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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 2, 2000
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 15, 2000: 22,531,809
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RAINFOREST CAFE, INC.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
July 2, January 2,
(In Thousands) 2000 2000
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,825 $ 11,480
Marketable securities available-for-sale 1,375 23,957
Accounts receivable and other 6,177 8,027
Income tax receivable 4,886 --
Inventories 8,579 9,043
Deferred income taxes -- 10,198
Note receivable from related party 1,777 1,721
Prepaid expenses and other 2,530 2,986
----------- -----------
Total current assets 41,149 67,412
Property, Equipment and Leasehold Improvements, net 107,119 186,042
Other Assets 3,557 8,262
----------- -----------
Total Assets $ 151,825 $ 261,716
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,743 $ 4,397
Accrued liabilities-
Payroll and payroll taxes 5,411 2,492
Other 9,630 7,282
----------- -----------
Total current liabilities 17,784 14,171
Deferred Occupancy Costs 29,216 27,434
Deferred Income Tax -- 9,385
----------- -----------
Total liabilities 47,000 50,990
Minority Interest 810 1,168
Put Options 1,213 7,166
Commitments and Contingencies
Shareholders' Equity:
Common stock, no par value, 50,000 shares authorized;
22,503 and 24,237 issued and outstanding 172,859 171,321
Retained earnings (70,057) 33,137
Cumulative other comprehensive loss -- (2,066)
----------- -----------
Total shareholders' equity 102,802 202,392
----------- -----------
Total Liabilities and Shareholders' Equity $ 151,825 $ 261,716
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Thirteen Twenty-six Twenty-six
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
July 2, July 4, July 2, July 4,
(In Thousands) 2000 1999 2000 1999
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Operating Activities:
Net income (loss) $(101,601) $ 3,884 $(103,176) $ 6,596
Adjustments to reconcile net income (loss) to net cash
flows from operating activities-
Depreciation and amortization 6,106 4,873 11,907 9,494
Amortization of deferred occupancy costs and other 301 (48) 921 (16)
Impairment and store closure charge 101,540 -- 101,540 --
Equity in loss of unconsolidated affiliates 24 176 226 339
Loss on sale of investments 3,662 -- 3,662 --
Deferred income tax 813 -- 813 --
Change in operating assets and liabilities-
Accounts receivable and other 91 2,388 (880) 170
Inventories 417 770 464 901
Prepaid expenses and other (850) (216) (1,567) (1,217)
Accounts payable 1,169 (2,519) (1,654) (2,740)
Accrued liabilities 529 1,242 2,917 3,369
Income taxes (5,871) 1,614 (4,886) 1,614
----------- ----------- ---------- -----------
Net cash provided by operating activities 6,330 12,164 10,287 18,510
----------- ----------- ---------- -----------
Investing Activities:
Proceeds from sales of available-for-sale investments 19,957 8,616 31,155 17,924
Purchases of available-for-sale investments (315) (13,754) (10,188) (18,304)
Purchases of furniture, equipment and leasehold
improvements, net of landlord reimbursements (9,705) (12,682) (22,711) (23,453)
Other (391) 600 (458) 357
----------- ----------- ---------- -----------
Net cash provided by (used in) investing activities 9,546 (17,220) (2,202) (23,476)
----------- ----------- ---------- -----------
Financing Activities:
Proceeds from the sale of common stock and put options, net 71 241 236 1,038
Repurchase of common stock (1,385) (2,007) (4,650) (2,936)
Tenant allowances collected (384) 2,300 674 4,348
----------- ----------- ---------- -----------
Net cash provided by (used in) financing activities (1,698) 534 (3,740) 2,450
----------- ----------- ---------- -----------
Increase (Decrease) in Cash and Cash Equivalents 14,178 (4,522) 4,345 (2,516)
Cash and Cash Equivalents, beginning of period 1,647 18,869 11,480 16,863
----------- ----------- ---------- -----------
Cash and Cash Equivalents, end of period $ 15,825 $ 14,347 $ 15,825 $ 14,347
=========== =========== ========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Income taxes $ 1,212 $ 2,091 $ 1,224 $ 2,103
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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RAINFOREST CAFE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 2, 2000
(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 2, 2000. 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 December 31, 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) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year's presentation and to improve comparability with other restaurant entities.
