<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 OCTOBER 3, 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
November 16, 1999:
23,902,104
<PAGE> 2
RAINFOREST CAFE, INC.
INDEX
<TABLE>
<CAPTION>
Page number
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
October 3, 1999 and January 3, 1999.......................................................2
Consolidated Statements of Operations for the thirteen and
thirty-nine weeks ended October 3, 1999 and thirteen and
forty weeks ended October 4, 1998.........................................................3
Consolidated Statements of Cash Flows for the thirteen and
thirty-nine weeks ended October 3, 1999 and thirteen and
forty weeks ended October 4, 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 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>
October 3, January 3,
(In Thousands) 1999 1999
ASSETS ---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,717 $ 16,863
Short-term investments 4,051 13,567
Accounts receivable 11,839 15,679
Inventories 10,668 11,191
Deferred income taxes 3,766 3,766
Prepaid expenses and other 3,585 3,563
-------- --------
Total current assets 45,626 64,629
Long-Term Investments 24,626 15,915
Furniture, Equipment and Leasehold Improvements, net 189,974 168,982
Other Assets 5,190 6,001
-------- --------
Total Assets $265,416 $255,527
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,392 $ 6,897
Accrued liabilities-
Payroll and payroll taxes 3,766 2,831
Other 6,597 5,165
Income tax payable 4,937 -
-------- --------
Total current liabilities 17,692 14,893
Deferred Occupancy Costs 24,556 23,498
Deferred Income Tax 4,074 4,074
-------- --------
Total liabilities 46,322 42,465
Commitments and Contingencies
Shareholders' Equity:
Common stock, no par value, 50,000 shares authorized;
24,099 and 24,651 issued and outstanding 183,561 186,764
Retained earnings 37,601 27,443
Cumulative other comprehensive loss (2,068) (1,145)
-------- --------
Total shareholders' equity 219,094 213,062
-------- --------
Total Liabilities and Shareholders' Equity $265,416 $255,527
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Forty
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 3, October 4, October 3, October 4,
(In Thousands, Except Per Share Data) 1999 1998 1999 1998
Revenues: ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Restaurant sales $ 58,070 $ 43,150 $ 157,688 $ 118,934
Retail sales 13,225 12,265 39,127 34,356
Licensing fees and royalties 910 596 2,687 1,211
---------- ---------- ---------- ----------
Total revenues 72,205 56,011 199,502 154,501
---------- ---------- ---------- ----------
Costs and Expenses:
Food and beverage costs 13,752 10,103 37,045 28,026
Cost of retail goods sold 6,301 5,666 18,527 15,572
Restaurant operating expenses 31,367 22,224 86,377 61,593
Retail operating expenses 5,124 4,089 14,514 11,185
Depreciation and amortization 4,963 3,177 13,804 8,827
Preopening expenses 1,020 2,995 3,154 6,867
---------- ---------- ---------- ----------
Total costs and expenses 62,527 48,254 173,421 132,070
---------- ---------- ---------- ----------
Income from Unit Operations and Licensing 9,678 7,757 26,081 22,431
---------- ---------- ---------- ----------
Other (Income) Expense:
General, administrative and development expenses 4,288 3,159 12,010 9,155
Interest income (480) (1,090) (2,223) (4,991)
Equity in earnings of unconsolidated subsidiaries 363 (5) 702 183
---------- ---------- ---------- ----------
Total other (income) expense 4,171 2,064 10,489 4,347
---------- ---------- ---------- ----------
Income before Income Taxes and Cumulative Effect of
Change in Accounting Principle 5,507 5,693 15,592 18,084
Provision for Income Taxes 1,927 1,936 5,416 6,148
---------- ---------- ---------- ----------
Income before Cumulative Effect of Change in
Accounting Principle 3,580 3,757 10,176 11,936
Cumulative Effect of Change in Accounting Principle
Related to Start-Up Costs (net of income taxes of $2,202) -- -- -- 3,916
---------- ---------- ---------- ----------
Net Income $ 3,580 $ 3,757 $ 10,176 $ 8,020
========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Basic Earnings Per Common Share before Change in
Accounting Principle: $ 0.15 $ 0.15 $ 0.42 $ 0.47
Cumulative Effect of Change in Accounting Principle: -- -- -- 0.15
---------- ---------- ---------- ----------
Basic Earnings Per Common Share: $ 0.15 $ 0.15 $ 0.42 $ 0.31
========== ========== ========== ==========
Basic Weighted Average Shares Outstanding: 24,171 25,288 24,405 25,581
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Diluted Earnings Per Common Share before Change
in Accounting Principle: $ 0.15 $ 0.15 $ 0.41 $ 0.46
Cumulative Effect of Change in Accounting Principle: -- -- -- 0.15
