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 Registrants 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. Yes [X] No [ ]
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 approximately $715.1 million based upon the last reported sale price in the Nasdaq National Market of $21.64 as of the last business day of the Registrants most recently completed second fiscal quarter.
As of December 28, 2003, the number of shares outstanding of the Registrants Common Stock, no par value, was 33,749,236 (excluding 292,500 shares held in the Companys treasury).
Portions of the Registrants Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 10, 2004 are incorporated by reference in Part III hereof.
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 2004 and statements included in the section of Managements Discussion and Analysis of Financial Condition and Results of Operations entitled OUTLOOK FOR FUTURE OPERATING RESULTS, 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. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Companys ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Companys business discipline over a large restaurant base; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation affecting the restaurant industry; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and 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 Companys 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.
Page ---- Part I Item 1. Business 4 Item 2. Properties 14 Item 3. Legal Proceedings 14 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 18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 28 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 49 Item 9A. Controls and Procedures 49 Part III Item 10. Directors and Executive Officers of the Registrant 49 Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management 50 Item 13. Certain Relationships and Related Transactions 50 Item 14. Principal Accountant Fees and Services 50 Part IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 50 Signatures 52
RARE Hospitality International, Inc. and subsidiaries (the Company) operates and franchises 239 restaurants as of March 3, 2004, including 194 LongHorn Steakhouse restaurants, 17 The Capital Grille restaurants and 26 Bugaboo Creek Steak House restaurants, as well as two additional restaurants (the specialty restaurants), Hemenways Seafood Grille & Oyster Bar (Hemenways) and The Old Grist Mill Tavern. The Company was incorporated in Georgia in December 1982.
LongHorn Steakhouse restaurants are casual dining, full-service establishments serving both lunch and dinner amidst an attractive and inviting atmosphere. With locations spread throughout 23 states in the Eastern half of the United States, LongHorn Steakhouse restaurants feature a variety of top quality menu items including signature steaks, as well as salmon, shrimp, chicken, ribs, pork chops, burgers and prime rib. Designed with an inviting décor reminiscent of the classic American West, LongHorn Steakhouse restaurants appeal to all ages with a unique combination of hospitable, attentive service, moderate price, high quality dishes and a comfortable atmosphere.
The Capital Grille, with locations in major metropolitan cities in the United States, boasts an atmosphere of power dining, relaxed elegance and style. Nationally acclaimed for dry aging steaks on premises, The Capital Grille serves classic steak house offerings such as chops, large North Atlantic lobsters and fresh seafood. The restaurants feature an award-winning wine list offering over 300 selections, personalized service, comfortable club-like atmosphere and premiere private dining rooms. The Capital Grille is the ideal dining choice for business meetings and social occasions.
Bugaboo Creek Steak House restaurants are designed as attractive, family-friendly establishments featuring moderately priced, flavorful food items and an offering of full liquor service. Primarily located in states on the Eastern seaboard, Bugaboo Creek Steak House restaurants attract guests of all ages with a rustic décor reminiscent of a Canadian Rocky Mountain lodge. Stressing a friendly and attentive service style, Bugaboo Creek Steak House restaurants offer a variety of menu offerings including signature seasoned steaks, prime rib, smoked baby-back ribs, spit roasted half chicken, grilled salmon and shrimp.
The following tables set forth the location of each existing restaurant and restaurants under construction by concept at March 3, 2004 and the number of restaurants in each area.
ALABAMA Birmingham 1 Dothan 1 Huntsville 1 Mobile 2 Montgomery 2 FLORIDA Daytona Beach 1 Destin 1 Ft. Myers 2 Jacksonville 7 Miami/Ft. Lauderdale 7 Ocala 1 Orlando 7 St. Augustine 1 Tallahassee 1 Tampa/ St. Petersburg 9 West Palm Beach 4 GEORGIA Albany 1 Athens 1 Atlanta 29 Augusta 1 Cartersville 1 Columbus 1 Dalton 1 Macon 1 Rome 1 Savannah 1 Statesboro 1 Tifton 1 Valdosta 1 Warner Robbins 1 ILLINOIS Fairview Heights 1 INDIANA Indianapolis 3 KANSAS Kansas City 2 KENTUCKY Bowling Green 1 Florence 1 Lexington 1 Louisville 1 MAINE Portland 1 MARYLAND Baltimore 3 Waldorf 1 MASSACHUSETTS Boston 6 Springfield 1 MICHIGAN Detroit 1 MISSOURI Kansas City 4 Jefferson City 1 St. Louis 5 NEW HAMPSHIRE Concord 2 Nashua 1 NEW JERSEY Edison 2 Flanders 1 Howell 1 Parsippany 1 Rochelle Park 1 NORTH CAROLINA Burlington 1 Charlotte 7 Greensboro 1 Hickory 1 High Point 1 Winston-Salem 1 OHIO Cincinnati 5 Cleveland 10 Columbus 5 Dayton 1 Toledo 1 PENNSYLVANIA Erie 1 Philadelphia 3 RHODE ISLAND Warwick 1 SOUTH CAROLINA Anderson 1 Charleston 2 Columbia 3 Greenville 1 Spartanburg 1 Hilton Head 1 Rock Hill 1 TENNESSEE Chattanooga 1 Jackson 1 Nashville 5 VERMONT Montpelier 1 VIRGINIA McLean 1 WEST VIRGINIA Charleston 1 Total Existing Company-Owned/ Joint Venture Restaurants 191
PUERTO RICO Bayamon 1 Carolina 1 San Patricio 1 Total Existing Franchisee-Owned Restaurants 3 Total LongHorn Steakhouse Restaurants 194
CONNECTICUT Manchester 1 DELAWARE Newark 1 DISTRICT OF COLUMBIA Washington 1 GEORGIA Atlanta 5 MAINE Bangor 1 Portland 1 MARYLAND Gaithersburg 1 MASSACHUSETTS Boston 7 Seekonk 1 Shrewsbury 1 NEW HAMPSHIRE Newington 1 NEW YORK Albany 1 Poughkeepsie 1 Rochester 1 PENNSYLVANIA Philadelphia 1 RHODE ISLAND Warwick 1 Total Bugaboo Creek Steak House Restaurants 26
ARIZONA Phoenix 1 COLORADO Denver 1 DISTRICT OF COLUMBIA Washington 1 FLORIDA Miami 1 GEORGIA Atlanta 1 ILLINOIS Chicago 1 MASSACHUSETTS Boston 2 MICHIGAN Troy 1 MINNESOTA Minneapolis 1 MISSOURI Kansas City 1 NORTH CAROLINA Charlotte 1 PENNSYLVANIA Philadelphia 1 RHODE ISLAND Providence 1 TEXAS Dallas 1 Houston 1 VIRGINIA McLean 1 Total The Capital Grille Restaurants 17
MASSACHUSETTS The Old Grist Mill Tavern, Seekonk 1 RHODE ISLAND Hemenway's Seafood Grille & Oyster Bar, Providence 1 Total Specialty Restaurants 2
FLORIDA LongHorn Steakhouse, Jacksonville LongHorn Steakhouse, Palm Harbor The Capital Grille, Ft. Lauderdale GEORGIA Bugaboo Creek Steak House, Newnan LongHorn Steakhouse, Dawsonville INDIANA LongHorn Steakhouse, Evansville KANSAS LongHorn Steakhouse, Speedway LongHorn Steakhouse, Topeka KENTUCKY LongHorn Steakhouse, Frankfort MAINE LongHorn Steakhouse, Augusta MARYLAND LongHorn Steakhouse, Hagerstown MICHIGAN LongHorn Steakhouse, Auburn Hills MISSOURI LongHorn Steakhouse, Jefferson City LongHorn Steakhouse, St. Peters NEW HAMPSHIRE LongHorn Steakhouse, Newington NEW JERSEY LongHorn Steakhouse, Woodbridge NEW YORK The Capital Grille, New York NORTH CAROLINA LongHorn Steakhouse, Wilmington OHIO LongHorn Steakhouse, West Chester VIRGINIA LongHorn Steakhouse, Chantilly Total Restaurants Under Construction 20
The Companys prototypical LongHorn Steakhouse has an average seating capacity of approximately 188 seats in approximately 5,400 square feet of space. The prototype has been modified over the years with the objective of increasing the Companys return on investment on new LongHorn Steakhouse restaurants by increasing the sales capacity and reducing capital expenditures as a percentage of revenue. The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but 52 of its LongHorn Steakhouse restaurants in operation. The Company also owns five sites for restaurants under construction and owns the site for one restaurant with construction scheduled to begin later in 2004. Five of the 21 LongHorn Steakhouse restaurants opened in 2003 were located on property purchased at an average cost of approximately $932,000 per location. The average cash investment to construct a LongHorn Steakhouse restaurant in 2003 was approximately $1,702,000 excluding real estate costs and excluding pre-opening expenses of approximately $197,000.
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 currently leases all of its The Capital Grille sites, but intends to purchase land in those circumstances it believes are cost-effective. Two The Capital Grille restaurants were opened in 2003. The average cash investment to construct a Capital Grille restaurant in 2003 was approximately $2,487,000 (net of landlord allowances of $547,000) and excluding pre-opening expenses of approximately $364,000.
The Company has continued to develop and refine the Bugaboo Creek Steak House restaurant design with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants opened in 2003. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype for restaurants to be opened in the future.
Three Bugaboo Creek Steak House restaurants were opened in 2003. The average cash investment to construct a Bugaboo Creek Steak House in 2003 was approximately $2,503,000, excluding real estate costs and excluding pre-opening expenses of approximately $221,000. Two of the three Bugaboo Creek Steak House restaurants opened in 2003 were located on leased property. The Company paid approximately $856,000 for the one property purchased for a Bugaboo Creek Steak House site in 2003.
The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but three of its Bugaboo Creek Steak House restaurant in operation. The Company also owns the site for one restaurant under construction.
The Company plans to expand through the development of additional Company-owned LongHorn Steakhouse and Bugaboo Creek Steak House restaurants in existing markets and in selected new markets in the Eastern half of the United States. The Company believes that clustering in existing and new markets enhances its ability to supervise operations, market the Companys concepts and distribute supplies. The Company, however, also intends to open single restaurants in smaller markets in sufficiently close proximity to the Companys other markets to enable the Company to efficiently supervise operations and distribute supplies. LongHorn Steakhouse restaurants are currently located in the Eastern half of the United States, and Bugaboo Creek Steak House restaurants are located primarily in states on the Eastern seaboard.
The Company plans to expand through the development of additional Company-owned The Capital Grille restaurants in selected metropolitan markets nationwide.
The Companys restaurant development 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 28 to 31 Company-owned restaurants in 2004; 23 or 24 LongHorn Steakhouse restaurants; three or four Bugaboo Creek Steak House restaurants and two or three The Capital Grille restaurants. Of the restaurants proposed for 2004, the Company has opened four LongHorn Steakhouse restaurants, one Bugaboo Creek Steak House restaurant and has 20 restaurants under construction in Florida, Georgia, Indiana, Kansas, Kentucky, Maine, Maryland, Michigan, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio and Virginia, and has signed leases, purchased land, or signed agreements to purchase land for 17 additional restaurants as of March 3, 2004. The Company expects that all of the restaurants to be opened in 2004 will be Company-owned.
The Company will continue to evaluate suitable acquisitions in the restaurant industry as they are identified. The Company will continue to evaluate franchising of either LongHorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants in markets in which the Company would not otherwise expand.
The Company considers the location of a restaurant to be a critical factor to the units long-term success, and the Company devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on trade area demographics, the success or failure of relevant competitive restaurants operating in the area, population growth rates, as well as specific site characteristics, such as visibility, accessibility and traffic volumes. Senior management inspects and approves each restaurant site. It typically takes approximately 120 to 140 days to construct and open a new LongHorn Steakhouse restaurant, approximately 140 to 160 days to construct and open a new Bugaboo Creek Steak House restaurant and approximately 170 to 185 days to construct and open a new The Capital Grille restaurant. Currently the Company owns 63 of its restaurant sites (including one specialty restaurant site, six Company owned sites for restaurants currently under construction and one Company owned site for a restaurant with construction scheduled to begin later in 2004).
