ITEM 1. BUSINESS
The following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties. The actual results of Rainforest Cafe, Inc. (the "Company") could differ materially from the Company's historical results of operations and those discussed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those identified in "Certain Factors."
The Company owns, operates and licenses large, high volume, themed restaurant/retail facilities (a "Unit") under the name "Rainforest Cafe -- A Wild Place to Shop and Eat." The Company's Units are designed to provide a visually and audibly stimulating and entertaining rain forest environment that appeals to a broad range of customers of all ages. Each Rainforest Cafe consists of a Restaurant and a Retail Village. The Restaurant provides an attractive value to customers by offering a full menu of high quality food and beverage items, generous portions and excellent service in a unique and exciting environment. The Retail Village features apparel, toys and gifts with the Rainforest Cafe logo and other items reflecting the rain forest theme.
RECENT DEVELOPMENTS
TERMINATION OF MERGER AGREEMENT WITH LAKES GAMING, INC.
On December 22, 1999, Rainforest entered into an agreement and plan of merger with Lakes Gaming, Inc. and RFC Acquisition Co., a wholly-owned subsidiary of Lakes. Pursuant to the terms and subject to the conditions of the merger agreement, RFC Acquisition Co. was to be merged with and into Rainforest, with Rainforest continuing as the surviving corporation and a wholly-owned subsidiary of Lakes.
On January 24, 2000, Rainforest and Lakes announced that they would not proceed with their proposed merger transaction and entered into a mutual termination agreement. The termination was mutually agreed upon, and no payments were made by either party. A $2 million termination fee from Rainforest continues to be payable to Lakes if Rainforest consummates a takeover proposal within six months.
MERGER AGREEMENT WITH LANDRY'S SEAFOOD RESTAURANTS, INC.
On February 9, 2000, Landry's Seafood Restaurants, Inc. ("Landry's") and Rainforest announced that they had entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as of February 9, 2000, by and among Rainforest, the Company and LSR Acquisition Corp., a wholly owned subsidiary of the Landry's ("Merger Sub"). Pursuant to the Merger Agreement, Rainforest will be merged with and into Merger Sub, with Merger Sub being the surviving corporation in the merger. Pursuant to the Merger Agreement, each share of Rainforest common stock will be converted, at the shareholder's election, into the right to receive $5.23 in cash or .5816 shares of Landry's common stock for each share of Rainforest common stock outstanding, subject to mandatory proration. As a result of the transaction, approximately 65% of the shares of Rainforest common stock will be converted into Landry's common stock and approximately 35% of the shares of Rainforest common stock will be converted into cash. Landry's will issue approximately 9,028,000 shares of its common stock and pay approximately $43,750,000 in cash for all of the outstanding shares of common stock of Rainforest. The merger transaction is subject to various conditions including, among others, approval of holders of Rainforest common stock and regulatory approvals and consents.
It is intended that the merger transaction qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. In connection with the transactions contemplated by the Merger Agreement, Lyle Berman and Steven Schussler, shareholders of Rainforest holding approximately 6.6% and 4.1% of Rainforest's outstanding shares of common stock, respectively, have entered into agreements with Landry's to, among other things, vote their shares of common stock in favor of the transaction. Additionally, Lyle Berman (Chairman of the Board/Chief Executive Officer of Rainforest), Kenneth W. Brimmer (President of Rainforest), Steven Schussler (Senior Vice President-Development of Rainforest) and Ercument Ucan (Senior Vice President - Retail of Rainforest) have entered into employee termination, consulting and non-competition agreements with Landry's.
RAINFOREST AND ITS BOARD OF DIRECTORS ARE DEFENDANTS IN CERTAIN LAWSUITS CHALLENGING THE MERGER.
Rainforest and its Board of Directors were named as defendants in two purported class action lawsuits, filed on December 23, 1999 and January 13, 2000, respectively, in Hennepin County District Court in Minneapolis. On February 26, 2000, these plaintiffs amended their original complaints, alleging a breach of the board's fiduciary duties in connection with their consideration of the merger agreement between Rainforest and Landry's. Additionally, the plaintiffs may seek to permanently enjoin the merger, and seek compensatory damages for the alleged wrongs. Rainforest denies these allegations in their entirety and intends to defend itself vigorously.