(3) IMPAIRMENT AND STORE CLOSURE CHARGE
During the second quarter of 2000, Mall Unit same store sales continued to
decline. As a result, the Company re-evaluated its future operating results for
these Units. This re-evaluation led to the Company recording a $98.8 million
charge relating to the impairment of long-lived assets of 22 Mall Units and a
store closing charge of $2.7 million to exit the Company's Unit at the Aventura
Mall in Miami, Florida. Projected cash flows for certain Mall Units was
insufficient to justify the book value of the long-lived assets for these Units.
An impairment was recognized as the future undiscounted cash flows or appraised
values were estimated to be insufficient to recover the related carrying value
of these long-lived assets. As a result, the carrying value of these assets were
written down to their estimated fair values based on these criterias. The store
closing charge represents landlord exit payment, tenant concession
reimbursement, severance payments, legal and deconstruction costs related to the
exit of the Aventura Unit.
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(4) CHANGE OF CONTROL AGREEMENTS AND POLICIES
During the second quarter of 2000, the Company entered into various change of
control agreements with certain executive officers of the Company and adopted a
Change of Control Policy for all corporate level support employees. With respect
to the Change of Control Agreements for the Company's executive officers, the
agreements generally provide that if there is a "change of control" of the
Company and the executive is terminated within two years following the change of
control either (i) "without cause," or (ii) through "constructive termination,"
such executive is entitled to receive a lump sum payment equal to (a) two years
base salary and (b) six months of such executive's benefits. Twelve executive
employees, including Stephen Schussler and Ercu Ucan, Directors of the Company,
are covered by these agreements. The agreement, with respect to Lyle Berman, the
Company's Chairman and Chief Executive Officer, is identical to the other
executive Change of Control Agreements except that Mr. Berman would be entitled
to a lump sum payment of three years base salary, as opposed to two years, in
addition to six months of benefits.
The Company also adopted for its corporate level employees a Change of Control
Policy that provides that all corporate level employees who have been employed
with Rainforest Cafe for less than two years, shall receive a lump sum payment
equal to (a) six months salary and (b) six months of such employee's benefits if
such employee's employment is terminated within two years following a change of
control and such termination was (i) "without cause" or (ii) through
"constructive termination." In the case of corporate level employees employed
more than two years with the Company or who are in a director level position of
the Company, such employee is entitled to receive a lump sum payment equal to
(a) one year salary and (b) six months of benefits.
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 15, 2000, the Company owned and
operated 30 Units in the United States and licensed twelve 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.
In addition to operations in the United States, the Company has pursued
international growth opportunities through licensing arrangements. The Company
has entered into nine exclusive license agreements to develop up to 29 Units, of
which twelve are currently open, over the next ten years in the United Kingdom
and Ireland, Mexico, Canada, France, and certain cities and countries in Asia.
These agreements have 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
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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 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 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
Unit opened in Hong Kong. The Company believes two additional licensed Units
will be opened during 2000.
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.