The Company has modified its LongHorn Steakhouse prototype restaurant design over the years to an average of approximately 188 seats in approximately 5,400 square feet of space for prototypical LongHorn Steakhouse restaurants opened in 2003. An expanded kitchen design incorporating equipment needed for a broader menu is also part of the prototype. The Company believes its 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 Western-style steakhouse.
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 developed a Bugaboo Creek Steak House restaurant design, which served as the prototype for the three Bugaboo Creek Steak House restaurants constructed in 2003. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype, with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants to be opened in the future.
Management and Employees. The management staff of a typical Company restaurant consists of one general manager or managing partner, one to four assistant managers and one or two kitchen managers. In addition, a typical LongHorn Steakhouse restaurant employs approximately 40 to 80 staff members, a typical Bugaboo Creek Steak House restaurant employs approximately 50 to 85 staff members, and a typical The Capital Grille restaurant employs approximately 60 to 80 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 eight Company-owned LongHorn Steakhouse restaurants or joint venture restaurants, and report directly to one of the five Regional Vice Presidents for the LongHorn Steakhouse concept. The Regional Vice Presidents report to the Vice President of Operations of the LongHorn Steakhouse division. The Vice President of Operations of the LongHorn Steakhouse division reports to the President of the LongHorn Steakhouse division. The Company employs Bugaboo Creek Steak House regional managers, who have responsibility for the operating performance of three to five Bugaboo Creek Steak House restaurants and The Old Grist Mill Tavern. All of these regional managers report directly to the Director of Operations for the Bugaboo Creek Steak House concept. The Director of Operations for the Bugaboo Creek Steak House concept reports to the President of the Bugaboo Creek Steak House division. The Company also employs regional directors who have responsibility for four to five The Capital Grille restaurants and Hemenways Seafood Grille & Oyster Bar, all reporting directly to the Director of Operations for The Capital Grille. The Director of Operations for The Capital Grille reports to the Vice President of The Capital Grille.
The Company seeks to recruit managers with appropriate restaurant experience. The Company selects its restaurant personnel utilizing a selection process which includes psychological and analytical testing designed to identify individuals with traits the Company believes are important to achieving 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 Companys 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 Companys 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. The Company has also implemented a managing partner program in which qualifying general managers receive cash compensation and restricted stock awards based upon individual performance. During 2003, restricted stock awards were made to 107 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 Companys restaurants utilize touch screen POS systems and the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants employ a theoretical food costing program. During 2003, the Company completed the installation of a new point-of-sales system in each of its restaurants and implemented satellite communication and electronic gift card systems. The Company utilizes its 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 longer-term contracts on certain items to avoid short-term cost fluctuations. For the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants, beef is aged at the facility of the Company's supplier or distributor, who delivers the beef to the LongHorn Steakhouse and Bugaboo Creek Steak House 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 purchases a majority of its protein products under fixed price contracts with its primary suppliers. The failure of any of these suppliers to honor the prices under these contracts would have an adverse effect on the Company's results of operations to the extent that the then current market prices exceed the prices under the contracts. 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 these other products, and supplies from a sufficient number of approved suppliers such that the loss of any one supplier would not have a material adverse effect on the Company's results of operations or financial condition.
The Company utilizes one primary distributor for all of its restaurants, which delivers approximately 70-75% of the products (other than alcoholic beverages) and supplies that the Company utilizes in the operation of its restaurants. In the event of a disruption of service from the Companys primary distributor, management believes that alternative distribution channels could be arranged such that there would not be a material adverse effect on the Companys financial condition.
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 Company's third fiscal quarter. Extreme weather, especially during the winter months, may adversely affect sales.
The Companys interests in its restaurants are divided into three categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised restaurants.
Company-owned restaurants. As of March 3, 2004, 188 LongHorn Steakhouse restaurants, all Bugaboo Creek Steak House restaurants, all The Capital Grille restaurants, Hemenways Seafood Grille & Oyster Bar and The Old Grist Mill Tavern are owned and operated by the Company. The general manager or managing partner 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 joint ventures that, in the aggregate, operate three LongHorn Steakhouse restaurants as of March 3, 2004. These restaurants are located in Central Florida and owned by joint ventures managed by the Company. The joint venture pays management fees to the Company at the rate of 4% of monthly restaurant sales, and the Company controls its joint ventures use of the Companys service marks.
Franchised Restaurants.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 3, 2004, this franchisee operated three LongHorn Steakhouse restaurants in Puerto Rico.
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 restaurants gross sales during the conduct of a market, regional or national advertising campaign.
The franchisee has the right to terminate its franchise agreements upon default by the Company. The Company also retains the right to terminate a franchise for a variety of reasons, including the franchisees failure to pay amounts due under the agreement or to otherwise comply with the terms of the franchise agreement.
An important element of the Companys franchise program is the training the Company provides for each franchisee. With respect to each new franchisee restaurant, the Company provides the same training program provided to the Companys management and employees. In addition to this initial training, the Company provides supervision at the opening of the franchisees restaurants, beginning one week prior to opening, and routine supervision thereafter.
Franchisees are required to operate their restaurants in compliance with the Companys 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.
The Company has registered LONGHORN STEAKS and design, LONGHORN STEAKHOUSE and design, BUGABOO CREEK STEAK HOUSE and design, THE CAPITAL GRILLE and design, and HEMENWAYS SEAFOOD GRILLE & OYSTER BAR and design as service marks with the United States Patent and Trademark Office. The Company has additional registered marks used in connection with the operation 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 Companys policy to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks.
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 Companys competitors have been in existence for a substantially longer period than the Company and may be better established in the markets where the Companys 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 Companys restaurants in particular.
The Company is subject to various federal, state and local laws affecting its business. Each of the Companys 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 Companys 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 Companys operations.
During 2003, approximately 14.1% of the Companys restaurant sales were attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Companys 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 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 restaurants 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 Companys 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 Companys 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.
The Company operates under a Tip Rate Alternative Commitment (TRAC) agreement with the Internal Revenue Service. Through increased educational and other efforts in the restaurants, the TRAC agreement reduces the likelihood of potential Company-wide employer-only FICA assessments for unreported tips.
As of March 3, 2004, the Company employed approximately 15,000 persons, 209 of whom were corporate personnel, 1,186 of whom were restaurant management personnel and the remainder of whom were hourly personnel. Of the 209 corporate employees, 134 are in management positions and 75 are administrative or office employees. None of the Companys employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.
The Companys primary website can be found at www.rarehospitality.com. The Company makes available, free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934. These reports are made available on the website as soon as reasonably practical after their filing with, or furnishing to, the Securities and Exchange Commission. Furthermore, the Company also makes available on its website, and in print to any shareholder who requests it, the Companys Corporate Governance Policy, the Committee Charters for Audit, Compensation, and Governance/Nominating Committees, as well as the Code of Conduct that applies to all directors, officers, employees and those that do business with the Company. Amendments to these documents or waivers related to the Code of Conduct will be made available on the Companys website as soon as reasonably practicable after their execution.
As of March 3, 2004, 180 of the Companys restaurants were located in leased space (in addition, the Company has leased the space for 14 restaurants under construction and 14 sites for restaurants with construction scheduled to begin later in 2004). 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 Companys 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 existing Company-owned restaurants will expire over the period from 2004 through 2038 (assuming exercise of all renewal options).
The Company owns four office buildings in Atlanta, Georgia aggregating 40,000 square feet in which its corporate offices and central training facility are located. In addition, the Company leases approximately 1,973 square feet of space in Westborough, Massachusetts to house staff to support the operation of Bugaboo Creek Steak House restaurants. The locations of the Companys restaurants are listed in Item 1 of this report.
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 Companys results of operations or financial condition.
There were no matters submitted for a vote of security holders during the fourth quarter of 2003.
The Companys common stock trades on the Nasdaq National Market under the symbol RARE. The table below sets forth the high and low sales prices of the Companys common stock, as reported on the Nasdaq National Market, during the periods indicated as adjusted for the three-for-two stock split paid in the form of a 50% stock dividend on September 2, 2003:
FISCAL YEAR ENDED DECEMBER 28, 2003 HIGH LOW First Quarter $20.61 $16.89 Second Quarter 21.86 17.81 Third Quarter 27.24 21.49 Fourth Quarter 27.95 21.68 FISCAL YEAR ENDED DECEMBER 29, 2002 HIGH LOW First Quarter $18.36 $14.13 Second Quarter 19.83 15.63 Third Quarter 18.67 13.83 Fourth Quarter 19.13 14.60
The closing price of a share of the Companys common stock on March 3, 2004, was $28.49. As of March 3, 2004, there were approximately 505 holders of record of the Companys common stock.
Since the Companys initial public offering in 1992, the Company has not declared or paid any cash dividends 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 Companys Board of Directors is to retain all earnings to support operations and finance expansion. The Companys existing revolving line of credit restricts the payment of cash dividends without prior lender approval. See Managements 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 Companys earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors.
The following table provides information about the common stock that may be issued under all of the Companys existing equity compensation plans as of December 28, 2003. Details of the plans are discussed in Note 10 to the Companys Consolidated Financial Statements. The table does not include information with respect to shares subject to outstanding options granted under the Bugaboo Creek Steak House, Inc. 1994 Stock Option Plan, which is described in note 8 to this table.
Number of Securities to Weighted Average Number of Securities be Issued Upon Exercise Exercise Price of Remaining Available Plan Category of Outstanding Options Outstanding Options for Future Issuance Equity Compensation 1,112,260 (1) $18.65 1,120,222 (6) Plans Approved by 1,484,410 (2) $12.03 40,228 (7) Stockholders 137,811 (3) $12.58 56,251 843,997 (4) $8.12 -- Equity Compensation Plans not Approved by Stockholders 146,614 (5) $8.31 -- --------- ------ --------- Total 3,725,092 $13.00 1,216,701 ========= ====== =========
Following is selected consolidated financial data as of and for each of the fiscal years in the five-year period ended December 28, 2003. The Consolidated Financial Statements as of December 28, 2003 and December 29, 2002 and for each of the years in the three-year period ended December 28, 2003 and the independent auditors report thereon are included in this Form 10-K. All sales, restaurant operating expenses, and general and administrative expenses have been restated to conform to the presentation requirements of the consensus of the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board on EITF Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer (see Note 1 to consolidated financial statements). All share and per share amounts have been restated to give retroactive effect to the Companys 50% stock dividends in 2003 and 2000 (see Note 1 to consolidated financial statements). The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K and Managements Discussion and Analysis of Financial Condition and Results of Operations, also included in this Form 10-K.