---------- ---------- ---------- ----------
Diluted Earnings Per Common Share: $ 0.15 $ 0.15 $ 0.41 $ 0.31
========== ========== ========== ==========
Diluted Weighted Average Shares Outstanding: 24,512 25,684 24,757 25,918
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-nine Forty
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
October 3, October 4, October 3, October 4,
(In Thousands) 1999 1998 1999 1998
Operating Activities: ---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 3,580 $ 3,757 $ 10,176 $ 8,020
Adjustments to reconcile net income to net cash
flows from operating activities-
Depreciation and amortization 5,234 3,229 14,233 9,283
Change in accounting principle -- -- -- 3,916
Amortization of deferred occupancy costs and other 49 8,326 528 18,225
Change in operating assets and liabilities- --
Accounts receivable and other (3,902) (1,817) (3,393) (8,475)
Inventories (378) (3,175) 523 (5,377)
Preopening expenses -- -- -- (3,242)
Prepaid expenses and other 1,195 (3,335) (22) (3,335)
Accounts payable (1,765) (928) (4,505) (509)
Accrued liabilities (1,002) 454 2,367 2,620
Income tax payable 3,323 -- 4,937 --
-------- -------- -------- --------
Net cash provided by operating activities 6,334 6,511 24,844 21,126
-------- -------- -------- --------
Investing Activities:
Proceeds from sales of short-term investments 6,544 (7,600) 20,358 (31,212)
Purchases of short-term investments (960) 14,217 (11,086) 29,201
Proceeds from sales of long-term investments 3,121 14,252 7,231 33,572
Purchases of long-term investments (8,363) (11,475) (16,541) (18,280)
Purchases of furniture, equipment and leasehold
improvements, net of landlord reimbursements (11,242) (22,235) (34,695) (51,429)
Purchases of other assets 454 (1,135) 811 (3,389)
-------- -------- -------- --------
Net cash used in investing activities (10,446) (13,976) (33,922) (41,537)
-------- -------- -------- --------
Financing Activities:
Proceeds from the sale of common stock and put options, net 199 783 1,237 2,717
Repurchase of common stock (1,494) (9,252) (4,430) (20,879)
Tenant allowances collected 2,885 500 7,233 612
-------- -------- -------- --------
Net cash provided by (used in) financing activities 1,590 (7,969) 4,040 (17,550)
-------- -------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (108) (69) (108) (69)
Increase (Decrease) in Cash and Cash Equivalents (2,630) (15,503) (5,146) (38,030)
Cash and Cash Equivalents, beginning of period 14,347 31,094 16,863 53,621
-------- -------- -------- --------
Cash and Cash Equivalents, end of period $ 11,717 $ 15,591 $ 11,717 $ 15,591
======== ======== ======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ -- $ -- $ -- $ --
Income taxes 308 888 2,411 1,836
</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
OCTOBER 3, 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 10k 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.
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.
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.
(2) NET INCOME PER SHARE
Statement of Financial Accounting Standard (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.
(3) PREOPENING COSTS
During fiscal 1998, the Company elected the early adoption of AICPA Statement of
Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP
No. 98-5 requires companies to expense as incurred all start-up and preopening
costs that are not otherwise capitalizable as long-lived assets. Preopening
costs for periods presented herein reflect costs that were expensed as incurred.
In addition, the consolidated statement of operations for the forty weeks ended
October 4, 1999 has been restated to reflect, as a one time charge, the
cumulative effect of this change in accounting principle, net of income tax
benefit.
5
<PAGE> 7
(4) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation and to improve comparability with other restaurant entities.
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 November 16, 1999, the Company owned
and operated 27 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 revenue consists primarily of sales from its restaurant and retail
operations that are combined within each of the Company's Units. Comparable Unit
sales include the sales of units open for the full period of each period being
compared. New Units enter the comparable sales base at the beginning of the
nineteenth month of operation. As of November 16, 1999, the Company has opened
two additional domestic Units during the fourth quarter of 1999. No additional
Units are planned for the remainder of 1999. Because the Company anticipates
continued expansion, period to period comparisons may not be meaningful.