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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-six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales 82.0 % 79.2 % 82.0 % 78.3 %
Retail sales 17.3 19.5 17.2 20.3
Licensing fees and royalties .7 1.3 .7 1.4
------------ ------------ ------------ ------------
Total revenues 100.0 100.0 100.0 100.0
============ ============ ============ ============
Costs and Expenses:
Food and beverage costs (1) 23.9 23.6 23.8 23.4
Cost of retail goods sold (2) 49.9 44.7 49.0 47.2
Restaurant operating expenses (1) 61.0 55.9 61.9 56.7
Retail operating expenses (2) 37.7 30.7 38.7 30.5
Impairment and store closure (3) 149.1 -- 78.8 --
Depreciation and amortization (3) 8.2 6.8 8.6 7.0
Preopening expenses (3) 2.1 1.8 1.8 1.7
------------ ------------ ------------ ------------
Total costs and expenses (3) 244.7 87.3 175.2 88.3
------------ ------------ ------------ ------------
Income (loss) from Unit Operations and Licensing (143.0) 13.9 (73.9) 12.9
------------ ------------ ------------ ------------
Other (Income) Expense:
General, administrative and development 6.6 6.1 6.6 6.1
Interest Income (.7) (1.3) (.8) (1.4)
Loss on sale of investments 5.3 -- 2.8 --
Transaction costs .2 -- .8 --
Equity in loss of unconsolidated affiliates -- .3 .2 .3
------------ ------------ ------------ ------------
Total other (income) expense 11.4 5.0 9.6 5.0
------------ ------------ ------------ ------------
Income (Loss) before Income Taxes (154.4) 8.8 (83.5) 7.9
Provision for Income Taxes (6.3) 3.1 (4.0) 2.7
------------ ------------ ------------ ------------
Net Income (Loss) (148.1) % 5.8 % (79.5) % 5.2 %
============ ============ ============ ============
</TABLE>
(1) Percentage of restaurant sales
(2) Percentage of retail sales
(3) Percentage of restaurant and retail sales
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Results of operations for the quarter ended July 2, 2000, reflect the operations
of twenty-five Mall Units and five Icon Units open during the quarter. The Unit
at Opry Mills in Nashville, Tennessee and the Unit at the Fisherman's Wharf in
San Francisco, California were open for 53 days and 13 days, respectively,
during the second quarter of 2000.
THIRTEEN WEEKS ENDED JULY 2, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED JULY 4,
1999.
REVENUES
Total revenues increased 2% to $68.6 million for the thirteen week period ended
July 2, 2000 from $67.5 million for the thirteen weeks ended July 4, 1999. The
increase in revenues is primarily due to the addition of five domestic
Rainforest Cafe Units, which contributed $7.4 million for the second quarter of
2000. The increase in revenues was partially offset by a decrease in sales of
the comparable store sales base consisting of eighteen Units open more than 18
months. These Units experienced a decrease in sales of $6.4 million, or 12.7%,
for the second quarter of 2000 compared to the second quarter of 1999. 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.
Comparable store sales for the Company's Mall and Icon Units declined 19.1% and
5.4%, respectively, for the quarter ended July 2, 2000. Due to the continued
decline in Mall Unit comparable sales, the Company is no longer planning
expansion in shopping malls. All future expansion will be at tourist locations
and will be larger Icon Units such as the Unit planned for Disneyland Resorts in
Anaheim, California. The Company is currently reviewing all of its options at
some of its under-performing Mall Units, which may include Unit closure similar
to the Aventura Unit closing expected to be completed by August 31, 2000 (see
Item 1, Impairment and Store Closure Charge).
Restaurant sales as a percentage of total revenue increased from 79.2% for the
second quarter of 1999 to 82.0% for the comparable period in 2000. The increase
in the percentage of restaurant sales in the second quarter of 2000 is primarily
due to the comparable retail sales for the quarter declining 20.5%, while
restaurant comparable second quarter sales declined 10.6%.
Retail sales decreased as a percentage of total revenues from 19.5% for the
second quarter in 1999 to 17.3% for the comparable period in 2000. The decrease
in the percentage of retail sales in the second quarter is primarily due to an
83% decrease in the sale of Beanie Babies. Beanie Babies as a percentage of
retail sales was 2% for the second quarter of 2000 compared to 11% for the
comparable period in 1999. Comparable retail sales, excluding Beanie Babies, for
those Units open more than 18 months decreased 12.6% for the thirteen weeks
ended July 2, 2000 compared to the same period in 1999.