FISCAL YEARS ENDED -------------------------------------------------------------------------------- DEC 28, DEC 29, DEC 30, DEC 31, DEC 26, 2003 2002 2001 2000 1999 -------------------------------------------------------------------------------- (in thousands, except per share data) STATEMENT OF OPERATIONS DATA: Revenues: Restaurant sales $680,458 $584,159 $519,998 $453,284 $371,751 Franchise revenues 374 345 328 380 195 -------- -------- -------- -------- -------- Total revenues 680,832 584,504 520,326 453,664 371,946 Costs and expenses: Cost of restaurant sales 245,094 211,006 189,869 166,421 137,416 Operating expenses-- restaurants 298,978 257,252 228,340 194,874 161,924 Provision for asset impairments, restaurant closings, and other charges -- 495 2,802 -- 1,800 Depreciation and amortization-- restaurants 26,508 23,920 21,248 17,022 15,249 Pre-opening expense 5,782 3,802 3,764 3,318 3,051 General and administrative expenses 40,515 34,933 31,675 30,723 25,547 -------- -------- -------- -------- -------- Total costs and expenses 616,877 531,408 477,698 412,358 344,987 -------- -------- -------- -------- -------- Operating income 63,955 53,096 42,628 41,306 26,959 Interest expense, net 1,015 1,718 2,128 4,159 3,866 Early termination of interest rate swap agreement -- 1,540 1,100 -- -- Provision for litigation settlement -- -- -- 1,000 -- Minority interest 300 448 639 1,407 1,609 -------- -------- -------- -------- -------- Earnings before income taxes and cumulative effect of change in accounting principle 62,640 49,390 38,761 34,740 21,484 Income tax expense 20,363 15,951 12,603 11,480 7,060 -------- -------- -------- -------- -------- Earnings before cumulative effect of change in accounting principle 42,277 33,439 26,158 23,260 14,424 Cumulative effect of change in accounting principle (net of tax benefit of $760) -- -- -- -- 1,587 -------- -------- -------- -------- -------- Net earnings $ 42,277 $ 33,439 $ 26,158 $ 23,260 $ 12,837 ========= ========= ========= ========= ========= Basic earnings per common share before cumulative effect of change in accounting principle $ 1.27 $ 1.03 $ $0.83 $ 0.85 $ 0.53 Cumulative effect per common share of change in accounting principle -- -- -- -- 0.06 -------- -------- -------- -------- -------- Basic earnings per common share $ 1.27 $ 1.03 $ 0.83 $ 0.85 $ 0.47 ========= ========= ========= ========= ========= Diluted earnings per common share before cumulative effect of change in accounting principle $ 1.21 $ 0.98 $ 0.79 $ 0.80 $ 0.51 Cumulative effect per common share of change in accounting principle -- -- -- -- 0.06 -------- -------- -------- -------- -------- Diluted earnings per common share $ 1.21 $ 0.98 $ 0.79 $ 0.80 $ 0.45 Weighted average common shares ========= ========= ========= ========= ========= outstanding (basic) 33,162 32,586 31,503 27,407 27,072 Weighted average common shares ========= ========= ========= ========= ========= outstanding (diluted) 34,843 34,268 33,216 29,124 28,229 ========= ========= ========= ========= ========= ------------------------------------------------------------------- FISCAL YEARS ENDED ------------------------------------------------------------------- DEC 28, DEC 29, DEC 30, DEC 31, DEC 26, 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ (in thousands) BALANCE SHEET DATA: Working capital (deficit) $ 7,849 $ 2,617 $(4,931) $(23,114) $(11,031) Total assets 464,542 389,309 352,456 295,381 237,118 Debt, net of current installments -- -- 10,000 51,000 40,000 Obligations under capital leases, net of current installments 27,462 22,406 20,867 20,925 9,732 Minority interest 1,371 1,411 1,329 1,469 3,982 Total shareholders' equity 352,055 300,132 256,530 167,257 137,584
The Companys revenues are derived primarily from restaurant sales from Company-owned LongHorn Steakhouse, The Capital Grille, and Bugaboo Creek Steak House restaurants. The Company also derives a small percentage of its total revenue from two Company-owned specialty restaurants and franchise revenues from three franchised LongHorn Steakhouse restaurants. Cost of restaurant sales consists of food and beverage costs for all restaurants other than the three franchised LongHorn Steakhouse restaurants. Operating expenses restaurants consist of other costs incurred by the Company to operate its restaurants, including the cost of labor, advertising, operating supplies, rent, and utilities. Depreciation and amortization restaurants includes the depreciation attributable to restaurant-level capital expenditures. The depreciation and amortization relating to non-restaurant level capital expenditures is included in general and administrative expenses.
Preopening costs include direct and incremental costs such as payroll, food and beverage costs, and trainer payroll and travel expenses incurred prior to opening of new restaurants. General and administrative expenses include restaurant supervision expenses, accounting, finance, management information systems and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Interest expense, net includes interest on capital lease obligations and amortization of loan issue costs partially offset by capitalized construction period interest and interest income. Minority interest consists of the partners 50% share of earnings in the three LongHorn Steakhouse restaurants that are operated as joint venture restaurants.
The Companys management believes in the importance of building incremental top line sales at each restaurant to support the longer-term profitability of the Company. The change in year-over-year sales for the comparable restaurant base is referred to as same store sales. The Company defines the comparable restaurant base to include those restaurants open for a full 18 months prior to the beginning of each fiscal quarter. Same store sales increases can be generated by an increase in guest traffic counts (guest counts) or by increases in guest average check amount (average check). The average check can be affected by menu price changes and the mix of menu items sold (menu mix). The Company gathers sales data daily and regularly analyzes the guest counts and menu mix for each concept to assist in developing menu pricing, product offering and promotion strategies. Management believes that increases in guest counts are an indication of the long-term health of a concept, while increases in average check and menu mix contribute more significantly to current period profitability. The Company works to balance the pricing and product offerings with other initiatives to achieve the long-term goal of sustainable increases in same store sales.
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. Growth in average weekly sales includes the effect of newer restaurants that are not yet included in the same store sales base. Growth in average weekly sales in excess of growth in same store sales is generally an indication that newer restaurants are operating with sales levels in excess of the system average. Conversely, growth in average weekly sales less than growth in same store sales is generally an indication that newer restaurants are operating with sales levels lower than the system average. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normalized sales volumes and then to experience a drop off in sales after initial customer trials.
The incremental sales generated as a result of increases in same store sales make a significant contribution to the Companys profitability. Many restaurant level expenses are relatively fixed in nature and do not increase at the same rate as same store sales increases. With sales increasing and certain restaurant-level expenses staying fixed or semi-variable (rising more slowly than incremental sales), the incremental sales measured by these same store sales increases should be the Companys most profitable. When new restaurants are opened, there are preopening costs and certain relatively fixed costs including expense items such as management labor, rent and depreciation that must be absorbed. Additionally, it generally takes some period of time after opening before restaurant margins normalize. Accordingly, the sales at newly opened restaurants do not make a significant contribution to profitability in their initial months of operation.
The Companys revenues and expenses can be affected significantly by the number and timing of the opening of additional restaurants. For instance, preopening expenses for any particular period may reflect expenses associated with restaurants to be opened in future periods, in addition to those restaurants opened during the current period. The timing of restaurant openings also can affect the average weekly sales and other period-to-period comparisons.
The following table sets forth the percentage relationship to total revenues of the listed items included in the Companys consolidated statements of operations, except as indicated:
FISCAL YEARS ENDED ------------------------------------------------------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 30, 2003 2002 2001 Revenues: ------------------------------------------------------------------------- Restaurant sales: LongHorn Steakhouse 71.6% 71.3% 70.5% The Capital Grille 15.0 15.2 15.3 Bugaboo Creek Steak House 12.2 12.2 12.8 Other restaurants 1.1 1.2 1.4 ------ ------ ------ Total restaurant sales 99.9 99.9 99.9 Franchise revenues 0.1 0.1 0.1 ------ ------ ------ Total revenues 100.0 100.0 100.0 Costs and expenses: Cost of restaurant sales(1) 36.0 36.1 36.5 Operating expenses--restaurants(1) 43.9 44.0 43.9 Provision for asset impairments, restaurant closings, and other charges -- 0.1 0.5 Depreciation and amortization--restaurants(1) 3.9 4.1 4.1 Pre-opening expense - restaurants(1) 0.8 0.7 0.7 General and administrative expenses 6.0 6.0 6.1 ------ ------ ------ Total costs and expenses 90.6 90.9 91.8 ------ ------ ------ Operating income 9.4 9.1 8.2 Interest expense, net 0.1 0.3 0.4 Early termination of interest rate swap agreement -- 0.3 0.2 Minority interest -- 0.1 0.1 ------ ------ ------ Earnings before income taxes 9.2 8.5 7.4 Income tax expense 3.0 2.7 2.4 ------ ------ ------ Net earnings 6.2% 5.7% 5.0% ====== ====== ======
(1)
Cost of restaurant sales, restaurant operating expenses, depreciation and amortization and
pre-opening expense are
expressed as a percentage of total restaurant sales.
Year Ended December 28, 2003 Compared to Year Ended December 29, 2002
Total revenues increased 16.5% to $680.8 million for 2003, compared to $584.5 million for 2002.
Sales in the LongHorn Steakhouse restaurants increased 16.9% to $487.2 million for 2003, compared to $416.9 million for 2002. The increase reflects a 9.8% increase in restaurant operating weeks in 2003 as compared to 2002, resulting from an increase in the restaurant base from 170 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2002 to 187 restaurants at the end of 2003. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2003 were $52,570, a 6.4% increase over 2002. Same store sales for LongHorn Steakhouse restaurants increased 4.6% in 2003 as compared to 2002. The increase in same store sales for 2003 at LongHorn Steakhouse was attributable to an increase in guest counts of approximately 2.5% and the remainder was due to an increase in average check. Management believes a number of factors have contributed to the increased guest counts including a more effective use of media advertising resulting from the concentration of restaurants; menu evolution with more appealing menu offerings; and improved restaurant-level execution; all of which work together to provide a better overall customer experience.
Sales in The Capital Grille restaurants increased 15.5% to $102.4 million for 2003, compared to $88.6 million for 2002. The increase reflects a 5.3 % increase in restaurant operating weeks in 2003 as compared to 2002, resulting from the two new The Capital Grille restaurants opened during 2003, bringing the total The Capital Grille restaurants in operation to 17. Average weekly sales for The Capital Grille restaurants in 2003 were $124,743, a 9.8 % increase from 2002. Same store sales for The Capital Grille restaurants increased 10.9% in 2003, as compared to 2002. The increase in comparable restaurant sales at The Capital Grille restaurants is primarily attributable to an increase in guest counts, which management believes was driven principally by better execution at the restaurant level.
During 2003, average weekly sales increased at a rate slightly less than the increase in same store sales. The Capital Grille restaurants have historically opened at lower sales volumes and not experienced the drop off in sales after an initial honeymoon period commonly characteristic in casual dining restaurant concepts. Accordingly, sales volumes at the Companys two new The Capital Grille restaurants opened during 2003 had the impact of reducing average weekly sales for the overall concept.
Sales in the Bugaboo Creek Steak House restaurants increased 17.0% to $83.3 million for 2003, compared to $71.2 million for 2002. The increase reflects a 15.4% increase in restaurant weeks in 2003 as compared to 2002, resulting from an increase in the restaurant base from 22 Bugaboo Creek Steak House restaurants at the end of 2002 to 25 restaurants at the end of 2003. Average weekly sales for the Bugaboo Creek Steak House restaurants in 2003 were $69,553, a 1.4% increase from 2002. Same store sales for the Bugaboo Creek Steak House restaurants increased 2.6% in 2003, as compared to 2002. The increase in same store sales at Bugaboo Creek Steak House restaurants is attributable to an increase in average check offset by a slight decrease in guest counts. During 2003, average weekly sales increased at a rate slightly less than the increase in same store sales due to lower average weekly sales at restaurants opened in new competitive markets.
The Company has a franchisee that operates three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $374,000 and $345,000 in franchise revenue in 2003 and 2002, respectively. Franchise revenue is computed based on a fixed percentage of the franchisees sales; therefore, the increase in 2003 franchise revenue over the prior year was due to the 8.7% increase in same store sales for the Companys franchised restaurants.
Cost of restaurant sales, as a percentage of total restaurant sales, decreased to 36.0 % in 2003 from 36.1% in 2002. Contract pricing on certain protein and other products during 2003 was favorable as compared to the prior year. However, cost of sales increased in the second half of 2003 as compared to the prior year due to i) increases in the beef costs for certain contracts as they were renewed and ii) higher prices on beef purchases made when sales growth exceeded contracted quantities.
Restaurant operating expenses decreased as a percentage of total restaurant sales in 2003 to 43.9%, from 44.0% in 2002. The increased average weekly sales rate in 2003 leveraged fixed and semi-variable expenses (principally management labor and rent) as a percentage of total restaurant sales. The leveraging of these fixed expenses was partially offset by an increase in advertising spending, credit card fees and utility costs as a percentage of total restaurant sales. Advertising increased by approximately 0.3% of total restaurant sales but was within the Companys historical targeted spending range of 2.8% to 3.2% of total restaurant sales. Increased credit card usage by customers caused credit card processing fees to increase by 0.1% as a percentage of total restaurant sales. Additionally, utilities expenses increased by approximately 9.5% per operating week in 2003 as compared to 2002 principally due to rate increases, resulting in a 0.1% increase as a percentage of total restaurant sales.
Depreciation and amortization restaurants increased to $26.5 million in 2003, from $23.9 million in 2002, due to the Companys new restaurant construction and depreciation of capital expenditures associated with the Companys remodeling of older restaurants. The amount of depreciation expense per operating week was approximately the same in 2003 as it was in 2002.
Pre-opening expense increased to $5.8 million or 0.8% of total restaurant sales in 2003 from $3.8 million or 0.7% of total restaurant sales in 2002. This increase was the result of the Company opening a total of 26 new restaurants in 2003 as compared to opening 20 restaurants in 2002. The amount of pre-opening expense per new restaurant in 2003 was approximately equal to preopening expense per new restaurant in 2002.