In addition to operations in the United States, the Company has pursued
international growth opportunities through licensing arrangements. The Company
has entered into seven exclusive license agreements to 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 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. All agreements, with the
exception of the agreement relating to the United Kingdom and Ireland, 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 Canadian development is a 50/50 joint venture
with the Elephant and Castle Group located in Vancouver, Canada. In addition,
during the third quarter of 1999, the Company purchased a beneficial ownership
of a 75% equity interest in Yorkdale Rainforest Restaurant, Inc. (a Canadian
federal corporation) which owns 100% of the Unit in the Yorkdale Shopping Centre
located in North York, Ontario, Canada. Elephant and Castle is the beneficial
owner of the 25% minority interest in Yorkdale Rainforest Restaurant, Inc.. The
results of this entity are consolidated with the Company's other wholly-owned
and majority owned subsidiaries. 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 20% equity in the
6
<PAGE> 8
Unit opened in Hong Kong. The Company believes no additional licensed Units will
be opened during fourth quarter of 1999.
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. 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 will 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 Thirty-nine Forty
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 3, 1999 October 4, 1998 October 3, 1999 October 4, 1998
--------------- --------------- --------------- ---------------
Revenues:
<S> <C> <C> <C> <C>
Restaurant sales 80.4% 77.0% 79.0% 77.0%
Retail sales 18.3 21.9 19.6 22.2
Licensing fees and royalties 1.3 1.1 1.3 .8
------- ---------- -------- ------
Total revenues 100.0 100.0 100.0 100.0
======= ========== ======== ======
Costs and Expenses:
Food and beverage costs (1) 23.7 23.4 23.5 23.6
Cost of retail goods sold (2) 47.6 46.2 47.4 45.3
Restaurant operating expenses (1) 54.0 51.5 54.8 51.8
Retail operating expenses (2) 38.7 33.3 37.1 32.6
Depreciation and amortization (3) 7.0 5.7 7.0 5.8
Preopening expenses (3) 1.4 5.4 1.6 4.5
Total costs and expenses 86.6 86.2 86.9 85.5
Income from Unit Operations and Licensing 13.4 13.8 13.1 14.5
------- ---------- -------- ------
Other (Income) Expense:
General, administrative and development 5.9 5.6 6.0 5.9
Interest Income (.7) (1.9) (1.1) (3.2)
Equity in earnings of unconsolidated subsidiaries .5 .0 .4 .1
------- ---------- -------- ------
Total other (income) expense 5.8 3.7 5.3 2.8
------- ---------- -------- ------
Income before Income Taxes and Cumulative Effect
of Change in Accounting Principle 7.6 10.2 7.8 11.7
Provision for income taxes 2.6 3.5 2.7 4.0
------- ---------- -------- ------
Income before Cumulative Effect of Change in
Accounting Principle 5.0 6.7 5.1 7.7
Cumulative Effect of Change in Accounting
Principle -- -- -- 2.5
------- ---------- -------- ------
Net Income 5.0% 6.7% 5.1% 5.2%
======= ========== ======== ======
</TABLE>
(1) Percentage of restaurant sales
(2) Percentage of retail sales
(3) Percentage of unit sales
8
<PAGE> 10
Results of operations for the quarter ended October 3, 1999, reflect the
operations of twenty-one mall Units and four freestanding Units open during the
quarter. No Units were opened during the quarter ended October 3, 1999.
THIRTEEN WEEKS ENDED OCTOBER 3, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED
OCTOBER 4, 1998.
REVENUES
Total revenues increased 29% to $72.2 million for the thirteen-week period ended
October 3, 1999 from $56.0 million for the thirteen weeks ended October 4, 1998.
The increase in revenues is primarily due to the addition of seven domestic
Rainforest Cafe Units, which contributed $16.5 million for the third 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 $3.0 million, or 7.4%,
for the third quarter of 1999 compared to the third 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 77.0% for the
third quarter of 1998 to 80.4% for the comparable period in 1999. The increase
in the percentage of restaurant sales in the third quarter of 1999 is primarily
due to the comparable retail sales for the quarter declining 11.7%, while
restaurant comparable third quarter sales declined 6.2%.
