-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IkjEOk5SMwK7gECai8WYThd0RumgzgfUBrx51iYdbpYkvetPJhDe3vU0FMWrq+wY jViweU97taBlyrAvZ94njQ== 0000950144-00-003572.txt : 20000324 0000950144-00-003572.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950144-00-003572 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991226 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RARE HOSPITALITY INTERNATIONAL INC CENTRAL INDEX KEY: 0000883976 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581498312 STATE OF INCORPORATION: GA FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19924 FILM NUMBER: 576688 BUSINESS ADDRESS: STREET 1: 8215 ROSWELL RD STREET 2: BLDG 200 CITY: ATLANTA STATE: GA ZIP: 30350 BUSINESS PHONE: 7703999595 MAIL ADDRESS: STREET 1: 8215 ROSWELL ROAD STREET 2: BLDG 200 CITY: ATLANTA STATE: GA ZIP: 30350 FORMER COMPANY: FORMER CONFORMED NAME: LONGHORN STEAKS INC DATE OF NAME CHANGE: 19930328 10-K405 1 RARE HOSPITALITY INTERNATIONAL, INC. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 26, 1999 COMMISSION FILE NUMBER 0-19924 ---------------- RARE HOSPITALITY INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-1498312 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 8215 ROSWELL ROAD, BLDG 600; 30350 ATLANTA, GA (Zip Code) (Address of principal executive offices) 770-399-9595 (Registrant's telephone number, including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE (Title of Class) 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 15, 2000, the aggregate market value of the voting stock held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are "affiliates" of the Registrant) of the Registrant was $186,155,720 based upon the last reported sale price in the Nasdaq National Market on March 15, 2000 of $17.125. As of March 15, 2000, the number of shares outstanding of the Registrant's Common Stock, no par value, was 11,841,100. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 15, 2000 are incorporated by reference in Part III hereof. FORWARD-LOOKING STATEMENTS Certain of the matters discussed in the following pages, particularly regarding estimates of the number and locations of new restaurants that RARE Hospitality International, Inc. and its subsidiaries (the "Company") intend to open during fiscal 2000, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, among the other factors that could cause actual results to differ materially are the following: failure of facts to conform to necessary management estimates and assumptions; the Company's ability to identify and secure suitable locations on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's business discipline over a large restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions, such as inflation or a recession, and growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; the risks set forth in Exhibit 99(a) to this Form 10-K which are hereby incorporated by reference; and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. ================================================================================ -2- 3 RARE HOSPITALITY INTERNATIONAL, INC. INDEX
PAGE ---- Part I Item 1. Business.............................................. 4 Item 2. Properties............................................ 13 Item 3. Legal Proceedings..................................... 13 Item 4. Submission of Matters to a Vote of Security Holders............................................. 15 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................. 15 Item 6. Selected Financial Data............................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................................... 23 Item 8. Financial Statements and Supplementary Data........... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 42 Part III Item 10. Directors and Executive Officers of the Registrant.... 42 Item 11. Executive Compensation................................ 42 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... 42 Item 13. Certain Relationships and Related Transactions........ 43 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 43 Signatures......................................................... 45 Financial Statement Schedules Exhibits
-3- 4 PART I ITEM 1. BUSINESS GENERAL RARE Hospitality International, Inc. and subsidiaries (the "Company"), formerly known as LongHorn Steaks, Inc., operates and franchises 157 restaurants as of March 15, 2000, including 126 LongHorn Steakhouse restaurants, 18 restaurants operated under the names Bugaboo Creek Steak House and Bugaboo Creek Lodge & Bar ("Bugaboo Creek"), and 11 The Capital Grille restaurants, as well as two additional restaurants (the "specialty restaurants"), Hemenway's Seafood Grille & Oyster Bar ("Hemenway's") and The Old Grist Mill Tavern. The Company was incorporated in Georgia in December 1982. On January 13, 1997, the Company changed its name from LongHorn Steaks, Inc. to RARE Hospitality International, Inc., to reflect the fact that it no longer operated only LongHorn Steakhouse restaurants. As a result of this change, the Company's common stock, which had traded on the Nasdaq National Market under the symbol "LOHO", began trading under its current symbol "RARE". CONCEPTS LongHorn Steakhouse restaurants, which are located primarily in the southeastern and midwestern United States, are casual dining, full-service restaurants that serve lunch and dinner, offer full liquor service and feature a menu consisting of fresh cut steaks, as well as salmon, shrimp, chicken, ribs, pork chops and prime rib. LongHorn Steakhouse restaurants emphasize high quality, moderately priced food and attentive, friendly service, provided in a casual atmosphere resembling a Texas roadhouse. The 18 Bugaboo Creek restaurants are located primarily in the northeastern and mid-Atlantic regions of the United States. The Bugaboo Creek restaurants are casual dining restaurants designed to resemble a Canadian Rocky Mountain lodge. Menu offerings include seasoned steaks, prime rib, spit-roasted half chickens, smoked baby back ribs, grilled salmon and a variety of freshwater fish. The 11 The Capital Grille restaurants are located in major metropolitan areas across the United States. These restaurants are fine-dining restaurants with menu offerings ranging from chilled baby lobster and beluga caviar appetizers to entrees of dry aged steaks, lamb and veal steaks, lobster, grilled salmon and chicken and a wine list of over 300 selections. -4- 5 RESTAURANT LOCATIONS The following tables set forth the location of each existing restaurant and restaurant under construction by concept at March 15, 2000 and the number of restaurants in each area. LONGHORN STEAKHOUSE RESTAURANTS EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS ALABAMA Dothan ........................................................ 1 Huntsville .................................................... 1 Mobile ........................................................ 1 Montgomery .................................................... 1 FLORIDA Daytona Beach ................................................. 1 Destin ........................................................ 1 Ft. Myers ..................................................... 2 Jacksonville .................................................. 4 Miami/Ft. Lauderdale .......................................... 6 Ocala ......................................................... 1 Orlando ....................................................... 6 St. Augustine ................................................. 1 Tallahassee ................................................... 1 Tampa/ St. Petersburg ......................................... 6 West Palm Beach ............................................... 2 GEORGIA Albany ........................................................ 1 Athens ........................................................ 1 Atlanta ....................................................... 25 Augusta ....................................................... 1 Buford ........................................................ 1 Cartersville .................................................. 1 Columbus ...................................................... 1 Dalton ........................................................ 1 Macon ......................................................... 1 Newnan ........................................................ 1 Rome .......................................................... 1 Savannah ...................................................... 1 Statesboro .................................................... 1 Valdosta ...................................................... 1 Warner Robbins ................................................ 1 Woodstock ..................................................... 1 ILLINOIS Fairview Heights ............................................. 1 KENTUCKY Florence ..................................................... 1 MISSOURI St. Louis ..................................................... 4 NEW HAMPSHIRE Concord ....................................................... 1 NORTH CAROLINA Burlington .................................................... 1 Charlotte ..................................................... 5 Greensboro/High Point/Winston-Salem ........................... 3 Hickory ....................................................... 1 OHIO Cincinnati .................................................... 4 Cleveland ..................................................... 7 Columbus ...................................................... 4
-5- 6 Pickerington .................................................. 1 St. Clairsville ............................................... 1 SOUTH CAROLINA Columbia ...................................................... 3 Greenville/Spartanburg ........................................ 2 Hilton Head ................................................... 1 Rock Hill ..................................................... 1 TENNESSEE Chattanooga ................................................... 1 Clarksville ................................................... 1 Nashville ..................................................... 4 WEST VIRGINIA Charleston .................................................... 1 Total Existing Company-Owned/Joint Venture Restaurants ..... 123 EXISTING FRANCHISEE-OWNED RESTAURANTS PUERTO RICO Bayamon ...................................................... 1 Carolina ..................................................... 1 San Patricio ................................................. 1 Total Existing Franchisee-Owned Restaurants ............ 3 Total LongHorn Steakhouse Restaurants .................. 126
BUGABOO CREEK RESTAURANTS EXISTING COMPANY-OWNED RESTAURANTS CONNECTICUT Manchester .................................................... 1 DELAWARE Newark ....................................................... 1 GEORGIA Duluth ........................................................ 1 MAINE Bangor ........................................................ 1 Portland ...................................................... 1 MARYLAND Gaithersburg .................................................. 1 MASSACHUSETTS Boston ........................................................ 5 Seekonk ....................................................... 1 NEW HAMPSHIRE Newington ..................................................... 1 NEW YORK Albany ........................................................ 1 Poughkeepsie .................................................. 1 Rochester ..................................................... 1 PENNSYLVANIA Philadelphia .................................................. 1 RHODE ISLAND Warwick ....................................................... 1 Total Bugaboo Creek Restaurants ........................... 18
-6- 7 THE CAPITAL GRILLE RESTAURANTS EXISTING COMPANY-OWNED RESTAURANTS DISTRICT OF COLUMBIA Washington .................................................... 1 FLORIDA Miami ......................................................... 1 ILLINOIS Chicago ....................................................... 1 MASSACHUSETTS Boston ........................................................ 2 MICHIGAN Troy .......................................................... 1 MINNESOTA Minneapolis ................................................... 1 NORTH CAROLINA Charlotte ..................................................... 1 RHODE ISLAND Providence .................................................... 1 TEXAS Dallas ........................................................ 1 Houston ....................................................... 1 Total The Capital Grille Restaurants .................... 11
SPECIALTY RESTAURANTS EXISTING COMPANY-OWNED RESTAURANTS MASSACHUSETTS The Old Grist Mill Tavern, Seekonk ............................ 1 RHODE ISLAND Hemenway's Seafood Grille & Oyster Bar, Providence ............ 1 Total Specialty Restaurants ............................. 2
RESTAURANTS UNDER CONSTRUCTION FLORIDA LongHorn Steakhouse, Gulf Gate .............................. 1 LongHorn Steakhouse, Southchase ............................. 1 LongHorn Steakhouse, Waterford Lakes ........................ 1 KENTUCKY LongHorn Steakhouse, Bowling Green .......................... 1 MISSOURI LongHorn Steakhouse, Chesterfield ........................... 1 NORTH CAROLINA LongHorn Steakhouse, Charlotte .............................. 1 Total Restaurants Under Construction .................... 6
-7- 8 UNIT ECONOMICS LONGHORN STEAKHOUSE The Company's modified LongHorn Steakhouse restaurant design, which has been developed and refined over the past five years, has increased capacity from an average of 150 seats for LongHorn Steakhouse restaurants open prior to 1994 to an average of 198 seats for LongHorn Steakhouse restaurants opened in 1999. The objective of this modification was to increase the revenues of the Company's new LongHorn Steakhouse restaurants while reducing capital expenditures as a percentage of revenues. The Company intends to continue to emphasize leasing as its preferred arrangement for LongHorn Steakhouse sites and currently leases all but 31 of its LongHorn Steakhouse restaurants in operation and owns two sites for restaurants under construction. The Company purchases land only in those circumstances it believes are cost-effective. Four of the 15 LongHorn Steakhouse restaurants opened in 1999 were located on property purchased at an average cost of approximately $707,000 per location. The average cash investment to open a LongHorn Steakhouse restaurant in 1999 was approximately $1,251,000, excluding real estate costs and excluding pre-opening expenses of approximately $158,000. Through December 27, 1998 the Company amortized pre-opening expenses over the first 12 months of a restaurant's operation. After December 27, 1998, in accordance with Statement of Position 98-5 Reporting on the Costs of Start-up Activities ("SOP 98-5"), the Company began to expense pre-opening costs as incurred. BUGABOO CREEK The Company has developed a modified Bugaboo Creek restaurant design, which served as the prototype for the Bugaboo Creek restaurant constructed in 1999. This modified design is smaller than earlier designs and utilizes approximately 6,575 square feet with a capacity of 233 seats. The Company is in the process of further refining the prototype, with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants. The Company intends to continue to emphasize leasing as its preferred arrangement for Bugaboo Creek sites and currently leases all but one of its Bugaboo Creek sites. The Company purchases land only in those circumstances it believes are cost-effective. The Bugaboo Creek restaurant opened in 1999 was located on leased property. The cash investment to construct the Bugaboo Creek restaurant opened in 1999 was approximately $1,736,000, excluding pre-opening expenses of approximately $175,000. Through December 27, 1998, the Company amortized pre-opening expenses over the first 12 months of a restaurant's operation. After December 27, 1998, in accordance with SOP 98-5, the Company began to expense pre-opening costs as incurred. THE CAPITAL GRILLE The Capital Grille restaurant development strategy includes the use of sites that are historic or unique in nature. Accordingly, the Company utilizes methods to balance control of the construction costs with the retention of the unique ambiance of each location. The Company intends to continue to emphasize leasing as its preferred arrangement for The Capital Grille sites and currently leases all of its The Capital Grille sites. The Company intends to purchase land only in those circumstances it believes are cost-effective. Through December 27, 1998, the Company amortized pre-opening expenses over the first 12 months of each restaurant's operation. After December 27, 1998, in accordance with SOP 98-5, the Company will expense pre-opening costs as incurred. EXPANSION STRATEGY LONGHORN STEAKHOUSE AND BUGABOO CREEK RESTAURANTS: The Company plans to expand through the development of existing joint venture partnerships and additional Company-owned LongHorn Steakhouse restaurants and additional Company-owned Bugaboo Creek restaurants in existing markets and in other selected metropolitan markets in the southeastern, midwestern, northeastern and mid-Atlantic regions of the United States. Currently, the Company has joint venture arrangements covering territories in various areas of Florida, North Carolina, and South Carolina. The Company plans to continue to expand its restaurant base by clustering its restaurants in existing and new markets, with LongHorn Steakhouse restaurants currently located primarily in the southeastern and midwestern regions of the United States and Bugaboo Creek restaurants located primarily in the northeastern and mid-Atlantic regions of the United States. Beginning in 2000, the Company intends to begin to open LongHorn Steakhouse restaurants in the northeastern United States. The Company believes that clustering in existing markets enhances its ability to supervise operations, market the Company's concepts and distribute supplies. The Company, however, also intends to open single restaurants in smaller markets in -8- 9 sufficiently close proximity to the Company's other markets to enable the Company to efficiently supervise operations and distribute supplies. THE CAPITAL GRILLE: The Company plans to expand through the development of additional Company-owned The Capital Grille restaurants in selected metropolitan markets nationwide. OVERALL: The Company's objective is to increase earnings by expanding market share in existing markets and by developing restaurants in new markets. The Company currently plans to open 19 to 22 Company-owned and joint venture restaurants in 2000: 17 to 19 LongHorn Steakhouse restaurants; one Bugaboo Creek restaurant and one to two The Capital Grille restaurants. Of the restaurants proposed for 2000, the Company has opened five LongHorn Steakhouse restaurants, has six restaurants under construction in Virginia, Missouri, Kentucky, Florida, and North Carolina, and has signed leases on sites for 11 additional restaurants as of March 15, 2000. The Company expects that one of the 17 to 19 LongHorn Steakhouse restaurants to be opened in 2000 will be developed under an existing joint venture relationship, and that all of the Bugaboo Creek and The Capital Grille restaurants to be opened in 2000 will be Company-owned. In September 1999, the Company acquired the ownership interest of its joint venture partner in ten LongHorn Steakhouse restaurants located in south Florida markets for an aggregate purchase price of approximately $2.9 million; comprised of 104,000 shares of Company common stock and approximately $600,000 in notes payable in a transaction accounted for under the purchase method. Subsequent to the completion of this joint venture acquisition, the Company became the active manager of all non-franchised LongHorn Steakhouse restaurants. In May 1999, the Company acquired the ownership interest of its joint venture partner in four LongHorn Steakhouse restaurants located in the Columbus, Ohio market for an aggregate purchase price of $750,000; comprised of 25,000 shares of Company common stock, $150,000 in cash and a $30,000 note, in a transaction accounted for under the purchase method. The Company will continue to evaluate suitable acquisitions in the restaurant industry as they are identified. The Company will consider on a selective basis qualified applicants with substantial restaurant experience and financial resources for franchises of either LongHorn Steakhouse restaurants or Bugaboo Creek restaurants. The Company does not currently anticipate offering franchises for The Capital Grille restaurants. The Company expects that it will grant franchises to operators who are not joint venture partners with the Company primarily in markets in which the Company would not otherwise expand. SITE SELECTION AND RESTAURANT LAYOUT The Company considers the location of a restaurant to be a critical factor to the unit's long-term success and devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on trade area demographics, target population density and household income level as well as specific site characteristics, such as visibility, accessibility and traffic volumes. The Company also reviews potential competition and the profitability of national chain restaurants operating in the area. Senior management inspects and approves each restaurant site. It typically takes approximately 100 to 120 days to construct and open a new LongHorn Steakhouse restaurant, approximately 130 to 140 days to construct and open a new Bugaboo Creek restaurant and approximately 170 to 185 days to construct and open a new The Capital Grille restaurant. While the Company will consider the option of purchasing sites for its new restaurants where it is cost-effective to do so, currently all but 34 of the Company's restaurant sites are leased (including two sites for restaurants currently under construction). The Company has modified its LongHorn Steakhouse prototype restaurant design, increasing its average seating capacity from approximately 150 seats for LongHorn Steakhouse restaurants open prior to 1994 to an average of 198 seats in approximately 5,200 square feet of space for LongHorn Steakhouse restaurants opened in 1999. An expanded kitchen design incorporating equipment needed for a broader menu is also part of the prototype. The Company believes the kitchen design simplifies training, lowers costs and improves the consistency and quality of the food. The prototype restaurant design also includes cosmetic changes that provide a total restaurant concept intended to be inviting and comfortable while maintaining the ambiance of a Texas roadhouse. -9- 10 The Company has renovated and remodeled some of the older LongHorn Steakhouse restaurants to include cosmetic improvements such as repainting and refinishing, new booths, new lighting and various decor adjustments. Exterior improvements encompassed repainting and additional lighting designed to convey a more inviting image. The Company has modified its Bugaboo Creek prototype restaurant design to incorporate a smaller seating capacity than its average restaurant. This new prototype was utilized for the Bugaboo Creek restaurant opened in 1999. The Company has implemented the new prototype with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs. RESTAURANT OPERATIONS Management and Employees. The management staff of a typical Company restaurant consists of one general manager or managing partner, two to four assistant managers and one or two kitchen managers. In addition, a typical LongHorn Steakhouse restaurant employs approximately 30 to 80 staff members, a typical Bugaboo Creek restaurant employs approximately 50 to 85 staff members, and a typical The Capital Grille restaurant employs approximately 60 staff members. The general manager or managing partner of each restaurant has primary responsibility for the day-to-day operation of the restaurant and is responsible for maintaining Company-established operating standards. The Company employs LongHorn Steakhouse regional managers, who each have responsibility for the operating performance of four to seven Company-owned LongHorn Steakhouse restaurants or joint venture restaurants and report directly to one of the Directors of Operations for the LongHorn Steakhouse concept. The Directors of Operations report to the Senior Vice President of Operations of the LongHorn Steakhouse division. The Company employs Bugaboo Creek regional managers, who each have responsibility for the operating performance of from four to six Bugaboo Creek restaurants and The Old Grist Mill Tavern. All of these regional managers report directly to the Vice President of Operations for the Bugaboo Creek concept. The Company also employs regional managers who each have responsibility for from three to five The Capital Grille restaurants and Hemenway's, all reporting directly to the Vice President of Operations for The Capital