General and administrative expenses increased to $40.5 million in 2003, from $34.9 million in 2002, but remained flat at 6.0% as a percent of total revenue in 2003 and 2002. The increased amounts expensed in 2003 were primarily compensation related, associated with increased bonuses, payroll and other costs of building the infrastructure necessary to support the Companys growth.
Interest expense, net decreased to $1.0 million in 2003, from $1.7 million in 2002. The decrease in interest expense, net was due to lower average borrowings under the Companys revolving credit facility and increased interest income earned as the balances of cash and short-term investments increased in 2003 as compared to 2002.
Minority interest decreased to $300,000 in 2003, from $448,000 in 2002. This reflects a decrease in the average number of joint venture restaurants in 2003 compared to 2002 resulting primarily from the purchase of the joint venture partners interest in two restaurants during 2003 and seven joint venture restaurants during 2002. The Company currently has three joint venture LongHorn Steakhouse restaurants remaining.
Income tax expense in 2003 was 32.5% of earnings before income taxes. The Companys 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 $42.3 million in 2003, as compared to net income of $33.4 million in 2002, reflects the net effect of the items discussed above.
Year Ended December 29, 2002 Compared to Year Ended December 30, 2001
Total revenues increased 12.3% to $584.5 million for 2002, compared to $520.3 million for 2001.
Sales in the LongHorn Steakhouse restaurants increased 13.8% to $416.9 million for 2002, compared to $366.5 million for 2001. The increase reflects a 10.2% increase in restaurant operating weeks in 2002 as compared to 2001, resulting from an increase in the restaurant base from 154 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2001 to 170 restaurants at the end of 2002. Average weekly sales for all company-owned and joint venture LongHorn Steakhouse restaurants in 2002 were $49,392, a 3.2% increase over 2001. Sales for the comparable LongHorn Steakhouse restaurants increased 2.7% in 2002 as compared to 2001. The increase in comparable restaurant sales for 2002 at LongHorn Steakhouse was attributable to an increase in average check and guest counts.
Sales in The Capital Grille restaurants increased 10.6% to $88.6 million for 2002, compared to $80.1 million for 2001. The increase reflects a 5.3% increase in restaurant operating weeks in 2002 as compared to 2001, resulting from the full-year 2002 impact of the three The Capital Grille restaurants that opened in 2001. Average weekly sales for all The Capital Grille restaurants in 2002 were $113,637, a 5.1% increase from 2001. Sales for the comparable The Capital Grille restaurants increased 4.9% in 2002, as compared to 2001. The increase in comparable restaurant sales at The Capital Grille restaurants is attributable primarily to an increase in guest counts.
Sales in the Bugaboo Creek Steak House restaurants increased 7.7% to $71.2 million for 2002, compared to $66.1 million for 2001. The increase reflects a 7.7% increase in restaurant weeks in 2002 as compared to 2001, resulting from an increase in the restaurant base from 19 Bugaboo Creek Steak House restaurants at the end of 2001 to 22 restaurants at the end of 2002. Average weekly sales for all Bugaboo Creek Steak House restaurants in 2002 were $68,609, a 2.5% increase from 2001. Sales for the comparable Bugaboo Creek Steak House restaurants increased 1.9% in 2002, as compared to 2001. The increase in comparable restaurant sales at Bugaboo Creek Steak House restaurants is attributable primarily to an increase in average check.
The Companys franchise revenue increased to $345,000 in 2002 from $328,000 in 2001 due to a 5.2% increase in same store sales for the Companys three franchised LongHorn Steakhouse restaurants.
Cost of restaurant sales, as a percentage of restaurant sales, decreased to 36.1% in 2002 from 36.5% in 2001. Contract pricing on certain protein and other products during 2002 were favorable as compared to the prior year.
Restaurant operating expenses increased as a percentage of restaurant sales in 2002 to 44.0%, from 43.9% in 2001. This was due to an increase in restaurant management and hourly labor as a percentage of restaurant sales, partially offset by greater sales leverage of fixed and semi-fixed expenses (principally advertising and rent).
The provision for asset impairments, restaurant closings, and other charges of $495,000 in 2002 consisted of the write down of one LongHorn Steakhouse restaurant. The amount of the charge was determined under SFAS No. 144 by comparing discounted future cash flows to the carrying value of impaired assets.
Depreciation and amortization restaurants increased to $23.9 million in 2002, from $21.2 million in 2001, due to the Companys new restaurant construction and depreciation of capital expenditures associated with the Companys remodeling of older restaurants.
Pre-opening expense remained flat at $3.8 million or 0.7% of total restaurant sales in both 2002 and 2001. The amounts charged to pre-opening expense in any year are dependent upon the number of restaurants opened and the restaurant concept.
General and administrative expenses increased to $34.9 million in 2002, from $31.7 million in 2001, but decreased as a percent of total revenues to 6.0% in 2002 from 6.1% in 2001. The increased costs in 2002 were primarily compensation related, associated with increased accruals for management bonuses, payroll and the cost of building the infrastructure necessary to support the Companys growth. General and administrative expenses, as a percent of total revenues, decreased principally due to greater leverage of fixed and semi-fixed expenses resulting from increased sales at existing restaurants and new restaurants.
Interest expense, net decreased to $1.7 million in 2002, from $2.1 million in 2001. The decrease in interest expense, net is due to the repayment of amounts outstanding under the Companys revolving credit facility and an increase in interest income in 2002.
Concurrent with amending and restating the Companys $100.0 million revolving credit agreement, the Company repaid all amounts outstanding under the credit agreement and terminated an associated interest rate swap agreement that had been accounted for as a hedge. The Company paid $1,540,000 resulting in an after-tax expense of $961,000 associated with terminating the interest rate swap agreement. The repayment of amounts outstanding under the credit agreement combined with the termination of the associated hedge created an ineffective hedge relationship, which resulted in the $1,540,000 charge to earnings in 2002.
Minority interest decreased to $448,000 in 2002, from $639,000 in 2001. This reflects a decrease in the number of joint venture restaurants in 2002 compared to 2001 resulting primarily from the purchase of the joint venture partners interest in seven restaurants during 2002 and one joint venture restaurant during 2001.
Income tax expense in 2002 was 32.3% of earnings before income taxes. The Companys 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 $33.4 million in 2002, as compared to net income of $26.2 million in 2001, reflects the net effect of the items discussed above.
The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. The Companys principal financing sources in 2003 were cash flow from operations ($84.7 million), and proceeds from the exercise of employee stock options ($7.1 million). The primary uses of funds consisted of costs associated with expansion, principally leasehold improvements, equipment, land and buildings associated with the construction of new restaurants ($76.9 million) and the purchase of short-term investments ($6.3 million).
Since substantially all sales in the Companys restaurants are for cash or credit card receipts, which are generally settled in three days, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital.
The increases in accounts receivable, inventory, prepaid expenses, accounts payable and accrued expenses are principally due to the new restaurants which were opened during 2003 and the result of generally higher average unit volumes experienced during 2003. Further increases in current asset and liability accounts are expected as the Company continues its restaurant development program.
Due to the relatively short time period (less than 30 days) between the ordering of inventories, preparation for sale, collection of payment and subsequent payment for inventories, there are no material changes in the underlying drivers of cash flows that are not clearly identifiable in the Companys consolidated statement of cash flows.
The Company has a revolving credit facility, which allows the Company to borrow up to $100.0 million through its maturity in November 2007. 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 1.75% (depending on the Companys leverage ratio) or the administrative agents prime rate of interest, at the Companys option, and pay a commitment fee of 0.3% to 0.4% (depending on the Companys leverage-ratio) per year on any unused portion of the facility. No amounts were outstanding, and $100.0 million was available, under the Companys revolving credit agreement on December 28, 2003. As of December 28, 2003, terms of the revolving credit facility provide for interest to be accrued at LIBOR plus 1.25% or the prime rate and payment of the commitment fee at a rate of 0.30% 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.
The Company currently plans to open 23 or 24 LongHorn Steakhouse restaurants, three or four Bugaboo Creek Steak House restaurants and two or three The Capital Grille restaurants in 2004. The Company estimates that its capital expenditures will be approximately $83 to $88 million in 2004. The capital expenditure estimate for 2004 includes the estimated cost of developing 28 to 31 new restaurants, ongoing refurbishment in existing restaurants, costs associated with obtaining real estate for year 2005 planned openings and continued investment in improved management information systems.
In September 2001, the Companys Board of Directors authorized the Company to use up to $15.0 million to purchase shares of its common stock through open market transactions, block purchases or in privately negotiated transactions. In July 2002, the Board of Directors extended this program through April 2003. During the first quarter of 2003, the Company purchased 150,000 shares of its common stock under this program for a total purchase price of $2.625 million (average price of $17.50 per share). In July 2003, the Companys Board of Directors authorized the Company to use up to $25.0 million to purchase shares of its common stock from time to time through May 2005. No purchases have been made under this program.
The Company expects that available borrowings under the Companys 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 2006.
Revenues. The Company plans to grow revenues by opening additional restaurants and by increasing average unit volumes at both existing and new restaurants. The Company's new restaurant development plans for 2004 are summarized in the section entitled "LIQUIDITY AND CAPITAL RESOURCES". Based upon current economic conditions and the Company's business trends, the Company is targeting same store sales growth in 2004 of 3% to 4% for all three concepts, compared with 2003. The Company anticipates that this same store sales increase will be comprised of an approximate 2% to 3% increase in average check and 1% to 2% increase in guest counts. New restaurant development and the targeted same store sales growth are expected to result in an increase in total revenue of approximately 17% to 18%.
Cost of restaurant sales. The Company is anticipating increased commodity prices in 2004 based primarily on higher protein pricing particularly with respect to beef. The Company is under fixed price contracts with its primary suppliers for the majority of its anticipated usage of protein products in 2004; however, the Company pays market prices for other products such as produce and fresh seafood and for any protein purchases in excess of contracted amounts. Based on the fixed prices negotiated for its protein products partially offset by current and anticipated menu price increases, the Company expects its costs of goods sold as a percentage of total restaurant sales to increase by 0.6% to 0.7% in 2004 as compared with 2003.
Operating expenses restaurants. For the last several years, the Company has experienced wage rate pressure for both restaurant management and hourly positions, resulting from a tight labor market for skilled positions in the restaurant industry. Based upon labor market conditions that exist today, the Company expects this trend to continue in 2004. In addition, the Company expects that both (i) an increase in the cost of employee health insurance coverage and (ii) an increase in unemployment insurance expense will contribute to upward pressure on overall labor costs as a percentage of total restaurant sales. The Companys targeted growth in same store sales of 3% to 4%, if achieved, will greatly mitigate these cost pressures resulting in a slight amount of leveraging of operating expenses as a percentage of total restaurant sales.
Pre-opening expense. Pre-opening costs are expensed as incurred and are expected to approximate $190,000 for each LongHorn Steakhouse restaurant, $200,000 for each Bugaboo Creek Steak House restaurant, and $375,000 for each The Capital Grille restaurant. Restaurant pre-opening expenses may vary materially from period to period depending on when restaurants open. As a result of the planned opening of more new restaurants in 2004, as compared to 2003, the Company anticipates that pre-opening expenses will be higher in 2004 by approximately $800,000 to $1,100,000.
Depreciation and amortization restaurants. The Company expects depreciation to increase as it invests in the development of new restaurants, the ongoing refurbishment in existing restaurants, and due to the full-year effect of the installation of a new point of sale system in all existing restaurants during 2003. Due to greater leverage of this fixed expense resulting from expected average weekly sales increases in 2004, the Company expects depreciation and amortization to decrease slightly as a percentage of restaurant sales.
General and administrative expenses. To support the Companys expected increase in the number of new restaurants in 2004, the Company plans to increase total general and administrative expenses by approximately 16% to 17%, compared with 2003. This percentage growth in general and administrative expense is expected to be slightly less than the percentage growth in revenue causing this expense category to decrease slightly as a percentage of total revenue in 2004 as compared to 2003.
Interest expense, net. The Company does not plan to have any amounts outstanding under its revolving credit facility during 2004. However, due to the addition of capital leases during 2003 and 2004 the Company expects net interest expense to increase in 2004 compared with 2003 by approximately $200,000 to $300,000.