Retail sales decreased as a percentage of total revenues from 21.9% for the
third quarter in 1998 to 18.3% for the comparable period in 1999. The decrease
in the percentage of retail sales in the third quarter is primarily due to a 57%
decrease in the sale of Beanie Babies. Beanie Babies as a percentage of retail
sales was 7.3% for the third quarter of 1999 compared to 18.3% for the
comparable period in 1998. The decrease in Beanie Babies sales was primarily due
to fewer shipments from the manufacturer in the third quarter of 1999 compared
to 1998 and the announcement from the manufacturer that this product line will
be discontinued at the end of 1999. Comparable retail sales, excluding Beanie
Babies, for those Units open more than 18 months increased 2.9% for the thirteen
weeks ended October 3, 1999 compared to the same period in 1998.
Licensing fees and royalties increased $.3 million, or 53%, for the thirteen
weeks ended October 3, 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 October 3, 1999 compared to 1.1% 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.
However, the royalties received from the International Unit located in North
York, Ontario, Canada are not included in licensing fees and royalties as this
Unit is 75% owned by the Company and as such the intercompany royalty payment
amount is eliminated upon consolidation.
9
<PAGE> 11
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 36% to $13.8 million for the third quarter of
1999 compared to $10.1 million for the comparable period of 1998. The increase
in food and beverage costs was primarily due to Unit expansion. Food and
beverage costs increased as a percentage of restaurant sales from 23.4% in the
third quarter of 1998 to 23.7% for the comparable period in 1999. This slight
increase was primarily due increased sales promotions and discount offers.
Cost of retail goods sold increased 11% to $6.3 million for the third quarter of
1999 compared to $5.7 million for the third 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 46.2% in the third
quarter of 1998 to 47.6% 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 promotional discounts for the third quarter of 1999 compared
to the comparable period in 1998.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 41% and 25%, respectively,
from the third 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
51.5% in the third quarter of 1998 to 54.0% in the third quarter of 1999. The
increase in restaurant operating expenses 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 13.3% for the thirteen weeks ended October 3, 1999 versus
12.2% 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 33.3%
in the third quarter of 1998 to 38.7% in the third quarter of 1999. The increase
in retail operating expenses in the third quarter of 1999 as a percentage of
retail sales is primarily due to retail operating expenses increasing 25% for
the third quarter of 1999 versus the same period in 1998 while retail sales
increased only 8% for those same periods. As a percentage of retail sales,
retail occupancy costs increased to 13.7% for the thirteen weeks ended October
3, 1999 versus 12.3% for the comparable quarter.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 56% to $5.0 million in the third quarter
of 1999 compared to $3.2 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 third quarter of 1999 from 5.7% 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 October 3, 1999
compared to the same period in 1998 while depreciation and amortization remained
constant.
10
<PAGE> 12
PREOPENING EXPENSES
Preopening expenses decreased 66% from $3.0 million in the third quarter of 1998
to $1.0 million in the same period of 1999. Preopening expenses decreased as a
percentage of restaurant and retail sales from 5.4% for the third quarter of
1998 to 1.4% for the third quarter of 1999. The decrease in preopening expenses
as a percentage of sales for the third quarter is primarily due to no Units
being opened during the third quarter of 1999 and only two Units planned for the
fourth quarter of 1999 compared to three Units being opened in both the third
and fourth quarter of 1998. Also, the average preopening costs incurred to date
for the four malls Units that opened in 1999 averaged approximately $685,000
compared to approximately $800,000 for the mall Units opened during 1998.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 35% to $4.3 million
for the third 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 increases in the number of corporate employees and expansion of
marketing and promotional efforts. General, administrative and development
expenses as a percentage of revenues increased to 5.9% in the third quarter of
1999 from 5.6% for the same period in 1998.
INTEREST INCOME
Interest income of $.5 million and $1.1 million for the third 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 investing $71.5
million, net of landlord contributions, of property, equipment and leasehold
improvement purchases to develop new Units since the third quarter of 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
For the thirteen weeks ended October 3, 1999 the Company recognized losses of
$.4 million for equity in earnings of unconsolidated subsidiaries compared to
approximately no equity earnings for the comparable period in 1998. The loss was
primarily due to the closing of a subsidiary that was formed to import retail
apparel.
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 third 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.
11
<PAGE> 13
THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 COMPARED TO THE FORTY WEEKS ENDED
OCTOBER 4, 1998.
REVENUES
Total revenues increased 29% to $199.5 million for the thirty-nine week period
ended October 3, 1999 from $154.5 million for the forty weeks ended October 4,
1998. The increase in revenues is primarily due to the addition of seven
domestic Rainforest Cafe Units, which contributed $38.4 million for the three
quarters ended October 3, 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
$16.7 million, or 10.0%, for the thirty-nine weeks ended October 3, 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
forty weeks ended October 4, 1998 to 79.0% for the comparable period in 1999.