Licensing fees and royalties decreased $363,000, or 42%, for the thirteen weeks
ended July 2, 2000 compared to the comparable period in 1999. Licensing fees and
royalties decreased as a percentage of revenue to .7% for the thirteen weeks
ended July 2, 2000 compared to 1.3% for the same period in 1999. The decrease
was due to lower International Unit sales. In addition, certain royalty
arrangements were amended to lower the royalty amounts for four struggling
International Units. The royalties received from
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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.
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 6% to $13.4 million for the second quarter of
2000 compared to $12.6 million for the comparable period of 1999. 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 23.6% in the
second quarter of 1999 to 23.9% for the comparable period in 2000. The increase
was primarily due to the write-off of certain discontinued food items that
became obsolete upon the Company changing certain menu items.
Cost of retail goods sold increased 1% to $5.9 million for the second quarter of
2000 compared to $5.9 million for the second quarter of 2000. The increase in
cost of retail goods sold was primarily due to an increase in promotional and
discount offers and the Company taking certain seasonal permanent markdowns in
June of 2000 compared to July in the previous year. As a result, cost of retail
goods sold increased as a percentage of retail sales from 44.7% in the second
quarter of 1999 to 49.9% for the comparable period in 2000.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 15% and 11%, respectively,
from the second quarter of 1999 to the comparable period in 2000. 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
55.9% in the second quarter of 1999 to 61.0% in the second quarter of 2000. The
increase in restaurant operating expenses for both comparable periods as a
percentage of restaurant sales is primarily due to diminishing utilization of
fixed management salaries and other fixed costs at Units which experienced sales
declines over the comparable period from the prior year.
Retail operating expenses as a percentage of retail sales increased from 30.7%
in the second quarter of 1999 to 37.7% in the second quarter of 2000. The
increase in retail operating expenses in the second quarter of 2000 as a
percentage of retail sales is due to the same factors that affected restaurant
expenses as noted above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 24% to $5.6 million in the second
quarter of 2000 compared to $4.5 million for the comparable period in 1999. 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 8.2% for the second quarter of 2000 from 6.8% for the same period
in 1999. The increase in these expenses as a percentage of sales is due to
capital improvements in existing Units and decreased comparable store sales in
certain Units.
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IMPAIRMENT AND STORE CLOSURE
The Company recorded a $101.5 million asset impairment and store closing charge
during the second quarter of 2000 (See Item 1, Impairment and Store Closing
Charge).
PREOPENING EXPENSES
Preopening expenses increased 18% from $1.2 million in the second quarter of
1999 to $1.4 million in the same period of 2000. Preopening expenses increased
as a percentage of restaurant and retail sales from 1.8% for the second quarter
of 1999 to 2.1% for the second quarter of 2000. The increase as a percentage of
sales for the second quarter is primarily due to opening one Icon Unit and one
Mall Unit in the second quarter of 2000 compared with opening two Mall Units in
the comparable quarter of 1999.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 10% to $4.5 million
for the second quarter of 2000 compared to $4.1 million for the comparable
period of 1999. The increase in general administrative and development expenses
was due primarily to the development of marketing and loyalty programs. General,
administrative and development expenses as a percentage of revenues increased to
6.6% in the second quarter of 2000 from 6.1% for the same period in 1999.
INTEREST INCOME
Interest income of $453,000 and $885,000 for the second quarter of 2000 and
1999, respectively, was generated primarily by investing the proceeds from the
available funds. The decrease in interest income is primarily due to $35.6
million, net of landlord contributions, of property, equipment and leasehold
improvement purchases to develop new Units since the second quarter of 1999.
LOSS ON SALE OF INVESTMENTS
During the second quarter of 2000, the Company sold most of its
available-for-sale securities which resulted in a realized loss of $3.7 million.
The sale of these securities was to reduce market risks associated with its
investment portfolio. The Company has reinvested most of these funds in
short-term investments or cash equivalents, which are generally comprised of
securities with maturity dates or redemption dates of less than twelve months or
three months, respectively.
