activities:
Proceeds from sales of short-term investments 7,808 11,884 13,814 (23,612)
Purchases of short-term investments (5,992) (8,628) (10,126) 14,984
Proceeds from sales of long-term investments 808 12,515 4,110 19,320
Purchases of long-term investments (7,762) (8,619) (8,178) (6,805)
Purchases of furniture, equipment and leasehold
improvements, net of landlord reimbursements (12,682) (12,308) (23,453) (29,194)
Other 600 (249) 357 (2,254)
-------- -------- -------- --------
Net cash used in investing activities (17,220) (5,405) (23,476) (27,561)
-------- -------- -------- --------
Financing Activities:
Proceeds from the sale of common stock and put options, net 241 949 1,038 1,935
Repurchase of common stock (2,007) - (2,936) (11,627)
Tenant allowances collected 2,300 - 4,348 112
-------- -------- -------- --------
Net cash provided by (used in) financing activities 534 949 2,450 (9,580)
-------- -------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents (4,522) 5,363 (2,516) (22,527)
Cash and Cash Equivalents, beginning of period 18,869 25,731 16,863 53,621
-------- -------- -------- --------
Cash and Cash Equivalents, end of period $ 14,347 $ 31,094 $ 14,347 $ 31,094
======== ======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ - $ - $ - $ -
Income taxes 2,091 925 2,103 948
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
RAINFOREST CAFE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 1999
(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 included in the
Company's Form 10-K for the fiscal year ended January 3, 1999. 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.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires the Company's management to make certain
estimates and assumptions for the periods covered by the financial statements.
These estimates and assumptions affect the reported amounts of assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the fiscal year ending January 2, 2000. Certain
prior amounts in the accompanying condensed financial statements have been
reclassified to conform with current year presentation.
(2) NET INCOME PER SHARE
During fiscal 1997, the Company adopted the provisions of SFAS No. 128,
"Accounting for Earnings Per Share." SFAS No. 128 requires companies to present
basic earnings per share (EPS) and diluted EPS. Basic EPS is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during the period. For the Company, diluted
EPS includes the dilutive effect of potential stock option exercises, calculated
using the treasury stock method. EPS amounts for all periods presented reflect
the provisions of SFAS No. 128.
5
<PAGE> 7
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(R)
- - A Wild Place to Shop and Eat(R)." As of August 13, 1999, the Company owned and
operated 25 Units in the United States and licensed ten 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 and Norfolk, Virginia; Miami, Fort Lauderdale and
Downtown Disney Marketplace at Walt Disney World(R) in Orlando, Florida; Ontario
and Costa Mesa, California; Westbury and West Nyack, New York; Edison, New
Jersey; Burlington, Massachusetts; Auburn Hills, Michigan; Philadelphia,
Pennsylvania; Towson, Maryland; Denver, Colorado; Grapevine, Texas; Tempe,
Arizona; Overland Park, Kansas; Seattle, Washington; and at the MGM Grand Hotel
and Casino in Las Vegas, Nevada.
The Company presently plans to open two additional domestic Units during the
remaining quarters of 1999. 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 15,000
to 17,000 square feet, with between 275 and 350 restaurant seats and 10% to 20%
of square footage dedicated to retail selling space. However, some Units may be
significantly larger (Icon Units), 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 expansion opportunities through licensing arrangements. The
Company has entered into seven exclusive license agreements to potentially
develop up to 28 Units, of which ten are currently open, over the next ten years
in the United Kingdom and Ireland, Mexico, Canada, France, and certain cities
and countries in Asia and South America. The Company intends to pursue and enter
into additional license agreements in the future. These agreements have per Unit
development fees of at least $100,000 and royalties ranging from 3% to 10% of
Unit sales. Generally, all agreements have area licensing fees that are
proportionate to market size and economic potential. 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 headquartered in Vancouver, Canada. The Agreement with Jungle
Investments Limited (JIL) to develop Hong Kong, Macau, Taiwan and Shanghai
allowed the Company to purchase 20% equity in JIL as well as 22.2% equity in the
Unit opened in Hong Kong. These agreements give the Company a 24.98% ownership
in the Hong Kong Unit. The first international licensed Unit opened in London in
June, 1997, followed by Units in Cancun and Mexico City, Mexico; Vancouver,
Canada; Manchester, United Kingdom; Hong Kong, China; a second location in
Mexico City, Mexico; Toronto, Canada; Disneyland Paris in Paris, France; and a
second location in Toronto, Canada. The Company believes no additional
International Units will be opened during the remaining quarters of 1999.