The increase in the percentage of restaurant sales in the first thirty-nine
weeks in 1999 is primarily due to the comparable retail sales declining 12.8%,
while restaurant comparable thirty-nine week sales declined 9.2%.
Retail sales decreased as a percentage of total revenues from 22.2% for the
forty weeks ended October 4, 1998 to 19.6% for the comparable period in 1999.
The decrease in the percentage of retail sales in the third quarter is primarily
due to the large decrease in the sale of Beanie Babies during the second and
third quarters of 1999. This decrease in Beanie Baby sales was primarily due to
fewer shipments from the manufacturer during the second and third quarter of
1999 as well as the manufacturer announcing that it plans to discontinue this
product line at the end of 1999. Comparable retail sales, excluding Beanie
Babies, for those Units open more than 18 months decreased 6.5% for the
thirty-nine weeks ended October 3, 1999 compared to the same period in 1998.
Licensing fees and royalties increased $1.5 million, or 122%, for the
thirty-nine weeks ended October 3, 1999 compared to the comparable period in
1998. Licensing fees and royalties increased as a percentage of revenue to 1.3%
for the thirty-nine weeks ended October 3, 1999 compared to .8% for the same
period in 1998. The increase was due to ten international Units being open at
October 3, 1999 compared to only four Units as of October 4, 1998.
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 32% to $37.0 million for the thirty-nine weeks
ended October 3, 1999 compared to $28.0 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 for the thirty-nine weeks ended October 3, 1999 compared to the
comparable period in 1998.
Cost of retail goods sold increased 19% to $18.5 million for the thirty-nine
weeks ended October 3, 1999 compared to $15.6 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 45.3% in the forty week period ended October 4, 1998 to 47.4% 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
12
<PAGE> 14
retail promotional discounts for the thirty-nine weeks ended October 3, 1999
compared to the comparable period in 1998.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 40% and 30%, respectively,
from the forty weeks ended October 4, 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
51.8% in the forty weeks ended October 4, 1998 to 54.8% for the comparable
period of 1999. The increase in restaurant operating expenses as a percentage of
restaurant sales is primarily due to increased promotional and marketing
expenses and decreased comparable Unit sales, which caused fixed restaurant
operating expenses, including occupancy, to increase as a percentage of sales.
Retail operating expenses as a percentage of retail sales increased from 32.6%
in the forty weeks ended October 4, 1998 to 37.1% for the thirty-nine weeks
ended October 3, 1999. The increase in retail operating expenses as a percentage
of retail sales is primarily due to decreased comparable Unit retail sales,
which caused fixed retail operating expenses to increase as a percentage of
sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 56% to $13.8 million in the thirty-nine
weeks ended October 3, 1999 compared to $8.8 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 thirty-nine weeks ended October 3, 1999
from 5.8% for the same period in 1998. The primary reason for the increase in
these expenses for the thirty-nine weeks ended October 3, 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 54% from $6.9 million in the forty weeks ended
October 4, 1998 to $3.2 million in the same period of 1999. Preopening expenses
decreased as a percentage of restaurant and retail sales from 4.5% for the forty
weeks ended October 4, 1998 to 1.6% for the thirty-nine weeks ended October 3,
1999. The decrease in preopening expenses as a percentage of sales for the third
quarter is primarily due to six Units being constructed in 1999 versus eight
Units in 1998 as well as preopening expenses per Unit decreasing 15% for those
Units opened in 1999 compared to those opened in 1998.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 31% to $12.0 million
for the thirty-nine weeks ended October 3, 1999 compared to $9.2 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 the marketing department. General, administrative and
development expenses remained fairly consistent with percentage of revenue at
6.0% and 5.9%, respectively, for the thirty-nine weeks ended October 3, 1999 and
the forty weeks ended October 4, 1998.
13
<PAGE> 15
INTEREST INCOME
Interest income of $2.2 million and $5.0 million for the thirty-nine weeks ended
October 3, 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 investing $71.5 million, net of landlord
contributions, of property, equipment and leasehold improvement purchases to
develop new Units since the quarter ended October 4, 1998.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES
For the thirty-nine weeks ended October 3, 1999, the Company recognized losses
of $.7 million for equity in earnings of unconsolidated subsidiaries compared to
losses of $.2 million for the comparable period in 1998. The loss was primarily
due to the closing of a subsidiary that was formed to import retail apparel
during third quarter of 1999 and the write-down of its inventory during second
quarter of 1999.