Under Minnesota law, Rainforest is required, subject to certain exceptions and exclusions, to indemnify its current and former officers and directors in connection with lawsuits of this nature. Under the merger agreement, Landry's has also agreed to indemnify these individuals for a period of six years for these types of claims. Accordingly, prior to the merger, Rainforest will bear the cost of defending itself, its current and former directors and officers, and for any settlement or judgment in these lawsuits and, after the merger, Landry's will bear the cost of defending Rainforest and its current and former directors and officers, for any settlement or judgment of such matters. Although these lawsuits are in their early stages, and Rainforest and, after the merger, Landry's plan to defend themselves vigorously, there can be no assurance that the costs of defense and any settlement or judgment will not have a material adverse effect on Rainforest or Landry's or their combined results of operations.
See ITEM 3. - LEGAL PROCEEDINGS.
THE RAINFOREST CAFE CONCEPT AND STRATEGY
The Company seeks to differentiate itself by providing high quality, freshly prepared food and proprietary retail merchandise in a themed environment. The key factors of the Company's market positioning and operating strategy are as follows:
Distinctive Concept. The Company's rain forest theme is promoted by a simulated unique rain forest environment throughout the Unit. Each Rainforest Cafe features a visually and audibly exciting environment that usually includes a variety of live tropical birds, exotic saltwater fish in large custom-designed aquariums, animated robotic animals and sculpted banyan trees that create a canopy of foliage. The dynamic rain forest atmosphere is further enhanced by simulated thunder and lightning storms, tropical rain showers, waterfalls, mists that emanate from extensive rock formations and specially-developed aromatic scents. This entertaining rain forest environment makes each Rainforest Cafe "A Wild Place to Shop and Eat."
Broad-Based Appeal. Management believes that the Company's Rainforest Cafe concept has broader appeal than other theme-based restaurant concepts because it attracts customers of all ages. The Company's distinctive concept, combined with high quality food and retail merchandise, make the Rainforest Cafe appealing to children, teenagers, adults, and senior citizens.
High Profile Unit Locations. In order to take maximum advantage of the Company's broad-based appeal, the Company believes that the placement of its Units in high profile, heavy-traffic locations is critical to its success. By being in such locations, the Company believes its Units appeal to both destination customers as well as passers-by who are drawn to its visually and audibly exciting environment. The Company believes that its format, as developed at its existing Units, can be utilized in multiple high traffic locations with favorable demographics such as shopping malls, entertainment centers and Disney theme parks.
High Quality Food. The Restaurant provides an attractive value to customers by offering a moderately-priced, full menu of high quality food and beverage items served in generous portions in a distinctive environment. The Restaurant features a wide variety of beverages, appetizers, pastas, sandwiches, salads, pizzas, burgers and full-platter entrees, presented in a visually appealing manner. Menu items are prepared on-site using high quality ingredients. Lunch and dinner entrees range in price from $8.99 to $21.99 and the average guest check was approximately $13.50 for the fiscal year ended January 2, 2000. Management believes that its high quality food contributes to a significant level of repeat business.
Commitment to Retail and Building Brand Awareness. In order to enter the Restaurant, all customers must pass through the Unit's Retail Village. The Retail Village offers over 3,000 SKUs and includes apparel, toys and gifts with the Rainforest Cafe logo and other items suggesting the rain forest theme. The Company has also developed eight proprietary Animal Characters, each with a distinct personality, as an additional method of merchandising its retail products. The Company utilizes several of its Animal Characters for clothing, toys and gifts. By offering items featuring the Rainforest Cafe logo and Animal Characters, the Company believes it is continuing to build "brand equity" in the Rainforest Cafe name that will allow it to attract more customers and to enhance its competitive retail position. The Retail Village is also intended to be educational, with displays of live exotic tropical birds and fish and an animated talking tree that delivers environmental messages.