6
<PAGE> 8
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. Most 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
rent and percentage rent provisions.
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. Corporate management, supervisory and staff salaries, employee
benefits, travel, information systems, finance, 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.
7
<PAGE> 9
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total revenues
(except where noted) were as follows:
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-six Twenty-seven
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 4, 1999 July 4, 1999 July 5, 1998 July 5, 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 79.2 % 75.7 % 78.3 % 77.0 %
Retail sales 19.5 23.7 20.3 22.4
Licensing fees and royalties 1.3 .6 1.4 .6
----------- ------------ ----------- -----------
Total revenues 100.0 100.0 100.0 100.0
=========== ============ =========== ===========
Costs and Expenses:
Food and beverage costs (1) 23.6 23.5 23.4 23.7
Cost of retail goods sold (2) 44.7 43.5 47.2 44.8
Restaurant operating expenses (1) 54.6 52.6 55.2 51.9
Retail operating expenses (2) 35.9 31.1 36.3 32.1
Depreciation and amortization (3) 6.8 5.8 7.0 5.8
Preopening expenses (3) 1.8 2.7 1.7 4.0
Total costs and expenses (3) 87.2 84.2 88.3 85.6
Income from Unit Operations and Licensing 13.9 16.3 12.9 14.9
----------- ------------ ----------- -----------
Other (Income) Expense:
General, administrative and development 6.1 6.0 6.1 6.1
Interest Income (1.3) (3.1) (1.4) (4.0)
Other, net .3 .3 .3 .2
----------- ------------ ----------- -----------
Total other (income) expense 5.0 3.2 5.0 2.3
----------- ------------ ----------- -----------
Income before Income Taxes and Cumulative Effect
of Change in Accounting Principle 8.8 13.1 7.9 12.6
Provision for income taxes 3.1 4.4 2.7 4.3
----------- ------------ ----------- -----------
Income before Cumulative Effect of Change in
Accounting Principle 5.8 8.6 5.2 8.3
Cumulative Effect of Change in Accounting
Principle -- -- -- 4.0
----------- ------------ ----------- -----------
Net Income 5.8 % 8.6 % 5.2 % 4.3 %
=========== ============ =========== ===========
</TABLE>
(1) Percentage of restaurant sales
(2) Percentage of retail sales
(3) Percentage of restaurant and retail sales
8
<PAGE> 10
Results of operations for the quarter ended July 4, 1999, reflect the operations
of twenty-one mall Units and four Icon Units open during the quarter. The Unit
at MacArthur Center in Norfolk, Virginia and the Unit at South Center Mall in
Seattle, Washington were open for 26 days and 6 days, respectively, during the
second quarter of 1999.
THIRTEEN WEEKS ENDED JULY 4, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED JULY 5,
1998.
REVENUES
Total revenues increased 25% to $67.5 million for the thirteen week period ended
July 4, 1999 from $53.9 million for the thirteen weeks ended July 5, 1998. The
increase in revenues is primarily due to the addition of ten domestic Rainforest
Cafe Units which contributed $19.1 million for the second quarter of 1999. The
increase in revenues was partially offset by a decrease in sales of the
comparable store sales base consisting of twelve Units open more than 18 months.
These Units experienced a decrease in sales of $3.5 million, or 11%, for the
second quarter of 1999 compared to the second quarter of 1998. The Company's
experience to date indicates that a Unit's revenues may decrease on a comparable
basis after the first year of operations, although this has not been the case
for all of the Company's Units. 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.
