1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 4, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-27366
RAINFOREST CAFE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1779527
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
720 South Fifth Street
Hopkins, MN 55343 (Address of principal executives offices, including zip code)
(612) 945-5400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- --------
Number of shares of Common Stock, no par value per share outstanding as of
May 14, 1999: 24,549,204
2
RAINFOREST CAFE, INC.
INDEX
PART I. FINANCIAL INFORMATION Page number
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of
April 4, 1999 and January 3, 1999........................2
Consolidated Statements of Operations for the thirteen
weeks ended April 4, 1999 and fourteen weeks
ended April 5,
1998.....................................................3
Consolidated Statements of Cash Flows for the thirteen
weeks ended April 4, 1999 and fourteen weeks
ended April 5,
1998.....................................................4
Condensed Notes to Consolidated Financial
Statements...............................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................15
Item 6. Exhibits and Reports on Form 8K.......................15
Signature Page.................................................16
1
3
RAINFOREST CAFE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 4, January 3,
(In Thousands) 1999 1999
---------------------- -----------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 18,869 $ 16,863
Short-term investments 11,451 13,567
Accounts receivable and other 15,686 15,679
Inventories 11,060 11,191
Deferred income taxes 3,766 3,766
Prepaid expenses 4,564 3,563
---------------------- -----------------------
Total current assets 65,396 64,629
Long-Term Investments 13,029 15,915
Furniture, Equipment and Leasehold Improvements, net 174,137 168,982
Other Assets 6,244 6,001
---------------------- -----------------------
Total Assets $ 258,806 $ 255,527
====================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,676 $ 6,897
Accrued liabilities-
Payroll and payroll taxes 1,986 2,831
Other 8,137 5,165
---------------------- -----------------------
Total current liabilities 16,799 14,893
Deferred Occupancy Costs 22,535 23,498
Deferred Income Tax 4,074 4,074
---------------------- -----------------------
Total liabilities 43,408 42,465
---------------------- -----------------------
Commitments and Contingencies
Shareholders' Equity:
Common stock, no par value, 50,000,000 shares authorized;
25,449,687 and 26,351,268 issued and outstanding 186,631 186,764
Retained earnings 30,153 27,443
Cumulative other comprehensive loss (1,386) (1,145)
---------------------- -----------------------
Total shareholders' equity 215,398 213,062
---------------------- -----------------------
Total Liabilities and Shareholders' Equity $ 258,806 $ 255,527
====================== =======================
The accompanying notes are an integral part of these consolidated financial
statements.
2
4
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen Weeks Ended Fourteen Weeks Ended
(In Thousands, Except Per Share Data) April 4, 1999 April 5, 1998
---------------- ----------------
Revenues:
Restaurant sales $ 46,076 $ 35,007
Retail sales 12,766 9,312
Licensing fees and royalties 919 307
---------------- ----------------
Total revenues 59,761 44,626
---------------- ----------------
Costs and Expenses:
Food and beverage costs 10,649 8,331
Cost of retail goods sold 6,356 4,353
Restaurant operating expenses 25,758 17,930
Retail operating expenses 4,673 3,124
Depreciation and amortization 4,337 2,554
Preopening costs 940 2,415
---------------- ----------------
Total costs and expenses 52,713 38,707
---------------- ----------------
Income from Unit Operations and Licensing 7,048 5,919
---------------- ----------------
Other (Income) Expenses:
General, administrative and development expenses 3,637 2,791
Interest income (861) (2,208)
Other 163 -
---------------- ----------------
Total other (income) expenses 2,939 583
---------------- ----------------
Income before Income Taxes and Cumulative Effect of
Change in Accounting Principle 4,109 5,336
Provision for Income Taxes 1,397 1,814
---------------- ----------------
Income before Cumulative Effect of Change in
Accounting Principle 2,712 3,522
Cumulative Effect of Change in Accounting Principle
Related to Start-Up Costs (net of income taxes
of $2,202) - 3,916
---------------- ----------------
Net income $ 2,712 $ (394)
================ ================
Basic Earnings Per Common Share:
Basic earnings per common share before change in
accounting principle $ 0.11 $ 0.14
Cumulative effect of change in accounting principle - (0.16)
================ ================
Basic earnings per common share $ 0.11 $ (0.02)
================ ================
Basic Weighted Average Shares Outstanding 24,584 25,987
================ ================