INCOME TAXES
The effective tax benefit for second quarter of 2000 was $4.4 million, or 4.1%
of the loss before income tax benefit, compared to an income tax provision of
$2.1 million, or an effective tax rate of 35% for the same quarter in 1999. The
income tax benefit represents amounts expected to be recovered from the prior
two years income taxes paid based on the Company's expected taxable net
operating loss for 2000. No additional benefit was recorded as a deferred tax
asset valuation allowance was established due to the uncertainty of realizing
certain tax credit and loss carryforwards.
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TWENTY-SIX WEEKS ENDED JULY 2, 2000 COMPARED TO THE TWENTY-SIX WEEKS ENDED JULY
4, 1999.
REVENUES
Total revenues increased 2% to $129.8 million for the twenty-six week period
ended July 2, 2000 from $127.3 million for the twenty-six weeks ended July 4,
1999. The increase in revenues is primarily due to the addition of five domestic
Rainforest Cafe Units, which contributed $12.1 million for the first and second
quarter of 2000. Also, four domestic Units which were only open for a portion of
the first two quarters in 1999, compared to the full two quarters of 2000, had
an increase in revenues of $5.1million. The increase in revenues was offset by a
decrease in sales of the comparable store sales base consisting of eighteen
Units open more than 18 months. These Units experienced a decrease in sales of
$13.1 million, or 12.6%, for the twenty-six weeks ended July 2, 2000 compared to
the comparable period of 1999.
Restaurant sales as a percentage of total revenue increased from 78.3% for the
twenty-six weeks ended July 4, 1999 to 82.0% for the comparable period in 2000.
The increase in the percentage of restaurant sales in the first twenty-six weeks
in 2000 is primarily due to the comparable retail sales declining 22.6%, while
restaurant comparable twenty-six week sales declined 9.8%.
Retail sales decreased as a percentage of total revenues from 20.3% for the
twenty-six weeks ended July 4, 1999 to 17.2% for the comparable period in 2000.
The decrease in the percentage of retail sales in the second quarter is
primarily due to an 85% decrease in the sale of Beanie Babies. Beanie Babies as
a percentage of retail sales was 3.2% for the first and second quarter of 2000
compared to 17.1% for the comparable period in 1999. Comparable retail sales,
excluding Beanie Babies, for those Units open more that 18 months decreased
10.4% for the twenty-six weeks ended July 2, 2000 compared to the same period in
1999.
Licensing fees and royalties decreased $824,000, or 46%, for the twenty-six
weeks ended July 2, 2000 compared to the comparable period in 1999. Licensing
fees and royalties decreased as a percentage of revenue to .7% for the
twenty-six weeks ended July 2, 2000 compared to .1.4% for the same period in
1999. The decrease was due to lower International Unit sales as well as a
decrease in certain royalty arrangements for four struggling International
Units.
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 8.6% to $25.3 million for the twenty-six weeks
ended July 2, 2000 compared to $23.3 million for the comparable period of 1999.
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%
for the twenty-six weeks ended July 4, 1999 to 23.8% for the comparable period
in 2000. The increase was primarily due to the write-off of certain discontinued
food items that became obsolete upon the Company changing certain menu items.
Cost of retail goods sold decreased 10.3% to $11.0 million for the twenty-six
weeks ended July 2, 2000 from $12.2 million for the comparable period of 1999.
The decrease in cost of retail goods sold was primarily due to a decrease in
retail sales. Cost of retail goods sold increased as a percentage of retail
sales from 47.2% in the twenty-six week period ended July 4, 1999 to 49.0% for
the comparable period in 2000. The increase in cost of retail goods sold as a
percentage of retail sales was primarily due to an increase in retail discounts
and
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permanent markdowns for the twenty-six weeks ended July 2, 2000 compared to
the comparable period in 1999.