Income tax expense. The Company expects its effective income tax rate for 2004 to be approximately 33.25% of earnings before income taxes. In years subsequent to 2004, the company expects its effective income tax rate to increase slightly each year.
Earnings per share. Based upon the net effect of the items discussed above, the Company expects 2004 diluted earnings per common share in a range of $1.36 to $1.38.
The preceding discussion of liquidity and capital resources and outlook for future operating results contain certain 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. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Companys ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Companys business discipline over a large restaurant base; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation affecting the restaurant industry; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and 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 Companys 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.
The Company has not entered into any transactions with unconsolidated entities, that are financial guarantees, retained or contingent interests in transferred assets, derivative instruments, or obligations arising out of a variable interest entity that provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company and that have a material current effect, or that are reasonably likely to have a material future effect, on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The table below summarizes the Companys significant contractual obligations, by maturity, as of December 28, 2003 (in thousands):
LESS THAN 1 1 - 3 4 - 5 AFTER 5 TOTAL YEAR YEARS YEARS YEARS ----- ---- ----- ----- ----- Bank revolving credit facility $ -- $ -- $ -- $ -- $ -- Capital lease obligations 63,203 2,593 5,403 5,632 49,575 Operating leases 118,963 17,228 30,776 23,858 47,101 Purchase obligations 21,544 21,544 -- -- -- -------- ------- ------- ------- ------- Total contractual cash obligations $203,710 $41,365 $36,179 $29,490 $96,676 ======== ======= ======= ======= =======
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 Companys 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.
A majority of the Companys employees are paid hourly rates related to federal and state minimum wage laws and various laws that allow for credits to that wage. Although the Company has been able to and will continue to attempt to pass along increases in the minimum wage and in other costs through food and beverage price increases, there can be no assurance that all such increases can be reflected in its prices or that increased prices will be absorbed by customers without diminishing, at least to some degree, customer spending at its restaurants.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). The Company adopted SFAS 142 effective as of the beginning of fiscal year 2002. SFAS 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This Statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. In the first quarter of fiscal 2002, the Company ceased amortization of goodwill and performed the required goodwill impairment testing. The impairment test required the Company to compare the fair value of each reporting unit to its carrying value to determine whether there is an indication that an impairment may exist. If an impairment of goodwill is determined to exist, it is measured as the excess of its carrying value over its fair value. Upon performing the initial test of the carrying value of the Companys goodwill, it was concluded that there was no current indication of impairment to goodwill. Accordingly, no impairment losses were recorded upon the initial adoption of SFAS 142.
As of the date of adoption, the Company had unamortized goodwill in the amount of approximately $19.2 million. Amortization expense related to goodwill was approximately $1.1 million for fiscal year 2001. In accordance with SFAS 142, no goodwill amortization expense was recorded in the Companys financial statements for 2003 or 2002. For the foreseeable future, management believes the only impact on the Companys consolidated financial statements from the adoption of SFAS 142 will be the elimination of goodwill amortization expense.
The proforma effects of the adoption of SFAS 142 on net earnings and basic and diluted earnings per share is as follows (in thousands, except per share amounts):
--------------------------- Year Ended --------------------------- 2003 2002 2001 ---- ---- ---- Net earnings, as reported $ 42,277 $ 33,439 $ 26,158 Goodwill amortization, net of tax benefit -- -- 679 --------- --------- --------- Net earnings, pro forma $ 42,277 $ 33,439 $ 26,837 ========= ========= ========= Basic earnings per common share: Net earnings, as reported $ 1.27 $ 1.03 $ 0.83 Goodwill amortization, net of tax benefit -- -- 0.02 --------- --------- --------- Net earnings, pro forma $ 1.27 $ 1.03 $ 0.85 ========= ========= ========= Diluted earnings per common share: Net earnings, as reported $ 1.21 $ 0.98 $ 0.79 Goodwill amortization, net of tax benefit -- -- 0.02 --------- --------- --------- Net earnings, pro forma $ 1.21 $ 0.98 $ 0.81 ========= ========= =========
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB issued modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the revised interpretations provisions no later than the first quarter of fiscal 2004. The Company has adopted FIN 46, which did not have, and the Company does not expect the Revised Interpretations to have an impact on the Companys consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for hedging relationships designated and contracts entered into or modified after June 30, 2003, except for the provisions that relate to SFAS No. 133 implementation issues, which will continue to be applied in accordance with their respective dates. The adoption of SFAS No. 149 in the third quarter of 2003 did not impact the Companys consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted SFAS No. 150 and it did not have a material impact on the Companys consolidated financial statements.
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Companys most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.
Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Companys business model or changes in the Companys capital strategy can result in the actual useful lives differing from the Companys estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could also result in shortened useful lives.
The Companys accounting policies regarding property and equipment include judgments by management regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated, and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used. As discussed further below, these judgments may also impact the Companys need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.
Long-lived assets, including restaurant sites, fixed assets, intangibles and goodwill are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. Expected cash flows associated with an asset is a key factor in determining the recoverability of the asset. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Companys estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Judgments made by the Company related to the expected useful lives of long-lived assets and the Companys ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize a material impairment charge. In 2002, the Company recognized a $495,000 charge for the writedown of one LongHorn Steakhouse restaurant and in 2001 recognized a $2,802,000 charge for the writedown of five LongHorn steakhouse restaurants based on an evaluation of expected cash flows.
The Company self-insures for a significant portion of expected losses under its workers compensation, employee medical, employment practices and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred and incurred but not reported claims.
The accounting policies regarding self-insurance programs include certain management judgments and assumptions regarding the frequency or severity of claims and claim development patterns, and claim reserve, management, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense than that reported under these programs.
Income taxes are accounted for by the Company in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The Company reviews and assesses the recoverability of any deferred tax assets recorded on the balance sheet and provides any necessary allowances as required. An adjustment to the deferred tax asset would be charged to income in the period such determination was made.
The Company may be exposed to market risk from changes in interest rates on debt.
As of December 28, 2003, the Company had no borrowings outstanding under its $100.0 million revolving credit facility. Amounts outstanding under such credit facility bear interest at LIBOR plus a margin of 1.25% to 1.75% (the applicable margin depending on the Companys leverage ratio), or the administrative agents prime rate of interest at the Companys option. Accordingly, the Company is exposed to the impact of interest rate movements. To achieve the Companys objective of managing its exposure to interest rate changes, the Company may from time to time use interest rate swaps.
The Company invests portions of its excess cash, if any, in highly liquid investments. At December 28, 2003, the Company had $16.0 million in high-grade overnight repurchase agreements, and $24.0 million in short-term investments in the form of federal, state, and municipal bonds. As of December 28, 2003, the Company has classified all short-term investments as trading securities. The market risk on such investments is minimal due to their short-term nature.
PAGE ---- Independent Auditors' Report 32 Consolidated Balance Sheets 33 Consolidated Statements of Operations 34 Consolidated Statements of Shareholders' 35 Equity and Comprehensive Income Consolidated Statements of Cash Flows 36 Notes to Consolidated Financial Statements 37
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 28, 2003 and December 29, 2002, 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 28, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 28, 2003 and December 29, 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 28, 2003 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002 and its method of accounting for derivative instruments and hedging activities in 2001.
KPMG LLP
KPMG LLP
Atlanta, Georgia
February 6, 2004
2003 2002 ASSETS ---- ---- Current assets: Cash and cash equivalents $ 20,508 $ 13,732 Short-term investments 24,036 17,735 Accounts receivable 8,730 6,576 Inventories 16,558 14,309 Prepaid expenses 5,039 3,477 Refundable income taxes (note 6) 2,162 4,124 Deferred income taxes (note 6) 4,887 4,484 -------- -------- Total current assets 81,920 64,437 Property and equipment, less accumulated depreciation and amortization (notes 3 and 8) 354,448 299,773 Goodwill 19,187 19,187 Other 8,987 5,912 -------- -------- Total assets $464,542 $389,309 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,729 $ 17,727 Accrued expenses (note 4) 55,218 44,015 Current installments of obligations under capital leases (note 8) 124 78 -------- -------- Total current liabilities 74,071 61,820 Deferred income taxes (note 6) 5,452 1,138 Obligations under capital leases, net of current installments (note 8) 27,462 22,406 Other 4,131 2,402 -------- -------- Total liabilities 111,116 87,766 Minority interest 1,371 1,411 Shareholders' equity (notes 5, 9, and 10): Preferred stock, no par value. Authorized 10,000 shares, none issued -- -- Common stock, no par value. Authorized 60,000 shares; issued 34,042 shares and 33,099 shares at December 28, 2003 and December 29, 2002, respectively 203,624 191,174 Unearned compensation - restricted stock (1,303) (1,124) Retained earnings 154,723 112,446 Treasury shares at cost; 293 shares and 143 shares at December 28, 2003 and December 29, 2002, respectively (4,989) (2,364) -------- -------- Total shareholders' equity 352,055 300,132 Commitments and contingencies -------- -------- (notes 3, 5, 7, 8 and 11) Total liabilities and shareholders' equity $464,542 $389,309 ======== ========
2003 2002 2001 Revenues: ------ ------ ------ Restaurant sales: LongHorn Steakhouse $ 487,221 $ 416,917 $ 366,538 The Capital Grille 102,414 88,637 80,131 Bugaboo Creek Steak House 83,325 71,216 66,141 Other restaurants 7,498 7,389 7,188 -------- -------- -------- Total restaurant sales 680,458 584,159 519,998 Franchise revenues 374 345 328 -------- -------- -------- Total revenues 680,832 584,504 520,326 Costs and expenses: -------- -------- -------- Cost of restaurant sales 245,094 211,006 189,869 Operating expenses-- restaurants 298,978 257,252 228,340 Provision for asset impairments, restaurant closings, and other charges (note 2) -- 495 2,802 Depreciation and amortization-- restaurants 26,508 23,920 21,248 Pre-opening expense 5,782 3,802 3,764 General and administrative expenses 40,515 34,933 31,675 -------- -------- -------- Total costs and expenses 616,877 531,408 477,698 -------- -------- -------- Operating income 63,955 53,096 42,628 Interest expense, net 1,015 1,718 2,128 Early termination of interest rate swap agreement -- 1,540 1,100 Minority interest 300 448 639 -------- -------- -------- Earnings before income taxes 62,640 49,390 38,761 Income tax expense (note 6) 20,363 15,951 12,603 -------- -------- -------- Net earnings $ 42,277 $ 33,439 $ 26,158 ======== ======== ======== Basic earnings per common share $ 1.27 $ 1.03 $ 0.83 ======== ======== ======== Diluted earnings per common share $ 1.21 $ 0.98 $ 0.79 Weighted average common shares ======== ======== ======== outstanding (basic) 33,162 32,586 31,503 Weighted average common shares ======== ======== ======== outstanding (diluted) 34,843 34,268 33,216 ======== ======== =======