Diluted Earnings Per Common Share:
Diluted earnings per common share before change in
accounting principle $ 0.11 $ 0.14
Cumulative effect of change in accounting principle - (0.16)
---------------- ----------------
Diluted earnings per common share $ 0.11 $ (0.02)
================ ================
Diluted Weighted Average Shares Outstanding 24,918 26,038
================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
3
5
RAINFOREST CAFE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirteen Weeks Fourteen Weeks
Ended Ended
(In Thousands) April 4, 1999 April 5, 1998
--------------- ---------------
Operating Activities:
Net income (loss) $ 2,712 $ (394)
Adjustments to reconcile net income to net cash
flows from operating activities-
Depreciation of property, equipment and leasehold improvements 5,116 3,085
Amortization of deferred occupancy costs and other (463) 1,673
Change in accounting principle -- 3,916
Change in operating assets and liabilities-
Accounts receivable (2,055) (3,844)
Inventories 131 1,096
Preopening expenses -- (1,977)
Prepaid expenses and other (1,001) (288)
Accounts payable (221) 918
Accrued liabilities 2,127 610
-------- --------
Net cash provided by operating activities 6,346 4,795
-------- --------
Investing Activities:
Proceeds from sale of short-term investments 6,006 4,909
Purchases of short-term investments (4,134) (16,793)
Proceeds from sale of long-term investments 3,302 8,619
Purchases of long-term investments (416) --
Purchases of furniture, equipment and leasehold
improvements, net of landlord reimbursements (10,771) (16,886)
Purchases of other assets (243) (2,005)
-------- --------
Net cash (used in) investing activities (6,256) (22,156)
-------- --------
Financing Activities:
Proceeds from the sale of common stock and put options, net 797 986
Repurchase of common stock (929) (11,627)
Tenant allowances collected 2,048 112
-------- --------
Net cash provided by (used in) financing activities 1,916 (10,529)
-------- --------
Increase (decrease) in Cash and Cash Equivalents 2,006 (27,890)
Cash and Cash Equivalents, beginning of period 16,863 53,621
-------- --------
Cash and Cash Equivalents, end of period $ 18,869 $ 25,731
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ -- $ --
Income taxes 12 23
The accompanying notes are an integral part of these consolidated financial
statements.
4
6
RAINFOREST CAFE, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 4, 1999
(UNAUDITED)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include all accounts of Rainforest Cafe,
Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the
Company). All significant intercompany balances and transactions have been
eliminated.
The accompanying unaudited consolidated financial statements have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure, normally
included in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the accompanying disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim financial statements be read in conjunction with the Company's
most recent audited financial statements and notes thereto included in the
Company's Form 10k for the fiscal year ended January 3, 1999.. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented have been made.
The preparation of the financial statements in accordance with generally
accepted accounting principles requires the Company's management to make certain
estimates and assumptions for the periods covered by the financial statements.
These estimates and assumptions affect the reported amounts of assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates. Operating results for the thirteen weeks ended April 4, 1999 are not
necessarily indicative of the results that may be expected for the fiscal year
ending January 2, 2000.
(2) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On December 29, 1997, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 relates
to the display of financial information rather than impacting the computation of
net income and earnings per share. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income, which in addition to the
current definition of net income, includes certain amounts recorded directly in
equity. For the Company, comprehensive income consists of net income, foreign
currency translation gains (losses) and unrealized investment gains (losses).
Effective December 29, 1997 the Company adopted Statement of Position (SOP) No.
98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 requires
companies to expense as incurred all start-up and preopening costs that are not
otherwise capitalizable as long-lived assets. As a result of the Company's
adoption of SOP 98-5, the Company recognized a $3.9 million charge, net of $2.2
million of related tax benefit, during the first quarter of 1998 for the
cumulative effect of the change in accounting principle for the unamortized
balance of preopening costs and other start-up expenses as of December 28, 1997.