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 thirty-nine weeks ended October 3, 1999
was increased to 34.7% from 34% for the same period of 1998. The increase
reflects an effective rate increase for the second and third quarter of 1999 to
35% compared to 34% in the first quarter of 1999 and the first three 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 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 thirty-nine-weeks ended October 3, 1999 and the forty weeks
ended October 4, 1998:
<TABLE>
<CAPTION>
(Dollar Amounts in Millions) Period Ended
------------
October 3, 1999 October 4, 1998
---------------- ---------------
<S> <C> <C>
Cash and marketable securities on hand, end of period $ 40.4 $ 59.2
Net working capital, end of period $ 27.9 $ 51.7
Current ratio, end of period 2.6 to 1 4.2 to 1
Long-term debt, end of period $ --- $ ---
Cash provided by operations $ 24.8 $ 21.1
Capital expenditure $ 34.7 $ 51.4
</TABLE>
14
<PAGE> 16
The Company generated cash flow from operating activities of $24.8 million for
the thirty-nine weeks ended October 3, 1999 compared to $21.1 million for the
forty weeks ended October 4, 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 thirty-nine weeks ended October 3, 1999, the Company generated
approximately $1.1 million from the sale of put options compared to
approximately $1.8 million for the comparable forty week period in 1998. At July
5, 1999, put options which may require the purchase of approximately 2.1 million
shares of the Company's Common Stock, were outstanding at exercise prices
ranging from $5.00 to $7.00 per share, with a weighted average exercise price of
$5.72. 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.
For the thirty-nine weeks ended October 3, 1999, 640,300 shares of Common Stock
were repurchased through put option assignments and open market purchases at a
cost of $4.4 million compared with 1,653,000 shares repurchased through put
option assignment and open market purchases in the same period of 1998 at a cost
of $20.9 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 $790,000 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
concessions will be available in the future.
The Company anticipates 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.
15
<PAGE> 17
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.
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.
INTERNAL BUSINESS INFORMATION AND ACCOUNTING SYSTEMS
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 and
installed for non-compliant systems to ensure that such software will be Year
2000 compliant. Presently, all internal Year
16
<PAGE> 18
2000 compliance initiatives are on schedule. The installation of a compliant
finance and human resources application suite was completed and in production at
October 3, 1999. All Unit software applications and associated hardware Year
2000 upgrades are completed.
COMMUNICATIONS WITH VENDORS, SUPPLIERS, AND VENDORS
The Company had requested and has received written responses from all of 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 by December 31,
1999. For those vendors that have not responded, the Company does not believe
that failure of such vendors to be Year 2000 compliant will have a material
adverse impact on the Company's operations.
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 the costs of becoming Year 2000 Compliant will be
$120,000. However, the estimated costs relating to the resolution of the
Company's Year 2000 compliance issues are based on management's best assumptions
that the Company's review and remediation to become Year 2000 compliant will be
successful. 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 final stages of developing an operational contingency plan
to address any unavoidable Year 2000 issues. Although the Company expects to
have the plan substantially completed during 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
17
<PAGE> 19
existing management, general economic conditions, changes in federal or state
laws or regulations and unanticipated results of litigation.
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 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 3, 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: November 16, 1999 /s/ Kenneth Brimmer
---------------------------------------
Kenneth Brimmer
President
Date: November 16, 1999 /s/ Mark S. Robinow
---------------------------------------
Mark S. Robinow
Chief Financial Officer
(Principal Financial Officer)
19
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JAN-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 11,717
<SECURITIES> 28,677
<RECEIVABLES> 11,839
<ALLOWANCES> 0
<INVENTORY> 10,668
<CURRENT-ASSETS> 45,626
<PP&E> 189,974
<DEPRECIATION> 0
<TOTAL-ASSETS> 265,416
<CURRENT-LIABILITIES> 17,692
<BONDS> 0
0
0
<COMMON> 183,651
<OTHER-SE> 219,094
<TOTAL-LIABILITY-AND-EQUITY> 265,416
<SALES> 199,502
<TOTAL-REVENUES> 199,502
<CGS> 55,572
<TOTAL-COSTS> 117,849
<OTHER-EXPENSES> 10,489
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 15,592
<INCOME-TAX> 5,416
<INCOME-CONTINUING> 10,176
<DISCONTINUED> 0
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<EPS-BASIC> .42
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