Focus on Customer Satisfaction. The Company is committed to staffing each Unit with an experienced management team and providing its customers with prompt, friendly and efficient service. A customer's experience is also enhanced by the attitude and attention of Unit personnel, including "tour guides" (greeters), "safari guides" (food servers), "navigators" (bartenders), "pathfinders" (retail staff) and tropical bird curators. The Company recognizes that, in order to maintain a high level of repeat customers and to attract new business through word of mouth, it must provide superior customer service.
Commitment to Attracting and Retaining Quality Employees. By providing extensive training and attractive compensation, the Company fosters a strong corporate culture and encourages a sense of personal commitment from its employees. The Company believes its compensation structure and positive corporate culture enable it to attract and retain quality employees. The Company believes that Unit management is important for the profitability of each Rainforest Cafe and accordingly, places particular emphasis on recruiting Unit-level Managing Directors that have significant restaurant and management experience. The Company anticipates that, prior to opening a Unit, a Managing Director will have been trained at one or more Rainforest Cafes for four to six months. All full-time corporate employees and certain members of Unit management are eligible to participate in the Company's Stock Option Plans and all full-time employees are eligible to participate in the Company's 1997 Employee Stock Purchase Plan.
RAINFOREST CAFE FEATURES
To create a simulated rain forest environment, Rainforest Cafes generally include:
Live Exotic Birds -- Most Rainforest Cafes display live exotic birds such as macaws and cockatoos in the Retail Village. The Company has curators specifically devoted to caring for the birds and fish and for answering guest questions. When the exotic birds are not on display they are kept and maintained in a specially designed "habitat room."
Aquariums -- Rainforest Cafes have large aquarium systems, including walk-through aquariums that contain many varieties of saltwater fish from locales such as Africa and South America. Aquariums range in size from 750 to 10,000 gallons and are placed throughout each Unit to maximize visibility to customers.
Tropical Rainstorms and Waterfalls -- Simulated lightning and thunderstorms "sweep" through each Rainforest Cafe every 20 to 30 minutes. Rainforest Cafes also utilize a mist system emanating from rock formations throughout the Unit and rain showers around the perimeter of the Restaurant and Mushroom Bar area. Other Rainforest Cafe features include cascading waterfalls, fountains and a ventilation system emitting a light floral aroma.
Trees, Foliage and Animated Animals -- The ceiling level of the Restaurant and Retail Village of a Rainforest Cafe are intertwined with a "forest" of sculpted life-like banyan trees that creates a canopy of foliage over diners and shoppers. Each banyan tree is sculpted for a realistic presentation of its overgrown root system. The Restaurant and Retail Village contains several rock formations, abundant foliage and jungle-like scenes. Interspersed throughout the facility are robotic animals such as life-size crocodiles, elephants, gorillas, snakes, butterflies and frogs.
Educational Commitment -- The Company makes each Rainforest Cafe an environmentally educational experience. The Rainforest Cafe's talking banyan tree "Tracy" delivers environmental messages to help educate and entertain children. Each Rainforest Cafe has an on-site curator who educates customers, including school groups, on the tropical birds and the rain forest. The curator also makes numerous presentations at schools and community organizations.
UNIT ECONOMICS
The Company identifies its current and planned domestic Rainforest Cafes as either "Mall" or "Icon" Units. The Mall Unit format generally ranges in size from approximately 15,000 to 23,000 square feet and has between 300 and 450 restaurant seats. Mall Units are located primarily in high traffic shopping malls such as Mall of America in Minneapolis Minnesota, South Coast Plaza in Orange County, California and Tysons Corner Center I in McLean, Virginia, a suburb of Washington D.C. The larger Icon Units are generally in excess of 20,000 square feet and have 400 to 600 restaurant seats (although some may be slightly smaller). Icon Units are generally located in high traffic tourist areas such as Downtown Disney Marketplace, Disney's Animal Kingdom, the MGM Grand Hotel and Casino in Las Vegas, Nevada and Downtown Chicago.