Restaurant sales as a percentage of total revenue increased from 75.7% for the
second quarter of 1998 to 79.2% for the comparable period in 1999. The increase
in the percentage of restaurant sales in the second quarter of 1999 is primarily
due to the comparable retail sales for the quarter declining 16%, while
restaurant comparable second quarter sales declined 9%.
Retail sales decreased as a percentage of total revenues from 23.7% for the
second quarter in 1998 to 19.5% for the comparable period in 1999. The decrease
in the percentage of retail sales in the second quarter is primarily due to a
37.3% decrease in the sale of Beanie Babies. Beanie Babies as a percentage of
retail sales was 17.8% for the second quarter of 1999 compared to 29.6% for the
comparable period in 1998. The decrease in Beanie Babies sales was primarily due
to fewer shipments from the manufacturer and decreased demand for the product
during the second quarter of 1999 compared to 1998.
Licensing fees and royalties increased $.6 million, or 178%, for the thirteen
weeks ended July 4, 1999 compared to the comparable period in 1998. Licensing
fees and royalties increased as a percentage of revenue to 1.3% for the thirteen
weeks ended July 4, 1999 compared to .6% for the same period in 1998. The
increase was due to ten International Units being open during the current
quarter compared to only four International Units in the prior year period.
9
<PAGE> 11
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 32% to $12.6 million for the second quarter of
1999 compared to $9.6 million for the comparable period of 1998. The increase in
food and beverage costs was primarily due to Unit expansion. Food and beverage
costs remained relatively stable as a percentage of restaurant sales.
Cost of retail goods sold increased 6% to $5.9 million for the second quarter of
1999 compared to $5.6 million for the second quarter of 1998. 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 43.5% in the second
quarter of 1998 to 44.7% for the comparable period in 1999. The increase in cost
of retail goods sold as a percentage of retail sales was primarily due to an
increase in sales discounts for the second quarter of 1999 compared to the
comparable period in 1998.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 36% and 19%, respectively,
from the second quarter of 1998 to the comparable period in 1999. 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
52.6% in the second quarter of 1998 to 54.6% in the second quarter of 1999. The
increase in restaurant operating expenses for both comparable periods as a
percentage of restaurant sales is primarily due to increased expenditures on
sales and marketing and increased occupancy expenses. As a percentage of
restaurant revenues, restaurant occupancy expense increased to 13.5% for the
thirteen weeks ended July 4, 1999 versus 12.3% for the same period in 1998. The
increase was primarily due to a decrease in comparable Unit sales, while base
rent for many Units remained fairly constant.
Retail operating expenses as a percentage of retail sales increased from 31.1%
in the second quarter of 1998 to 35.9% in the second quarter of 1999. The
increase in retail operating expenses in the second quarter of 1999 as a
percentage of retail sales is primarily due retail operating expenses increasing
19% for the second quarter of 1999 versus the same period in 1998 while retail
sales increased only 3% for those same periods. As a percentage of retail sales,
retail occupancy costs increased to 14.0% for the thirteen weeks ended July 4,
1999 versus 12.6% for the comparable quarter.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 45% to $4.5 million in the second
quarter of 1999 compared to $3.1 million for the comparable period in 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 6.8% for the second quarter of 1999 from 5.8% for the same period
in 1998. The increase in these expenses as a percentage of sales is due to a
decrease in comparable Unit sales for the 13 weeks ended July 4, 1999 compared
to the same period in 1998 while depreciation and amortization remained
constant.