Grille. The Company seeks to recruit managers with substantial restaurant experience. The Company selects its restaurant personnel utilizing a selection process which includes psychological and analytical testing which is designed to identify individuals with those traits the Company believes are important to success in the restaurant industry. The Company requires new managers to complete an intensive training program focused on both on-the-job training as well as a rigorous in-house classroom-based educational course. The program is designed to encompass all phases of restaurant operations, including the Company's philosophy, management strategy, policies, procedures and operating standards. Through its management information systems, senior management receives daily reports on sales, and weekly reports on guest counts, payroll, cost of sales and other restaurant operating expenses. Based upon these reports, management believes that it is able to closely monitor the Company's operations. The Company maintains performance measurement and incentive compensation programs for its management-level employees. The performance programs reward restaurant management teams with cash bonuses for meeting sales and profitability targets. Incentive compensation may also be provided to management in some instances in the form of stock options or restricted stock awards. During 1999, stock options were awarded to 29 LongHorn Steakhouse restaurant-level managing partners, general managers and assistant managers, and restricted stock awards were made to five LongHorn Steakhouse restaurant-level managing partners in compliance with their respective managing partner agreements. Management Information Systems. The Company utilizes a Windows-based accounting software package and a network that enables electronic communication throughout the Company. In addition, all of the Company's restaurants utilize Windows-based POS systems and the LongHorn Steakhouse and Bugaboo Creek restaurants employ a theoretical food costing program. The Company utilizes these management information systems to develop pricing strategies, identify food cost issues, monitor new product reception and evaluate restaurant-level productivity. The Company expects to continue to develop its management information systems in each concept to assist restaurant management in analyzing their business and to improve efficiency. Purchasing. The Company establishes product quality standards for beef and other protein products, then negotiates directly with suppliers to obtain the lowest possible prices for the required quality. The Company also utilizes select long-term contracts on certain items to avoid short-term cost fluctuations. For the LongHorn Steakhouse and Bugaboo Creek restaurants, beef is aged at the facility of the Company's largest distributor, who delivers the beef to the LongHorn Steakhouse and Bugaboo Creek restaurants when the age reaches specified guidelines. This arrangement is closely monitored by Company personnel and management believes it provides for efficient and cost-effective meat processing and distribution, while maintaining the Company's control and supervision of purchasing and aging. The Company's management negotiates directly with suppliers for most other food and beverage products to ensure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases its meat, food and other supplies from a sufficient number of suppliers such that the loss of any one supplier would not have a material effect on the Company. The Company generally utilizes a different distribution system for each of its restaurant concepts. -10- 11 Seasonality. Although individual restaurants have seasonal patterns of performance that depend on local factors, aggregate sales by the Company's restaurants have not displayed pronounced seasonality, other than lower sales during the "back-to-school" season, which falls in the Company's third fiscal quarter, and higher sales during the Christmas holiday season, which falls in the Company's fourth fiscal quarter. Extreme weather, especially during the winter months, may adversely affect sales. OWNERSHIP STRUCTURES The Company's interests in its restaurants are divided into three categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised restaurants. Company-owned restaurants. 95 LongHorn Steakhouse restaurants, all Bugaboo Creek restaurants, all The Capital Grille restaurants, Hemenway's and The Old Grist Mill Tavern are owned and operated by the Company. The general manager of each of these restaurants is employed and compensated by the Company. See "Restaurant Operations -- Management and Employees" above. Joint Venture Restaurants. The Company is a partner in various joint venture partnerships and limited partnerships that in the aggregate operate 28 LongHorn Steakhouse restaurants as of March 15, 2000. The joint ventures are either 50/50 joint ventures for the ownership of a single restaurant managed by the Company or are formed with the goal of developing multiple restaurants in a particular market with an experienced restaurant operator who owns from 10% to 32% of the joint venture. All limited partnerships are for the operation of a single restaurant with the restaurant manager as a 10% limited partner and the Company or a joint venture as the general partner. The joint ventures and limited partnerships pay fees to the Company at the rate of $3,000 to $6,500 per restaurant per month. At present, all restaurants are managed by the Company. Those joint ventures that operate under franchise agreements pay royalties at the rate of 1.5% of gross sales. The Company either controls its joint ventures' use of its service marks or the joint ventures operate under franchise agreements with the Company. Franchise agreements for joint ventures are modified by an addendum that provides that no franchise fee is payable and reduces the royalty rate to 1.5% of gross sales. In the event that the Company's partner in the joint venture or any other entity should acquire the joint venture's restaurants, this addendum to the franchise agreement would terminate and the operation of the restaurants would continue under the terms of the franchise agreement. One of the joint ventures has an area development agreement with the Company for the development of additional restaurants. One other joint venture does not have specific development rights although the Company has agreed, during a specified time, not to establish restaurants in its market areas except through the joint venture. The joint venture partnerships are terminable by either joint venture partner upon default by the other partner. Two of the joint ventures give the Company the option under certain circumstances to acquire the interest of the Company's joint venture partner. Franchised Restaurants. As of March 15, 2000, 24 of the 28 restaurants operated by the Company's joint ventures are operated under franchise agreements. In addition, the Company has one unaffiliated franchisee with an area development agreement with the right to operate franchised LongHorn Steakhouse restaurants in Puerto Rico. As of March 15, 2000, this franchisee operated three LongHorn Steakhouse restaurants in Puerto Rico. Franchise Agreements. The franchise agreements are granted with respect to individual restaurants and are either for a term of ten years with a right of the franchisee to acquire a successor franchise for an additional ten-year period if specified conditions are met or for a period of twenty years. The franchise agreements provide for a franchise fee of $60,000, which amount is reduced for subsequent franchises acquired by the same franchisee. The franchise fees are payable in full upon execution. The franchise agreements provide for royalties with respect to each restaurant of 4% of gross sales and require the franchisee to expend on local advertising during each calendar month an amount equal to at least 1.5% of gross sales and, if the Company establishes an advertising fund, to contribute an additional amount of 0.5% of gross sales to such fund or up to 4.5% of the restaurant's gross sales during the conduct of a market, regional or national advertising campaign. Each franchisee has the right to terminate its franchise agreement upon default by the Company. The Company also retains the right to terminate a franchise for a variety of reasons, including the franchisee's failure to pay amounts due under the agreement or to otherwise comply with the terms of the franchise agreement. General. An important element of the Company's franchise program is the training the Company provides for each franchisee. With respect to each new franchisee, the Company provides the same training program provided to the Company's management -11- 12 and employees. In addition to this initial training, the Company provides supervision at the opening of the franchisee's first restaurant, beginning one week prior to opening and routine supervision thereafter. Franchisees are required to operate their restaurants in compliance with the Company's methods, standards and specifications regarding such matters as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs. The franchisee has full discretion to determine the prices to be charged to all customers. In addition, all franchisees are required to purchase food, ingredients, supplies and materials that meet standards established by the Company or which are provided by suppliers approved by the Company. The Company does not receive fees or profits on sales by third-party suppliers to franchisees. The franchise laws of many jurisdictions limit the ability of a franchisor to terminate or refuse to renew a franchise. Area Development Agreements. The Company has also entered into area development agreements with developers, including joint ventures in which the Company is a partner. Under these agreements, the developer has exclusive rights to establish and operate LongHorn Steakhouse restaurants in a defined territory generally for a period of five years, conditioned upon meeting a development schedule provided in the area development agreement. Each area development agreement provides the developer with the option to renew the agreement, usually for an additional five-year period, predicated upon the establishment of new performance goals and the Company's determination that the developer has the capability to comply with the new performance goals. Development fees paid upon execution of area development agreements reflect the size of the territory involved and are non-refundable, but are applied to the payment of franchise fees for restaurants opened pursuant to franchises granted to the developer. SERVICE MARKS The Company has registered LONGHORN STEAKS and design, LONGHORN STEAKHOUSE and design, BUGABOO CREEK STEAK HOUSE and design and THE CAPITAL GRILLE and design as service marks with the United States Patent and Trademark Office and has an application pending with respect to BUGABOO CREEK LODGE & BAR and design. The Company has additional registered marks used in connection with the operations of its various restaurants. The Company regards its service marks as having significant value and as being important factors in the marketing of its restaurants. The Company is aware of names and marks similar to the service marks of the Company used by other persons in certain geographic areas; however, the Company believes such uses will not adversely affect the Company. It is the Company's policy to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks. COMPETITION The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors, both steakhouses and non-steakhouses, with substantially greater financial and other resources than the Company. Such competitors include a large number of national and regional restaurant chains. Some of the Company's competitors have been in existence for a substantially longer period than the Company and may be better established in the markets where the Company's restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company's restaurants in particular. GOVERNMENT REGULATION The Company is subject to various federal, state and local laws affecting its business. Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. In addition, most municipalities in which the Company's restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. The Company is also subject to federal and state environmental regulations, but they have not had a material effect on the Company's operations. During 1999, approximately 15.3% of the Company's restaurant sales are attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not experienced and does not presently anticipate experiencing any significant delays or -12- 13 other problems in obtaining or renewing licenses or permits to sell alcoholic beverages; however, the failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant's operations. The Company and its franchisees are subject in each state in which they operate restaurants to "dram shop" statutes or case law interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company is also subject to federal and state laws regulating the offer and sale of franchises administered by the Federal Trade Commission and various similar state agencies. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. These laws often apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company designs its restaurants to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled. The Company's restaurant operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, overtime and tip credits. A significant number of the Company's food service and preparation personnel receive gratuities and are paid at rates related to the federal minimum wage. Significant additional government-imposed increases in minimum wages, paid leaves-of-absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities would have an adverse effect on the profitability of the Company. EMPLOYEES As of March 15, 2000, the Company employed approximately 9,250 persons, 166 of whom were corporate personnel, 682 of whom were restaurant management personnel and the remainder of whom were hourly personnel. Of the 166 corporate employees, 52 are in management positions and 114 are administrative or office employees. None of the Company's employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good. ITEM 2. PROPERTIES As of March 15, 2000, all but 34 of the Company's restaurants were located in leased space (including two sites for restaurants under construction). Initial lease expirations typically range from ten to fifteen years, with the majority of these leases providing for an option to renew for at least one additional term of three to 15 years. All of the Company's leases provide for a minimum annual rent, and approximately half of the leases call for additional rent based on sales volume (generally 2.0% to 8.0%) at the particular location over specified minimum levels. Generally the leases are net leases which require the Company to pay the costs of insurance, taxes and a portion of lessors' operating costs. The leases on the operating Company-owned restaurants will expire over the period from 2002 through 2029 (assuming exercise of all renewal options). The Company owns a 10,000 square foot office building and leases a 15,000 square feet office building in which its corporate offices, LongHorn Steakhouse restaurant operations and The Capital Grille restaurant operations are headquartered. Both office buildings are located in Atlanta, Georgia. The Company has recently entered into a contract to purchase an additional 5,000 square foot office building located adjacent to its corporate offices in Atlanta, Georgia. In addition, the Company leases approximately 1,500 square feet of space in East Providence, Rhode Island to house staff to support the operation of Bugaboo Creek restaurants. ITEM 3. LEGAL PROCEEDINGS In January 1996, the Company and Moo Management, Inc. ("Moo") formed a joint venture ("RTL Joint Venture") for the development of LongHorn Steakhouse restaurants. The parties never developed LongHorn Steakhouse restaurants and, beginning in the fall of 1996, negotiated to amend their joint venture agreement to develop Bugaboo Creek Steak House restaurants in an expanded territory. While these negotiations were taking place, the parties entered into a ground lease (the "Ground Lease") in the name of RTL Joint Venture and the Company, with its own funds, subsequently built on the leased premises a Bugaboo Creek Steak House restaurant. In the fall of 1997, the negotiations between the Company and Moo broke -13- 14 down. The Company believes that the parties did not reach a binding agreement to develop Bugaboo Creek Steak House restaurants while Moo asserts that such an agreement was reached. On, April 30, 1998, the Company filed a Petition for Declaratory Relief and Contract Reformation styled RARE Hospitality International, Inc. v. Centercap Associates, L.L.C. and Moo Management, Inc., C.A. No. 16350 NC in the Chancery Court of New Castle County, Delaware seeking a determination that the Company, and not RTL Joint Venture, is the tenant under the Ground Lease. In its amended Answer and Counterclaim in this action, Moo alleged that the Company and Moo agreed to the terms of a binding joint venture agreement to develop Bugaboo Creek Steak House restaurants and entered into the Ground Lease in furtherance thereof. In its Counterclaim, Moo alleged that the Company has breached the alleged agreement and, as a result, Moo has been deprived of the profit that it would have earned from the purchase and operation of three Bugaboo Creek Steak House restaurants owned by the Company, has been damaged by the efforts undertaken and the expenses incurred by Moo in preparation for performance of the alleged joint venture agreement and has been deprived of the profits lost and that would be lost as the result of the Company's failure to perform the alleged joint venture agreement. Moo sought an unspecified amount of monetary damages and the dismissal of the Company's petition. Following a preliminary hearing in this matter held on December 13, 1998, this action and the counterclaim were dismissed without prejudice. On June 9, 1998, the Company filed a Demand for Arbitration with the American Arbitration Association in Atlanta, Georgia styled RARE Hospitality International, Inc. v. Moo Management, Inc., AAA Case no. 30418025798, and filed an Amended Demand for Arbitration on July 7, 1998. In this arbitration, the Company sought an immediate hearing and injunctive relief directing that the Ground Lease be transferred to the Company and that Moo and its principals be relieved from liability on the Ground Lease. The Company further requested an award declaring that there is no joint venture or partnership between the Company and Moo to develop Bugaboo Creek Steak House restaurants and granting monetary damages for the Company's losses incurred as a result of the wrongful conduct of Moo. Following a preliminary hearing on this matter held on December 18, 1998, this action and the counterclaim were dismissed without prejudice. A hearing was held on July 23, 1998, with respect to the Company's request for preliminary relief. On July 29, 1998, the arbitrator entered an Order determining that the Company's request for preliminary injunctive relief was subject to arbitration, that the arbitrator had jurisdiction to decide that request and granting the Company's request for preliminary relief by ordering Moo to sign on behalf of RTL Joint Venture an assignment of the Ground Lease to the Company. The Company must also make an accounting to Moo on a monthly basis of the operations of the Bugaboo Creek Steak House restaurant operated on the Ground Lease until further order of the arbitrator. On August 6, 1998, Moo filed an Answer and Counterclaim in the arbitration. In its Answer and Counterclaim, Moo denies the Company's claim, alleges that the Company has waived its right to arbitration and that the tribunal is without jurisdiction to hear the matter, makes essentially the same counterclaims as contained in Moo's Answer and Counterclaim in the Delaware action described above and seeks unspecified damages in an amount to be proven, but not less than $5,000,000. The week of December 7, 1998, an evidentiary hearing was conducted in the arbitration with respect to only the issue of liability, if any, of the Company. The hearing was continued and concluded with closing arguments on March 11, 1999. On May 26, 1999, the arbitrator rendered a decision on liability and ruled that the Company and Moo did reach agreement to become partners in the development of Bugaboo Creek Steak House restaurants in certain territories. The arbitrator further ruled that the Company is liable to Moo for actual damages it sustained, if any, from the Company's failure to perform the agreement. The damages phase of the arbitration continued with a hearing in January 2000, at which time the Company asserted that no damages were sustained by Moo as a result of the Company's failure to develop Bugaboo Creek Steak House restaurants with Moo and Moo asserted damages of up to $7.7 million. It is anticipated that the arbitrator will render a decision on damages in the first quarter of 2000. Management continues to believe that the Company's position has merit and that the resolution of these matters will not have a material adverse effect on the Company's financial condition. -14- 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted for a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock was traded on the Nasdaq National Market under the symbol "LOHO" from March 31, 1992 until January 10, 1997. The stock now trades under the symbol "RARE". The table below sets forth the high and low sales prices of the Company's common stock, as reported on the Nasdaq National Market, during the periods indicated.
FISCAL YEAR ENDED DECEMBER 26, 1999 HIGH LOW ----------------------------------- ---- --- First Quarter................................ $ 15 5/8 $ 12 3/4 Second Quarter............................... 26 3/16 13 1/4 Third Quarter................................ 25 3/4 17 11/16 Fourth Quarter............................... 22 3/8 15 1/8
FISCAL YEAR ENDED DECEMBER 27, 1998 HIGH LOW ----------------------------------- ---- --- First Quarter................................ $ 12 $ 8 5/8 Second Quarter............................... 13 7/8 10 7/8 Third Quarter................................ 15 10 9/16 Fourth Quarter............................... 14 8 1/2
As of March 15, 2000, there were approximately 324 holders of record of the Company's common stock. Since the Company's initial public offering in 1992, the Company has not declared or paid any cash dividends or distributions on its capital stock. The Company does not intend to pay any cash dividends on its common stock in the foreseeable future, as the current policy of the Company's Board of Directors is to retain all earnings to support operations and finance expansion. The Company's existing revolving line of credit restricts the payment of cash dividends without prior lender approval. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company's earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors. While the Company has not declared or paid any cash dividends on its capital stock since its initial public offering, due to the accounting for a subsequent acquisition as a pooling of interests the Company's consolidated financial statements reflect distributions made by certain entities prior to their acquisition by the Company. In September 1999, the Company issued 104,000 shares of its common stock (The "Underwood Shares") and issued approximately $600,000 in notes payable to JJU, Inc. in exchange for JJU's interest in Gold Coast Restaurant Group, a joint venture partnership between JJU, Inc. and the Company. Exemption from registration of the issuance of the Underwood Shares was claimed under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and Rules 505 and 506 promulgated under the Securities Act of 1933, as amended. In May 1999, the Company issued 25,000 shares of its common stock (the "Denti Shares"), paid $150,000 in cash and issued a $30,000 note payable to Denti Restaurant Group, Inc. ("Denti") in exchange for Denti's interest in Buckeye Steakhouse Ventures, a joint venture partnership between Denti and The Company. Exemption from registration of the issuance of the Denti Shares was claimed under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended, and Rules 505 and 506 promulgated under the Securities Act of 1933, as amended. -15- 16 ITEM 6. SELECTED FINANCIAL DATA Following is selected consolidated financial data as of and for each of the fiscal years in the five-year period ended December 26, 1999. The Consolidated Financial Statements as of December 26, 1999 and December 27, 1998 and for each of the years in the three-year period ended December 26, 1999 and the independent auditors' report thereon are included in this Form 10-K. The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations," also included in this Form 10-K.