ACCUMULATED COMMON STOCK OTHER TOTAL --------------------------- RESTRICTED RETAINED TREASURY COMPREHENSIVE SHAREHOLDERS' SHARES DOLLARS STOCK EARNINGS STOCK INCOME (LOSS) EQUITY ------------ ------------- ------------------------------------------------------------- ----------- BALANCE, DECEMBER 31, 2000 29,441 124,497 (338) 52,849 (9,751) -- 167,257 Comprehensive income (net of tax): Net earnings -- -- -- 26,158 -- -- 26,158 Cumulative effect of change in accounting principle, net of taxes -- -- -- -- -- (624) (624) Change in unrealized loss from interest rate swaps, net of taxes -- -- -- -- -- 41 41 ------- Total comprehensive income 25,575 Issuance of shares pursuant to public offering 2,144 47,872 -- -- 9,751 -- 57,623 Purchase of common stock for treasury -- -- -- -- (159) -- (159) Issuance of shares pursuant to restricted stock awards 26 414 (414) -- -- -- -- Amortization of restricted stock -- -- 230 -- -- -- 230 Issuance of shares to retirement plans 42 656 -- -- -- -- 656 Issuance of shares pursuant to exercise of stock options 630 4,303 -- -- -- -- 4,303 Tax benefit of stock options exercised -- 1,045 -- -- -- -- 1,045 --------- --------- ------- -------- ------- ------- -------- BALANCE, DECEMBER 30, 2001 32,283 178,787 (522) 79,007 (159) (583) 256,530 Comprehensive income (net of tax): Net earnings -- -- -- 33,439 -- -- 33,439 Other comprehensive income, change in unrealized loss from interest rate swaps -- -- -- -- -- 583 583 Total comprehensive income 34,022 Purchase of common stock for treasury -- -- -- -- (2,205) -- (2,205) Issuance of shares to retirement plans 16 219 -- -- -- -- 219 Issuance of shares pursuant to restricted stock awards 66 1,038 (1,038) -- -- -- 436 Issuance of shares pursuant to exercise of stock options 734 5,262 -- -- -- -- 5,262 Tax benefit of stock options exercised -- 5,868 -- -- -- -- 5,868 --------- -------- -------- -------- --------- --------- -------- BALANCE, DECEMBER 29, 2002 33,099 191,174 (1,124) 112,446 (2,364) -- 300,132 Net earnings and other comprehensive income -- -- -- 42,277 -- -- 42,277 Purchase of common stock for treasury -- -- -- -- (2,625) -- (2,625) Issuance of shares pursuant to restricted stock award 47 969 (969) -- -- -- -- Amortization of restricted stock -- -- 790 -- -- -- 790 Forfeiture of restricted stock (11) (263) -- -- -- -- (263) Issuance of shares pursuant to exercise of stock options 907 7,120 -- -- -- -- 7,120 Tax benefit of stock options exercised -- 4,624 -- -- -- -- 4,624 ------- ---------- --------- --------- ------- ------ ---------- BALANCE, DECEMBER 28, 2003 34,042 $ 203,624 $ (1,303) $ 154,723 $(4,989) $ -- $ 352,055
2003 2002 2001 Cash flows from operating activities: ------- ------- ------ Net earnings $ 42,277 $ 33,439 $ 26,158 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 27,992 25,597 24,067 Non-cash portion of provision for asset impairments, restaurant closings and other charges -- 495 2,802 Minority interest 300 448 639 Deferred tax expense (benefit) 3,911 5,573 (823) Issuance of common stock to employee retirement plans -- 219 656 Changes in assets and liabilities: Accounts receivable (2,154) (807) (1,114) Inventories (2,249) (872) (2,284) Prepaid expenses (1,562) (408) (1,823) Other assets (1,390) (731) (796) Refundable income taxes 6,586 5,646 1,187 Accounts payable 229 (5,943) 6,550 Accrued expenses 10,782 8,190 2,164 ------- ------- ------- Net cash provided by operating activities 84,722 70,846 57,383 Cash flows from investing activities: ------- ------- ------- Purchase of property and equipment (76,915) (54,397) (55,497) Purchase of short-term investments, net (6,301) (17,735) -- ------- ------- ------- Net cash used in investing activities (83,216) (72,132) (55,497) Cash flows from financing activities: ------- ------- ------- Repayments of debt, net -- (10,000) (41,000) Proceeds from issuance of common stock -- - 57,623 Principal payments on capital leases (79) (58) (44) Proceeds from minority partner contributions -- 156 -- Distributions to minority partners (340) (522) (779) Increase (decrease) in bank overdraft included in accounts payable and accrued expenses 1,194 (3,594) 378 Purchase of common stock for treasury (2,625) (2,205) (159) Proceeds from exercise of stock options 7,120 5,262 4,303 ------- ------- ------- Net cash provided by (used in) financing activities 5,270 (10,961) 20,322 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 6,776 (12,247) 22,208 Cash and cash equivalents at beginning of year 13,732 25,979 3,771 ------- ------- ------- Cash and cash equivalents at end of year $ 20,508 $ 13,732 $ 25,979 Supplemental disclosure of cash flow information: ======= ======= ======= Cash paid for income taxes $ 9,737 $ 6,243 $ 11,914 ======= ======= ======= Cash paid for interest net of amounts capitalized $ 1,078 $ 1,934 $ 2,311 Supplemental disclosure of non-cash financing and investing activities: ======= ======= ======= Assets acquired under capital lease $ 5,181 $ 1,617 $ -- ======= ======= =======
RARE Hospitality International, Inc., including its wholly owned subsidiaries (the Company), is a multi-concept restaurant company operating in 28 states and the District of Columbia, which are located primarily in the Eastern half of the United States. At December 28, 2003, the Company operated the following restaurants:
CONCEPT NUMBER IN OPERATION --------------- --------------------- LongHorn Steakhouse 187 Bugaboo Creek Steak House 25 The Capital Grille 17 Other specialty concepts 2
The Company is a partner in joint ventures that, in the aggregate, operate three LongHorn Steakhouse restaurants, which are managed by the Company.
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.
The Companys fiscal year is a 52- or 53-week year ending on the last Sunday in each calendar year. Each of the four fiscal quarters is typically made up of 13 weeks.
The Company effected a three-for-two stock split in the form of a 50% stock dividend paid on September 2, 2003 to shareholders of record on August 12, 2003. All references to the number of common shares and per share amounts prior to the stock split have been restated to give retroactive effect to the stock split for all periods presented.
In November 2001, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on EITF Issue 01-9, Accounting for Consideration Given by a Vendor to a Customer. EITF 01-9 addresses the recognition, measurement and income statement classification for sales incentives offered to customers. Sales incentives include discounts, coupons, free products or services and generally any other offers that entitle a customer to receive a reduction in the price of a product. Under EITF 01-9, the reduction in or refund of the selling price of the product resulting from any sales incentives should be classified as a reduction of revenue. Prior to adopting the provisions of EITF 01-9, the Company recognized certain sales incentives as either general and administrative or restaurant operating expense. Although this pronouncement does not have any impact on the Companys consolidated results of operations or financial position, the presentation prescribed has the effect of reducing net sales and operating expenses. The Company adopted EITF 01-9 as of the beginning of 2002 and has reclassified prior years sales and operating expenses to conform to the new presentation requirement. The reduction in net sales and operating expenses resulting from the adoption of EITF 01-9 amounted to $12,881,000 for 2001.
The Company considers all highly liquid investments which have original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of overnight repurchase agreements and totaled approximately $16.0 million at December 28, 2003 and $9.8 million at December 29, 2002. The carrying amount of these instruments approximates their fair market values. All overdraft balances have been reclassified as current liabilities.
Short term investments consist of federal, state and municipal bonds. The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). Pursuant to the provisions of SFAS 115, the Company has classified its investment portfolio as trading. Trading securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized gains and losses on trading securities are included in the determination of net earnings.
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 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, seven years for restaurant equipment, and three years for computer hardware and software.
The Company accounts for pre-opening and organization costs in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires entities to expense as incurred all organization and pre-opening costs.
The Company accounts for the costs of developing or acquiring computer software in accordance with the American Institute of Certified Public Accountants 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.
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.
The Company adopted SFAS 142, Goodwill and Other Intangible Assets, effective as of the beginning of fiscal year 2002. SFAS 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. In the first quarter of fiscal 2002, the Company ceased amortization of goodwill and performed the required goodwill impairment testing. The fair value of each reporting unit was compared to its carrying value to determine whether there is an indication that impairment may exist. If an impairment of goodwill is determined to exist, it is measured as the excess of its carrying value over its fair value. Upon performing the initial and subsequent annual tests for impairment of the carrying value of the Companys goodwill, it was concluded that there was no current indication of impairment to goodwill. Accordingly, no impairment losses have been recorded.
As of the date of adoption of SFAS 142, the Company had unamortized goodwill in the amount of approximately $19.2 million. Amortization expense related to goodwill was approximately $1.1 million for fiscal years 2001. In accordance with SFAS 142, no goodwill amortization expense was recorded in the Companys financial statements for fiscal 2003 or 2002.
Other assets consist of debt issuance costs, trademarks, deposits, and purchased liquor licenses. Trademarks are amortized on a straight-line basis over five years. The Company applies the provisions of SFAS 142 to purchased liquor licenses; accordingly, in the first quarter of fiscal 2002, the Company ceased amortizing purchased liquor licenses and began testing the liquor licenses for impairment annually. There was no impairment in 2003 or 2002. Debt issuance costs are amortized on a straight-line basis over the term of the debt.
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 each of fiscal year 2002 and 2001.
The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, 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 cash flows and fair value less costs to sell. Accordingly, actual results could vary significantly from such estimates.
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 carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the 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.
Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect net earnings. These benefits are principally generated from employee exercises of stock options and vesting of employee restricted stock awards.
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, Accounting for Stock Issued to Employees (APB 25), 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 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 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 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 123. The fair value of the options granted during 2003, 2002 and 2001 is estimated at approximately $5.8 million, $4.9 million and $8.6 million, respectively, on the date of grant, using the Black-Scholes option pricing model with the following assumptions:
2003 2002 2001 ---- ---- ---- Dividend yield 0 0 0 Volatility 44% 46% 51% Risk-free interest rate 3.25% 4% 4% Average expected life 5 yrs 5 yrs 6 yrs
In accordance with the provisions of APB25, the Company did not recognize any compensation expense from the issuance of employee stock options. The following table represents the effect on net income and earnings per share if the Company had applied the fair value based method and recognition provisions of SFAS 123 (in thousands except per share amounts):
2003 2002 2001 ---- ---- ---- Net earnings, as reported $ 42,277 $ 33,439 $ 26,158 Total stock-based employee compensation expense determined under fair value methods for all awards, net of related tax effects 3,853 3,275 3,261 --------- --------- --------- Pro forma net earnings $ 38,424 $ 30,164 $ 22,897 Basic earnings per common share: ========= ========= ========= Net earnings, as reported $ 1.27 $ 1.03 $ 0.83 ========= ========= ========= Net earnings, pro forma $ 1.16 $ 0.93 $ 0.73 Diluted earnings per common share: ========= ========= ========= Diluted earnings, as reported $ 1.21 $ 0.98 $ 0.79 ========= ========= ========= Diluted earnings, pro forma $ 1.12 $ 0.89 $ 0.70 ========= ========= =========
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends the transition and disclosure provisions of SFAS 123. The Company has not elected to use the fair value method of accounting for stock-based employee compensation. See Note 10 for further discussion of the Company's stock option plans.
Advertising costs are expensed in the periods in which the costs are incurred. Total advertising expense included in operating expenses - restaurants was approximately $21.2 million, $16.8 million and $16.1 million for the years ended December 28, 2003, December 29, 2002 and December 30, 2001, respectively.
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.
The Company accounts for earnings per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires dual disclosure of earnings per share-basic and diluted. Basic earnings per share equals net earnings 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 per share is computed by dividing net earnings by the weighted average number of common shares outstanding after giving effect to dilutive stock options and restricted stock.
The following table presents a reconciliation of weighted average shares and earnings per share amounts (amounts in thousands, except per share data):
2003 2002 2001 Weighted average number of common shares used ------ ------ ------ in basic calculation 33,162 32,586 31,503 Dilutive effect of restricted stock awards 179 146 111 Dilutive effect of net shares issuable pursuant to stock option plans 1,502 1,536 1,602 Weighted average number of common shares used --------- ---------- --------- in diluted calculation 34,843 34,268 33,216 ========= ========== ========= Net earnings $ 42,277 $ 33,439 $ 26,158 ========= ========== ========= Basic earnings per common share $ 1.27 $ 1.03 $ 0.83 ========= ========== ========= Diluted earnings per common share $ 1.21 $ 0.98 $ 0.79 ========= ========== =========
Options to purchase 82,402 shares of common stock at December 28, 2003, were excluded from the computation of diluted earnings per common share because the related exercise prices were greater than the average market price for 2003 and would have been antidilutive.
Accounts receivable is primarily comprised of amounts due from the Companys credit card processor.
The carrying value of the Companys cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, 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, short-term investments, 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 Companys 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.
The Company, from time to time, has used interest rate swap agreements in the management of interest rate risk. The Company carries all derivative instruments on the balance sheet at fair value. Prior to November 2002, the Company used interest rate swap agreements to effectively fix the interest rate on a portion of the variable rate borrowings under the Companys $100.0 million revolving credit facility (see Note 5). These interest rate swap agreements were classified as a hedge of a cash flow exposure under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and accordingly, the effective portion of the initial fair value and subsequent changes in the fair value of those agreements are reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted cash flows affect earnings.