10
<PAGE> 12
PREOPENING EXPENSES
Preopening expenses decreased 17% from $1.4 million in the second quarter of
1998 to $1.2 million in the same period of 1999. Preopening expenses decreased
as a percentage of restaurant and retail sales from 2.7% for the second quarter
of 1998 to 1.8% for the second quarter of 1999. The decrease as a percentage of
sales for the second quarter is primarily due to six Units being constructed in
1999 versus eight Units in 1998. Also, the average preopening costs incurred to
date for the four malls Units that opened in 1999 averaged approximately
$680,000 compared to approximately $800,000 for the mall Units opened during
1998.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 27% to $4.1 million
for the second quarter of 1999 compared to $3.2 million for the comparable
period of 1998. The increase in general administrative and development expenses
was due primarily to the increases in corporate employees and expansion of
marketing and promotional efforts. General, administrative and development
expenses as a percentage of revenues increased to 6.1% in the second quarter of
1999 from 6.0% for the same period in 1998. The Company's objective is to more
effectively leverage its operational and corporate support infrastructure with
higher sales volume.
INTEREST INCOME
Interest income of $.9 million and $1.7 million for the second of 1999 and 1998,
respectively, was generated primarily by investing the proceeds from the
Company's two follow-on public offerings completed in January and September
1996. The decrease in interest income is primarily due to $65.7 million, net of
landlord contributions, of property, equipment and leasehold improvement
purchases to develop new Units since the second quarter of 1998.
INCOME TAXES
The provision for income taxes in both 1999 and 1998 periods is based upon the
Company's estimated effective tax rate, including tax exempt interest income.
The effective tax rate for second quarter 1999 was increased to 35% from 34% for
the same quarter of 1998, reflecting the reduction of tax exempt interest in
relation to taxable operating income. The effective tax rate reflects the large
sales volume and presence in lower tax states such as Florida and Nevada.
TWENTY-SIX WEEKS ENDED JULY 4, 1999 COMPARED TO THE TWENTY-SEVEN WEEKS ENDED
JULY 5, 1998.
REVENUES
Total revenues increased 29% to $127.3 million for the twenty-six week period
ended July 4, 1999 from $98.5 million for the twenty-seven weeks ended July 5,
1998. The increase in revenues is primarily due to the addition of ten domestic
Rainforest Cafe Units, which contributed $34.5 million for the second quarter of
1999. The increase in revenues was partially offset by a decrease in sales of
the comparable store sales base consisting of twelve Units open more than 18
months. These Units experienced a decrease in sales of
11
<PAGE> 13
$6.8 million, or 12%, for the twenty-six weeks ended July 4, 1999 compared to
the comparable period of 1998. Also, the comparable period in 1998 included an
extra week in which sales were $2.8 million.
Restaurant sales as a percentage of total revenue increased from 77.0% for the
twenty-seven weeks ended July 5, 1998 to 78.3% for the comparable period in
1999. The increase in the percentage of restaurant sales in the first twenty-six
weeks in 1999 is primarily due to the comparable retail sales declining 14%,
while restaurant comparable twenty-six week sales declined 11%.
Retail sales decreased as a percentage of total revenues from 22.4% for the
twenty-seven weeks ended July 5, 1998 to 20.3% for the comparable period in
1999. The decrease in the percentage of retail sales in the second quarter is
primarily due to a decrease in the sale of Beanie Babies. This decrease in
Beanie Baby sales was primarily due to fewer shipments from the manufacturer
during April and May of 1999 and slowing demand for the product.
Licensing fees and royalties increased $1.2 million, or 189%, for the twenty-six
weeks ended July 4, 1999 compared to the comparable period in 1998. Licensing
fees and royalties increased as a percentage of revenue to 1.4% for the
twenty-six weeks ended July 4, 1999 compared to .6% for the same period in 1998.
The increase was due to ten international Units being open at July 4, 1999
compared to only four Units as of July 5, 1998.
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 30% to $23.3 million for the twenty-six weeks
ended July 4, 1999 compared to $17.9 million for the comparable period of 1998.
The increase in food and beverage costs was primarily due to Unit expansion.
Food and beverage costs remained relatively stable as a percentage of restaurant
sales.