FISCAL YEARS ENDED ------------------------------------------------------------- DEC 26, DEC 27, DEC. 28, DEC. 29, DEC. 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant sales ................................ $382,275 $319,084 $ 264,727 $ 212,894 $ 149,279 Wholesale meat sales ............................ -- -- -- 2,547 6,495 Franchise revenues .............................. 195 -- 27 308 606 -------- -------- --------- --------- --------- Total revenues ............................... 382,470 319,084 264,754 215,749 156,380 Costs and expenses: Cost of restaurant sales ........................ 137,416 116,602 97,568 78,637 54,074 Cost of wholesale meat sales .................... -- -- -- 2,491 6,159 Operating expenses -- restaurants ................ 171,943 142,730 119,480 94,587 67,629 Operating expenses -- meat division .............. -- -- -- 234 766 Provision for asset impairments, restaurant closings, and other charges ......... 1,800 2,500 23,666 1,436 155 Merger and conversion expenses .................. -- -- -- 2,900 -- Depreciation and amortization -- restaurants .... 15,249 17,636 15,218 12,191 7,171 Pre-opening expense ............................. 3,051 -- -- -- -- General and administrative expenses ............. 26,052 22,470 23,590 13,732 11,082 -------- -------- --------- --------- --------- Total costs and expenses ..................... 355,511 301,938 279,522 206,208 147,036 -------- -------- --------- --------- --------- Operating income (loss) ...................... 26,959 17,146 (14,768) 9,541 9,344 Interest expense (income), net ................... 3,866 2,939 1,245 (79) (291) Provision for litigation settlement .............. -- -- -- 605 -- Minority interest ................................ 1,609 1,334 1,219 602 5 -------- -------- --------- --------- --------- Earnings (loss) before income taxes .......... 21,484 12,873 (17,232) 8,413 9,630 Income tax expense (benefit) ..................... 7,060 4,120 (5,000) 3,170 3,047 -------- -------- --------- --------- --------- Earnings (loss) before cumulative effect of change in accounting principle ......... 14,424 8,753 (12,232) 5,243 6,583 Cumulative effect of change in accounting principle (net of tax benefit of $760) ......... 1,587 -- -- -- -- -------- -------- --------- --------- --------- Net earnings (loss) .......................... $ 12,837 $ 8,753 $ (12,232) $ 5,243 $ 6,583 ======== ======== ========= ========= ========= Basic earnings (loss) per common share before cumulative effect of change in accounting principle ....................................... $ 1.20 $ 0.73 $ (1.04) $ 0.46 $ 0.67 Cumulative effect per common share of change in accounting principle .................. 0.13 -- -- -- -- -------- -------- --------- --------- --------- Basic earnings (loss) per common share ........... $ 1.07 $ 0.73 $ (1.04) $ 0.46 $ 0.67 ======== ======== ========= ========= ========= Diluted earnings (loss) per common share before cumulative effect of change in accounting principle ............................ $ 1.15 $ 0.72 $ (1.04) $ 0.45 $ 0.66 Cumulative effect per common share of change in accounting principle .................. 0.13 -- -- -- -- -------- -------- --------- --------- --------- Diluted earnings (loss) per common share ......... $ 1.02 $ 0.72 $ (1.04) $ 0.45 $ 0.66 ======== ======== ========= ========= ========= Weighted average common shares outstanding (basic) ............................. 12,032 12,004 11,751 11,302 9,753 ======== ======== ========= ========= ========= Weighted average common shares outstanding (diluted) ........................... 12,546 12,099 11,751 11,631 9,955 ======== ======== ========= ========= =========
-16- 17
FISCAL YEARS ENDED ---------------------------------------------------------- DEC 26, DEC 27, DEC. 28, DEC. 29, DEC. 31, 1999 1998 1997 1996 1995 ---------------------------------------------------------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit) ................... $ (11,031) $ 1,136 $ 1,359 $ 2,065 $ 561 Total assets ................................ 237,118 218,862 195,486 151,594 107,735 Debt, net of current installments ........... 40,000 48,000 43,000 7,100 13,858 Obligations under capital leases, net of current installments ...................... 9,732 9,732 5,051 -- -- Minority interest ........................... 3,982 2,610 4,890 3,301 615 Total shareholders' equity .................. 137,584 120,618 111,980 121,384 78,133
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's revenues are derived primarily from restaurant sales from Company-owned and joint venture restaurants. The Company also derives a small percentage of its total revenue from franchise revenues from unaffiliated franchised restaurants. Cost of restaurant sales consists of food and beverage costs for Company-owned and joint venture restaurants. Restaurant operating expenses consist of all other restaurant-level costs. These expenses include the cost of labor, advertising, operating supplies, rent, and utilities. Depreciation and amortization includes only the depreciation attributable to restaurant-level capital expenditures, and for fiscal years prior to 1999, amortization associated with pre-opening expenditures. General and administrative expenses include finance, accounting, management information systems, and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Minority interest consists of the partners' share of earnings in joint venture restaurants. The Company defines the comparable restaurant base for 1999 and 1998 to include those restaurants open for a full 18 months prior to the beginning of each fiscal quarter. The Company defines the comparable restaurant base for 1997 to include those restaurants open for a full 15 months prior to the beginning of the fiscal year. Average weekly sales are defined as total restaurant sales divided by restaurant weeks. A "restaurant week" is one week during which a single restaurant is open, so that two restaurants open during the same week constitutes two restaurant weeks. The Company's revenues and expenses can be affected significantly by the number and timing of the opening of additional restaurants. The timing of restaurant openings also can affect the average sales and other period-to-period comparisons. -17- 18 The following table sets forth the percentage relationship to total revenues of the listed items included in the Company's consolidated statements of operations, except as indicated:
FISCAL YEARS ENDED --------------------------------------------------- DECEMBER 26, DECEMBER 27, DECEMBER 28, 1999 1998 1997 --------------------------------------------------- Revenues: Restaurant Sales: LongHorn Steakhouse ............................ 68.1% 66.3% 64.3% The Capital Grille ............................. 15.1 16.0 14.9 Bugaboo Creek .................................. 14.9 15.7 16.9 Other restaurants .............................. 1.8 2.0 3.9 ----- ----- ----- Total restaurant sales ...................... 99.9 100.0 100.0 Franchise revenues ............................... 0.1 -- -- ----- ----- ----- Total revenues .............................. 100.0 100.0 100.0 Costs and expenses: Cost of restaurant sales(1) ..................... 35.9 36.5 36.9 Operating expenses -- restaurants(1) ............ 45.0 44.7 45.1 Provision for asset impairments, restaurant closings, and other charges ........ 0.5 0.8 8.9 Depreciation and amortization -- restaurants(1) 4.0 5.5 5.7 Pre-opening expense -- restaurants(1) ........... 0.8 -- -- General and administrative expenses ............. 6.8 7.0 8.9 ----- ----- ----- Total costs and expenses .................... 93.0 94.6 105.5 ----- ----- ----- Operating income (loss) ..................... 7.0 5.4 (5.5) Interest expense (income), net ................... 1.0 0.9 0.5 Minority interest ................................ 0.4 0.4 0.5 ----- ----- ----- Earnings (loss) before income taxes ......... 5.6 4.0 (6.5) Income tax expense (benefit) .................... 1.8 1.3 (1.9) ----- ----- ----- Earnings before cumulative effect of change in accounting principle ............. 3.8 2.7 (4.6) Cumulative effect of change in accounting principle (net of tax benefit) .................. 0.4 -- -- ----- ----- ----- Net earnings (loss) ............................ 3.4% 2.7% (4.6)% ===== ===== =====
- ------------ (1) Cost of restaurant sales, restaurant operating expenses, depreciation and amortization and pre-opening expense are expressed as a percentage of total restaurant sales. RESULTS OF OPERATIONS Year Ended December 26, 1999 Compared to Year Ended December 27, 1998 REVENUES Total revenues increased 19.9% to $382.5 million for 1999 compared to $319.1 million for 1998. LongHorn Steakhouse: Sales in the LongHorn Steakhouse restaurants increased 23.2% to $260.5 million for 1999, compared to $211.4 million for 1998. The increase reflects a 13.8% increase in restaurant operating weeks in 1999 as compared to 1998, resulting from an increase in the restaurant base from 104 company-owned and joint venture LongHorn Steakhouse restaurants at the end of 1998 to 118 restaurants at the end of 1999. Average weekly sales for all company-owned and joint venture LongHorn Steakhouse restaurants in 1999 were $45,086, an 8.3% increase over 1998. Sales for the comparable LongHorn Steakhouse restaurants increased 5.9% in 1999 as compared to 1998. The increase in comparable restaurant sales for 1999 at LongHorn Steakhouse was attributable primarily to an increase in guest counts. -18- 19 The Capital Grille: Sales in The Capital Grille restaurants increased 13.3% to $57.9 million for 1999, compared to $51.1 million for 1998. Average weekly sales for all The Capital Grille restaurants in 1999 were $101,207, a 13.3% increase from 1998. Sales for the comparable The Capital Grille restaurants increased 9.4% in 1999, as compared to 1998. The increase in total and comparable restaurant sales at The Capital Grille restaurants is attributable primarily to an increase in guest counts. The increase in average weekly sales was greater than the increase in comparable restaurant sales due to the closure of an underperforming The Capital Grille restaurant in the fourth quarter of 1998. Bugaboo Creek: Sales in the Bugaboo Creek restaurants increased 13.6% to $56.9 million for 1999, compared to $50.1 million for 1998. The increase reflects a 9.5% increase in restaurant weeks in 1999 as compared to 1998, resulting from an increase in the restaurant base from 17 Bugaboo Creek restaurants at the end of 1998 to 18 restaurants at the end of 1999. Average weekly sales for all Bugaboo Creek restaurants in 1999 were $63,109, a 3.8% increase from 1998. Sales for the comparable Bugaboo Creek restaurants increased 1.6% in 1999, as compared to 1998. The increase in comparable restaurant sales at Bugaboo Creek restaurants is attributable primarily to an increase in guest counts. Franchise Revenue: During 1997, the Company acquired all of the LongHorn Steakhouse restaurants that were then paying franchise revenues. In September 1998, a franchise LongHorn Steakhouse restaurant opened in Puerto Rico; this franchisee began paying franchise fees in January 1999. No franchise revenues were earned during 1998. In October 1999, the Company's franchisee opened its second franchise LongHorn Steakhouse in Puerto Rico. In 1999 the Company received $195,000 in franchise revenue. COSTS AND EXPENSES Cost of restaurant sales, as a percentage of restaurant sales, decreased to 35.9% in 1999 from 36.5% in 1998. This decrease is due, in part, to favorable purchasing contracts negotiated during the year, which reduced the cost of restaurant sales as a percentage of restaurant sales. Restaurant operating expenses increased as a percentage of restaurant sales in 1999 to 45.0% from 44.7% in 1998. This was due to an increase in management incentives and advertising expense, partially offset by greater leverage of fixed and semi-fixed expenses. The provision for asset impairments, restaurant closings, and other charges of $1.8 million in 1999 consisted primarily of the write down of two Bugaboo Creek restaurants, which was determined under Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" ("SFAS No. 121") by comparing expected future cash flows to the carrying value of impaired assets. General and administrative expenses of $26.1 million in 1999 decreased, as a percent of sales, to 6.8% of total revenues, from $22.5 million in 1998, or 7.0% of total revenues. The decrease as a percentage of total revenues was due primarily to the increase in sales in 1999 as partially offset by higher general and administrative expenses in 1999, primarily payroll related, associated with building the infrastructure necessary to support the Company's growth. Interest expense increased to $3.9 million in 1999 compared to $2.9 million in 1998. The increase in interest expense is due to higher average balances outstanding under the Company's obligations under capital leases as well as additional expenses associated with amending the Company's $100 million revolving credit facility. The Company's weighted average interest rate on borrowings, including the amortization of debt issue costs, under its revolving credit facility was approximately 8.7% in 1999, compared to 7.8% in 1998. Minority interest increased to $1.6 million in 1999 from $1.3 million in 1998. This reflects an increase in the number of joint venture restaurants for most of 1999 and the improved performance of the joint venture restaurants, partially offset by the purchase of joint venture partners' partnership interests in 14 joint venture restaurants during 1999. Income tax expense in 1999 was 32.9% of earnings before income taxes. The Company's effective income tax rate differs from applying the statutory federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes. -19- 20 Net income of $12.8 million in 1999, as compared to net income of $8.8 million in 1998, reflects the net effect of the items discussed above after taking into consideration the charge related to the cumulative effect of change in accounting principle (net of tax) in 1999 of $1.6 million. This charge was associated with the Company's adoption of SOP 98-5 in the first quarter of 1999 requiring the write-off of the balance of previously unamortized preopening expenses. Year Ended December 27, 1998 Compared to Year Ended December 28, 1997 REVENUES Total revenues increased 20.5% to $319.1 million for 1998 compared to $264.7 million for 1997. LongHorn Steakhouse: Sales in the LongHorn Steakhouse restaurants increased 24.1% to $211.4 million for 1998 compared to $170.3 million for 1997. The increase reflects a 16.4% increase in restaurant operating weeks in 1998 as compared to 1997, resulting from an increase in the restaurant base from 96 LongHorn Steakhouse restaurants at the end of 1997 to 104 restaurants at the end of 1998. Average weekly sales for all LongHorn Steakhouse restaurants in 1998 were $41,638, a 6.7% increase over 1997. Sales for the comparable LongHorn Steakhouse restaurants increased 5.0% in 1998 as compared to 1997. The increase in comparable restaurant sales for 1998 at LongHorn Steakhouse was attributable primarily to an increase to guest counts. The Capital Grille: Sales in The Capital Grille restaurants increased 29.3% to $51.1 million for 1998 compared to $39.5 million for 1997. The increase reflects a 42.1% increase in restaurant operating weeks in 1998 as compared to 1997, resulting from an increase in the restaurant base from 10 The Capital Grille Restaurants at the end of 1997 to 11 restaurants at the end of 1998. Average weekly sales for all The Capital Grille restaurants in 1998 were $89,329, a 9.0% decrease from 1997. Sales for the comparable The Capital Grille restaurants increased 6.1% in 1998 as compared to 1997. The increase in comparable restaurant sales at The Capital Grille restaurants is primarily attributable to an increase in guest counts. Bugaboo Creek: Sales in the Bugaboo Creek restaurants increased 12.2% to $50.1 million for 1998 compared to $44.6 million for 1997. The increase reflects a 9.1% increase in restaurant weeks in 1998 as compared to 1997, resulting from an increase in the restaurant base from 16 Bugaboo Creek restaurants at the end of 1997 to 17 restaurants at the end of 1998. Average weekly sales for all Bugaboo Creek restaurants in 1998 were $60,788, a 2.8% increase from 1997. Sales for the comparable Bugaboo Creek restaurants decreased 2.5% in 1998 as compared to 1997. The decrease in comparable restaurant sales at Bugaboo Creek restaurants is primarily attributable to a decrease in guest counts. Franchise Revenue: During 1997, the Company acquired all of the LongHorn Steakhouse restaurants that were then paying franchise revenues. In September 1998, a franchise LongHorn Steakhouse restaurant opened in Puerto Rico; this franchisee began paying franchise fees in January 1999. No franchise revenues were earned during 1998. COSTS AND EXPENSES Cost of restaurant sales, as a percentage of restaurant sales, decreased to 36.5% in 1998 from 36.9% in 1997. This decrease is due, in part, to purchasing contracts negotiated during the year, which stabilized the cost of restaurant sales as a percentage of restaurant sales. Restaurant operating expenses decreased as a percentage of restaurant sales in 1998 to 44.7% from 45.1% in 1997. The decrease in operating expenses as a percentage of sales in 1998 was due to an increase in average unit sales providing greater leverage of fixed and semi-fixed expenses, principally rent and management labor. The provision for asset impairments, restaurant closings, and other charges of $2.5 million in 1998 was determined under SFAS No. 121 by comparing expected future cash flows to the carrying value of these assets. This charge was primarily the result of a decision by management, in the fourth quarter, to close one The Capital Grille restaurant partially offset by favorable developments in estimated amounts accrued in 1997 for costs associated with closed facilities. -20- 21 General and administrative expenses decreased to $22.5 million in 1998 or 7.0% of total revenues, from $23.6 million in 1997, or 8.9% of total revenues. The decrease as a percentage of total revenues was primarily due to the $5 million in nonrecurring expenses recognized in 1997 as partially offset by higher general and administrative expenses in 1998, primarily payroll related, associated with building the infrastructure necessary to support the Company's growth. Interest expense increased to $2.9 million in 1998 compared to $1.2 million in 1997. The increase in interest expense is due to higher average borrowings outstanding under the Company's revolving credit agreement as well as additional expenses associated with obtaining the Company's new revolving credit facility. The Company's weighted average interest rate on borrowings was approximately 7.8% in 1998, including the amortization of debt issue costs, compared to 7.2% in 1997. Minority interest increased to $1.3 million in 1998 from $1.2 million in 1997. This reflects an increase in the number of joint venture restaurants for most of 1998, partially offset by the purchase of joint venture partners' partnership interests in 11 joint venture restaurants during the fourth quarter of 1998. Income tax expense in 1998 was 32.0% of earnings before income taxes. The Company's effective income tax rate differs from applying the statutory federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes. Net income of $8.8 million in 1998, as compared to a net loss of $12.2 million in 1997, reflects the net effect of the items discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. The Company's principal financing source in 1999 was cash flow from operations ($36.7 million). The primary use of funds consisted of costs associated with expansion, principally leasehold improvements, equipment, land and buildings associated with the construction of new restaurants ($36.8 million) and repayment of borrowings under the Company's revolving credit facility ($8 million). Since substantially all sales in the Company's restaurants are for cash, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital. The increases in inventory, prepaid expenses, accounts payable, and accrued expenses are principally due to the new restaurants which were opened during 1999 and the result of higher average unit volumes experienced during 1999. Further increases in current asset and liability accounts are expected as the Company continues its restaurant development program. In November 1999, the Company amended and restated its $100 million revolving credit facility, principally to extend the maturity date. Beginning with the last day of the quarter ending June 2003, the amount available under the revolving credit facility would be reduced each quarter by $8.3 million, reducing the commitment to $50 million as of the termination date in September 2004. The terms of the revolving credit facility, as amended, require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 1.25% to 2.0% (depending on the Company's leverage ratio) or the administrative agent's prime rate of interest plus a margin of 0% to 0.75% (depending on the Company's leverage ratio), at the Company's option, and pay a commitment fee of 0.3% to 0.5% per year on any unused portion of the facility. As of December 26, 1999, interest on the revolving credit facility accrues at LIBOR plus 1.5% or the prime rate plus 0.25%. As of December 26, 1999, the Company was required to pay a commitment fee of 0.325% per year on any unused portion of the facility. The revolving credit facility contains various covenants and restrictions which, among other things, require the maintenance of stipulated leverage and fixed charge coverage ratios and minimum consolidated net worth, as defined, and also limit additional indebtedness in excess of specified amounts. The Company is currently in compliance with such covenants. In August 1999, the Company amended an existing interest rate swap agreement with a commercial bank, which effectively fixes the interest rate at 7.6% on $40 million through August 2000, decreasing to $35 million through May 2001 and decreasing to $25 million through August 2004. The Company is exposed to credit losses on this interest rate swap in the event of counterparty non-performance, but does not anticipate any such losses. On December 26, 1999, $40 million was outstanding and $60 million was available under the Company's revolving credit facility at a weighted average interest rate equal to 8.0%. Giving effect to the interest rate swap agreement, the weighted average interest rate on borrowings under the revolving credit facility was 7.6%. The Company currently plans to open 17 to 19 Company-owned and joint venture LongHorn Steakhouse restaurants, one Bugaboo Creek restaurant and one to two The Capital Grille restaurants in 2000. The Company estimates that its capital -21- 22 expenditures (without consideration of contributions from joint venture partners) will be approximately $52 to $56 million in 2000. The capital expenditure estimate for 2000 includes the estimated cost of developing 19 to 22 new restaurants, ongoing refurbishment in existing restaurants, a planned expansion of the corporate offices in Atlanta, costs associated with obtaining real estate for year 2001 planned openings, and continued investment in improved management information systems. In February 2000, the Company's Board of Directors authorized the Company to purchase up to $10 million of its outstanding common stock through February 2001. As of March 15, 2000, the Company had purchased an aggregate 436,000 shares of its common stock for a total purchase price of approximately $7.9 million (average price of $18.04) under this program. The Company expects that available borrowings under the Company's revolving credit facility, together with cash on hand and cash provided by operating activities, will provide sufficient funds to finance its expansion and share repurchase plans through the year 2001. The preceding discussion of liquidity and capital resources contains certain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, among the other factors that could cause actual results to differ materially are the following: failure of facts to conform to necessary management estimates and assumptions; the Company's ability to identify and secure suitable locations on acceptable terms, open new restaurants in a timely manner, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company's business discipline over a large restaurant base; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; changes in customer dining patterns; competitive pressures from other national and regional restaurant chains; business conditions, such as inflation or a recession, and growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; the risks set forth in Exhibit 99(a) to this Form 10-K, which are hereby incorporated by reference and other risks identified from time to time in the Company's SEC reports, registration statements and public announcements. See the description of forward-looking statements found in "Forward Looking Statements." EFFECT OF INFLATION Management believes that inflation has not had a material effect on earnings during the past several years. Inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company's restaurant operating margins. In the past, however, the Company generally has been able to modify its operations and increase menu prices to offset increases in its operating costs. Federal law increased the hourly minimum wage to $5.15 on September 1, 1997. The legislation, however, froze the wages of tipped employees at $2.13 per hour if the difference is earned in tip income. Although the Company has experienced slight increases in hourly labor costs since this increase in the hourly minimum wage, the effect of the increase in minimum wage was significantly diluted due to the fact that the majority of the Company's hourly employees are tipped and the Company's non-tipped employees have historically earned wages greater than the federal minimum. As such, the Company's increases in hourly labor cost were not proportionate to the increases in minimum wage rates. IMPACT OF YEAR 2000 ISSUES Most hardware and software designed in the past was not designed to recognize calendar dates beginning in the Year 2000. The failure of such hardware and software to properly recognize the dates beginning in the Year 2000 could result in miscalculations or system failures, which could result in an adverse effect on the Company's operations. Beginning in 1998, the Company formulated a four-part plan to address the Year 2000 issue, which included assessment, remediation, testing and implementation. The Company's key information technology systems, including its financial, informational and operational systems ("IT Systems"), which are mainly comprised of third party hardware and software were assessed and tested to determine Year 2000 readiness. In addition, the Company assessed and tested its non-IT systems that utilize embedded technology such as microcontrollers and reviewed them for Year 2000 compliance. Required system modifications or replacements were made by the end of 1999. To operate its business, the Company relies upon its suppliers, distributors and other third party service providers ("Material Providers"), over which it can assert little control. The Company's ability to conduct its core business is dependent upon the ability of these Material Providers to remediate their Year 2000 issues to the extent they affect the Company. If the Material Providers do not appropriately remediate their Year 2000 issues or develop viable contingency plans, the Company's ability to conduct its core business may be materially impacted, which could result in a material adverse effect on the Company's financial condition. The Company requested and received information regarding the state of Year 2000 readiness from all of its Material Providers. The communications received by the Company from its Material Providers did not disclose any material Year 2000 -22- 23 issues. As part of the Year 2000 readiness efforts, the Company developed contingency plans to limit the Year 2000 disruptions and financial loss that might have occurred in the event of failures in the Company's or Material Provider's IT Systems or non-IT systems. These contingency plans were developed and in place by the end of 1999 for all of the IT systems that were determined to be mission critical. The Company expensed costs associated with its Year 2000 system changes as the costs were incurred, except for system change costs that the Company would otherwise capitalize. The program, including testing and remediation of all of the Company's systems and applications, the cost of external consultants, the purchase of software and hardware, the development and implementation of viable contingency plans, including the compensation of internal employees working on Year 2000 projects, cost approximately $1,000,000 (except for fringe benefits of internal employees, which are not separately tracked) from inception in calendar year 1998 through completion in calendar year 1999. Of these costs, approximately $100,000 was incurred (approximately $80,000 of which was capitalized) during 1998, and approximately $900,000 was incurred (approximately $800,000 of which was capitalized) during 1999. The Company experienced no significant difficulties with its IT systems and non-IT systems as a result of the date change to the Year 2000 or the leap year date of February 29, 2000 and, as of March 15, 2000, had experienced no difficulties from material providers as a result of the Year 2000 date change or the leap year date of February 29, 2000. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133") to all fiscal quarters beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for certain hedge transactions. The Company is analyzing the implementation requirements and currently does not anticipate there will be a material impact on the results of operations or financial position after the adoption SFAS No. 133. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK As of December 26, 1999, $40 million was outstanding under the Company's $100 million revolving credit facility. Amounts outstanding under such credit facility bear interest at LIBOR plus a margin of 1.25% to 2.0% (depending on the Company's leverage ratio), or the administrative agent's prime rate of interest plus a margin of 0% to 0.75% (depending on the Company's leverage ratio) at the Company's option. Accordingly, the Company is exposed to the impact of interest rate movements. To achieve the Company's objective of managing its exposure to interest rate changes, the Company from time to time uses interest rate swaps. The Company has an interest rate swap agreement with a commercial bank, which effectively fixes the interest rate at 7.6% on $40 million of the Company's borrowings through August 2000, decreasing to $35 million through May 2001 and decreasing to $25 million through August 2004. The Company is exposed to credit losses on this interest rate swap in the event of counterparty non-performance, but does not anticipate any such losses. While changes in LIBOR and the administrative agent's prime rate of interest could affect the cost of borrowings under the credit facility in excess of amounts covered by the interest rate swap agreement (no amount was outstanding in excess of amounts covered by the interest rate swap agreement at December 26, 1999) in the future, the Company does not consider its current exposure to changes in such rates to be material, and the Company believes that the effect, if any, of reasonably possible near-term changes in interest rates on the Company's financial condition, results of operations or cash flows would not be material. INVESTMENT PORTFOLIO The Company invests portions of its excess cash, if any, in highly liquid investments. At December 26, 1999, the Company had approximately $7 million invested in high-grade overnight repurchase agreements. -23- 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997 WITH INDEPENDENT AUDITORS' REPORT THEREON -24- 25 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report .................................... 26 Consolidated Balance Sheets ..................................... 27 Consolidated Statements of Operations ........................... 28 Consolidated Statements of Shareholders' Equity and Comprehensive Income ........................................ 29 Consolidated Statements of Cash Flows ........................... 30 Notes to Consolidated Financial Statements ...................... 31
-25- 26 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders RARE Hospitality International, Inc.: We have audited the accompanying consolidated balance sheets of RARE Hospitality International, Inc. and subsidiaries (the "Company") as of December 26, 1999 and December 27, 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 26, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RARE Hospitality International, Inc. and subsidiaries as of December 26, 1999 and December 27, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 26, 1999 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for pre-opening and organization costs in 1999. KPMG LLP Atlanta, Georgia February 4, 2000 -26- 27 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 26, 1999 AND DECEMBER 27, 1998 (IN THOUSANDS)
1999 1998 --------- --------- ASSETS Current assets: Cash and cash equivalents .......................... $ 8,864 $ 12,060 Accounts receivable ................................ 3,047 3,443 Inventories ........................................ 10,213 9,609 Prepaid expenses ................................... 815 789 Pre opening costs, net of accumulated amortization . -- 2,102 Refundable income taxes ............................ 2,568 2,700 Deferred income taxes (note 7) ..................... 8,179 6,932 --------- --------- Total current assets ............................. 33,686 37,635 Property and equipment, less accumulated depreciation and amortization (notes 4 and 9) ..... 187,281 167,810 Goodwill, less accumulated amortization ............ 13,185 10,045 Other .............................................. 2,966 3,372 --------- --------- Total assets ..................................... $ 237,118 $ 218,862 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................... $ 17,870 $ 12,423 Accrued expenses (note 5) .......................... 26,847 24,076 --------- --------- Total current liabilities ...................... 44,717 36,499 Debt, net of current installments (note 6) .......... 40,000 48,000 Deferred income taxes (note 7) ...................... 1,103 1,403 Obligations under capital leases, net of current installments (note 9) .............................. 9,732 9,732 --------- --------- Total liabilities ................................ 95,552 95,634 Minority interest ................................... 3,982 2,610 Shareholders' equity (notes 2, 6, 11, and 12): Preferred stock, no par value. Authorized 10,000 shares, none issued ...................... -- -- Common stock, no par value. Authorized 25,000 shares; issued 12,384 shares and 12,077 shares at December 26, 1999 and December 27, 1998, respectively ................. 110,258 105,092 Unearned compensation -- restricted stock ......... (376) (478) Retained earnings ................................. 29,589 16,752 Treasury shares at cost; 145 shares and 60 shares at December 26, 1999 and December 27, 1998, respectively ................................... (1,887) (748) --------- --------- Total shareholders' equity ..................... 137,584 120,618 Commitments and contingencies (notes 6, 8, 9, and 13)............................ --------- --------- Total liabilities and shareholders' equity ..... $ 237,118 $ 218,862 ========= =========
See accompanying notes to consolidated financial statements. -27- 28 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997 -------- --------- --------- Revenues: Restaurant sales: LongHorn Steakhouse ........................... $ 260,507 $ 211,440 $ 170,343 The Capital Grille ............................ 57,890 51,096 39,520 Bugaboo Creek Steak House ..................... 56,925 50,090 44,631 Other restaurants .............................. 6,953 6,458 10,233 --------- --------- --------- Total restaurant sales ...................... 382,275 319,084 264,727 Franchise revenues .......................... 195 -- 27 --------- --------- --------- Total revenues .............................. 382,470 319,084 264,754 --------- --------- --------- Costs and expenses: Cost of restaurant sales ....................... 137,416 116,602 97,568 Operating expenses -- restaurants ............... 171,943 142,730 119,480 Provision for asset impairments, restaurant closings, and other charges (note 3) ......... 1,800 2,500 23,666 Depreciation and amortization -- restaurants ... 15,249 17,636 15,218 Pre-opening expense ........................... 3,051 -- -- General and administrative expenses ........... 26,052 22,470 23,590 --------- --------- --------- Total costs and expenses ................... 355,511 301,938 279,522 --------- --------- --------- Operating income (loss) .................... 26,959 17,146 (14,768) Interest expense, net ........................... 3,866 2,939 1,245 Minority interest (note 2) ...................... 1,609 1,334 1,219 --------- --------- --------- Earnings (loss) before income taxes and cumulative effect of change in accounting principle .................................. 21,484 12,873 (17,232) Income tax expense (benefit) (note 7) ........... 7,060 4,120 (5,000) --------- --------- --------- Earnings (loss) before cumulative effect of change in accounting principle ............. 14,424 8,753 (12,232) Cumulative effect of change in accounting principle (net of tax benefit of $760) (note 1) 1,587 -- -- --------- --------- --------- Net earnings (loss) ........................ $ 12,837 $ 8,753 $ (12,232) ========= ========= ========= Basic earnings per common share before cumulative effect of change in accounting principle ...................................... $ 1.20 $ 0.73 $ (1.04) Cumulative effect per common share of change in accounting principle ........................ 0.13 -- -- --------- --------- --------- Basic earnings (loss) per common share .......... $ 1.07 $ 0.73 $ (1.04) ========= ========= ========= Diluted earnings per common share before cumulative effect of change in accounting principle ...................................... $ 1.15 $ 0.72 $ (1.04) Cumulative effect per common share of change in accounting principle ........................... 0.13 -- -- --------- --------- --------- Diluted earnings (loss) per common share ........ $ 1.02 $ 0.72 $ (1.04) ========= ========= ========= Weighted average common shares outstanding (basic) ............................ 12,032 12,004 11,751 ========= ========= ========= Weighted average common shares outstanding (diluted) .......................... 12,546 12,099 11,751 ========= ========= =========
See accompanying notes to consolidated financial statements. -28- 29 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997 (IN THOUSANDS)
COMMON STOCK RESTRICTED RETAINED TREASURY SHARES DOLLARS STOCK EARNINGS STOCK ------ ------- ----- -------- ----- BALANCE, DECEMBER 29, 1996 ............................. 11,653 $101,099 $ -- $20,231 $ -- Net loss ............................................... -- -- -- (12,232) -- Exercise of stock options .............................. 290 2,543 -- -- -- Issuance of shares in connection with purchase of minority interest .................................. 36 339 -- -- -- Unrealized loss on marketable debt securities .......... -- -- -- -- -- ------ -------- ------ ------- ------- BALANCE, DECEMBER 28, 1997 ............................. 11,979 103,981 -- 7,999 -- Net earnings ........................................... -- -- -- 8,753 -- Exercise of stock options .............................. 53 536 -- -- -- Issuance of shares pursuant to restricted stock award .. 45 575 (575) -- -- Amortization of restricted stock ....................... -- -- 97 -- -- Purchase of common stock ............................... -- -- -- -- (748) ------ -------- ------ ------- ------- BALANCE, DECEMBER 27, 1998 ............................. 12,077 105,092 (478) 16,752 (748) Net earnings ........................................... -- -- -- 12,837 -- Exercise of stock options .............................. 176 2,100 -- -- -- Tax benefit of non-qualified stock options exercised ... -- 195 -- -- -- Issuance of shares in connection with purchase of minority interest .................................. 129 2,827 -- -- -- Issuance of shares pursuant to restricted stock awards ................................................ 2 44 (44) -- -- ------ -------- ------ ------- ------- Amortization of restricted stock ....................... -- -- 146 -- -- Purchase of common stock ............................... -- -- -- -- (1,139) ------ -------- ------ ------- ------- BALANCE, DECEMBER 26, 1999 ............................. 12,384 $110,258 $ (376) $29,589 $(1,887) ====== ======== ====== ======= ======= ACCUMULATED OTHER TOTAL COMPREHENSIVE SHAREHOLDERS' INCOME (1) EQUITY ---------- ------ BALANCE, DECEMBER 29, 1996 ............................. $ 54 $ 121,384 Net loss ............................................... -- (12,232) Exercise of stock options .............................. -- 2,543 Issuance of shares in connection with purchase of minority interest .................................. -- 339 Unrealized loss on marketable debt securities .......... (54) (54) ------- --------- BALANCE, DECEMBER 28, 1997 ............................. -- 111,980 Net earnings ........................................... -- 8,753 Exercise of stock options .............................. -- 536 Issuance of shares pursuant to restricted stock award .. -- -- Amortization of restricted stock ....................... -- 97 Purchase of common stock ............................... -- (748) ------- --------- BALANCE, DECEMBER 27, 1998 ............................. -- 120,618 Net earnings ........................................... -- 12,837 Exercise of stock options .............................. -- 2,100 Tax benefit of non-qualified stock options exercised ... -- 195 Issuance of shares in connection with purchase of minority interest .................................. -- 2,827 Issuance of shares pursuant to restricted stock awards ................................................ -- -- ------- --------- Amortization of restricted stock ....................... -- 146 Purchase of common stock ............................... -- (1,139) ------- --------- BALANCE, DECEMBER 26, 1999 ............................. $ -- $ 137,584 ======= =========
(1) Comprehensive income (loss) for fiscal years 1999, 1998 and 1997 was $12,837, $8,753, and $(12,286), respectively. See accompanying notes to consolidated financial statements. -29- 30 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997 (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net earnings (loss) ................................................. $12,837 $8,753 $(12,232) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization ...................................... 16,758 18,733 16,418 Non-cash portion of provision for asset impairments, restaurant closings and other charges .............................. 1,800 2,500 22,367 Cumulative effect of accounting change ............................. 1,587 -- -- Minority interest .................................................. 1,609 1,334 1,219 Preopening costs ................................................... -- (3,137) (5,208) Deferred tax (benefit) expense ..................................... (2,307) 1,327 (3,864) Changes in assets and liabilities: Accounts receivable ................................................ 396 (1,389) 468 Inventories ........................................................ (604) (443) (1,269) Prepaid expenses ................................................... (26) 584 92 Other assets ....................................................... 64 (1,207) (22) Refundable income taxes ............................................ 1,847 1,752 (6,900) Accounts payable ................................................... 3,366 (1,176) (126) Accrued expenses ................................................... (672) 7,482 1,222 ------- ------ -------- Net cash provided by operating activities ......................... 36,655 35,113 12,165 ------- ------ -------- Cash flows from investing activities: Proceeds from sale of marketable debt securities .................... -- 609 252 Purchase of property and equipment .................................. (36,822) (24,955) (52,970) Purchase of joint venture and franchise interests ................... (206) (6,602) (3,797) ------- ------ -------- Net cash used in investing activities ............................ (37,028) (30,948) (56,515) ------- ------ -------- Cash flows from financing activities: Proceeds from (repayments of) debt, net ............................. (8,000) 5,000 35,900 Principal payments on long-term debt ................................ -- -- (31) Proceeds from minority partner contributions ........................ 2,180 1,772 2,660 Distributions to minority partners .................................. (2,417) (3,283) (2,928) Increase in bank overdraft included in accounts payable and accrued liabilities .......................................... 4,453 2,866 1,480 Purchase of common stock for treasury ............................. (1,139) (748) -- Proceeds from exercise of stock options ............................ 2,100 536 2, 543 ------- ------ -------- Net cash provided by financing activities ....................... (2,823) 6,143 39,624 ------- ------ -------- Net (decrease) increase in cash and cash equivalents ............ (3,196) 10,308 (4,726) Cash and cash equivalents at beginning of year ...................... 12,060 1,752 6,478 ------- ------ -------- Cash and cash equivalents at end of year ............................ $ 8,864 $12,060 $ 1,752 ------- ======= ======== Supplemental disclosure of cash flow information: Cash paid for income taxes ........................................ $ 7,508 $3,033 $ 9,624 ======= ====== ======== Cash paid for interest, net of interest capitalized ............... $ 3,510 $3,063 $ 1,039 ======= ====== ======== Supplemental disclosure of non-cash financing and investing activities: Assets acquired under capital lease ................................ $ -- $4,163 $ 5,600 Issuance of common stock in purchase of minority interest ......... $ 2,827 $ -- $ 339
See accompanying notes to consolidated financial statements. -30- 31 RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 26, 1999, DECEMBER 27, 1998, AND DECEMBER 28, 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OPERATIONS RARE Hospitality International, Inc., including its wholly owned subsidiaries (the "Company"), is a multi-concept restaurant company operating primarily in the Eastern and Mid-Western United States. At December 26, 1999, the Company operated the following restaurants:
CONCEPT NUMBER IN OPERATION ------- ------------------- LongHorn Steakhouse................... 118 Bugaboo Creek ........................ 18 The Capital Grille.................... 11 Other specialty concepts.............. 2
The Company is a partner in several joint ventures and limited partnerships organized for the purpose of operating LongHorn Steakhouse restaurants. As of December 26, 1999, 28 of the Company's restaurants operate in joint ventures and limited partnerships. CASH EQUIVALENTS The Company considers all highly liquid investments which have original maturities of three months or less to be cash equivalents. Cash equivalents, comprised of overnight repurchase agreements, totaled approximately $7 million and $8.5 million at December 26, 1999 and December 27, 1998, respectively. The carrying amount of these instruments approximates their fair market values. All overdraft balances have been reclassified as current liabilities. MARKETABLE DEBT SECURITIES Marketable debt securities are classified as available-for-sale and are reported at fair market value, with any unrealized gains or losses, net of deferred income taxes, reflected as a separate component of shareholders' equity. INVENTORIES Inventories, consisting principally of food and beverages, are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Property under capital leases is stated at the present value of minimum lease payments. Leasehold improvements and property held under capital leases are amortized on the straight-line method over the shorter of the term of the lease, which may include renewals, or the estimated useful life of the assets (generally 15 years for non-ground lease sites and 25 years for ground lease sites). Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the related assets, which approximates 25 years for buildings and land improvements, and seven years for equipment. BASIS OF PRESENTATION The consolidated financial statements include the financial statements of RARE Hospitality International, Inc., its wholly owned subsidiaries, and joint ventures over which the Company exercises control. All significant intercompany balances and transactions have been eliminated in consolidation. -31- 32 PRE-OPENING AND ORGANIZATION COSTS At the beginning of fiscal 1999, the Company adopted the American Institute of Certified Public Accountants ("AICPA") Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires most entities to expense as incurred all organization and pre-opening costs that are not otherwise capitalizable as long-lived assets. The Company previously deferred such costs and amortized them over a twelve-month period following the opening of each restaurant, as was the practice in the restaurant industry. As a result of the adoption of this change in accounting policy, the Company recorded a cumulative effect charge of $2.3 million (approximately $1.6 million net of tax benefit, or $0.13 per diluted share). Prior to fiscal 1999, amortization of deferred preopening costs was included with depreciation and amortization expense on the consolidated statements of operations. Effective with fiscal 1999, pre-opening costs are included as a separate item on the consolidated statements of operations. COMPUTER SOFTWARE FOR INTERNAL USE At the beginning of Fiscal 1999, the Company adopted the AICPA SOP 98-1, " Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 identifies the characteristics of internal-use software and specifies that once the preliminary project stage is complete, certain external direct costs, certain direct internal payroll and payroll-related costs and interest costs incurred during the development of computer software for internal use should be capitalized and amortized. Prior to Fiscal 1999 the Company expensed all such costs as incurred. The adoption of SOP 98-1 did not have a material impact on the Company's results of operations or financial position. UNREDEEMED GIFT CERTIFICATES The Company records a liability for outstanding gift certificates at the time they are issued. Upon redemption, sales are recorded and the liability is reduced by the amount of certificates redeemed. GOODWILL Goodwill, net of accumulated amortization of approximately $1.2 million and $800,000 at December 26, 1999 and December 27, 1998, respectively, represents the excess of purchase price over fair value of net assets acquired. Goodwill is amortized using the straight-line method over the expected period to be benefited (from 13 to 25 years). The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. In 1997, the Company's provision for asset impairments, restaurant closings and other charges included a $4.2 million charge for the write-off of goodwill recorded upon the acquisition of i) the Company's meat company; ii) the assets of Lone Star Steaks, Inc.; and iii) the franchise rights obtained from LongHorn Steaks of Alabama. OTHER ASSETS Other assets consist of organization costs, debt issuance costs, trademarks, and liquor licenses. Trademarks and liquor licenses are amortized on a straight-line basis over five years. Debt issuance costs are amortized on a straight-line basis over the term of the debt. The first quarter 1999 adoption of the change in accounting method prescribed by SOP 98-5 resulted in a one time charge of approximately $200,000, less applicable income taxes, related to the write-off of organization costs. RESTAURANT CLOSING COSTS Upon the decision to close or relocate a restaurant, estimated unrecoverable costs are charged to expense. Such costs include the write-down of buildings and/or leasehold improvements, equipment, and furniture and fixtures, to the estimated fair market value less costs of disposal, and a provision for future lease obligations, less estimated subrental income. The Company provided for the closure of one restaurant in 1998 and seven restaurants in 1997. -32- 33 RECOVERABILITY OF LONG-LIVED ASSETS The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires the Company to review its long-lived assets related to each restaurant periodically or whenever events or changes in circumstances indicate that the carrying amount of a restaurant may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Considerable management judgment is required to estimate discounted cash flows and fair value less costs to sell. Accordingly, actual results could vary significantly from such estimates. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In connection with the merger of the Company with Bugaboo Creek Steak House, Inc. (see note 2), the Company acquired certain enterprises affiliated with Bugaboo Creek Steak House, Inc. in a transaction accounted for as a pooling of interests. Prior to the merger, these affiliated entities were either S Corporations or partnerships, and as such, their stockholders or partners, and not the enterprises, were responsible for Federal and state income taxes. STOCK-BASED COMPENSATION Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees", and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation", which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS No. 123. ADVERTISING EXPENSES Advertising costs are expensed over the period covered by the related promotion. Total advertising expense included in operating expenses -- restaurants was approximately $10.8 million, $8.4 million and $8.3 million for the years ended December 26, 1999 December 27, 1998, and December 28, 1997, respectively. SEGMENT DISCLOSURE Due to the similar economic characteristics, as well as a single type of product, production process, distribution system and type of customer, the Company reports the operations of its different concepts on an aggregated basis and does not separately report segment information. Revenues from external customers are derived principally from food and beverage sales. The Company does not rely on any major customers as a source of revenue. -33- 34 EARNINGS (LOSS) PER SHARE The Company accounts for earnings (loss) per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share". SFAS No. 128 requires dual disclosure of earnings (loss) per share-basic and diluted. Basic earnings (loss) per share equals net earnings (loss) divided by the weighted average number of common shares outstanding and does not include the dilutive effects of stock options and restricted stock. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding after giving effect to dilutive stock options and restricted stock. For purposes of computing the diluted loss per share for 1997, the potentially dilutive impact of stock options is excluded since the effect would be antidilutive. The following table presents a reconciliation of weighted average shares and earnings (loss) per share amounts (amounts in thousands, except per share data):