5
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company, founded in February 1994, owns, operates, and licenses themed
restaurant/retail facilities (each a "Unit") under the name "Rainforest Cafe - A
Wild Place to Shop and Eat(R)." As of May 11, 1999, the Company owned and
operated 23 Units in the United States and licensed eight Units outside of the
United States. Rainforest Cafe Units range in size from the Company's initial
Unit opened on October 3, 1994 in the Mall of America in Bloomington, Minnesota,
which is approximately 15,000 square feet, to the 34,000 square foot Unit
located at Disney's Animal Kingdom at Walt Disney World(R) in Orlando, Florida.
The Company's other domestic Units are located in Chicago, Schaumburg and
Gurnee, Illinois; McLean, Virginia; Miami, Fort Lauderdale and Downtown Disney
Marketplace at Walt Disney World(R) in Orlando, Florida; Ontario and Costa Mesa,
California; Westbury and West Nyack, New York; Edison, New Jersey; Burlington,
Massachusetts; Auburn Hills, Michigan; Philadelphia, Pennsylvania; Towson,
Maryland; Denver, Colorado; Dallas, Texas; Tempe, Arizona; Overland Park,
Kansas; and at the MGM Grand Hotel and Casino in Las Vegas, Nevada.
The Company presently plans to open four additional domestic Units during the
remaining quarters of 1999. Because the Company anticipates continued expansion,
period to period comparisons may not be meaningful. The Company presently
intends to lease the sites for all future domestic Units and anticipates that
most of its future domestic Units will range in size from approximately 14,000
to 18,000 square feet, with between 275 and 350 restaurant seats and 10% to 20%
of square footage dedicated to retail selling space. However, some Units may be
significantly larger, such as the existing free-standing 30,000 square foot
Downtown Disney Market Place Unit and the free-standing 34,000 square foot
Disney's Animal Kingdom Unit, both of which contain approximately 550 restaurant
seats.
In addition to operations in the United States, the Company has pursued
international growth opportunities through licensing arrangements. The Company
has entered into seven exclusive license agreements to develop up to 28 Units,
of which nine are currently open, over the next ten years in the United Kingdom
and Ireland, Mexico, Canada, France, and certain cities and countries in Asia
and South America. The Company intends to enter into additional license
agreements in the future. These agreements have per Unit development fees of at
least $100,000 and royalties ranging from 3% to 10% of Unit sales. All
agreements, with the exception of the agreement relating to the United Kingdom
and Ireland, have area licensing fees which are proportionate to market size and
economic potential. Certain agreements, such as the agreement relating to the
United Kingdom and Ireland, allow the Company to become an equity participant of
20%-50% of each Unit developed. The agreement for the Canadian development is a
50/50 joint venture with the Elephant and Castle Group located in Vancouver,
Canada. The Agreement with Jungle Investments Limited (JIL) to develop Hong Kong
, Macau, Taiwan and Shanghai allowed the Company to purchase 20% equity in JIL
as well as 20% equity in the Unit opened in Hong Kong. The first international
licensed Unit opened in London in June, 1997, followed by Units in Cancun and
Mexico City, Mexico, Vancouver, Canada, Manchester, United Kingdom, Hong Kong,
China, a second location in Mexico City, Mexico and Toronto, Canada which opened
in August and October 1997 and June, September, October and November 1998,
respectively. The Company believes one additional Unit will be opened outside
the United States during 1999.
6
8
Components of operating expenses include operating payroll and fringe benefits
costs, occupancy costs, maintenance costs related to the bird habitat and
aquariums, and advertising and promotion costs. The majority of these costs are
variable and will increase with sales volume. Historically when a new Unit
opens, it incurs higher than normal levels of labor and food costs as Unit
personnel complete training. Management believes, however, that as new staff
gain experience, hourly labor schedules over the ensuing 30-60 day period will
gradually adjust because of operating efficiencies and then be similar to those
of established Units. Each of the Company's current leases includes both fixed
rent and percentage rent provisions.
General, administrative and development expenses include all corporate and
administrative functions that serve to support existing operations and provide
an infrastructure to support future growth. In addition, certain expenses
related to the recruiting and training of Unit management personnel are also
included. Corporate management, supervisory and staff salaries, employee
benefits, travel, information systems, finance, marketing, rent and office
expenses are primary items of cost in this category.