Cost of retail goods sold increased 23.4% to $12.2 million for the twenty-six
weeks ended July 4, 1999 compared to $9.9 million for the comparable period of
1998. 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 44.8% in the twenty-seven week period ended July 5, 1998 to 47.2% for the
comparable period in 1999. The increase in cost of retail goods sold as a
percentage of retail sales was primarily due to an increase in retail discounts
for the twenty-six weeks ended July 4, 1999 compared to the comparable period in
1998.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 40% and 32%, respectively,
from the twenty-seven weeks ended July 5, 1998 to the comparable period in 1999.
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
51.9% in the twenty-seven-weeks ended July 5, 1998 to 55.2% for the comparable
period of 1999. The increase in restaurant operating expenses as a percentage of
restaurant sales is primarily due to decreased comparable Unit sales, which
caused fixed restaurant occupancy expenses to increase as a percentage of sales.
Retail operating expenses as a percentage of retail sales increased from 32.1%
in the twenty-seven weeks ended July 5, 1998 to 36.3% for the twenty-six weeks
ended July 4, 1999. The increase in retail operating
12
<PAGE> 14
expenses as a percentage of retail sales is primarily due to decreased
comparable Unit retail sales, which caused fixed retail occupancy expenses to
increase as a percentage of sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 56% to $8.8 million in the twenty-six
weeks ended July 4, 1999 compared to $5.7 million for the comparable period in
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 7.0% for the twenty-six weeks ended July 4, 1999 from
5.8% for the same period in 1998. The primary reason for the increase in these
expenses for the twenty-six weeks ended July 4, 1999 compared to the same period
in 1998 as a percentage of sales is due to a decrease in comparable Unit sales
while depreciation and amortization remained constant.
PREOPENING EXPENSES
Preopening expenses decreased 45% from $3.9 million in the twenty-seven weeks
ended July 5, 1998 to $2.1 million in the same period of 1999. Preopening
expenses decreased as a percentage of restaurant and retail sales from 4.0% for
the twenty-seven weeks ended July 5, 1998 to 1.7% for the twenty-six weeks ended
July 4, 1999. The decrease as a percentage of sales for the second quarter is
primarily due six Units being constructed in 1999 versus eight Units in 1998 as
well as lower preopening expenses per Unit in 1999 compared to 1998.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 29% to $7.7 million
for the twenty-six weeks ended July 4, 1999 compared to $6.0 million for the
comparable period of 1998. The increase in general administrative and
development expenses was due primarily to the increases in corporate employees
and expansion of the marketing department. General, administrative and
development expenses as a percentage of revenues remained at a constant 6.1% for
the twenty-six weeks ended July 4, 1999 and the same period in 1998.
INTEREST INCOME
Interest income of $.1.7 million and $3.9 million for the twenty-six weeks ended
July 4, 1999 and the comparable period of 1998, respectively, was generated
primarily by investing the proceeds from the Company's two follow-on public
offerings completed in January and September 1996. The decrease in interest
income is primarily due to $65.7 million, net of landlord contributions, of
property, equipment and leasehold improvement purchases to develop new Units
since the twenty-seven weeks ended July 5, 1998.
13
<PAGE> 15
INCOME TAXES
The provision for income taxes in the 1999 and 1998 periods are both based upon
the Company's estimated effective tax rate, including tax exempt interest
income. The effective tax rate for the twenty-six weeks ended July 4, 1999 was
increased to 34.6% from 34% for the same period of 1998. The increase reflects
an effective rate increase for the second quarter of 1999 to 35% compared to 34%
in the first quarter of 1999 and the first two quarters of 1998. The increase
reflects the reduction of tax exempt interest in relation to taxable operating
income.
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 initial public offering.
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.
The following table represents a summary of the Company's key liquidity
measurements for the twenty-six-weeks ended July 4, 1999 and the twenty-seven
weeks ended July 5, 1998:
<TABLE>
<CAPTION>
(Dollar Amounts in Millions) Period Ended
------------
July 4, 1999 July 5, 1998
-------------- ------------
<S> <C> <C>
Cash and marketable securities on hand, end of period $ 44.0 $ 81.0
Net working capital, end of period $ 36.5 $ 65.6
Current ratio, end of period 3.1 to 1 5.0 to 1
Long-term debt, end of period $ --- $ ---
Cash provided by operations $ 18.5 $14.6
Capital expenditure $ 23.5 $29.2
</TABLE>
The Company generated cash flow from operating activities of $18.5 million for
the twenty-six weeks ended July 4, 1999 compared to $14.6 million for the
twenty-seven weeks ended July 5, 1998. 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, share repurchases and
working capital purposes.