UNIT OPERATING EXPENSES
Restaurant and retail operating expenses increased 17% and 9%, respectively,
from the twenty-six weeks ended July 4, 1999 to the comparable period in 2000.
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
56.7% in the twenty-six weeks ended July 4, 1999 to 61.9% for the comparable
period of 2000. The increase in restaurant operating expenses as a percentage of
restaurant sales is primarily due to fixed Unit costs such as occupancy and
management salaries and decreased comparable Unit sales.
Retail operating expenses as a percentage of retail sales increased from 30.5%
in the twenty-six weeks ended July 4, 1999 to 38.7% for the twenty-six weeks
ended July 2, 2000. The increase in retail operating expenses as a percentage of
retail sales is primarily due to the same factors that affected restaurant
expenses as noted above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 25% to $11.0 million in the twenty-six
weeks ended July 2, 2000 compared to $8.8 million for the comparable period in
1999. 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 8.6% for the twenty-six weeks ended July 2, 2000 from
7.0% for the same period in 1999. The increase in these expenses as a percentage
of sales is due to a decrease in comparable Unit sales while depreciation and
amortization remained constant.
IMPAIRMENT AND STORE CLOSURE
The Company took a $101.5 million asset impairment and store closing charge
during the second quarter of 2000 (See Item 1, Impairment and Store Closing
Charge).
PREOPENING EXPENSES
Preopening expenses increased 9% from $2.1 million in the twenty-six weeks ended
July 4, 1999 to $2.3 million in the same period of 2000. Preopening expenses
remained relatively stable as a percentage of restaurant and retail sales for
the twenty-six weeks ended July 4, 1999 compared to the twenty-six weeks ended
July 2, 2000.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 10% to $8.5 million
for the twenty-six weeks ended July 2, 2000 compared to $7.7 million for the
comparable period of 1999. The increase in general administrative and
development expenses was due primarily to the increases in corporate employees
and development of marketing and loyalty programs. General, administrative and
development expenses as a
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percentage of revenues increased as a percentage of revenues from 6.1% for the
twenty-six weeks ended July 4, 1999 to 6.6 for the same period in 2000.
INTEREST INCOME
Interest income of $1.1 million and $1.8 million for the twenty-six weeks ended
July 2, 2000 and the comparable period of 1999, 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 $35.6 million, net of landlord contributions, of
property, equipment and leasehold improvement purchases to develop new Units
since the twenty-six weeks ended July 4, 1999.
LOSS ON SALE OF INVESTMENTS
During the second quarter of 2000, the Company sold most of its
available-for-sale securities which resulted in a realized loss of $3.7 million.
The sale of these securities was to reduce market risks associated with its
investment portfolio. The Company has reinvested most of these funds in
short-term investments or cash equivalents, which are generally comprised of
securities with maturity dates or redemption dates of less than twelve months or
three months, respectively.
TRANSACTION COSTS
On February 9, 2000, the Company announced that it had an agreement to merge
with Landry's Seafood Restaurants, Inc. On April 26, 2000, the two parties
mutually agreed to terminate the merger agreement. Costs associated with the
proposed merger of $1.1 million were charged to operations during the twenty-six
weeks ended July 2, 2000.
INCOME TAXES
The effective tax benefit for the twenty-six weeks ended July 2, 2000 was $5.2
million, or 4.8% of the loss before income taxes, compared to an income tax
provision of $3.5 million, or an effective tax rate of 35% for the twenty-six
weeks ended July 4, 1999. The income tax benefit represents amounts expected to
be recovered from the prior two years income taxes paid based on the Company's
expected taxable net operating loss for 2000. No additional benefit credit was
recorded as a deferred tax asset valuation allowance was established due to the
uncertainty of realizing certain tax credit and loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents a summary of the Company's key liquidity
measurements for the twenty-six-weeks ended July 2, 2000 and the twenty-six
weeks ended July 4, 1999:
<TABLE>
<CAPTION>
(Dollar Amounts in Millions) Period Ended
------------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Cash and marketable securities on hand, end of period $ 17.2 $ 44.0
Net working capital, end of period $ 23.4 $ 36.5
Current ratio, end of period 2.3 to 1 3.1 to 1
</TABLE>
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<TABLE>
<S> <C> <C>
Long-term debt, end of period $ --- $ ---
Cash provided by operations $ 10.3 $ 18.5
Capital expenditure $ 22.7 $ 23.5
</TABLE>
The Company generated cash flow from operating activities of $10.3 million for
the twenty-six weeks ended July 2, 2000 compared to $18.5 million for the
twenty-six weeks ended July 4, 1999. The Company believes that it will continue
to generate cash from operating activities and earn interest income, both of
which will be utilized for development of the Icon Unit at the Disneyland Resort
in Anahiem, California, and working capital purposes.