The Company uses a 52- or 53- week fiscal year ending on the Sunday nearest
December 31.
7
9
RESULTS OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 4, 1999, COMPARED TO
THE FOURTEEN WEEKS ENDED APRIL 5, 1998.
The operating results of the Company expressed as a percentage of total revenues
(except where noted) were as follows:
Thirteen Fourteen
Weeks Ended Weeks Ended
April 4, 1999 April 5, 1998
-------------- --------------
Revenues
Restaurant sales 77.1 % 78.4 %
Retail sales 21.4 20.9
Licensing fee 1.5 .7
-------- ---------
Total revenues 100.0 100.0
======== =========
Costs and Expenses
Food and beverage costs (1) 23.1 23.8
Cost of retail goods sold (2) 49.8 46.7
Restaurant operating expenses (1) 55.9 51.2
Retail operating expenses (2) 36.6 33.5
Depreciation and amortization (3) 7.4 5.8
Preopening expenses (3) 1.6 5.4
-------- ---------
Total costs and expenses 88.2 86.7
-------- ---------
Income from Unit Operations and Licensing 11.8 13.3
-------- ---------
Other (Income) Expense:
General, administrative and development 6.1 6.2
Interest income (1.4) (4.9)
Equity in earnings .2 --
-------- ---------
Total other expenses 4.9 1.3
-------- ---------
Income before Income Taxes and Cumulative Effect of
Change in Accounting Principle 6.9 6.2
Provision for Income Taxes 2.4 4.1
-------- ---------
Income before Cumulative Effect of Change in
Accounting Principle 4.5 7.9
Cumulative Effect of Change in Accounting Principle -- 8.8
Net Income 4.5 % (0.9) %
======== =========
(1) Percentage of restaurant sales
(2) Percentage of retail sales
(3) Percentage of restaurant and retail sales
Results of operations for the quarter ended April 4, 1999, reflect the
operations of nineteen mall Units and four freestanding Units open during the
quarter. The Unit at Oak Park Mall in Overland Park, Kansas and the Unit at
Towson Town Center in Towson, Maryland were open for 41 days and 13 days,
respectively, during the first quarter of 1999.
8
10
REVENUES
Total revenues increased 34% to $59.8 million for the thirteen-week period ended
April 4, 1999 from $44.6 million for the fourteen weeks ended April 5, 1998. The
increase in revenues is primarily due to the addition of nine domestic
Rainforest Cafe Units that contributed $23.7 million for the first quarter of
1999 and were offset by $2.8 million generated from the additional week during
the first quarter of 1998. The increase in revenues was partially offset by a
decrease in sales of the comparable store sales base consisting of eight Units
open more than 18 months. The Company's experience to date indicates that a
Unit's revenues may decrease on a comparable basis after the first year of
operations. The comparable store sales base decreased $6.0 million or 12.6% in
the first quarter of 1999. Management believes that such decreases result from
the fact that the Company's new Units typically open at or near full capacity.
Local market conditions and competition may also impact Unit sales.
Restaurant sales decreased as a percentage of total revenue from 78.4% for the
first quarter of 1998 to 77.1% for the comparable period in 1999. The decrease
in the percentage of restaurant sales in the first quarter of 1999 is primarily
due to the increase in international sales as a percentage of total revenue.
Retail sales increased as a percentage of total revenues from 20.9% for the
first quarter in 1998 to 21.4% for the comparable period in 1999. The increase
in the percentage of retail sales in the first quarter is primarily due to a
comparable retail Unit sales increase at the Gurnee Mills, Downtown Chicago and
MGM Grand Units.
COST OF FOOD, BEVERAGE AND RETAIL MERCHANDISE
Food and beverage costs increased 28% to $10.6 million for the first quarter of
1999 compared to $8.3 million for the comparable period of 1998. The increase in
food and beverage costs was primarily due to Unit expansion. Food and beverage
costs as a percentage of restaurant sales decreased from 23.8% for the first
quarter of 1998 to 23.1% for the first quarter of 1999. The decrease was due to
the addition of new menu items and an increase in the percentage of liquor
sales.