During the twenty-six weeks ended July 4, 1999, the Company generated
approximately $1.0 million from the sale of put options compared to
approximately $1.3 million for the comparable twenty-seven week period in 1998.
At July 5, 1999, put options which may require the purchase of approximately 2.2
million shares of the Company's Common Stock, were outstanding at exercise
prices ranging from $5.00 to $8.94 per share, with a weighted average exercise
price of $5.65. 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 and
January 1999, pursuant to which up to 1.5 million shares, 3.0 million shares and
2.0 million shares, respectively, of the Company's Common Stock may be
repurchased over a one year period.
14
<PAGE> 16
For the twenty-six weeks ended July 4, 1999, 490,300 shares of Common Stock were
repurchased through put option assignments and open market purchases at a cost
of $2.9 million compared with 909,000 shares repurchased through put option
assignment and open market purchases in the same period of 1998 at a cost of
$11.6 million.
The average investment to open the Company's twenty-one Mall Units was $5.7
million, net of landlord concessions that averaged $1.6 million. Additionally,
the Company averaged approximately $800,000 in preopening expenses and purchased
an average of $300,000 of inventory in connection with the openings. Total
expenditures to develop the Company's four Icon Units averaged $12.3 million per
Unit, net of landlord concessions, which averaged $0.9 million. Preopening for
these Units averaged approximately $1.1 million and the initial average
inventory purchased was approximately $360,000.
The Company expects future domestic Mall Units to cost between $4.5 million and
$6.5 million to develop, net of anticipated landlord contributions. In addition,
the Company expects that it will incur approximately $675,000 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 Fisherman's Wharf in San Francisco,
California and at Disney's California Adventure, in Anaheim California, which
may cost significantly more. In connection with the construction of existing
Units, the Company has received landlord concessions, which reduced the cost of
building these Units. There can be no assurance, however, that landlord
concession will be available in the future.
The Company contemplates that the development and opening of each of its Units
in 1999 through 2000 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 2000.
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 Unit expansion but will be partially offset by increases
in trade payables.
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, some of 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.
15
<PAGE> 17
YEAR 2000 READINESS
The Year 2000 issue results from the fact that many computers, embedded computer
microprocessors, computer software applications and databases only use two
digits (rather than four) to define the applicable year. As a result, such
computer systems and applications may recognize a date of "00" as the year 1900
instead of the intended year 2000, which could result in data miscalculations
and computer system failures. Computer systems and applications are considered
to be Year 2000 compliant when they are fully capable of correctly processing
transactions in the year 2000. The Year 2000 issue is real and presents a number
of serious risks and uncertainties that could have a broad impact across all
industries and which could materially impact the Company's results of
operations, liquidity and financial position.
In order to operate its business, the Company relies upon many first 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 significant
modifications to any of the IT systems provided to it by its IT vendors.
AWARENESS AND ASSESSMENT
The Company's Year 2000 assessment 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.
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's software vendors have made assurances that
their software is either Year 2000 compliant, or updates have been received for
non-compliant systems to ensure that such software will be Year 2000 compliant.
Presently, all internal Year 2000 compliance initiatives are on schedule. The
installation of a compliant finance and human resources application suite was
completed and in production at July 4, 1999. The remaining Unit software
applications and associated hardware Year 2000 upgrades are expected be
completed by September 30, 1999.