During the twenty-six weeks ended July 2, 2000, the Company generated $0 from
the sale of put options compared to approximately $1.0 million for the
comparable twenty-six week period in 1999. At July 4, 2000, put options which
may require the purchase of approximately 200,000 shares of the Company's Common
Stock, were outstanding at exercise prices ranging from $5.38 to $6.75 per
share, with a weighted average exercise price of $6.06. 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. As of August 14, 2000, the
Company is not planning on repurchasing any of it's stock, other than the
200,000 shares discussed above, for the remainder of the year.
For the twenty-six weeks ended July 2, 2000, 702,000 shares of Common Stock were
repurchased through put option assignments at a cost of $4.7 million compared
with 493,300 shares repurchased through put option assignment and open market
purchases in the same period of 1999 at a cost of $2.9 million.
The average investment to open the Company's twenty-one Mall Units was $5.8
million per Unit, net of landlord concessions, which averaged $1.7 million.
Additionally, the Company averaged approximately $740,000 in preopening expenses
and purchased an average of $235,000 of inventory in connection with the
openings. Total expenditures to develop the Company's five 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 development costs for the its Icon Unit at the Disneyland
Resorts in Anaheim, California to be approximately $21 million. In addition,
preopening costs are estimated to be approximately $1.1 million and inventory
purchases to be approximately $350,000 this Unit.
The Company contemplates that the development and opening of the Icon Unit at
the Disneyland Resort in Anahiem, California 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.
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. The Mall Units may also have higher fourth quarter revenues compared to
the first two quarters as a result of seasonal traffic increases at mall
locations seasonally stronger retail sales. Units at entertainment centers or
Disney theme parks may show fluctuations in accordance with any overall
seasonality at these locations.
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The primary inflationary factors affecting the Company's operations include
food, beverage and labor costs. Units in higher cost labor markets such as
California, New York and Nevada may experience lower operating margins than
Units located in lower cost labor markets. In addition, the Company's leases
require the Company to pay costs that are subject to inflationary increases,
such as base rent, taxes, maintenance, repairs and utilities. The Company
believes low inflation rates have contributed to relatively stable costs. There
is no assurance, however, that low inflation rates will continue.
FORWARD-LOOKING DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information included in this annual
report and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made by the Company)
contain statements that are forward-looking, such as statements relating to
plans for future expansion and other business development activities as well as
other capital spending, financial sources and the effects of competition. Such
forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to development and construction activities,
including delays in opening new Units, acceptance of the Rainforest Cafe
concept, the quality of the Company's restaurant and retail operations,
dependence on discretionary consumer spending, the Company's failure to defend
its intellectual property rights, dependence on existing management, general
economic conditions, changes in federal or state laws or regulations.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
SHAREHOLDER CLASS ACTION LITIGATION
The Company is a defendant from time to time in routine lawsuits incidental to
its business, which individually and in the aggregate, are not expected to have
any material adverse effect on the Company. In addition, the company is party to
the following:
IN RE: RAINFOREST CAFE, INC. SHAREHOLDERS' LITIGATION
The Company and certain directors are named as defendants in a purported class
action lawsuit, In re: Rainforest Cafe, Inc. Shareholders' Litigation. This is a
consolidation of three lawsuits, Billie Mack v. Lyle Berman, et al., Robert Fink
v. Rainforest Cafe, Inc., et al., and Heartland Group, Inc. v. Rainforest Cafe,
Inc., et al. filed on December 23, 1999, January 13, 2000 and March 27, 2000,
respectively. The actions were filed in Hennepin County District Court of
Minnesota, alleging that defendants breached their fiduciary duty and engaged in
unfair dealing to the detriment of the holders of Rainforest Cafe common stock
in connection with a proposed merger of the Company with Landry's. By order
dated June 12, 2000, the court dismissed the case with prejudice, but reserved
plaintiffs' claim for attorney fees. A hearing on the claim for attorney fees is
scheduled for August 16, 2000.