Cost of retail goods sold increased 46% to $6.4 million for the first quarter of
1998 compared to $4.4 million for the first quarter of 1998. The increase in
cost of retail goods sold was primarily due to Unit expansion. Cost of retail
goods sold increased as a percentage of retail sales from 46.7% in the first
quarter of 1998 to 49.8% for the comparable period in 1999. The increase in the
first quarter is primarily due to higher permanent markdowns taken during the
quarter.
OPERATING EXPENSES
Restaurant and retail operating expenses increased 44% and 50%, respectively,
from the first quarter of 1999 to the comparable period in 1998. The increase in
restaurant and retail operating expenses was primarily due to Unit expansion.
Restaurant operating expenses increased as a percentage of restaurant sales from
51.2% in the first quarter of 1998 to 55.9% in the first quarter of 1999. The
increase in restaurant operating expenses as a percentage of restaurant sales
are primarily due to diminishing utilization of fixed management salaries and
other fixed costs at Units which experienced sales declines over the comparable
period from the prior year. Expenditures on advertising and marketing increased
at most Units and contributed to the higher costs. A high level of operating
expenses at the Aventura Mall Unit due to low sales volume contributed to the
increase in restaurant operating expenses as a percentage of restaurant sales
for the first quarter of 1999. Retail operating expenses as a percentage of
retail sales
9
11
increased from 33.5% in the first quarter of 1998 to 36.6% in the first quarter
of 1999. The increase in retail operating expenses in the first quarter of 1999
as a percentage of retail sales is due to the same factors that affected
restaurant expenses as noted above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 70% to $4.3 million in the first quarter
of 1999 compared to $2.6 million for the comparable period in 1998. The increase
in depreciation and amortization was primarily due to Unit expansion.
Depreciation and amortization as a percentage of restaurant and retail sales
increased to 7.4% for the first quarter of 1999 from 5.8% for the same period in
1998. The increase in these expenses as a percentage of sales is due to capital
improvements in existing Units and decreased comparable store sales in certain
Units.
PREOPENING COSTS
Preopening expenses decreased 61% from $2.4 million in the first quarter of 1998
to $0.9 million in the same period of 1999. Preopening expenses decreased as a
percentage of restaurant and retail sales from 5.4% for the first quarter of
1998 to 1.6% for the first quarter of 1999. The decrease as a percentage of
sales is primarily due to the opening in April 1998 of the Icon Unit at Disney's
Animal Kingdom at Walt Disney World(R) in Orlando and the decrease in the ratio
of new Unit openings compared to the number of mature Units. The Company is also
gaining preopening efficiencies as more Units are being developed.
As a result of the highly customized and operationally complex nature of the
Company's Units, the Unit preopening process is extensive and costly relative to
that of most chain restaurant operations. Preopening costs which often exceed
$800,000 per Unit, include recruiting, training, relocation and related costs
for developing management and hourly staff for new Units, as well as other costs
directly related to the opening of new Units. Preopening costs will vary from
location to location depending on a number of factors including, among others,
the proximity of other established Company Units, the size and the layout of
each location, and the relative difficulty of the Unit staffing and training
process.
GENERAL, ADMINISTRATIVE AND DEVELOPMENT EXPENSES
General, administrative and development expenses increased 30.3% to $3.6 million
for the first quarter 1999 compared to $2.8 million for the comparable period of
1998. The increase in general administrative and development expenses was due
primarily to the increases in regional Unit management, corporate employees and
development of marketing and advertising programs. General, administrative and
development expenses as a percentage of revenues decreased to 6.1% in the first
quarter of 1999 from 6.3% for the same period in 1998. Management believes
general, administrative and development expenses will continue to grow at a
slower rate than total revenues over the next year resulting in a continual
decrease in these expenses as a percentage of total revenues.
INTEREST INCOME
Interest income of $0.9 million and $2.2 million for the first quarter of 1999
and 1998, respectively, was generated primarily by investing the proceeds from
the Company's two follow-on public offerings completed in January and September
1996. The decrease in interest income is primarily due to $65.2 million of
property, equipment and leasehold improvement purchases to develop new Units
since the first quarter of 1998.