COMMUNICATIONS WITH SUPPLIERS AND VENDORS
The Company had requested and has received written responses from its major
product and service suppliers. The information received indicates no risk to the
normal continuation of business due to disclosed Year 2000 non-compliance or
progress toward resolution of identified Year 2000 issues. For those vendors
that have not responded, all of the Company's efforts in this regard will not
necessarily guarantee that events and circumstances outside the Company's direct
influence and control will not adversely impact on its operations.
16
<PAGE> 18
EXPECTED COSTS TO ADDRESS THE YEAR 2000 ISSUE
Based on the Company's current assessment, the costs of addressing potential
Year 2000 issues are not expected to be material or have a material adverse
impact on the Company's results of operations, liquidity and financial position.
The Company estimates that additional assessment, remediation, testing and
implementation costs are expected to be less than $50,000 and will be funded by
cash flows from operations. However, the estimated costs relating to the
resolution of the Company's Year 2000 compliance issues are based on
management's best estimates. While the Company currently believes that the year
2000 issues outlined above should not have a material impact on its financial
position or results of operations, it remains uncertain as to what extent, if
any, the Company may be impacted. Consequently, there can be no assurance that
the forward-looking statements will be achieved.
CONTINGENCY PLAN
The Company is in the initial stages of developing an operational contingency
plan to address any unavoidable Year 2000 issues. Although the Company expects
to have the plan substantially completed by the start of the fourth quarter of
fiscal 1999, modifications to the plan will likely continue through the
remainder of fiscal 1999 and into fiscal 2000.
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, other capital spending, financial sources, and the
effects of competition in addition to expenses related to any Company
litigation, and the Company's Year 2000 compliance. 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 1998 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, dependence on existing management, general
economic conditions, changes in federal or state laws or regulations and
unanticipated results of litigation.
17
<PAGE> 19
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, Emanuel Massing vs. Lyle
Berman et al., alleging violations by the Company and such executive officers of
certain Federal securities laws. The complaint was filed on May 3, 1999 in the
United State District Court for the district of Minnesota. This action is a
follow-up action to the previous shareholder action, In Re: Rainforest Cafe,
Inc. Securities Litigation, which was dismissed without prejudice on December
21, 1998. Like its predecessor case, the new 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 the action is without merit and
intends to defend this claim vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
A. The Annual Meeting of Shareholders was held on May 17, 1999.
B. Matters voted upon:
(1) Directors elected at meeting:
<TABLE>
<CAPTION>
AFFIRMATIVE NEGATIVE
VOTES VOTES ABSTENTIONS
----------- --------- -----------
<S> <C> <C> <C>
Lyle Berman 18,524,619 557,950 5,466,635
Kenneth W. Brimmer 18,539,338 543,231 5,466,635
David L. Rogers 18,563,474 519,095 5,466,635
Steven W. Schussler 18,558,876 523,693 5,466,635
Ercu Ucan 18,540,838 541,731 5,466,635
Joel N. Waller 18,562,574 519,995 5,466,635
</TABLE>
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 July 4, 1999.
18
<PAGE> 20
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: August 16, 1999 /s/ Kenneth Brimmer
-----------------------------------------
Kenneth Brimmer
President
Date: August 16, 1999 /s/ Mark S. Robinow
----------------------------------------
Mark S. Robinow
Chief Financial Officer (Principal
Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> JUL-04-1999
<CASH> 14,347
<SECURITIES> 29,618
<RECEIVABLES> 10,861
<ALLOWANCES> (39)
<INVENTORY> 10,290
<CURRENT-ASSETS> 53,673
<PP&E> 217,266
<DEPRECIATION> (35,791)
<TOTAL-ASSETS> 260,775
<CURRENT-LIABILITIES> 17,136
<BONDS> 0
0
0
<COMMON> 184,855
<OTHER-SE> 32,601
<TOTAL-LIABILITY-AND-EQUITY> 260,775
<SALES> 125,520
<TOTAL-REVENUES> 127,297
<CGS> 35,519
<TOTAL-COSTS> 75,375
<OTHER-EXPENSES> 6,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,085
<INCOME-TAX> 3,489
<INCOME-CONTINUING> 6,596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,596
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