The Company adopted SFAS No. 133 beginning January 2001. As a result of adopting this new accounting standard, the Company recorded a net transition adjustment of $624,000 ($1,006,000 transition adjustment loss net of related tax benefit of $382,000) in accumulated other comprehensive income at January 1, 2001. Concurrent with the completion of the February 2001 common stock offering, the Company amended its interest rate swap agreements to fix the interest rate on future amounts under the Companys credit facility. The Company paid approximately $1.1 million resulting in an after-tax expense of $682,000 associated with amending the interest rate swap agreements to reduce the notional principal to amounts equal to the variable rate debt expected to be outstanding in the future under the Companys credit facility. The repayment of amounts outstanding under the credit agreement combined with the termination of the associated hedge created an ineffective hedge relationship, which is reported in earnings immediately; accordingly, the $1.1 million payment to terminate a portion of the swap agreements was reported as early termination of interest rate swap agreement in the Companys statement of operations.
Concurrent with the November 2002, amendment and extension of the Companys $100.0 million revolving credit facility, all amounts outstanding under the credit facility were repaid and the interest rate swap agreement was terminated. The Company paid $1,540,000 resulting in an after-tax expense of $961,000 associated with terminating this interest rate swap, which was reported as early termination of interest rate swap agreement in the Companys statement of operations.
At December 28, 2003 the Company had no interest rate swap agreements.
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 accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
During 2003, net earnings were the same as comprehensive income. For 2002 and 2001, comprehensive income includes net earnings adjusted for net unrealized losses on interest rate swaps.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). The Company adopted SFAS 142 effective as of the beginning of fiscal year 2002. SFAS 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. In the first quarter of fiscal 2002, the Company ceased amortization of goodwill and performed the required goodwill impairment testing. The impairment test required the Company to compare the fair value of each reporting unit to its carrying value to determine whether there is an indication that an impairment may exist. If an impairment of goodwill is determined to exist, it is measured as the excess of its carrying value over its fair value. Upon performing the initial test for impairment of the carrying value of the Companys goodwill, it was concluded that there was no current indication of impairment to goodwill. Accordingly, no impairment losses were recorded upon the initial adoption of SFAS 142.
As of the date of adoption, the Company had unamortized goodwill in the amount of approximately $19.2 million. Amortization expense related to goodwill was approximately $1.1 million for fiscal year 2001. In accordance with SFAS 142, no goodwill amortization expense was recorded in the Companys financial statements for 2003 or 2002. For the foreseeable future, management believes the only impact on the Companys consolidated financial statements from the adoption of SFAS 142 will be the elimination of goodwill amortization expense.
The proforma effects of the adoption of SFAS 142 on net earnings and basic and diluted earnings per share is as follows (in thousands, except per share amounts):
2003 2002 2001 ---- ---- ---- Net earnings, as reported $ 42,277 $ 33,439 $ 26,158 Goodwill amortization, net of tax benefit -- -- 679 --------- --------- --------- Net earnings, pro forma $ 42,277 $ 33,439 $ 26,837 ========= ========= ========= Basic earnings per common share: Net earnings, as reported $ 1.27 $ 1.03 $ 0.83 Goodwill amortization, net of tax benefit -- -- 0.02 --------- --------- --------- Net earnings, pro forma $ 1.27 $ 1.03 $ 0.85 ========= ========= ========= Diluted earnings per common share: Net earnings, as reported $ 1.21 $ 0.98 $ 0.79 Goodwill amortization, net of tax benefit -- -- 0.02 --------- --------- --------- Net earnings, pro forma $ 1.21 $ 0.98 $ 0.81 ========= ========= =========
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51, which addresses consolidation by business enterprises of variable interest entities (VIEs) either: (1) that do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristic of a controlling financial interest. In December 2003, the FASB issued modifications to FIN 46 (Revised Interpretations) resulting in multiple effective dates based on the nature as well as the creation date of the VIE. VIEs created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the revised interpretations provisions no later than the first quarter of fiscal 2004. The Company has adopted FIN 46, which did not have, and the Company does not expect the Revised Interpretations to have an impact on the Companys consolidated financial statements.
In April 2003, the FASB issied SFAS No. 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies the financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for hedging relationships designated and contracts entered into or modified after June 30, 2003, except for the provisions that relate to SFAS No. 133 implementation issues, which will continue to be applied in accordance with their respective dates. The adoption of SFAS No. 149 in the third quarter of 2003 did not impact the Companys consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity, and imposes certain additional disclosure requirements. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has adopted SFAS No. 150 and it did not have a material impact on the Companys consolidated financial statements.
Certain reclassifications have been made to the 2002 and 2001 consolidated financial statements to conform with the 2003 presentation. Assets under the Companys Supplemental Deferred Compensation Plan equate to the liabilities under the plan (see Note 7 for further discussion of the Companys Supplemental Deferred Compensation Plan). The asset and corresponding liability account balances at December 29, 2003 and December 28, 2002, were approximately $4.1 million and $2.4 million, respectively. The asset and liability accounts were netted for balance sheet presentation prior to 2003. For 2003 presentation, these amounts have been shown as separate non-current assets and liabilities. The respective asset and liability amounts have been reclassified in the 2002 consolidated balance sheet to conform with the 2003 presentation.
The provision for asset impairments, restaurant closings, and other charges of $495,000 in fiscal 2002 consisted of the write down of one LongHorn Steakhouse restaurant. The amount of the charge was determined under SFAS 144 by comparing discounted expected future cash flows to the carrying value of impaired assets.
The provision for asset impairments, restaurant closings, and other charges of $2.8 million in fiscal 2001 consisted primarily of the write down of five LongHorn Steakhouse restaurants. The amount of the charge was determined under SFAS 121 by comparing discounted expected future cash flows to the carrying value of impaired assets.
Major classes of property and equipment at December 28, 2003 and December 29, 2002 are summarized as follows (in thousands):
2003 2002 ------ ------ Land and improvements $ 53,083 $ 44,585 Buildings 55,874 45,978 Leasehold improvements 209,934 182,022 Assets under capital lease 27,807 22,626 Restaurant equipment 87,232 72,970 Furniture and fixtures 40,443 36,366 Construction in progress 26,084 16,896 --------- --------- 500,457 421,443 Less accumulated depreciation and amortization 146,009 121,670 --------- --------- $ 354,448 $ 299,773 ========= =========
During 2003, 2002 and 2001, the Company capitalized interest during construction of approximately $1,067,000, $978,000 and $826,000, 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 28, 2003, such commitments totaled approximately $21.5 million.
Accrued expenses consist of the following at December 28, 2003 and December 29, 2002 (in thousands):
2003 2002 ------ ------ Accrued self insurance reserves $ 5,300 $ 4,200 Accrued provision for asset impairments, restaurant closings, and other charges 454 536 Accrued rent 9,076 7,362 Accrued compensation 10,529 8,071 Other taxes accrued 5,909 5,777 Accrued gift certificate liability 19,402 15,174 Other 4,548 2,895 -------- -------- $ 55,218 $ 44,015 ======== ========
The Company has a variable interest rate revolving credit facility (the Revolving Credit Facility), which permits the Company to borrow up to $100.0 million through the termination date in November 2007. The Revolving Credit Facility is the result of amendments to and a restatement of the Companys previous $100.0 million credit facility. The Revolving Credit Facility bears interest at the Companys option of LIBOR plus a margin of 1.25% to 1.75% (the applicable margin) depending on the Companys leverage ratio or the administrative agents prime rate of interest, and requires payment of a commitment fee on any unused portion at a rate of 0.3% to 0.4% per year (depending on the Companys leverage ratio). At December 28, 2003 and December 29, 2002, the applicable margin was 1.25%. On December 28, 2003 and December 27, 2002, there were no amounts outstanding under the Companys revolving credit facility. The commitment fee on the unused portion of the Revolving Credit Facility on December 28, 2003, and on December 29, 2002 was 0.3% per year. Amounts available under the Companys revolving credit facility totaled $100.0 million on both December 28, 2003 and December 29, 2002, respectively.
The Revolving Credit 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 Revolving Credit Facility is secured by the common stock of entities that own substantially all of the Bugaboo Creek Steak House and The Capital Grille restaurants. At December 28, 2003, the Company was in compliance with the provisions of the Revolving Credit Facility.
Income tax (benefit) expense consists of (in thousands):
CURRENT DEFERRED TOTAL ------- -------- ----- Year ended December 28, 2003: U.S. Federal $ 14,764 $ 3,510 $ 18,274 State and local 1,688 401 2,089 --------- --------- --------- $ 16,452 $ 3,911 $ 20,363 Year ended December 29, 2002: ========= ========= ========= U.S. Federal $ 9,314 $ 5,001 $ 14,315 State and local 1,064 572 1,636 --------- --------- --------- $10,378 $ 5,573 $15,951 ========= ========= ========= Year ended December 30, 2001: U.S. Federal $ 12,049 $ (739) $ 11,310 State and local 1,377 (84) 1,293 --------- --------- --------- $ 13,426 $ (823) $ 12,603 ========= ========= =========
The differences between the statutory Federal income tax rate and the effective income tax rate reflected in the consolidated statements of operations are as follows:
2003 2002 2001 ----- ----- ----- Federal statutory income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.6 2.6 2.6 Meals and entertainment 0.1 0.1 0.1 FICA tip credit (4.7) (4.8) (5.2) Other (0.5) (0.6) -- ----- ----- ------ Effective tax rates 32.5% 32.3% 32.5% ===== ===== =====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 28, 2003 and December 29, 2002 are presented below (in thousands):
2003 2002 Deferred tax assets (liabilities): ---- ---- Provisions for restaurant closings, and other charges $ 1,667 $ 2,115 Accrued rent 3,413 2,768 Accrued joint venture contract termination -- 115 Pre-opening costs 57 138 Accrued insurance 362 403 Accrued workers' compensation 860 582 Property and equipment (6,628) (1,954) Deferred Compensation Plan 1,689 911 Restricted stock 1,148 759 Smallwares (2,495) (2,192) Other (638) (299) ------- -------- Net deferred tax asset (liability) $ (565) $ 3,346 ======= ========
In assessing the realizability of deferred tax assets, the Companys 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 Companys 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 temporary differences are deductible, the Companys management believes it is more likely than not the Company will realize the benefits of these deductible differences.
The Company provides employees who meet minimum service requirements with retirement benefits under a 401(k) plan (the RARE Plan). Under the RARE Plan, eligible employees may make contributions of between 1% and 20% of their annual compensation. Effective for 2000, contributions to the RARE Plan by officers and highly compensated employees were limited to 2% of their annual compensation and effective for 2001, officers and highly compensated employees do not participate in this plan. The Company makes quarterly matching contributions in an amount equal to 50% of the first 5% of employee compensation contributed, resulting in a maximum Company contribution of 2.5% of employee compensation. The Companys expense under the RARE Plan was $592,000, $627,000 and $574,000 for 2003, 2002 and 2001, respectively.
Effective January 1, 2000, the Company implemented the Supplemental Deferred Compensation Plan (the Supplemental Plan), a nonqualified plan which allows officers and highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The maximum aggregate amount deferred under the Supplemental Plan and the RARE Plan could not exceed the lesser of 20% of annual compensation or $20,000. The Company makes quarterly matching contributions in an amount equal to 50% of employee contributions, not to exceed the lesser of 2.5% of the employees total annual compensation or $5,000. The Companys expense under the Supplemental Plan was $414,000, $324,000 and $302,000 for 2003, 2002 and 2001, respectively. Company contributions to both the RARE Plan and the Supplemental Plan vest at the rate of 20% each year beginning after the employees first year of service.
The Company entered into a rabbi trust agreement to protect the assets of the Supplemental Plan. Each participants account is comprised of their contribution, the Companys matching contribution and each participants share of earnings or losses in the plan. In accordance with EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested, the accounts of the rabbi trust are reported in the Companys consolidated financial statements. The Companys consolidated balance sheet includes the investments in other non-current assets and the offsetting obligation is included in other non-current liabilities. The deferred compensation plan investments are considered trading securities and are reported at fair value with the realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, are recorded in operating income.
The Company is obligated under various capital leases for certain restaurant facilities that expire at various dates during the next 30 years. The Company also has noncancelable operating leases for certain 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 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 anticipated life of the leases.