10
12
INCOME TAXES
The provision for income taxes in the 1999 and 1998 periods are both based upon
the Company's estimated effective tax rate, including tax-exempt interest
income. The effective tax rate for the first quarter of 1999 was 34% and was
consistent with the rate used for the comparable quarter in 1998. The effective
tax rate reflects the addition of more Units in lower tax states such as Nevada
and Florida. The Company expects that the effective tax rate for the remaining
quarters in 1999 will increase to 35% as the amount of tax exempt interest
decreases in relation to taxable operating income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital needs arise from the development and opening of
new Units. In January 1996, the Company issued an aggregate of 6,210,000 shares
of Common Stock pursuant to a secondary public offering at $12.67 per share. The
net proceeds to the Company, after payment of underwriting fees and offering
expenses, were approximately $73.6 million. In May 1996, the Company received
approximately $1.0 million in net proceeds from the exercise of warrants at
$3.20 per share issued to Underwriters of the Company's IPO. In September 1996,
the Company issued an aggregate of 4,837,500 shares of Common Stock pursuant to
an additional public offering at $21.00 per share. The net proceeds to the
Company, after payment of underwriting fees and offering expenses, were
approximately $96.0 million.
The following table represents a summary of the Company's key liquidity
measurements for the thirteen weeks ended April 4, 1999 and the fourteen weeks
ended April 5, 1998:
(Dollar Amounts in Millions) PERIOD ENDED
April 4, 1999 April 5, 1998
-------------- -------------
Cash and marketable securities on hand, end of period $ 43.3 $ 46.3
Net working capital, end of period $ 48.6 $ 49.7
Current ratio, end of period. 3.9 to 1 4.3 to 1
Long-term debt, end of period $ --- $ ---
Cash provided by operations $ 6.3 $ 4.8
Capital expenditure $ 10.8 $ 16.9
The Company generated cash flow from operating activities of $6.3 million for
the first quarter of 1999 compared to $4.8 million for the comparable period in
1998. During the first thirteen weeks of 1999, the Company generated
approximately $756,000 from the sale of put options compared to approximately
$1.0 million for the comparable fourteen-week period in 1998. At April 4, 1999,
put options, which may require the purchase of approximately 2.1 million shares
of the Company's Common Stock, were outstanding at exercise prices ranging from
$5.00 to $13.45 per share, with a weighted average exercise price of $5.83. The
sale of the put options was executed as a part of a stock repurchase program
announced in January 1997 and amended in January 1998 and January 1999, pursuant
to which up to 1.5 million shares, 3.0 million shares and 2.0 million shares,
respectively, of the Company's Common Stock may be repurchased over a one year
period. In the first thirteen weeks of 1999, 113,800 shares of Common Stock were
repurchased through put option assignments at a cost of $929,400 compared with
909,000 shares repurchased through put option assignment and open market
purchases in the first fourteen weeks of 1998 at a cost of $11.6 million. The
Company believes that it will continue to generate cash from operating
activities and earn interest income, both of which will be utilized for future
development and working
11
13
capital purposes.
The average investment to open the Company's nineteen Mall Units was $5.8
million, net of landlord concessions which averaged $1.6 million. Additionally,
the Company averaged approximately $790,000 in preopening expenses and purchased
an average of $300,000 of inventory in connection with the openings. Total
expenditures to develop the Company's four Icon Units averaged $12.3 million per
Unit, net of landlord concessions, which averaged $0.9 million. Preopening for
these Units averaged approximately $1.1 million and the initial average
inventory purchased was approximately $360,000.
The Company expects future domestic Mall Units to cost between $5.5 million and
$7.0 million to develop, net of anticipated landlord contributions. In addition,
the Company expects that it will incur approximately $700,000 in preopening
costs and purchase approximately $300,000 of inventory in connection with the
opening of these Units. The Company also expects to open selected, larger Icon
Units, such as its planned Unit in San Francisco, California, which may cost
significantly more. In connection with the construction of existing Units, the
Company has received landlord concessions, which reduced the cost of building
these Units. There can be no assurance, however, that landlord concessions will
be available in the future.
The Company contemplates that the development and opening of each of its Units
in 1999 through 2000 will be financed with existing cash on hand and cash flow
from operations. The Company may require additional equity or debt financing for
expansion beyond 2000.
It is not anticipated that the Company's business will require substantial
working capital to meet its operating requirements. Virtually all of the
Company's revenues are collected in cash or pursuant to credit card processing.