1999 1998 1997 ---- ---- ---- Weighted average number of common shares used in basic calculation ........................................... 12,032 12,004 11,751 Dilutive effect of restricted stock award ....................... 28 1 -- Dilutive effect of net shares issuable pursuant to stock option plans ................................. 486 94 -- -------- -------- -------- Weighted average number of common shares used in diluted calculation ......................................... 12,546 12,099 11,751 ======== ======== ======== Earnings (loss) before cumulative effect of change in accounting principle ........................................ $ 14,424 $ 8,753 $(12,232) Cumulative effect of change in accounting principle (net of tax benefit) ................................. 1,587 -- -- -------- -------- -------- Net earnings (loss) ........................................ $ 12,837 $ 8,753 $(12,232) ======== ======== ======== Basic earnings (loss) per common share before cumulative effect of change in accounting principle ...................................................... $ 1.20 $ 0.73 $ (1.04) Cumulative effect per common share of change in accounting principle ........................................ 0.13 -- -- -------- -------- -------- Basic earnings (loss) per common share .......................... $ 1.07 $ 0.73 $ (1.04) ======== ======== ======== Diluted earnings (loss) per common share before cumulative effect of change in accounting principle ...................................................... $ 1.15 $ 0.72 $ (1.04) Cumulative effect per common share of change in accounting principle ........................................ 0.13 -- -- -------- -------- -------- Diluted earnings (loss) per common share ........................ $ 1.02 $ 0.72 $ (1.04) ======== ======== ========
Options to purchase 266,672 shares of common stock at December 26, 1999, were excluded from the computation of diluted earnings per share because the related exercise prices were greater than the average market price for 1999 and would have been antidilutive. ACCOUNTS RECEIVABLE Accounts receivable represent amounts due from restaurant customers and suppliers. FINANCIAL INSTRUMENTS The carrying value of the Company's cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, debt, and obligations under capital leases approximates their fair value. The fair value of a financial instrument is the amount for which the instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: For cash and cash equivalents, accounts receivable, accounts payable and accrued expenses the carrying amounts approximate fair value because of the short maturity of these financial instruments. The fair value of the Company's debt and obligations under capital leases is estimated by discounting future cash flows for these instruments at rates currently offered to the Company for similar debt or long-term leases, as appropriate. -34- 35 The Company, from time to time, uses interest rate swaps to reduce interest rate volatility. The interest differential to be paid or received on the swap is recognized in the consolidated statement of operations, as incurred, as a component of interest expense. DERIVATIVE FINANCIAL INSTRUMENTS The Company may, from time to time, use interest rate swap agreements in the management of interest rate exposure. The interest rate differential to be paid or received is normally accrued as interest rates change, and is recognized as a component of interest expense over the life of the agreements. If an agreement is terminated prior to the maturity date and is characterized as a hedge, any accrued rate differential would be deferred and recognized as interest expense through the original maturity date of the hedge. The Company believes that it does not have material risk from any interest rate swaps, and the Company does not anticipate any material losses from the use of such instruments. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and net unrealized gains (loses) on securities and is presented in the consolidated statements of shareholders' equity and comprehensive income. The statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. FUTURE APPLICATION OF ACCOUNTING STANDARDS In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). This statement defers the effective date of SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133") to all fiscal quarters beginning after June 15, 2000. SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for certain hedge transactions. The Company is analyzing the implementation requirements and currently does not anticipate there will be a material impact on the results of operations or financial position after the adoption SFAS No. 133. RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and 1997 consolidated financial statements to conform with the 1999 presentation. (2) BUSINESS COMBINATIONS AND JOINT VENTURES In September 1999, the Company acquired the ownership interest of its joint venture partner in ten LongHorn Steakhouse restaurants located in south Florida markets for an aggregate purchase price of approximately $2.9 million; comprised of 104,000 shares of Company common stock and approximately $600,000 in notes payable in a transaction accounted for under the purchase method. The excess purchase price over the book value of the minority interest acquired was approximately $2.9 million and was recorded as goodwill to be amortized over 20 years. In May 1999, the Company acquired the ownership interest of its joint venture partner in four LongHorn Steakhouse restaurants located in the Columbus, Ohio market for an aggregate purchase price of $750,000; comprised of 25,000 shares of Company common stock, $150,000 in cash and a $30,000 note, in a transaction accounted for under the purchase method. The excess of purchase price over the book value of the minority interest acquired was approximately $750,000 and was recorded as goodwill to be amortized over 20 years. In December 1998, the Company purchased the assets of one previously franchised LongHorn Steakhouse location in Tampa, Florida, in a transaction accounted for under the purchase method, for approximately $1.2 million in cash and a -35- 36 $50,000 note. The excess of cost over fair value of tangible assets acquired was approximately $1.2 million and was recorded as goodwill to be amortized over 20 years. In November 1998, the Company acquired the ownership interest of its joint venture partners in 11 LongHorn Steakhouse restaurants located in the Cleveland, Ohio, and St. Louis, Missouri markets for an aggregate purchase price of $5.3 million in cash and a $200,000 note in a transaction accounted for under the purchase method. The excess of cost over the minority interest acquired was approximately $3.8 million and was recorded as goodwill to be amortized over 20 years. In the fourth quarter of 1997, the Company acquired the ownership interests of its joint venture partners in ten LongHorn Steakhouse restaurants located in South Georgia, Southern Alabama, and the Panhandle of Florida for an aggregate purchase price of approximately $1.1 million in cash, notes payable, and the Company's common stock in a transaction accounted for under the purchase method. The excess of cost over the minority interest acquired was approximately $1.1 million and was recorded as goodwill to be amortized over 20 years. In January 1997, the Company purchased the assets of two previously franchised locations in Greenville and Spartanburg, South Carolina, in a transaction accounted for under the purchase method, for approximately $2 million in cash. The excess of cost over fair value of tangible assets acquired was approximately $1.4 million and was recorded as goodwill to be amortized over the 13-year period remaining under the acquired franchise agreement. (3) PROVISION FOR ASSET IMPAIRMENTS, RESTAURANT CLOSINGS, AND OTHER CHARGES The provision for asset impairments, restaurant closings, and other charges of $1.8 million in fiscal 1999 consisted primarily of the write down of two Bugaboo Creek restaurants, which was determined under SFAS No. 121 by comparing discounted future cash flows to the carrying value of impaired assets. The provision for asset impairments, restaurant closings, and other charges of $2.5 million in 1998 was primarily the result of a decision by management, in the fourth quarter, to close one The Capital Grille restaurant partially offset by favorable developments in estimated amounts accrued in 1997 for costs associated with closed facilities. The provision for asset impairments, restaurant closings, and other charges of approximately $23.7 million in 1997 was the result of a decision by management, in the fourth quarter, to close seven restaurants and certain administrative facilities, as well as the Company's assessment of the impairment of certain assets. The Company's decision resulted from significant changes in key management and a strategic review process employed by new management. This charge reduced carrying values for long-lived assets to be held and used to estimated fair value and of long-lived assets to be disposed of in connection with the closure of the seven restaurants and the administrative facilities to estimated fair market value less costs to sell. (4) PROPERTY AND EQUIPMENT Major classes of property and equipment at December 26, 1999 and December 27, 1998 are summarized as follows (in thousands):
1999 1998 ---- ---- Land and improvements ............................ $ 22,090 $ 18,559 Buildings ........................................ 22,374 19,608 Leasehold improvements ........................... 115,331 100,396 Assets under capital lease ....................... 9,732 9,732 Restaurant equipment ............................. 47,441 42,147 Furniture and fixtures ........................... 22,096 20,928 Construction in progress ......................... 9,927 4,262 --------- --------- 248,991 215,694 Less accumulated depreciation and amortization .. 61,710 47,884 --------- --------- $ 187,281 $ 167,810 ========= =========
-36- 37 During 1999, 1998 and 1997, the Company capitalized interest during construction of approximately $457,000, $270,000, and $663,000, respectively, as a component of property and equipment. The Company has, in the normal course of business, entered into agreements with vendors for the purchase of restaurant equipment, furniture, fixtures, buildings, and improvements for restaurants that have not yet opened. At December 26, 1999, such commitments totaled approximately $9.5 million. (5) ACCRUED EXPENSES Accrued expenses consist of the following at December 26, 1999 and December 27, 1998 (in thousands):
1999 1998 ---- ---- Accrued future lease obligations and other charges ................................ $ 2,038 $ 3,037 Accrued rent ............................ 2,345 1,859 Payroll and related ..................... 6,803 5,596 Other taxes accrued ..................... 3,586 2,955 Gift certificates ....................... 6,740 4,707 Other ................................... 5,335 5,922 ------- ------- $26,847 $24,076 ======= =======
(6) DEBT The Company has a variable interest rate revolving credit facility which permits the Company to borrow up to $100 million. Beginning with the last day of the quarter ending June 2003 the amount available under the revolving credit facility would be reduced each quarter by $8.3 million, reducing the commitment to $50 million as of the termination date in September 2004 (the "1999 Facility"). The 1999 Facility is the result of amendments and a restatement of the Company's previous $100 million credit facility. The 1999 Facility bears interest at the Company's option of LIBOR plus a margin of 1.25% to 2.0% (depending on the Company's leverage ratio) or the administrative agent's prime rate of interest, plus a margin of 0% to 0.75% (depending on the Company's leverage ratio) and requires payment of a commitment fee on any unused portion at a rate of 0.3% to 0.5% per year (depending on the Company's leverage ratio). At December 26, 1999 and December 27, 1998, the interest rate on outstanding obligations under the Company's revolving credit facilities was 6.836% and 6.898%, respectively, based on LIBOR plus 1.5% and LIBOR plus 1.625%, respectively. The commitment fee on the unused portion of the 1999 Facility on December 26, 1999, was 0.30% per year. At December 26, 1999 and December 27, 1998, debt outstanding under the revolving credit facilities totaled $40 million and $48 million, respectively. Amounts available under the Company's revolving credit facilities totaled $60 million and $52 million at December 26, 1999 and December 27, 1998, respectively. The 1999 Facility restricts payment of dividends, without prior approval of the lender, and contains certain financial covenants, including debt to capitalization, leverage and interest coverage ratios, as well as minimum net worth and maximum capital expenditure covenants. The 1999 Facility is secured by the common stock of entities, which own substantially all of the Bugaboo Creek and The Capital Grille restaurants. At December 26, 1999, the Company was in compliance with the provisions of the 1999 Facility. Assuming the $40 million outstanding at December 26, 1999, under the 1999 Facility is outstanding at the end of 2002, the scheduled maturity would be in 2004. In August 1999, the Company amended an existing interest rate swap agreement with a commercial bank, which effectively fixes the interest rate at 7.6% on $40 million through August 2000, decreasing to $35 million through May 2001 and decreasing to $25 million through August 2004. The Company is exposed to credit losses on this interest rate swap in the event of counterparty non-performance, but does not anticipate any such losses. After giving affect to the interest rate swap agreement, the weighted average interest rate on borrowings under the revolving credit facility was 7.6% on December 26, 1999. Prior to amendment, this interest rate swap agreement fixed the interest rate at 7.515% on $40 million through August 1999, decreasing to $35 million through February 2000 and decreasing to $25 million through August 2001. -37- 38 (7) INCOME TAXES Income tax (benefit) expense consists of (in thousands):
CURRENT DEFERRED TOTAL ------- -------- ----- Year ended December 26, 1999: U.S. Federal ................................. $ 7,483 $(1,354) $ 6,129 State and local .............................. 1,124 (193) 931 ------- ------- ------- $ 8,607 $(1,547) $ 7,060 ======= ======= ======= Year ended December 27, 1998: U.S. Federal ................................. $ 2,026 $ 1,121 $ 3,147 State and local .............................. 767 2 06 973 ------- ------- ------- $ 2,793 $ 1,327 $ 4,120 ======= ======= ======= Year ended December 28, 1997: U.S. Federal ................................. $ (923) $(3,215) $(4,138) State and local .............................. (213) (649) (862) ------- ------- ------- $(1,136) $(3,864) $(5,000) ======= ======= =======
The differences between income taxes at the statutory Federal income tax rate and income tax expense reported in the consolidated statements of operations are as follows:
1999 1998 1997 ---- ---- ---- Federal statutory income tax rate .................. 35.0% 35.0% (34.0)% State income taxes, net of federal benefit ......... 3.3 3.6 (5.0) Meals and entertainment ............................ 0.8 0.4 (1.5) FICA tip credit .................................... (6.7) (8.3) 7.3 Other .............................................. 0.5 1.3 4.2 ----- ----- ----- Effective tax rates ........................ 32.9% 32.0% (29.0)% ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 26, 1999 and December 27, 1998 are presented below (in thousands):
1999 1998 ---- ---- Deferred tax assets: Provisions for restaurant closings, and other charges ..... $ 4,181 $ 3,905 Deferred rent ............................................. 891 717 Accrued joint venture contract termination ................ 553 423 Preopening costs .......................................... 1,342 2,054 Accrued insurance ......................................... 203 499 Accrued workers' compensation ............................. 514 297 Other ..................................................... 1,260 527 ------- Total gross deferred tax assets ........................ 8,944 8,422 Deferred tax liability -- Property and equipment .......... (1,868) (2,893) ------- ------- Net deferred tax assets ................................ $ 7,076 $ 5,529 ======= =======
In assessing the realizability of deferred tax assets, the Company's management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company's management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the periods in which the deferred tax assets are deductible, the Company's management believes it is more likely than not the Company will realize the benefits of these deductible differences, at December 26, 1999. -38- 39 (8) EMPLOYEE BENEFIT PLANS The Company provides employees who meet minimum service requirements with retirement benefits under a 401(k) salary reduction and profit sharing plan (the "RARE Plan"). Under the RARE plan, employees may make contributions of between 1% and 20% of their annual compensation. The Company is required to make an annual matching contribution up to a maximum of 2.5% of employee compensation. Additional contributions are made at the discretion of the Board of Directors. The Company's expense under the RARE plan was $396,000, $396,000, and $260,000 for 1999, 1998, and 1997, respectively. (9) LEASES AND RELATED COMMITMENTS The Company is obligated under various capital leases for certain restaurant facilities that expire at various dates during the next 25 years. The Company has noncancelable operating leases for restaurant facilities. Rental payments include minimum rentals, plus contingent rentals based on restaurant sales at the individual stores. These leases generally contain renewal options for periods ranging from three to 15 years and require the Company to pay all executory costs such as insurance and maintenance. Under the provisions of certain leases, there are certain rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the life of the anticipated lease terms. Future minimum lease payments under capital lease obligations and noncancelable operating leases at December 26, 1999 are as follows (in thousands):
YEARS ENDING AT OR ABOUT DECEMBER 31: CAPITAL OPERATING ------- --------- 2000................................. $ 860 $ 11,135 2001................................. 860 10,718 2002................................. 892 10,211 2003................................. 929 9,406 2004................................. 947 8,475 Thereafter...................................... 20,512 33,157 ------- -------- Total minimum lease payments.................... 25,000 $ 83,102 Less imputed interest (at 9%)................... 15,268 ======== ------- Present value of minimum lease payments..... 9,732 Less current maturities......................... -- ------- Obligations under capital leases, excluding current maturities................... $ 9,732 =======
Rental expense consisted of the following amounts (in thousands):
1999 1998 1997 ---- ---- ---- Minimum lease payments............. $10,942 $ 9,611 $8,252 Contingent rentals ................ 1,228 799 686 ------- ------- ------ Total rental expense .............. $12,170 $10,410 $8,938 ======= ======= ======
A standby letter of credit in the amount of $750,000 has been issued to secure the Company's obligations under a lease of real estate. Drafts may be presented against this letter of credit in the event that the Company is in default of the terms of the lease, all applicable grace periods have expired and the Company has failed to cure all such defaults. The amount of such drafts may be for the amount presently due and owing by the Company to the landlord or the full amount of the letter of credit if the landlord has notified tenant that it has terminated the lease or has exercised its right to repossess the leased premises. (10) RELATED PARTY TRANSACTIONS During 1999, 1998, and 1997, RDM Design, a company owned by a relative of two Company directors, provided architectural design services to the Company. Fees paid for these services (including payments for subcontracted engineering services) amounted to approximately $106,000, $12,000, and $11,000 for the years 1999, 1998, and 1997, respectively. Through August 1999, the Company leased, from entities in which certain of the Company's directors had a financial interest, the land and buildings in which it operates one LongHorn Steakhouse restaurant. Rental expense includes approximately $71,800, $110,500, and $106,000 for 1999, 1998, and 1997, respectively, for rents paid related to this restaurant site. In August 1999, the Company acquired this land and building for a purchase price of $911,000. -39- 40 (11) SHAREHOLDERS' EQUITY In 1998, the Company's Board of Directors authorized the Company to purchase shares of its common stock, through open market transactions, block purchases or in privately negotiated transactions. During 1999 and 1998, the Company purchased 85,000 and 59,500 shares, respectively, of its common stock for a total purchase price of approximately $1.9 million (average price of $13.06 per share). The Company's Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par value. The Board of Directors of the Company may determine the preferences, limitations, and relative rights of any class of shares of preferred stock prior to the issuance of such class of shares. In November 1997, in connection with the adoption of a Shareholders Rights Plan, the Board of Directors designated 500,000 shares of Series A Junior Participating Preferred Stock (the "Series A Stock") and filed such designation as an amendment to the Company's Articles of Incorporation. Holders of shares of Series A Stock are entitled to receive, when, as and if declared by the Board of Directors, (i) on each date that dividends or other distributions (other than dividends or distributions payable in common stock) are payable on the common stock comprising part of the Reference Package (as defined in the Articles of Incorporation), an amount per whole share of Series A Stock equal to the aggregate amount of dividends or other distributions that would be payable on such date to a holder of the Reference Package and (ii) on the last day of March, June, September and December in each year, an amount per whole share of Series A Stock equal to the excess of $1.00 over the aggregate dividends paid per whole share of Series A Stock during the three-month period ending on such last day. If any shares of Series A Stock are issued, no dividends (other than dividends payable in common stock) may be declared or paid unless the full cumulative dividends on all outstanding shares of Series A Stock have been or are contemporaneously paid. Upon the liquidation, dissolution or winding up of the affairs of the Company and before any distribution or payment to the holders of common stock, holders of shares of the Series A Stock are entitled to be paid in full an amount per whole share of Series A Stock equal to the greater of (i) $1.00 or (ii) the aggregate amount distributed or to be distributed prior to the date of such liquidation, dissolution or winding up to a holder of the Reference Package. After payment in full to each holder of shares of Series A Stock, the Series A Stock shall have no right or claim to any of the remaining assets of the Company. Each outstanding share of Series A Stock votes on all matters as a class with any other capital stock comprising part of the Reference Package and shall have the number of votes that a holder of the Reference Package would have. As of December 26, 1999, there were no shares of Series A Stock issued and outstanding and all of such shares are issuable in accordance with the Company's Shareholders Rights Plan. (12) STOCK OPTIONS The Company's 1997 Long-Term Incentive Plan, as amended (the "1997 Stock Option Plan"), provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, performance units, restricted stock, dividend equivalents and other stock based awards to employees, officers, directors, consultants, and advisors. The Company's Amended and Restated 1992 Incentive Plan (the "1992 Stock Option Plan") provides for the granting of incentive stock options, nonqualified stock options, and stock appreciation rights to key employees and directors, based upon selection by the Stock Option Committee. All stock options issued under the 1997 Stock Option Plan and the 1992 Stock Option Plan were granted at prices which equate to or were higher than current market value on the date of the grant, are generally exercisable after three to five years, and must be exercised within ten years from the date of grant. The 1997 Stock Option Plan and the 1992 Stock Option Plan authorized the granting of options to purchase 750,000 shares of common stock and 1,500,000 shares of common stock, respectively. The 1994 Bugaboo Creek Stock Option Plan (the "1994 Stock Option Plan") provides for the granting of options to acquire approximately 306,550 shares of the Company's common stock to directors, officers, and key employees of Bugaboo Creek Steak House, Inc.. Through December 27, 1998, the Company had granted options to purchase approximately 214,050 shares of common stock pursuant to the terms of the 1994 Stock Option Plan. Options awarded under the 1994 Stock Option Plan prior to the merger were adjusted based on the exchange ratio of 1.78 shares of common stock of Bugaboo Creek Steak House, Inc. for each share of the Company's common stock. Options awarded under the 1994 Stock Option Plan were generally granted at prices which equate to current market value on the date of the grant, are generally exercisable after two to three years, and expire ten years subsequent to award. The 1994 Stock Option Plan was cancelled by the Company in 1999; accordingly, no additional shares are available to be issued. The Company's Amended and Restated 1996 Stock Plan for Outside Directors (the "1996 Stock Option Plan") provides for the automatic granting of non-qualified stock options to outside directors. The 1996 Stock Option Plan authorizes the granting of options to purchase up to an aggregate of 100,000 shares of common stock. All stock options issued under the 1996 Stock -40- 41 Option Plan are granted at prices which are equal to the current market value on the date of the grant, become exercisable six months and one day after the date of grant, and must be exercised within ten years from the date of grant. The Company applies APB 25 in accounting for its stock option plans. Accordingly, no compensation expense has been recognized for the Company's stock-based compensation plans. Had compensation cost for the Company's stock option plans been determined based upon the fair value methodology prescribed under SFAS No. 123, the Company's 1999, 1998, and 1997 net earnings (loss) and net earnings (loss) per share would have been reduced (increased in 1997) by approximately $1.7 million, $2 million, and $1 million, or approximately $0.14, $0.17, and $0.09 per share, respectively. The effects of disclosing compensation cost under SFAS No. 123 may not be representative of the effects on reported earnings for future years. The fair value of the options granted during 1999, 1998, and 1997 is estimated at approximately $1.4 million, $1.7 million, and $3.4 million, respectively, on the date of grant, using the Black-Scholes option-pricing model with the following assumptions: dividend yield of zero, volatility of 20%, risk-free interest rate of 6%, and an average expected life of eight years. As of December 26, 1999 and December 27, 1998, options to purchase 911,010 and 592,626 shares of common stock, respectively, were exercisable at weighted average exercise prices of $13.16 and $13.47 per share, respectively. Option activity under the Company's stock option plans is as follows:
WEIGHTED SHARES AVERAGE PRICE ------ ------------- Outstanding at December 29, 1996............. 1,410,766 $ 15.28 Granted in 1997.............................. 995,150 14.47 Exercised in 1997............................ (289,980) 8.81 Canceled in 1997............................. (642,843) 17.72 --------- Outstanding at December 28, 1997............. 1,473,093 14.79 Granted in 1998.............................. 567,950 11.62 Exercised in 1998............................ (52,400) 10.17 Canceled in 1998............................. (186,795) 16.24 --------- Outstanding at December 27, 1998............. 1,801,848 13.58 Granted in 1999.............................. 205,513 18.65 Exercised in 1999............................ (175,296) 11.95 Canceled in 1999............................. (135,543) 14.05 --------- Outstanding at December 26, 1999............. 1,696,522 14.28 =========
The following table summarizes information concerning options outstanding and exercisable as of December 26, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------ ----------- ---- ----- ----------- ----- $8.75 to $10...................... 375,050 7.6 $ 9.52 305,150 $ 9.51 $10.01 to $15..................... 820,230 7.7 13.14 374,616 12.12 $15.01 to $20..................... 299,570 6.7 17.96 121,450 17.37 $20.01 to $25..................... 201,672 5.4 22.19 107,794 22.07
(13) COMMITMENTS AND CONTINGENCIES JOINT VENTURES Several of the Company's joint venture agreements and employment agreements with joint venture partners and restaurant managers require or provide the Company with the option to purchase the managers' interests upon termination of the joint venture. The purchase prices are based upon certain multiples of the relevant restaurant's cash flow or profits. -41- 42 PURCHASE COMMITMENTS The Company has entered into certain purchasing agreements with certain meat suppliers requiring the Company to purchase contracted quantities of meat at established prices through their expiration on varying dates in 2000 and 2001. The quantities contracted for are based on usage projections management believes to be conservative estimates of actual requirements during the contract terms. The Company does not anticipate any material adverse effect on its results of operations or financial condition from these contracts. OTHER Under the Company's insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Company's preference to retain a significant portion of certain expected losses related primarily to workers' compensation, employee medical and general liability costs. Provisions for losses expected under these programs are recorded based upon the Company's estimates of the aggregate liability for claims incurred. The Company has a surety bond totaling $1.5 million at December 26, 1999 that is being maintained as security under the Company's worker's compensation policies. The Company is engaged in arbitration and litigation with a joint venture partner regarding a dispute related to a joint venture agreement. The arbitrator in the arbitration has determined that the Company is liable to its partner for breach of a joint venture agreement. A hearing has been held on the issue of damages, at which time the Company asserted that no damages were sustained and the joint venture partner asserted damages of up to $7.7 million. The arbitrator has not rendered his decision. Management believes that the Company's position has merit and the resolution of these matters will not have a material adverse effect on the Company's financial condition. The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these incidental actions will have a material adverse effect on the Company's financial condition. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors and nominees for director and executive officers of the Registrant is incorporated herein by reference from the sections of the Registrant's definitive Proxy Statement to be delivered to shareholders of the Registrant in connection with the annual meeting of shareholders to be held May 15, 2000 (the "Proxy Statement") entitled "Election of Directors - Certain Information Concerning Nominees and Directors," and "-- Meetings of the Board of Directors and Committees" and "Executive Officers of the Company." ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated herein by reference from the section of the Proxy Statement entitled "Executive Compensation." In no event shall the information contained in the Proxy Statement under the sections entitled "Shareholder Return Analysis," or "Compensation Committee's Report on Executive Compensation" be incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this item is incorporated herein by reference from the section of the Proxy Statement entitled "Beneficial Owners of More Than Five Percent of the Company's Common Stock; Shares Held by Directors and Executive Officers." -42- 43 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Related Transactions is incorporated herein by reference from the section of the Proxy Statement entitled "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A)(1) LISTING OF FINANCIAL STATEMENTS The following financial statements of the Registrant are set forth herein in Part II, Item 8: Consolidated Balance Sheets as of December 26, 1999 and December 27, 1998 Consolidated Statements of Operations - For Each of the Years in the Three-Year Period Ended December 26, 1999 Consolidated Statements of Shareholders' Equity and Comprehensive Income - For Each of the Years in the Three-Year Period Ended December 26, 1999 Consolidated Statements of Cash Flows - For Each of the Years in the Three-Year Period Ended December 26, 1999 Notes to Consolidated Financial Statements Independent Auditors' Report (A)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES Not applicable. -43- 44 (A)(3) LISTING OF EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 3(a) -- Amended and Restated Articles of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3(a) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 3(b) -- Bylaws of the Registrant (incorporated herein by reference from Exhibit 3(b) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 4(a) -- See Exhibits 3(a) and 3(b) for provisions of the Amended and Restated Articles of Incorporation and Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant 4(b) -- Specimen Stock Certificate for the Common Stock of the Registrant (incorporated herein by reference from Exhibit 4(b) of the Registrant's annual report on Form 10-K for the year ended December 27, 1998). 4(c) -- Shareholder Protection Rights Agreement, dated as of November 4, 1997, between RARE Hospitality International, Inc. and SunTrust Bank, Atlanta, as Rights Agent (which includes as Exhibit B thereto the Form of Right Certificate) (incorporated herein by reference from Exhibit 99.1 of the Registrant's Form 8-K dated November 4, 1997). 10(a) -- Amended and Restated Credit Agreement dated August 26, 1998, by and among the Registrant and First Union National Bank as administrative agent and Bank Boston, N.A. and Fleet National Bank as co-agents (incorporated by reference from Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended September 27, 1998). 10(b) -- First Amendment to Credit Agreement (incorporated herein by reference from Exhibit 10(b) of the Registrant's annual report on Form 10-K for the year ended December 27, 1998). 10(c) -- Second Amendment to Credit Agreement. 10(d) -- Pledge Agreement dated as of November 4, 1999 by Registrant in favor of First Union National Bank. 10(e) -- LongHorn Steaks, Inc. Amended and Restated 1992 Incentive Plan (incorporated by reference from Exhibit 10(n) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(f) -- Amended and Restated RARE Hospitality International, Inc. 1996 Stock Plan for Outside Directors (incorporated herein by reference from Exhibit 10(e) of the Registrant's annual report on Form 10-K for the year ended December 27, 1998). 10(g) -- Bugaboo Creek Steak House, Inc. 1994 Stock Option Plan (incorporated herein by reference from Exhibit 4(c) to Registration Statement on Form S-8, Registration No. 333-11983). 10(h) -- RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan (incorporated herein by reference from Exhibit 10(i) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 10(i) -- Amendment No. 1 to RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan (incorporated herein by reference from Exhibit 10(j) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 10(j) -- Amendment No. 2 to RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan Directors (incorporated herein by reference from Exhibit 10(i) of the Registrant's annual report on Form 10-K for the year ended December 27, 1998). 10(k) -- Employment Agreement dated February 13, 1992 between the Registrant and George W. McKerrow, Sr. (incorporated by reference from Exhibit 10(o) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(l) -- Employment Agreement dated February 13, 1992 between the Registrant and George W. McKerrow, Jr. (incorporated by reference from Exhibit 10(p) to Registration Statement on Form S-1, Registration Statement No. 33-45695). 10(m) -- Employment Agreement dated September 30, 1997 between the Registrant and Philip J. Hickey, Jr. (incorporated herein by reference from Exhibit 10(m) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 10(n) -- Employment Agreement dated October 16, 1997 between the Registrant and Eugene I. Lee (incorporated herein by reference from Exhibit 10(n) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 10(o) -- Employment Agreement dated November 3, 1997 between the Registrant and William A. Burnett (incorporated herein by reference from Exhibit 10(o) of the Registrant's annual report on Form 10-K for the fiscal year ended December 28, 1997). 10(p) -- Employment Agreement dated November 30, 1998 between the Registrant and Thomas W. Gathers (incorporated herein by reference from Exhibit 10(p) of the Registrant's annual report on Form 10-K for the fiscal year ended December 27, 1998).
-44- 45 10(q) -- Employment Agreement dated March 23, 1998 between the Registrant and W. Douglas Benn (incorporated herein by reference from Exhibit 10(p) of the Registrant's quarterly report on Form 10-Q for the quarter ended March 29, 1998). 21(a) -- Subsidiaries of the Company. 23(a) -- Consent of KPMG LLP. 27(a) -- 1999 Financial Data Schedule (for SEC use only). 99(a) -- Safe Harbor Compliance Statement.
(B) REPORTS ON FORM 8-K None. (C) EXHIBITS The exhibits to this Report are listed under Item 14(a)(3) above. (D) FINANCIAL STATEMENT SCHEDULES See Item 14(a)(2) above. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. RARE Hospitality International, Inc. By: /s/ Philip J. Hickey, Jr. --------------------------- Philip J. Hickey, Jr. President and Chief Executive Officer Date: March 22, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date ---- By /s/ George W. McKerrow, Jr. March 22, 2000 --------------------------- George W. McKerrow, Jr. Chairman of the Board By /s/ Philip J. Hickey, Jr. March 22, 2000 ------------------------- Philip J. Hickey, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) -45- 46 By /s/ W. Douglas Benn March 22, 2000 ------------------- W. Douglas Benn Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ George W. McKerrow, Sr. March 22, 2000 --------------------------- George W. McKerrow, Sr. Director By /s/ Ronald W. San Martin March 22, 2000 ------------------- Ronald W. San Martin Director By /s/ John G. Pawly March 22, 2000 ----------------- John G. Pawly Director By /s/ Don L. Chapman March 22, 2000 ------------------ Don L. Chapman Director By /s/ Lewis H. Jordan March 22, 2000 ------------------- Lewis H. Jordan Director -46- EX-10.(C) 2 SECOND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10 (c) SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT THIS SECOND AMENDMENT AND WAIVER TO CREDIT AGREEMENT (this "Second Amendment") is made and entered into as of this 4th day of November, 1999 by and among RARE HOSPITALITY INTERNATIONAL, INC., a corporation organized under the laws of Georgia (the "Borrower"), the Lenders who are or may become a party to the Credit Agreement referred to below, FIRST UNION NATIONAL, as Administrative Agent for the Lenders (the "Administrative Agent) and BANKBOSTON, N.A. and FLEET NATIONAL BANK, as Co-Agents (collectively, the "Co-Agents"). Statement of Purpose The Lenders agreed to extend certain extensions of credit to the Borrower pursuant to the Amended and Restated Credit Agreement dated as of August 26, 1998 by and among the Borrower, the Lenders, the Administrative Agent and the Co-Agents (as amended by the First Amendment to Credit Agreement dated as of December 31, 1999 and as further amended or supplemented from time to time, the "Credit Agreement"). The parties now desire to amend the Credit Agreement in certain respects and waive certain provisions of the Credit Agreement, all on the terms and conditions set forth below. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Effect of Amendments and Waivers. Except as expressly amended hereby, the Credit Agreement and Loan Documents shall be and remain in full force and effect. The waivers granted herein are specific and limited and shall not constitute an amendment of the Credit Agreement or the Loan Documents or a modification, acceptance or waiver of any other provision of or default under the Credit Agreement, the Loan Documents or any other document or instrument entered into in connection therewith or a future modification, acceptance or waiver of the provisions set forth therein (except to the extent necessary to give effect to the specific waivers and agreements set forth herein). 2. Capitalized Terms. All capitalized undefined terms used in this Second Amendment shall have the meanings assigned thereto in the Credit Agreement. 3. Modification of Credit Agreement. The Credit Agreement is hereby amended as follows: (a) The defined terms "Fixed Charges" and "Revolving Credit Termination Date" set forth in Section 1.1 of the Credit Agreement are each hereby deleted in their entirety and the following definition shall be substituted in lieu thereof: "'Fixed Charges' means, with respect to the Borrower and its Subsidiaries as of the last day of any fiscal quarter, the sum of the following: (a) Interest Expense calculated for the period of four (4) fiscal quarters ending on such date, plus (b) Rental Expense calculated for the period of four (4) fiscal quarters ending on such date, plus (c) the difference (if positive) between (i) the average daily aggregate Revolving Credit Loans outstanding during the calendar month preceding such date minus (ii) the Aggregate Commitment, as reduced by any mandatory reductions pursuant to Section 2.6(c), on the last day of the fiscal quarter immediately following such date, all determined on a Consolidated basis in accordance with GAAP." "'Revolving Credit Termination Date' means the earliest of the dates referred to in Section 2.7." (b) The defined terms "Term-Out Amount", "Term-Out Maturity Date", and "Term-Out Period" set forth in Section 1.1 of the Credit Agreement are each hereby deleted in their entirety. 2 (c) The following defined terms shall be inserted into Section 1.1 in the correct alphabetical order: "'Conversion Date' shall have the meaning assigned thereto in Section 2.6(c)." "'Second Amendment' means the Second Amendment and Waiver to the Credit Agreement dated as of November __, 1999 by and among the Borrower, the Lenders and the Administrative Agent and the Co-Agents." (d) Section 2.4(a) of the Credit Agreement is hereby deleted in its entirety and the following Section 2.4(a) shall be substituted in lieu thereof: "(a) Repayment on Termination Date. The Borrower shall repay the outstanding principal amount of (i) all Revolving Credit Loans in full on the Revolving Credit Termination Date and (ii) all Swingline Loans in accordance with Section 2.2(b), together, in each case, with all accrued but unpaid interest thereon." (e) Section 2.6 of the Credit Agreement is hereby deleted in its entirety and the following Section 2.6 shall be substituted in lieu thereof: "SECTION 2.6 Permanent Reduction of the Aggregate Commitment. (a) Voluntary Reduction. The Borrower shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Administrative Agent, to permanently reduce, without premium or penalty, (i) the entire Aggregate Commitment at any time or (ii) portions of the Aggregate Commitment, from time to time, in an aggregate principal amount not less than $3,000,000 or any whole multiple of $1,000,000 in excess thereof. (b) Mandatory Permanent Reduction. The Aggregate Commitment shall be permanently reduced by the following amounts: (i) 100% of the Net Cash Proceeds received by the Borrower or any of its Subsidiaries from any issuance of Funded Debt (other than Funded Debt permitted pursuant to Section 10.1), (ii) 100% of the Net Cash Proceeds received by the Borrower or any of its Subsidiaries in connection with any sale of assets (including its equity ownership in any Person) not permitted pursuant to Section 10.6 (a) through (e) unless, so long as no Default or Event of Default has occurred and is continuing, such Net Cash Proceeds are reinvested in similar assets (or otherwise in a manner acceptable to the Administrative Agent, in its sole discretion) within 270 days after receipt of such Net Cash Proceeds; provided, that this clause (ii) shall not apply with respect to up to $10,000,000 of the aggregate Net Cash Proceeds received by the Borrower and its Subsidiaries prior to the Conversion Date and (iii) 100% of the Net Cash Proceeds received by the Borrower or any of its Subsidiaries under any policy of insurance of such Person or in connection with any condemnation proceeding involving property of such Person, unless, so long as no Default or Event of Default has occurred and is continuing, such Net Cash Proceeds are utilized by the Borrower or such Subsidiary within one hundred eighty (180) days of receipt of such Net Cash Proceeds to replace or repair any of its assets damaged in connection with the related claim or proceeding. (c) Regular Quarterly Reductions. Commencing with the last day of the fiscal quarter ending June 30, 2003 (the "Conversion Date") and continuing through the Revolving Credit Termination Date, the Aggregate Commitment shall be reduced on the last day of each fiscal quarter in equal quarterly reduction amounts (the "Reduction Amounts") equal to the amount required to reduce the Aggregate Commitment to $50,000,000 as of September 30, 2004; provided, that each of the Reduction Amounts remaining after any reduction pursuant to Section 2.6(b) shall be adjusted on a pro rata basis in connection with such reduction. 3 (d) Repayments. Each permanent reduction permitted or required pursuant to this Section 2.6 shall be accompanied by a payment of principal sufficient to reduce the aggregate outstanding Extensions of Credit of the Lenders after such reduction to the Aggregate Commitment as so reduced and if the Aggregate Commitment as so reduced is less than the aggregate amount of all outstanding Letters of Credit, the Borrower shall be required to deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Any reduction of the Aggregate Commitment to zero shall be accompanied by payment of all outstanding Obligations (and furnishing of cash collateral satisfactory to the Administrative Agent for all L/C Obligations) and shall result in the termination of the Commitments and Credit Facility. Such cash collateral shall be applied in accordance with Section 11.2(b). If the reduction of the Aggregate Commitment requires the repayment of any LIBOR Rate Loan, such repayment shall be accompanied by any amount required to be paid pursuant to Section 4.9 hereof." (f) Section 2.7 of the Credit Agreement is hereby deleted in its entirety and the following Section 2.7 shall be substituted in lieu thereof: SECTION 2.7 Termination of Credit Facility. The Credit Facility shall terminate on the earliest of (a) September 30, 2004, (b) the date of permanent reduction of the Aggregate Commitment in whole pursuant to Section 2.6 and (c) the date of termination by the Administrative Agent on behalf of the Lenders pursuant to Section 11.2(a). (g) The initial clause of Section 2.8 of the Credit Agreement is hereby deleted in its entirety and the following shall be substituted in lieu thereof: "SECTION 2.8 Increase in Aggregate Commitment. So long as no Default or Event of Default shall have occurred and be continuing, at any time prior to the Conversion Date," (h) Section 4.1(b)(iv) of the Credit Agreement is hereby deleted in its entirety and the following Section 4.1(b)(iv) shall be substituted in lieu thereof: "(iv) no Interest Period shall extend beyond the Revolving Credit Termination Date; and" (i) Section 4.1(c)(ii) of the Credit Agreement is hereby deleted in its entirety and the following Section 4.1(c)(ii) shall be substituted in lieu thereof: "(ii) upon the initial Adjustment Date and at all times thereafter, be determined by reference to the Adjusted Leverage Ratio in accordance with the following charts:
Adjusted Applicable Margin Per Annum Leverage Prior to April 1, 2003 Level Ratio LIBOR Rate Base Rate - ----- ----- ---------------------------- 1 Greater than or equal to 3.0 to 1.00 2.000% 0.750% 2 Less than 3.0 to 1.0 but greater than or equal to 2.50 to 1.0 1.875% 0.625% 3 Less than 2.5 to 1.0 but greater than or equal to 2.0 to 1.0 1.750% 0.500%
4 4 Less than 2.0 to 1.0 but greater than or equal to 1.50 to 1.0 1.625% 0.375% 5 Less than 1.50 to 1.0 but greater than or equal to 1.0 to 1.0 1.500% 0.250% 6 Less than 1.0 to 1.0 1.250% 0.000%
Adjusted Applicable Margin Per Annum Leverage Prior to April 1, 2003 Level Ratio LIBOR Rate Base Rate - ----- ----- ---------------------------- 1 Greater than or equal to 3.0 to 1.00 2.500% 1.250% 2 Less than 3.0 to 1.0 but greater than or equal to 2.50 to 1.0 2.375% 1.125% 3 Less than 2.5 to 1.0 but greater than or equal to 2.0 to 1.0 2.250% 1.000% 4 Less than 2.0 to 1.0 but greater than or equal to 1.50 to 1.0 2.125% 0.875% 5 Less than 1.50 to 1.0 but greater than or equal to 1.0 to 1.0 2.000% 0.750% 6 Less than 1.0 to 1.0 1.750% 0.500%
Adjustments, if any, in the Applicable Margin shall be made by the Administrative Agent on the tenth (10th) Business Day (the "Adjustment Date") after receipt by the Administrative Agent of financial statements for the Borrower and its Subsidiaries delivered under Section 7.1(a) or (b), as applicable, and the accompanying Officer's Compliance Certificate setting forth the Adjusted Leverage Ratio of the Borrower and its Subsidiaries as of the most recent fiscal quarter end. The Administrative Agent agrees to give the Borrower and the Lenders notice of any adjustment in the Applicable Margin within two (2) Business Days of such adjustment; provided, that the Administrative Agent's failure to give such notice shall not result in any liability to the Administrative Agent or in any way affect the validity of any such adjustment. In the event the Borrower fails to deliver such financial statements and certificate within the time required by 5 Sections 7.1(a) and 7.2 hereof, the Applicable Margin shall be the highest Applicable Margin set forth above until the delivery of such financial statements and certificate unless at such time the outstanding principal balance of the Loans are bearing interest at the "default rate" set forth in Section 4.1(d) below in which case the Applicable Margin shall not be increased pursuant to this sentence." (j) Section 9.4 of the Credit Agreement is hereby deleted in its entirety and the following Section 9.4 shall be substituted in lieu thereof: SECTION 9.4 Capital Expenditures. Permit Capital Expenditures plus the aggregate investments permitted by Sections 10.4(d) and (f) made by the Borrower and its Subsidiaries after the Closing Date (excluding any investment to the extent funded with the capital stock of the Borrower) to be greater than the following amounts in the aggregate during the following Fiscal Years:
Fiscal Year Capital Expenditures ----------- -------------------- 1998 (including only the portion thereof remaining after the Closing Date) $ 35,000,000 1999 $ 75,000,000 2000 $ 90,000,000 2001 $100,000,000 2002 $ 80,000,000 2003 and thereafter $ 80,000,000
provided, that (a) investments in any single restaurant unit owned by a Non-Controlled Joint Venture shall not exceed $1,500,000, (b) investments in Non-Controlled Joint Ventures shall not exceed $22,500,000 in the aggregate on any date of determination and (c) in no event shall more than forty percent (40%) of aggregate Capital Expenditures permitted in any Fiscal Year be used for Capital Expenditures with respect to The Capital Grille and Bugaboo Creek Steak House restaurants, on a combined basis. For the purposes of this Section 9.4 "Non-Controlled Joint Venture" shall mean a joint venture in which the Borrower and its Subsidiaries do not own more than fifty percent (50%) of the outstanding capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other managers of such Person. (k) Section 10.1(d) of the Credit Agreement is hereby amended by deleting the number "$20,000,000" set forth therein and substituting therefore the number "$40,000,000". (l) Section 10.7(d) of the Credit Agreement is hereby deleted in its entirety and the following Section 10.7(d) shall be substituted in lieu thereof: "(d) the Borrower may purchase, redeem, retire or otherwise acquire shares of its capital stock in an aggregate amount not to exceed $10,000,000 for the period from and including the date of the Second Amendment through and including the Revolving Credit Termination Date (plus, up to $10,000,000 of the Net Cash Proceeds received by the Borrower or any of its Subsidiaries prior to the Conversion Date from any sale of assets permitted pursuant to Section 10.6(f) above); and" 4. Waivers of Credit Agreement. The Borrower and its Subsidiaries intend to enter into a corporate restructuring (the "Corporate Restructuring") pursuant to which, among other things, (a) certain assets will be transferred to Bugaboo Creek Steakhouse, Inc. ("Bugaboo"), (b) the entities owning substantially all of the operations of The Capital Grille restaurants will be merged into The Capital Grille of Charlotte, Inc., which entity will change its name to Capital Grille Holdings, Inc. ("Capital Grille Holdings"), (c) the entities owning substantially all of the operations of Bugaboo Creek Steak House restaurants will be merged into Bugaboo Creek of Newark, Inc., which entity will change its name to Bugaboo Creek Holdings, Inc. ("Bugaboo Creek Holdings") (d) the operations of Old Grist Mill and Hemenways restaurants will each be consolidated into separate holding companies named Grist Mill Holdings, Inc. ("Grist Mill Holdings") and Hemenway Holdings, Inc. ("Hemenway Holdings"), respectively, and (e) Bugaboo will enter into transactions 6 with certain Affiliates to manage the operations of restaurants they own. The Administrative Agent and the Lenders hereby agree to waive the provisions of Sections 10.4, 10.5, 10.6 and 10.8 solely to permit the Corporate Restructuring; provided, that (i) each of the Borrower and Bugaboo shall survive the Corporate Restructuring; provided, that Bugaboo shall be permitted to change its name to Rare Hospitality Management, Inc., (ii) each of Capital Grille Holdings, Bugaboo Creek Holdings, Grist Mill Holdings and Hemenway Holdings shall be Wholly-Owned Subsidiaries of Bugaboo, (iii) neither the Borrower nor Bugaboo shall make any sale or transfer of assets in connection with the Corporate Restructuring except for a sale or transfer of assets to their respective Wholly-Owned Subsidiaries, (iv) neither the Borrower nor Bugaboo shall make any investments in connection with the Corporate Restructuring except investments in their respective Wholly-Owned Subsidiaries and (v) the Borrower and Bugaboo shall provide such documents reasonably requested by the Administrative Agent reflecting the name change of Bugaboo to Rare Hospitality Management, Inc., including without limitation, new stock certificates and stock powers pledged pursuant to the Pledge Agreement. 5. Representations and Warranties/No Default. By its execution hereof, the Borrower hereby certifies that (giving effect to this Second Amendment) each of the representations and warranties set forth in the Credit Agreement and the other Loan Documents is true and correct in all material respects as of the date hereof as if fully set forth herein, except to the extent that such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date), and that as of the date hereof no Default or Event of Default has occurred and is continuing. 6. Fees. The Borrower shall pay (a) to each of the Lenders party to this Second Amendment an amendment fee in an amount equal to the product of (i) .10% multiplied by (ii) the commitment of such Lender under the Credit Agreement and (b) to the Administrative Agent, the fees set forth in a separate fee letter of even date herewith. 7. Expenses. The Borrower shall pay all reasonable out-of-pocket expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Second Amendment, including without limitation, the reasonable fees and disbursements of counsel for the Administrative Agent. 8. Governing Law. This Second Amendment shall be governed by and construed in accordance with the laws of the State of North Carolina. 9. Counterparts. This Second Amendment may be executed in separate counterparts, each of which when executed and delivered is an original but all of which taken together constitute one and the same instrument. 7 IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the date and year first above written. [CORPORATE SEAL] RARE HOSPITALITY INTERNATIONAL, INC. By: ---------------------------------------------- Name: -------------------------------------------- Title: -------------------------------------------- FIRST UNION NATIONAL BANK, as Administrative Agent, Lender, Swingline Lender and Issuing Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- BANKBOSTON, N.A., as Co-Agent and as Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- FLEET NATIONAL BANK, as Co-Agent and as Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- SOUTHTRUST BANK, N.A., as Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- THE FUJI BANK, LIMITED, as Lender By: --------------------------------------------- Name: ------------------------------------- Title: ------------------------------------ 8 AMSOUTH BANK, as Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- WACHOVIA BANK, N.A., as Lender By: ---------------------------------------------- Name: -------------------------------------- Title: ------------------------------------- EX-10.(D) 3 PLEDGE AGREEMENT 1 EXHIBIT 10(d) PLEDGE AGREEMENT THIS PLEDGE AGREEMENT (as amended, restated, supplemented, or otherwise modified, the "Pledge Agreement"), dated as of August 26, 1998, is made by RARE HOSPITALITY INTERNATIONAL, INC., a corporation organized under the laws of the state of Georgia (the "Pledgor"), in favor of FIRST UNION NATIONAL BANK, a national banking association, as Administrative Agent (the "Administrative Agent"), for the ratable benefit of itself and the financial institutions (the "Lenders") that are, or may from time to time become, parties to the Credit Agreement referred to below. STATEMENT OF PURPOSE Pursuant to the terms of the Amended and Restated Credit Agreement dated the date hereof (as amended, restated, supplemented or otherwise modified, the "Credit Agreement") by and among the Pledgor, as borrower, the Lenders who are or may become party thereto, the Administrative Agent and BankBoston, N.A. and Fleet National Bank, as Co-Agents, the Lenders have agreed to make certain Extensions of Credit to the Pledgor as more particularly described therein. The Pledgor is the legal and beneficial owner of (a) the shares of Pledged Stock (as hereinafter defined) issued by certain corporations as specified on Schedule I attached hereto and incorporated herein by reference (collectively, the "Issuers") and (b) the Partnership/LLC Interests (as hereinafter defined) in the partnerships and limited liability companies listed on Schedule I hereto (collectively, the "Partnerships/LLCs"). In connection with the transactions contemplated by the Credit Agreement and as a condition precedent thereto, the Lenders have requested, and the Pledgor has agreed to execute and deliver this Pledge Agreement together with the Pledged Stock to the Administrative Agent, for the ratable benefit of itself and the Lenders. NOW, THEREFORE, in consideration of the foregoing premises and to induce the Administrative Agent and the Lenders to enter into and make available Extensions of Credit pursuant to the Credit Agreement, the Pledgor hereby agrees with the Administrative Agent, for the ratable benefit of itself and the Lenders, as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Credit Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: "Code" means the Uniform Commercial Code as in effect in the State of North Carolina; provided that if by reason of mandatory provisions of law, the 2 perfection or the effect of perfection or non-perfection of the security interests in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than North Carolina, "Code" means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection. "Collateral" means the Stock Collateral and the Partnership/LLC Collateral. "Obligations" means the Pledgor's obligations under the Credit Agreement, and each Loan Document to which such Pledgor is a party. "Partnership/LLC Collateral" means all of the Partnership/LLC Interests of the Pledgor in the Partnerships/LLCs and all Proceeds therefrom. "Partnership/LLC Interests" means the entire partnership or membership interest of the Pledgor in each Partnership/LLC listed on Schedule I hereto, including, without limitation, the Pledgor's capital account, its interest as a partner or member in the net cash flow, net profit and net loss, and items of income, gain, loss, deduction and credit of the Partnerships/LLCs, its interest in all distributions made or to be made by the Partnerships/LLCs to the Pledgor and all of the other economic rights, titles and interests of the Pledgor as a partner or member of the Partnerships/LLCs, whether set forth in the partnership agreement or membership agreement of the Partnerships/LLCs, by separate agreement or otherwise. "Pledge Agreement" means this Pledge Agreement, as amended, restated, supplemented or otherwise modified from time to time. "Pledged Stock" means the shares of capital stock of each Issuer listed on Schedule I hereto, together with all stock certificates, options or rights of any nature whatsoever that may be issued or granted by such Issuer to the Pledgor while this Pledge Agreement is in effect. "Proceeds" means all "proceeds" as such term is defined in Section 9-306(1) of the Code on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock and the Partnership/LLC Interests, collections thereon, proceeds of sale thereof or distributions with respect thereto. "Stock Collateral" means the Pledged Stock and all Proceeds therefrom. 2. Pledge and Grant of Security Interest. The Pledgor hereby delivers to the Administrative Agent, for the ratable benefit of itself and the Lenders, all the Pledged Stock and hereby grants to the Administrative Agent, for the ratable benefit of itself and the Lenders, a first priority security interest in the Pledged Stock and all other Collateral, as collateral security for the 2 3 prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. 3. Stock Powers; Register of Pledge. Concurrently with the delivery to the Administrative Agent of each certificate representing one or more shares of Pledged Stock, the Pledgor shall deliver an undated stock power covering such certificate, duly executed in blank by the Pledgor with, if the Administrative Agent so requests, signature guaranteed. 4. Pledgor Remains Liable. Anything herein to the contrary notwithstanding, (a) the Pledgor shall remain liable to perform all of its duties and obligations as a partner or member of the Partnerships/LLCs to the same extent as if this Pledge Agreement had not been executed, (b) the exercise by the Administrative Agent or any Lender of any of its rights hereunder shall not release the Pledgor from any of its duties or obligations as a partner or member of the Partnerships/LLCs, and (c) neither the Administrative Agent nor any Lender shall have any obligation or liability as a partner or member of the Partnerships/LLCs by reason of this Pledge Agreement. 5. Representations and Warranties. To induce the Administrative Agent and the Lenders to execute the Credit Agreement and make any Extensions of Credit and to accept the security contemplated hereby, the Pledgor hereby makes to the Administrative Agent and the Lenders all of the representations and warranties made by the Pledgor in the Credit Agreement and the other Loan Documents, as if the same was set forth herein in full and additionally represents and warrants that: (a) as of the Closing Date, the shares of Pledged Stock listed on Schedule I constitute all of the issued and outstanding shares of all classes of the capital stock of each Issuer; (b) all the shares of the Pledged Stock have been duly and validly issued and are fully paid and nonassessable; (c) as of the Closing Date, the Pledgor is the record and beneficial owner of, and has good and marketable title to, the Pledged Stock listed on Schedule I, free of any and all Liens or options in favor of, or claims of, any other Person, except the Lien created by this Pledge Agreement and the Liens permitted under Section 10.3 of the Credit Agreement; and (d) upon delivery to the Administrative Agent of the stock certificates evidencing the Pledged Stock, the Lien granted pursuant to this Pledge Agreement will constitute a valid, perfected first priority Lien on the Collateral, enforceable as such against all creditors of the Pledgor and any Persons purporting to purchase any of the Collateral from the Pledgor. 6. Certain Covenants. The Pledgor covenants and agrees with the Administrative Agent, for the ratable benefit of itself and the Lenders, that, from and after the date of this Pledge Agreement until the Obligations are paid in full and the Commitments are terminated: 3 4 (a) The Pledgor agrees that as a partner or member in the Partnerships/LLCs it will abide by, perform and discharge each and every obligation, covenant and agreement to be abided by, performed or discharged by the Pledgor under the terms of the partnership agreements and operating agreements, as applicable, of the Partnerships/LLCs, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, at no cost or expense to the Administrative Agent and the Lenders. (b) If the Pledgor shall, as a result of its ownership of the Collateral, become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), whether in addition to, in substitution of, as a conversion of, or in exchange for any of the Collateral, or otherwise in respect thereof, the Pledgor shall accept the same as the agent of the Administrative Agent, hold the same in trust for the Administrative Agent and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by the Pledgor to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by the Pledgor, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations. Further, if the Pledgor shall, as a result of its ownership of the Collateral, become entitled to receive or shall receive any options or rights, whether in addition to, in substitution of, as a conversion of, or in exchange for any of the Collateral, or otherwise in respect thereof, the Pledgor shall assign such options or rights as the case may be to the Administrative Agent, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations. In addition, any sums paid upon or in respect of the Collateral upon the liquidation or dissolution of any Issuer or Partnership/LLC shall be held by the Administrative Agent as additional collateral security for the Obligations. (c) Without the prior written consent of the Administrative Agent, the Pledgor will not (i) vote to enable, or take any other action to permit, any Issuer or Partnership/LLC to issue any stock, partnership interests, limited liability company interests or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock, partnership interests, limited liability company interests or other equity securities of any nature of such Issuer or Partnership/LLC except stock, partnership interests, limited liability company interests or other securities issued to the Pledgor and pledged to the Administrative Agent pursuant to the terms of this Pledge Agreement, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Collateral, or (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Collateral, or any interest therein, except for the Lien provided for by this Pledge Agreement and Liens permitted under Section 10.3 of the Credit Agreement. The Pledgor will defend the right, title and interest of the Administrative Agent in and to the Collateral against the claims and demands of all Persons whomsoever. 4 5 (d) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purposes of obtaining or preserving the full benefits of this Pledge Agreement and of the rights and powers herein granted. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any promissory note, other instrument or chattel paper, such note, instrument or chattel paper shall be immediately delivered to the Administrative Agent, duly endorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Pledge Agreement. (e) The Pledgor agrees to pay, and to save the Administrative Agent and the Lenders harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other similar taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Pledge Agreement. (f) Within ten (10) Business Days following the formation or acquisition of any Material Subsidiary of the Pledgor, the Pledgor agrees to execute a new pledge agreement or a supplement to this Pledge Agreement, as applicable, and such other documents and instruments as required pursuant to Section 8.12 of the Credit Agreement. 7. Cash Dividends and Distributions; Voting Rights. Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the Pledgor of the Administrative Agent's intent to exercise its rights pursuant to Paragraph 8 below, the Pledgor shall be permitted to receive all cash dividends and shareholder, partnership and membership distributions paid in accordance with the terms of the Credit Agreement in respect of the Collateral and to exercise all voting and corporate, partnership or membership rights, as applicable, with respect to the Collateral; provided, that no vote shall be cast or corporate, partnership or membership right exercised or other action taken which would impair in any material respect the Collateral or which would result in any violation of any provision of the Credit Agreement, the Notes, this Pledge Agreement or any other Loan Document. 8. Rights of the Administrative Agent. (a) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the Pledgor, (i) the Administrative Agent shall have the right to receive any and all cash dividends paid in respect of the Pledged Stock and partnership and membership distributions in respect of the Partnership/LLC Interests and make application thereof to the Obligations in the order set forth in Section 4.5 of the Credit Agreement and (ii) all shares of the Pledged Stock and the Partnership/LLC Interests shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (A) all voting, corporate, partnership, membership and other rights pertaining to such shares of the Pledged Stock or Partnership/LLC Interests at any meeting of shareholders, partners or members of the applicable Issuer or Partnership/LLC or otherwise and (B) any and all 5 6 rights of conversion, exchange, subscription and any other rights, privileges or options pertaining to such shares of the Pledged Stock or Partnership/LLC Interests as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock or Partnership/LLC Interests upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the applicable Issuer or Partnership/LLC, or upon the exercise by the Pledgor or the Administrative Agent of any right, privilege or option pertaining to such shares of the Pledged Stock or the Partnership/LLC Interests, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock or the Partnership/LLC Interests with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as it may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (b) The rights of the Administrative Agent and the Lenders hereunder shall not be conditioned or contingent upon the pursuit by the Administrative Agent or any Lender of any right or remedy against the Pledgor or against any other Person which may be or become liable in respect of all or any part of the Obligations or against any collateral security therefor, guarantee thereof or right of offset with respect thereto. Neither the Administrative Agent nor any Lender shall be liable for any failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so, nor shall the Administrative Agent be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. 9. Remedies. If an Event of Default shall occur and be continuing, upon the request of the Required Lenders, the Administrative Agent shall exercise, on behalf of itself and the Lenders, all rights and remedies granted in this Pledge Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, and in addition thereto, all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing with regard to the scope of the Administrative Agent's remedies, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by Applicable Law referred to below) to or upon the Pledgor, any Issuer, any Partnership/LLC or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, in the over-the-counter market, at any exchange, broker's board or office of the Administrative Agent or any Lender or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Lender shall have the right upon any such public sale or sales, and, to the extent permitted by Applicable Law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived or released. The Administrative Agent shall apply any Proceeds from time to time held by it and the net proceeds of any such collection, 6 7 recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred in respect thereof or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Lenders hereunder, including, without limitation, reasonable attorneys' fees and disbursements of counsel thereto, to the payment in whole or in part of the Obligations, in the order set forth in Section 4.5 of the Credit Agreement, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of Applicable Law, including, without limitation, Section 9-504(1)(c) of the Code, need the Administrative Agent account for the surplus, if any, to the Pledgor. To the extent permitted by Applicable Law, the Pledgor waives all claims, damages and demands it may acquire against the Administrative Agent or any Lender arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by Applicable Law, such notice shall be deemed reasonable and proper if given at least five (5) Business Days before such sale or other disposition. The Pledgor further waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the Code. Nothing in this Section 9 or otherwise in this Pledge Agreement shall be construed to require the Administrative Agent to give any notice of an action not otherwise required by Applicable Law and the express provision of the Pledge Agreement, the Credit Agreement or any other Loan Document. 10. Private Sales. (a) The Pledgor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Pledged Stock, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Pledged Stock for the period of time necessary to permit the applicable Issuer to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if the applicable Issuer would agree to do so. (b) The Pledgor further agrees to use commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Collateral pursuant to this Paragraph 10 valid and binding and in compliance with any and all other Applicable Laws. The Pledgor further agrees that a breach of any of the covenants contained in this Paragraph 10 will cause irreparable injury to the Administrative Agent and the Lenders not compensable in damages, that the Administrative Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Paragraph 10 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement. 7 8 11. Amendments, etc. With Respect to the Obligations. The Pledgor shall remain obligated hereunder, and the Collateral shall remain subject to the Lien granted hereby, notwithstanding that, without any reservation of rights against the Pledgor, and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender, and any of the Obligations continued, and the Obligations, or the liability of the Pledgor or any other Person upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered, or released by the Administrative Agent or any Lender, and the Credit Agreement, the Notes, any other Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or part, as the Lenders (or the Required Lenders, as the case may be) may deem advisable from time to time, and any guarantee, right of offset or other collateral security at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Administrative Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any other Lien at any time held by it as security for the Obligations or any property subject thereto. The Pledgor waives any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Pledge Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred in reliance upon this Pledge Agreement; and all dealings between the Pledgor, on the one hand, and the Administrative Agent and the Lenders, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Pledge Agreement. The Pledgor waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Pledgor with respect to the Obligations. 12. Limitation on Duties Regarding Collateral. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the Code or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar securities and property for its own account. Neither the Administrative Agent, any Lender nor any of their respective directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Pledgor or otherwise. 13. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral constitute irrevocable powers coupled with an interest. 14. Severability. Any provision of this Pledge Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 8 9 15. Paragraph Headings. The paragraph headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 16. No Waiver; Cumulative Remedies. Neither the Administrative Agent nor any Lender shall by any act (except by a written instrument pursuant to Paragraph 17 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 17. Waivers and Amendments; Successors and Assigns; Governing Law. None of the terms or provisions of this Pledge Agreement may be amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Administrative Agent; provided that any consent by the Administrative Agent to any waiver, amendment, supplement or modification hereto shall be subject to approval thereof by the Lenders or Required Lenders, as applicable, in accordance with Section 13.11 of the Credit Agreement. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Administrative Agent, the Lenders and their respective successors and assigns. This Pledge Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of North Carolina. 18. Notices. All notices and communications hereunder shall be given to the addresses and otherwise in accordance with Section 13.1 of the Credit Agreement. 19. Control Agreement; Acknowledgement by Issuers and Partnership/LLC. (a) The Pledgor hereby authorizes and instructs each Issuer and Partnership/LLC to comply, and each Issuer and Partnership LLC hereby agrees to so comply, with any instruction received thereby from the Administrative Agent in accordance with the terms of this Pledge Agreement with respect to the Collateral, without any consent or further instructions from the Pledgor (or other registered owner), and the Pledgor agrees that such Issuer and Partnership/LLC shall be fully protected in so complying. Each Issuer and Partnership/LLC agrees that its agreement set forth in the preceding sentence shall be sufficient to create in favor of the Administrative Agent, for the benefit of the Lenders, "control" of the Partnership/LLC Interests within the meaning of such term under Section 8-106(c) of the Code. (Notwithstanding the foregoing, nothing in this Pledge Agreement is intended or shall be construed to mean or imply that the Partnership/LLC Interests constitute "securities" within the meaning of such term under Section 8-102(a)(15) of the Code or otherwise to limit or modify the application of Section 8-103(c) of the Code. Rather, the Administrative Agent has requested that this provision be included in this Pledge Agreement solely out of an 9 10 abundance of caution in the event the Partnership/LLC Interests are, nevertheless, deemed to constitute "securities" under the Code.) (b) Each Issuer and Partnership/LLC acknowledges receipt of a copy of this Pledge Agreement and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. Each Issuer and Partnership/LLC agrees to notify the Administrative Agent promptly in writing of the occurrence of any of the events described in Section 6(c) of this Pledge Agreement. Each Issuer and Partnership/LLC further agrees that the terms of Section 10 of this Pledge Agreement shall apply to it with respect to all actions that may be required of it under or pursuant to or arising out of Section 10 of this Pledge Agreement. 20. Authority of Administrative Agent. The Pledgor acknowledges that the rights and responsibilities of the Administrative Agent under this Pledge Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Pledge Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Pledgor, the Administrative Agent shall be conclusively presumed to be acting as agent for itself and the Lenders with full and valid authority so to act or refrain from acting, and neither the Pledgor nor any Issuer or Partnership/LLC shall be under any obligation, or entitlement, to make any inquiry respecting such authority. 21. Consent to Jurisdiction. The Pledgor hereby irrevocably consents to the personal jurisdiction of the state and federal courts located in Mecklenburg County, North Carolina, in any action, claim or other proceeding arising out of or any dispute in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations. The Pledgor hereby irrevocably consents to the service of a summons and complaint and other process in any action, claim or proceeding brought by the Administrative Agent or any Lender in connection with this Pledge Agreement, any rights or obligations hereunder, or the performance of such rights and obligations, on behalf of itself or its property, in the manner provided in Section 13.1 of the Credit Agreement. Nothing in this Paragraph 21 shall affect the right of the Administrative Agent or any Lender to serve legal process in any other manner permitted by Applicable Law or affect the right of the Administrative Agent or any Lender to bring any action or proceeding against the Pledgor or its properties in the courts of any other jurisdictions. 22. Binding Arbitration; Waiver of Jury Trial. (a) Binding Arbitration. Upon demand of any party, whether made before or after institution of any judicial proceeding, any dispute, claim or controversy arising out of, connected with or relating to this Pledge Agreement or any other Loan Document ("Disputes"), between or among parties to this Pledge Agreement or any other Loan Document shall be resolved by binding arbitration as provided herein. Institution of a judicial proceeding by a party does not waive the right of that party to demand arbitration hereunder. Disputes may include, without limitation, tort claims, counterclaims, claims brought as class actions, claims arising from Loan Documents 10 11 executed in the future, or claims concerning any aspect of the past, present or future relationships arising out of or connected with the Loan Documents. Arbitration shall be conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association and Title 9 of the U.S. Code. All arbitration hearings shall be conducted in Charlotte, North Carolina. The expedited procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000. All applicable statutes of limitation shall apply to any Dispute. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding anything foregoing to the contrary, any arbitration proceeding demanded hereunder shall begin within ninety (90) days after such demand thereof and shall be concluded within one-hundred and twenty (120) days after such demand. These time limitations may not be extended unless a party hereto shows cause for extension and then such extension shall not exceed a total of sixty (60) days. The panel from which all arbitrators are selected shall be comprised of licensed attorneys. The single arbitrator selected for expedited procedure shall be a retired judge from the highest court of general jurisdiction, state or federal, of the state where the hearing will be conducted. The parties hereto do not waive any applicable Federal or state substantive law except as provided herein. Notwithstanding the foregoing, this paragraph shall not apply to any Hedging Agreement that is a Loan Document. (b) Jury Trial. TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE ADMINISTRATIVE AGENT, EACH LENDER AND THE PLEDGOR HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. (c) Preservation of Certain Remedies. Notwithstanding the preceding binding arbitration provisions, the parties hereto and the other Loan Documents preserve, without diminution, certain remedies that such Persons may employ or exercise freely, either alone, in conjunction with or during a Dispute. Each such Person shall have and hereby reserves the right to proceed in any court of proper jurisdiction or by self help to exercise or prosecute the following remedies: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale granted in the Loan Documents or under applicable law or by judicial foreclosure and sale, (ii) all rights of self help including peaceful occupation of property and collection of rents, set off, and peaceful possession of property, (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and in filing an involuntary bankruptcy proceeding, and (iv) when applicable, a judgment by confession of judgment. Preservation of these remedies does not limit the power of an arbitrator to grant similar remedies that may be requested by a party in a Dispute. 23. Entire Agreement; Term of Agreement. This Pledge Agreement, together with the other Loan Documents, constitutes the entire agreement with respect to the subject matter hereof and supersedes all prior agreements with respect to the subject matter hereof. This Pledge Agreement shall remain in effect from the Closing Date through and including the date upon which 11 12 all Obligations shall have been indefeasibly and irrevocably paid and satisfied in full and the Commitments terminated. [Signature Pages Follow] 12 13 IN WITNESS WHEREOF, the undersigned have caused this Pledge Agreement to be duly executed and delivered as of the date first above written. [CORPORATE SEAL] RARE HOSPITALITY INTERNATIONAL, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- [CORPORATE SEAL] BUGABOO CREEK STEAK HOUSE, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- 14 SCHEDULE I To Pledge Agreement DESCRIPTION OF PLEDGED STOCK Subsidiaries
================================================================================================================================= Percentage of all Outstanding issued Issuer Class of Stock Certificate No. No. of Shares Capital Stock - --------------------------------------------------------------------------------------------------------------------------------- Bugaboo Creek Steak Common 2 1,000 100% House, Inc. - ---------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF PARTNERSHIP/LLC INTEREST Partnerships/LLCs Partnership/LLC Partnership/LLC Interest None EX-21.(A) 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21(A) SUBSIDIARIES
NAME STATE OF ORGANIZATION - ---- --------------------- RARE Hospitality Management, Inc. Delaware WHIP Pooling Corporation Georgia Hemenway Holdings, Inc. Georgia Grist Mill Holdings, Inc. Georgia Capital Grille Holdings of Texas, Inc. Texas The Capital Grille of Beverly Hills, Inc. California Capital Grille Holdings, Inc. North Carolina The Capital Grille of Las Vegas, Inc. Nevada The Capital Grille of New York, Inc. New York The Capital Grille of San Francisco, Inc. California The Capital Grille of Scottsdale, Inc. Arizona Bugaboo Creek of Abington, Inc. Pennsylvania Bugaboo Creek of East Longmeadow, Inc. Massachusetts Bugaboo Creek of Hicksville, Inc. New York Bugaboo Creek of Norwood, Inc. Massachusetts Bugaboo Creek Holdings, Inc. Delaware Bugaboo Creek of Virginia, Inc. Virginia Bugaboo Creek of West Orange, Inc. New Jersey RMA-LSI Joint Venture Georgia Carolina Steakhouse Ventures Georgia LSI-Elias Partners Florida LSI-Elias Partners II Florida LSI-Elias Partners III Georgia 6201 Airport Blvd. Limited Partnership Georgia 5440 Fruitville Road Limited Partnership Georgia 11102 Causeway Blvd. Limited Partnership Georgia 6225 North Andrews Avenue Limited Partnership Georgia 34863 Emerald Coast Parkway Limited Partnership Georgia 17211 South Park Center Limited Partnership Georgia 16641 Statesville Road Limited Partnership Georgia 171 Harbison Blvd. Limited Partnership Georgia 153 Huffman Mill Road Limited Partnership Georgia 6035 Blazer Limited Partnership Georgia 719 Northside Limited Partnership Georgia
EX-23.(A) 5 CONSENT OF KPMG LLP 1 CONSENT OF KPMG LLP EXHIBIT 23(a) INDEPENDENT AUDITORS' CONSENT The Board of Directors RARE Hospitality International, Inc. We consent to incorporation by reference in the registration statements No. 333-30046, No. 333-65485, No. 333-11983, No. 333-11963, No. 333-11969, No. 333-11977, No. 333-1028, No. 333-1030, and No. 33-57900 on Form S-8 of RARE Hospitality International, Inc. of our report dated February 4, 2000, relating to the consolidated balance sheets of RARE Hospitality International, Inc. as of December 26, 1999 and December 27, 1998, and the related consolidated statements of operations, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 26, 1999, which report appears in the December 26, 1999 annual report on Form 10-K of RARE Hospitality International, Inc. KPMG LLP Atlanta, Georgia March 22, 2000 EX-27.(A) 6 1999 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-K OF RARE HOSPITALITY INTERNATIONAL, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-26-1999 DEC-28-1998 DEC-26-1999 8,864 0 3,047 0 10,213 33,686 187,281 0 237,118 44,717 49,732 0 0 110,258 27,326 237,118 382,275 382,470 137,416 326,408 29,103 0 3,866 21,484 7,060 14,424 0 0 1,587 12,837 1.07 1.02 ASSET VALUES REPRESENT NET AMOUNTS.
EX-99.(A) 7 SAFE HARBOR COMPLIANCE STATEMENT 1 EXHIBIT 99(a) SAFE HARBOR COMPLIANCE STATEMENT FOR FORWARD-LOOKING STATEMENTS RARE Hospitality International, Inc. ("RARE") intends to qualify both its written and oral forward-looking statements for protection under Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, and any other similar safe harbor provisions. Generally, forward-looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected. Due to those uncertainties and risks, the investment community is urged not to place undue reliance on written or oral forward-looking statements of RARE. RARE undertakes no obligation to update or revise this Safe Harbor Compliance Statement for Forward-Looking Statements to reflect future developments. In addition, RARE undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. RARE provides the following risk factor disclosure in connection with its continuing effort to qualify its written and oral forward-looking statements for the safe harbor protection of the Securities Act of 1933 and the Securities Exchange Act of 1934 and any other similar safe harbor provisions. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include the disclosures contained in the Form 10-K to which this statement is attached as an exhibit and also include the following: WE MAY INCUR ADDITIONAL COSTS AND REDUCED PROFITS BY FAILING TO OPEN OR BY DELAYING THE OPENING OF PLANNED RESTAURANTS We plan to open 19 to 22 new restaurants in 2000. If we are unable to open a new restaurant or have to delay the opening of a new restaurant, we may incur substantial costs we would not otherwise incur, which may directly decrease our profits. We may be unable to open such restaurants, or open them on time, due to factors such as: - - Our inability to find quality locations to open new restaurants; - - Our inability to reach acceptable agreements regarding the lease or purchase of locations on which to open new restaurants; - - Our inability to raise or have available an adequate amount of money to construct and open new restaurants; - - Our inability to hire, train and retain the skilled management and other employees necessary to staff new restaurants when they are scheduled to open. - - Our inability to obtain required permits and approvals to open new restaurants; - - Our inability to efficiently manage the amount of time and money used to build and open each new restaurant. In addition, if we believe that we will be unable to open a new restaurant because of one of the above factors, we may have to stop construction of the restaurant or terminate any lease or purchase contract that we entered regarding such restaurant and pay damages or a termination fee to the other party to the contract. WE MAY BE UNABLE TO PROFITABLY OPERATE NEW RESTAURANTS As part of our expansion plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential customers may not be familiar with our restaurants. As a result, we may have to incur costs related to the opening, operation and promotion of those new restaurants that are substantially greater than those incurred in other areas. Even though we may incur substantial additional opening and promotion costs with these new restaurants, they may fail to attract the number of customers that our more established restaurants in existing markets attract. As a result, the revenue and profit generated at new restaurants may not equal the revenue and profit generated by our existing restaurants. The new restaurants may even operate at a loss. Because of our limited number of existing restaurants, if we open one or more new restaurants that we are unable to operate at a profit, this could have a significant adverse effect on our overall profits. Even if we do not incur substantial opening and promotion costs in opening a new restaurant that we would not otherwise usually incur, we may not be able to profitably operate a new restaurant in new markets. Most of our restaurants are located in the southeastern United States. If we open restaurants in areas where we did not previously have a restaurant, we may not be able to attract enough customers to operate that restaurant at a profit because potential customers may be unfamiliar with our restaurants or the atmosphere or menu of our restaurants might not appeal to them. 2 Another part of our expansion plans is to open restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market. OUR RESULTS OF OPERATIONS OR STOCK PRICE MAY BE IMPACTED AS A RESULT OF THE MOO ARBITRATION As disclosed in Item. 3 of our Annual Report on Form 10-K for the fiscal year ended December 26, 1999, and in previous filings with the Securities and Exchange Commission, we have been involved in the arbitration of a dispute with Moo Management, Inc. The damages phase of the hearing was concluded on January 27, 2000, at which time we asserted that no damages were sustained by Moo and Moo asserted damages of up to $7.7 million. The arbitrator's decision, which is expected in late March 2000, could have an adverse impact on our earnings, or could cause the market price of our common stock to drop. WE MAY EXPERIENCE HIGHER OPERATING COSTS DUE TO INCREASED PRICES AND SALARIES If we have to increase the compensation to our employees or pay higher prices for supplies and food items, we may have an increase in operating costs. If we are unable to increase our menu prices or take other actions to offset our increased operating costs, our profits will decrease. Many factors affect the prices that we have to pay for the various food and other items that we need to operate our restaurants, including seasonal fluctuations, changes in weather or demand and inflation. Factors that may affect the salaries and benefits that we pay to our employees, include the local unemployment rates and changes in minimum wage and employee benefits laws. In addition to the above factors over which we have no control, we may introduce new menu items and operating procedures which may either temporarily or permanently result in increased food or labor costs. WE MAY LOSE REVENUE OR INCUR INCREASED COSTS IF OUR RESTAURANTS DO NOT RECEIVE FREQUENT DELIVERIES OF FOOD AND OTHER SUPPLIES We have a contract with a single distributor for the distribution of most meat, food and other supplies for our LongHorn Steakhouse and Bugaboo Creek restaurants. Although we believe that we would be able to replace this distributor or to return to our prior system of using multiple distributors for these restaurants, our inability to do so in a short period of time on acceptable terms could increase our costs or could cause shortages at our restaurants of food and other items which may cause us to remove certain items from a restaurant's menu or temporarily close a restaurant. If we temporarily close a restaurant or remove popular items from a restaurant's menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage. WE DEPEND ON SENIOR MANAGEMENT FOR SUCCESSFUL OPERATION We believe that we will highly depend on the services of Philip J. Hickey, Jr. and Eugene I. Lee. If we lost the services of either Messrs. Hickey, Jr. or Lee, for any reason, we may be unable to replace them with qualified personnel which could have a material adverse effect on our business and development. Although we have employment agreements with Messrs. Hickey, Jr. and Lee, we could not prevent them from terminating their employment with us. Also, we do not carry key person life insurance on Messrs. Hickey, Jr. or Lee. OUR RESTAURANTS MAY NOT BE ABLE TO CONTINUE TO COMPETE SUCCESSFULLY WITH OTHER RESTAURANTS If our restaurants are unable to continue to compete successfully with other restaurants in new and existing markets, we may lose significant revenue. Our industry is intensely competitive with respect to price, service, location, type and quality of food. We compete with other restaurants for customers, restaurant locations and qualified management and other restaurant staff. Our LongHorn Steakhouse and Bugaboo Creek restaurants compete with other mid-priced, full service, casual dining restaurants, including steakhouses, such as Outback Steakhouse, Lone Star Steaks and Logan's Roadhouse. Our The Capital Grille restaurants compete with other upscale restaurants, including steakhouses, such as Morton's of Chicago, Ruth's Chris Steakhouse and The Palm as well as independent operators. Some of our competitors have greater financial resources than we have, have been in business longer or are better established in the markets where our restaurants are located or are planned to be located. In addition, we may have to make changes in one or more of our concepts in order to respond to changes in consumer tastes or dining patterns. If we change a restaurant concept, we may have different or additional competitors for our intended customers and may not be able to successfully compete against such competitors. 3 WE MAY INCUR ADDITIONAL COSTS OR LIABILITY AND LOSE REVENUE AS THE RESULT OF GOVERNMENT REGULATION Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic beverages, zoning and building codes, and other health, sanitation and safety matters. Our restaurants may lose revenue if they are unable to maintain liquor or other licenses required to serve alcoholic beverages or food. If one or more of our restaurants was unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue. The costs of operating our restaurants may increase if there are changes in minimum hourly wages, workers' compensation insurance rates, unemployment tax rates, sales tax, laws and regulations governing access for the disabled, such as the Federal American with Disabilities Act, and similar matters over which we have no control. If any of the above costs increased and we were unable to offset such increase by increasing our menu prices or by other means, we would generate lower profits. Our restaurants are subject in each state in which we operate to "dram shop" laws which allow a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. We carry liquor liability coverage as part of our existing insurance. However, a lawsuit under a dram shop law may result in a verdict in excess of our policy limits which could result in substantial liability for us and which may have an adverse material effect on our profitability and business. WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE The market price of our common stock may experience significant volatility from time to time. Such volatility may be affected by factors such as our quarterly operating results or changes in the economy, financial markets or the restaurant industry in general. Another factor which could affect our stock price is the outcome of the pending arbitration with Moo Management, Inc. In recent years, the stock market has experienced extreme price and volume fluctuations which has had a significant effect on the market prices of the securities issued by a company which may be unrelated to the operational performance of the company. In addition, we may be subject to securities class action litigation if the market price of our stock experiences significant volatility. Our management's attention and resources may be diverted from normal operations if we would become subject to any securities class action, which may have a material adverse effect on our business. OUR ANTI-TAKEOVER PROVISIONS MAY LIMIT SHAREHOLDER VALUE We have provisions in our articles of incorporation and in our shareholder protection rights agreement that may discourage or prevent a person or group from acquiring us without our approval. A shareholder may not receive as much in exchange for their shares of common stock as they could without these provisions. The following is a description of the above provisions that may reduce the market value of our shares of common stock. Under our shareholder protection rights agreement, we distributed one preferred stock purchase right for each outstanding share of our common stock to the shareholders of record on November 20, 1997. Each right entitles holders of a share of our common stock to purchase one one-hundredth of a share of our junior participating preferred stock at an exercise price initially equal to $48.00. Each one one-hundredth of a share of our junior participating preferred stock (1) has the same voting rights as one share of our common stock and (2) would be paid dividends at least equal to the dividends paid on each share of our common stock. Our preferred stock purchase rights are exercisable only if a person or group acquires beneficial ownership of 15% or more of our common stock, or announces a tender or exchange offer upon completion of which such person or group would beneficially own 15% or more of our common stock. If a person or group becomes a beneficial owner of 15% or more of our common stock, then each right not owned by the person or group entitles its holder to purchase, for an amount of cash equal to the right's then-current exercise price, shares of our common stock having a value equal to twice the right's exercise price. We may redeem the rights at a price of $.01 per right at any time until the close of business on the tenth business day following our announcement that a person or group has become the beneficial owner of 15% or more of our common stock. Our articles of incorporation contain a provision which provides that our board of directors consists of three classes of directors. Each class has the same number of directors or as close to equal as possible. The directors of each class serve for a term of three years with each class' term expiring in different successive years. For example, the term of the first class may expire in 2000 and each director elected in the first class in 2000 would serve until 2003, the term of the second class would expire in 2001 and each director elected in the second class in 2001 would serve until 2004, and the term of third class would expire in 2002 and each director elected in 2002 would serve until 2005. As a result, shareholders with sufficient shares to determine the election of directors would have to vote for their nominees at two successive annual meetings of shareholders in order to elect a majority of the directors. -----END PRIVACY-ENHANCED MESSAGE-----