Future minimum lease payments under capital lease obligations and noncancelable operating leases at December 28, 2003 are as follows (in thousands):
YEARS ENDING AT OR CAPITAL OPERATING ABOUT DECEMBER 31: ------- ---------- 2004 $ 2,593 $ 17,228 2005 2,665 16,259 2006 2,738 14,517 2007 2,763 13,318 2008 2,869 10,540 Thereafter 49,575 47,101 ------ -------- Total minimum lease payments 63,203 $118,963 ======== Less imputed interest (at 9%) 35,617 ------ Present value of minimum lease payments 27,586 Less current maturities 124 Obligations under capital leases, ------ excluding current maturities $ 27,462 ====== Rental expense consisted of the following amounts (in thousands): 2003 2002 2001 --- ---- ---- Minimum lease payments $17,746 $15,961 $14,686 Contingent rentals 2,219 1,721 1,651 ------- ------- ------- Total rental expense $19,965 $17,682 $16,337 ======= ======= =======
In September 2001, the Companys Board of Directors authorized the Company to use up to $15.0 million to purchase shares of its common stock through open market transactions, block purchases or in privately negotiated transactions through September 2002. In July 2002, the Companys Board of Directors extended this share repurchase program through April 2003. During the third quarter of 2001, the Company purchased 15,000 shares of its common stock for a total purchase price of approximately $159,000 (average price of $10.60 per share). During the fourth quarter of 2002, the Company purchased 127,500 shares of its common stock for a total purchase price of approximately $2,205,000 (average price of $17.29 per share). During the first quarter of 2003, the Company purchased 150,000 shares of its common stock for a total purchase price of approximately $2,625,000 (average price of $17.50 per share). On July 23, 2003, the Companys Board of Directors authorized the Company to purchase up to an additional $25.0 million of its common stock from time-to-time through May 2005.
In February 2001, the Company completed a public offering for 3.45 million shares of its common stock. Net proceeds to the Company from this offering were approximately $57.6 million.
The Companys 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 Companys 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 29, 2002, there were no shares of Series A Stock issued and outstanding and all of such shares are issuable in accordance with the Companys Shareholders Rights Plan.
The Companys Amended and Restated 2002 Long-Term Incentive Plan (the 2002 Plan), provides for the granting of incentive stock options, nonqualified stock options, and restricted stock to employees, officers, directors, consultants, and advisors. All stock options issued under the 2002 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 aggregate number of shares authorized to be awarded under the 2002 Plan is 2,250,000. Not more than 300,000 of such aggregate number of shares may be granted as awards of restricted stock.
The Companys 1997 Long-Term Incentive Plan, as amended (the 1997 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. All stock options issued under the 1997 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 Plan authorized the granting of options to purchase 2,981,250 shares of common stock.
The Companys 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 225,000 shares of common stock. All stock options issued under the 1996 Stock 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.
As of December 28, 2003 and December 29, 2002, options to purchase 2,019,575 and 2,242,701 shares of common stock, respectively, were exercisable at weighted average exercise prices of $10.04 and $7.89 per share, respectively. Option activity under the Companys stock option plans is as follows:
WEIGHTED SHARES AVERAGE PRICE ------ ------------- Outstanding at December 31, 2000 3,850,652 $ 7.12 Granted in 2001 1,113,375 14.65 Exercised in 2001 (635,672) 6.93 Canceled in 2001 (222,463) 10.69 --------- Outstanding at December 30, 2001 4,105,892 9.01 Granted in 2002 651,642 16.54 Exercised in 2002 (744,545) 7.17 Canceled in 2002 (73,812) 12.11 --------- Outstanding at December 29, 2002 3,939,177 10.57 --------- Granted in 2003 732,003 20.01 Exercised in 2003 (907,252) 7.85 Canceled in 2003 (31,753) 16.17 --------- Outstanding at December 28, 2003 3,732,175 12.99 =========
The following table summarizes information concerning options outstanding and exercisable as of December 28, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER REMAINING EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------ ------------ --------- ---------- ----------- --------- $0.01 to $5.00 59,475 3.7 $ 4.34 59,475 $ 4.34 $5.01 to $10.00 1,477,907 5.1 7.62 1,282,157 7.50 $10.01 to $15.00 798,878 7.0 14.41 389,636 14.26 $15.01 to $20.00 1,136,728 8.6 17.33 288,307 16.80 $20.01 to $25.00 250,187 9.6 22.04 -- -- $25.01 or greater 9,000 9.8 25.60 -- --
The Company has entered into 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 2004 and 2005. 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 financial condition or results of operations from these contracts.
Under the Companys insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Companys preference to self-insure a significant portion of certain expected losses related primarily to workers compensation, employee medical, employment practices and general liability costs. Provisions for losses expected under these programs are recorded based upon the Companys estimates of the aggregate liability for claims incurred.
The Company has deposits totaling $4.6 million at December 28, 2003 that are being maintained as security under the Companys workers compensation policies.
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 Companys financial condition or results of operations.
The following is a summary of the unaudited quarterly results of operations for the years ended December 28, 2003 and December 29, 2002 (in thousands, except per share data):
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 2003: ------- ------- ------- ------- ---- Revenues $ 164,149 $ 168,620 $ 166,247 $ 181,816 $ 680,832 Operating income 17,698 16,359 11,862 18,036 63,955 Earnings before income taxes 17,334 16,064 11,525 17,717 62,640 Net earnings 11,701 10,840 7,779 11,957 42,277 Net earnings per share*: Basic 0.36 0.33 0.23 0.36 1.27 Diluted 0.34 0.31 0.22 0.34 1.21 2002: Revenues $ 145,298 $ 145,386 $ 139,942 $ 153,878 $ 584,504 Operating income 15,159 13,977 10,121 13,839 53,096 Earnings before income taxes 14,530 13,436 9,506 11,918 49,390 Net earnings 9,735 9,141 6,416 8,147 33,439 Net earnings per share*: Basic 0.30 0.28 0.20 0.25 1.03 Diluted 0.29 0.26 0.19 0.24 0.98
* Per share amounts do not necessarily sum to the total year amounts due to changes in shares outstanding and rounding.
None.
In accordance with the Securities Exchange Act Rule 13a-15, the Companys management, under the supervision of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the design and operation of its disclosure controls and procedures were effective. There have been no significant changes in internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting subsequent to the date of such evaluation.
Information about directors and nominees for director and executive officers of the Registrant is incorporated herein by reference from the sections of the Registrants definitive Proxy Statement to be delivered to shareholders of the Registrant in connection with the annual meeting of shareholders to be held May 10, 2004 (the Proxy Statement) entitled Certain Information Concerning Nominees and Directors, and Meetings of the Board of Directors and Committees, Executive Officers of the Company and Section 16(a) Beneficial Ownership Reporting Compliance.
Information regarding executive compensation is incorporated herein by reference from the section of the Proxy Statement entitled Executive Compensation, Compensation Committee Interlocks and Insider Participation and Benefits to Named Executive Officers and Others. In no event shall the information contained in the Proxy Statement under the sections entitled Shareholder Return Analysis, or Compensation Committee Report on Executive Compensation be incorporated herein by reference.
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 Companys Common Stock; Shares Held by Directors and Executive Officers. Information required by this Item is incorporated herein by reference from Item 5, Equity Compensation Plan Information in this report.
Information regarding Certain Relationships and Related Transactions is incorporated herein by reference from the section of the Proxy Statement entitled Certain Transactions.
Information regarding principal accounting fees and services is incorporated herein by reference from the section of the Proxy Statement entitled Ratification of Selection of Auditors.
The following financial statements of the Registrant are set forth herein in Part II, Item 8:
Consolidated Balance Sheets as of December 28, 2003 and December 29, 2002
Consolidated
Statements of Operations - For Each of the Years in the Three-Year Period Ended
December 28, 2003
Consolidated Statements of Shareholders' Equity and Comprehensive Income - For Each of the
Years in the
Three-Year Period Ended December 28, 2003
Consolidated Statements of Cash Flows - For Each of the Years in the
Three-Year Period Ended December 28, 2003
Notes to Consolidated Financial Statements
Independent Auditors' Report
Not applicable.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 3(a) -- Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference from Exhibit 3.1 of the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2002) 3(b) -- Bylaws of the Registrant, as amended (incorporated herein by reference from Exhibit 3.2 of the Registrant's quarterly report on Form 10-Q for the quarter ended March 31, 2002) 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) -- Second Amended and Restated Credit Agreement dated November 21, 2002, by and among the Registrant and Wachovia Bank, National Association as Administrative Agent and Fleet National Bank as Syndication Agent, SunTrust Bank as Documentation Agent and South Trust Bank as Co-Agent (incorporated herein by reference from Exhibit 10(a) of the Registrant's annual report on Form 10-K for the fiscal year ended December 29, 2002). 10(b) -- LongHorn Steaks, Inc. Amended and Restated 1992 Incentive Plan, as amended (incorporated herein by reference from Exhibit 10(b) of the Registrant's annual report on Form 10-K for the fiscal year ended December 29, 2002). 10(c) -- RARE Hospitality International, Inc. 1996 Stock Plan for Outside Directors, as amended (incorporated herein by reference from Exhibit 10(c) of the Registrant's annual report on Form 10-K for the fiscal year ended December 29, 2002). 10(d) -- 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(e) -- 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(f) -- 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(g) -- Amendment No. 2 to 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 year ended December 27, 1998). 10(h) -- Form of stock option agreement under which options were granted to non-executive officer employees on the same terms as the RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan, but not under that plan. 10(i) -- RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan (incorporated herein by reference from Appendix A of the Registrant's Definitive Proxy Statement as filed with the Commission on April 11, 2003). 10(j) -- Employment Agreement dated April 28, 2003 between the Registrant and Philip J. Hickey, Jr. (incorporated herein by reference from Exhibit 10.1 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(k) -- Employment Agreement dated April 28, 2003 between the Registrant and Eugene I. Lee, Jr.(incorporated herein by reference from Exhibit 10.2 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(l) -- Employment Agreement dated April 28, 2003 between the Registrant and W. Douglas Benn (incorporated herein by reference from Exhibit 10.3 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(m) -- Employment Agreement dated April 28, 2003 between the Registrant and Joia M. Johnson (incorporated herein by reference from Exhibit 10.4 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(n) -- Employment Agreement dated April 28, 2003 between the Registrant and Thomas W. Gathers (incorporated herein by reference from Exhibit 10.5 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(o) -- Employment Agreement dated October 15, 2001 between the Registrant and David C. George (incorporated herein by reference from Exhibit 10.6 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 10(p) -- Employment Agreement dated October 1, 2002 between the Registrant and Dennis Pedra (incorporated herein by reference from Exhibit 10.7 of the Registrant's quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003). 21(a) -- Subsidiaries of the Company. 23(a) -- Consent of KPMG LLP. 31(a) -- Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act. 31(b) -- Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act. 32(a) -- Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1). 32(b) -- Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1). 99(a) -- Safe Harbor Compliance Statement.
(1) These exhibits are deemed to accompany this report and are not "filed" as part of the report.
None.
The exhibits to this Report are listed under Item 15(a)(3) above.
See Item 15(a)(2) above.
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. Chairman of the Board and Chief Executive Officer Date: March 12, 2004
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/ Philip J. Hickey, Jr. March 12, 2004 ----------------------------- Philip J. Hickey, Jr. Chairman of the Board and Chief Executive Officer (Principal Executive Officer) By /s/ W. Douglas Benn March 12, 2004 --------------------------- W. Douglas Benn Executive Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Roger L. Boeve March 12, 2004 ------------------------- Roger L. Boeve Director By /s/ Carolyn H. Byrd March 12, 2004 ------------------------- Carolyn H. Byrd Director By /s/ Don L. Chapman March 12, 2004 ------------------------- Don L. Chapman Director By March , 2004 ------------------------- James D. Dixon Director By /s/ Dick R. Holbrook March 12, 2004 ------------------------- Dick R. Holbrook Director By /s/ Lewis H. Jordan March 12, 2004 ----------------------- Lewis H. Jordan Director By /s/ Eugene I. Lee, Jr. March 12, 2004 --------------------------- Eugene I. Lee, Jr. President, Chief Operating Officer and Director By /s/ George W. McKerrow, Sr. March 12, 2004 ------------------------------------ George W. McKerrow, Sr. Director By /s/ Ronald W. San Martin March 12, 2004 ------------------------------- Ronald W. San Martin Director