Food and beverage inventories and merchandise inventories are expected to
increase in relation to trade accounts payable.
QUARTERLY FLUCTUATIONS, SEASONALITY AND INFLATION
As a result of the substantial revenues associated with each new Unit, the
timing of new Unit openings may result in significant fluctuations in quarterly
results. The Mall Units may also have higher third or fourth quarter revenues
compared to the first two quarters as a result of seasonal traffic increases at
mall locations seasonally stronger retail sales. Units at entertainment centers
or Disney theme parks may show fluctuations in accordance with any overall
seasonality at these locations.
The primary inflationary factors affecting the Company's operations include
food, beverage and labor costs. Management does not anticipate any significant
labor cost increases as a result of the minimum wage increases enacted in 1997
and 1998. Units in higher cost labor markets such as California, New York and
Nevada may experience lower operating margins than Units located in lower cost
labor markets. In addition, the Company's leases require the Company to pay
costs that are subject to inflationary increases, such as base rent, taxes,
maintenance, repairs and utilities. The Company believes low inflation rates
have contributed to relatively stable costs. There is no assurance, however,
that low inflation rates will continue.
12
14
YEAR 2000 READINESS
The Year 2000 issue results from the fact that many computers, embedded computer
microprocessors, computer software applications and databases only use two
digits (rather than four) to define the applicable year. As a result, such
computer systems and applications may recognize a date of "00" as the year 1900
instead of the intended year 2000, which could result in data miscalculations
and computer system failures. Computer systems and applications are considered
to be Year 2000 compliant when they are fully capable of correctly processing
transactions in the year 2000. The Year 2000 issue is real and presents a number
of serious risks and uncertainties that could have a broad impact across all
industries and which could materially impact the Company's results of
operations, liquidity and financial position.
In order to operate its business, the Company relies upon many first party
information technology systems ("IT"), including its point of sale systems,
table seating, electronic mail, inventory management, credit card processing,
payroll, accounts payable, and general ledger systems. The Company does not
maintain any proprietary IT systems and has not made any significant
modifications to any of the IT systems provided to it by its IT vendors.
As of April 4, 1999, the Company continued its assessment to identify and
evaluate the risks of the Year 2000 issue with respect to its business. The
Company's Year 2000 assessment as of April 4, 1999 focused on the following: (1)
the Company's internal business information and accounting systems, including
(a) the Company's point of sale systems, (b) financial and accounting software
and (c) computer hardware; and (2) the Company's vendors and suppliers of food,
beverage and retail products and other third party product and service
providers. To implement its assessment, the Company established an internal
review team to monitor and facilitate efficient Year 2000 Compliance. The
Company has also engaged a third-party consultant to assist in its evaluation of
Year 2000 readiness.
First, with respect to the Company's internal business information, including
the Company's point of sale systems and accounting systems, the Company has
reviewed its financial reporting systems, IT based and otherwise, to ensure that
they are Year 2000 compliant. The Company's software vendors have made
assurances that their software is either Year 2000 compliant or that timely
updates will be made to ensure that such software will be Year 2000 compliant.
In the process of reviewing the Company's internal business information and
accounting systems, the Company has determined that some of its personal
computers utilized by its corporate staff may not be Year 2000 compliant. Most
of these non-compliant computers have been replaced and the Company presently
anticipates that it will replace the few remaining computers by mid-1999.
Second, the Company is in the process of seeking to obtain assurances from its
key vendors and suppliers to determine the extent to which the Company is
vulnerable to Year 2000 issues because such vendor or supplier is or may not be
Year 2000 compliant. The Company has sent a letter and questionnaire to all key
suppliers of its goods and services to bring the Year 2000 issue to their
attention and to assess their readiness. The Company has identified and
prioritized those suppliers which provide mission-critical goods and services to
the Company. The Company has received written responses from its suppliers of
computerized point-of-sale systems, credit card processing services and outside
payroll processing services that represent their respective systems to be Year
2000 compliant. Most key vendors and suppliers have responded to the Company's
letter and questionnaire and the Company has noted that these vendors have
responded that they are Year 2000 compliant. For those vendors that have not
responded, all of the Company's efforts in this regard will not necessarily
guarantee that events and circumstances outside the Company's direct influence
and control will not adversely impact on its operations.