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Item 6. Exhibits and Reports on Form 8-K
A. Exhibits:
10.11 Change of Control Agreement Form between the Company and
Executives of the Company
10.12 Human Resources Change of Control Policy for All Corporate
Support Employees
27.1 Financial Data Schedule
B. Reports on Form 8-K:
During the quarter ended July 2, 2000, the Company filed six reports on
Form 8-K.
- On April 3, 2000 the Company filed a report on Form 8-K announcing its
projected sales for fiscal 2000. The report included, as exhibits, (i) the
press release issued by Rainforest Cafe, Inc. announcing the projected
sales for 2000.
- On April 5, 2000 the Company filed a report on Form 8-K announcing that a
leading independent proxy firm recommends vote for the proposed merger with
Landry's Seafood Restaurants, Inc. The report included, as exhibits, (i)
the press release issued by Rainforest Cafe, Inc. announcing that
Institutional Shareholder Services recommends shareholders to vote for the
proposed merger with Landry's Seafood Restaurants, Inc.
- On April 18, 2000 the Company filed a report on Form 8-K announcing that it
had postponed its vote on the merger with Landry's Seafood Restaurants,
Inc. The report included, as exhibits, (i) the press release issued by
Rainforest Cafe, Inc. announcing the Special Meeting for the shareholder
vote on the proposed merger with Landry's Seafood Restaurants, Inc. had
been postponed due to misinformation circulated by The State of Wisconsin
Investment Board concerning the voting recommendation of the Institutional
Shareholder Services.
- On April 20, 2000 the Company filed a report on Form 8-K announcing that
the deadline for shareholders to vote on the proposed merger with Landry's
Seafood Restaurants, Inc. had been extended. The report included, as
exhibits, (i) the press release issued by Rainforest Cafe, Inc. announcing
that in connection with its postponement of the Special Meeting of
shareholders, the deadline for shareholders to vote on the proposed merger
with Landry's Seafood Restaurants, Inc. had been extended.
- On April 27, 2000 the Company filed a report on Form 8-K terminating the
Merger Agreement with Landry's Seafood Restaurants, Inc. The report
included, as exhibits, (i) the Mutual Termination Agreement and (ii) the
press release issued by Landry's Seafood Restaurants, Inc. and Rainforest
Cafe, Inc. announcing the Mutual Termination Agreement.
- On May 25, 2000 the Company filed a report on Form 8-K declaring a dividend
of one preferred share purchase right per each outstanding share of Common
Stock. The report included, as exhibits, (i) the Certificate of Designation
of Series A Junior Participating Preferred Stock (ii) the Rights Agreement
between Rainforest Cafe, Inc. and Norwest Bank Minnesota, National
Association, as Rights Agent and (iii) the press release issued by
Rainforest Cafe, Inc. announcing the Shareholder Rights Plan and the
dividend of one Right per each outstanding share of Common Stock.
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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 15, 2000 /s/ Lyle Berman
------------------------------------
Lyle Berman
President
Date: August 15, 2000 /s/ Robert V. Hahn
------------------------------------
Robert V. Hahn
Chief Financial Officer
(Principal Financial Officer)
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