13
15
Based on the Company's current assessment, the costs of addressing potential
Year 2000 problems are not expected to be material or have a material adverse
impact on the Company's financial position. The current estimated cost of
replacing the Company's corporate-level personal computers, if any, which are
not Year 2000 compliant should not exceed $20,000. However, the estimated costs
relating to the resolution of the Company's Year 2000 compliance issues cannot
be fully and finally determined at this time.
While the Company currently believes that the year 2000 issues outlined above
should not have a material impact on its financial position or results of
operations, it remains uncertain as to what extent, if any, the Company may be
impacted.
FORWARD-LOOKING DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe-harbor"
for forward-looking statements. Certain information included in this report and
other materials filed by the Company with Securities and Exchange Commission (as
well as information included in oral statements or other written statements made
or to be made by the Company) contain statements that are forward-looking,
including statements relating to plans for future expansion and other business
development activities as well as other capital spending, financial sources, the
effects of competition, the expenses related to any Company litigation, the
Company's expectations as to when it will complete the remediation and testing
phases of the Company's Year 2000 readiness and the cost of achieving Year 2000
readiness. Such forward-looking information involves important risks and
uncertainties that could significantly affect anticipated results in the future
and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties are indicated in the Company's Form 10-K for fiscal 1998 and
include, but are not limited to, those relating to development and construction
activities, including delays in opening new Units, acceptance of the Rainforest
Cafe concept and the future Unit performance, the quality of the Company's
restaurant and retail operations, dependence on discretionary consumer spending,
the Company's failure to defend its intellectual property rights, the Company's
inability to identify and resolve all material Year 2000 problems in a timely
and cost effective manner, dependence on existing management, general economic
conditions, changes in federal or state laws or regulations and unanticipated
results of litigation.
14
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings:
SHAREHOLDER CLASS ACTION LITIGATION
The Company and certain executive officers of the Company are named as
defendants in a purported class action complaint, In Re: Rainforest Cafe, Inc.
Securities Litigation, alleging violations by the Company and such executive
officers of certain Federal securities laws. The complaint was filed on July 31,
1998 and is a consolidation of seven separate actions which were all filed in
the United States District Court for the District of Minnesota. The complaint
alleges that the defendants violated Federal securities laws by making
misrepresentations and omissions regarding the Company's performance and future
prospects during the class period while individually selling the Company's
Common Stock. The complaint purports to seek relief on behalf of a class of
plaintiffs who purchased the Company's Common Stock during the period between
October 20, 1997 and January 6, 1998. The action was dismissed without prejudice
on December 21, 1998. Plaintiffs filed an appeal of the judgement of dismissal
on January 29, 1999 and then filed a motion to voluntarily dismiss the appeal on
March 16, 1999. The appeal was dismissed on April 21, 1999.
SHAREHOLDER CLASS ACTION LITIGATION
The Company and certain executive officers of the Company are named as
defendants in a purported class action complaint, Emanuel Massing vs. Lyle
Berman et al., alleging violations by the Company and such executive officers of
certain Federal securities laws. The complaint was filed on May 3, 1999 in the
United State District Court for the district of Minnesota. This action is a
follow-up action to the previous shareholder action, In Re: Rainforest Cafe,
Inc. Securities Litigation. Like its predecessor case, the complaint alleges
that the defendants violated Federal securities laws by making
misrepresentations and omissions regarding the Company's performance and future
prospects during the class period while individually selling the Company's
Common Stock. The complaint purports to seek relief on behalf of a class of
plaintiffs who purchased the Company's Common Stock during the period between
October 20, 1997 and January 6, 1998. The Company believes the action is without
merit and intends to defend this claim vigorously.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits:
27.1 Financial Data Schedule
B. Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
quarter ended April 4, 1999.
15
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RAINFOREST CAFE, INC.
Date: May 12, 1999 /s/ Kenneth Brimmer
-----------------------------------------
Kenneth Brimmer
President
Date: May 12, 1999 /s/ Mark S. Robinow
-----------------------------------------
Mark S. Robinow
Chief Financial Officer (Principal Financial
Officer)
16