The Company's twenty-one domestic Units that were open the entire fiscal year ended January 2, 2000, generated average revenues of $11.3 million during 1999. The Company's twenty-three Mall Units open at the end of 1999, were developed at an average cost of $5.8 million, net of landlord contributions. Additionally, the Company incurred average pre-opening costs of approximately $760,000 and purchased an average of $240,000 of inventory in connection with each opening. Management anticipates that the majority of its future domestic Units will be in urban entertainment areas and that average development cost, pre-opening cost and inventory costs will be higher than historical averages as most these Units will be Icon Units and cost more than typical Mall Units. The Company currently has four Icon Units which were developed at an average cost of $12.3 million, net of landlord contributions. The Company incurred an average of $1.1 million pre-opening expenses and purchased an average of $400,000 inventory in connection with the opening of these Icon Units. The Company expects development costs for additional Icon Units to range from $12 million to $19 million, net of landlord contributions. In addition, the Company anticipates pre-opening costs for each Icon Unit of $1.0 million to $1.5 million and expects to purchase approximately $400,000 of inventory in connection with each opening.
Management believes that the Company's demonstrated ability to generate high sales volumes and customer traffic at its existing Units enables it to obtain attractive sites and negotiate favorable lease terms, including landlord contributions.
CURRENT UNIT LOCATIONS
The following table sets forth certain information about the Company's existing Units and international Units developed by licensees of the Company:
- ---------- (1) Designates Icon Units.
EXPANSION PLANS AND SITE SELECTION
The following table sets forth certain information about the Company's planned Units, all of which are subject to existing leases except where otherwise indicated:
- ---------- (1) Designates Icon Units.
The Company's domestic site selection strategy is to locate its Units in high profile, heavy traffic locations. A variety of factors are analyzed in the site selection process, including local market demographics, site visibility, business seasonality, construction costs and projected Unit economics. By operating in high profile, heavy traffic locations, the Company believes its Units appeal to both destination customers as well as passers-by who are drawn to its visually and audibly exciting environment. The Company believes that its format, as developed at its existing Units, can be utilized in a number of high traffic venues with favorable demographics such as entertainment centers and Disney theme parks.
While most of the future Rainforest Cafes will be located in shopping malls or entertainment centers, the Downtown Disney Marketplace Unit located in Walt Disney World near Orlando, Florida and the Downtown Chicago Unit are stand-alone facilities. Customers are able to enter the Downtown Disney Marketplace Unit without having to enter Disney's adjacent theme parks. The Rainforest Cafe at Disney's Animal Kingdom in Walt Disney World is also a stand-alone facility. The 34,000 square foot, 550 seat Unit is the only full service sit-down restaurant at Disney's Animal Kingdom. Patrons pass by the Rainforest Cafe upon entering and leaving the park.
The Company's Disney leases provide among other things, that the Company will not own, operate, develop or manage a restaurant: (i) within a 75 mile radius of Downtown Disney Marketplace, Disney's Animal Kingdom or (ii) in a theme park located anywhere in the world that is not affiliated with Disney or its affiliates. The Company also agreed that it would not open a Unit within 50 miles of The Disneyland Resort in Anaheim, California. Disney waived its radius restriction with respect to the Company's South Coast Plaza and Ontario Mills Units in California. Additionally, the Company has granted MGM Grand the right of first refusal, with certain exceptions, with respect to the development of a Unit in any hotel/casino operation.
INTERNATIONAL LICENSE AND JOINT VENTURE AGREEMENTS
The Company has entered into eight separate exclusive license arrangements relating to the development of Rainforest Cafes in the United Kingdom and Ireland, France, Mexico, Canada and certain countries and cities in Asia and South America. 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. For the fiscal year ended January 2, 2000, approximately 1.2% of the Company's total revenues were derived from international licensing fees and royalties. Through the fiscal year ended January 2, 2000, the Company's expenditures in acquiring ownership interests in certain international Rainforest Cafes was $5.5 million, not including the investment in the majority-owned subsidiary Yorkdale Rainforest Restaurant, Inc. that was made during the third quarter of 1999.
United Kingdom and Ireland. In August 1996, the Company entered into a License and Area Development Agreement with Glendola Leisure Ltd. ("Glendola"), an affiliate of the Foundation Group, a London-based hotel and restaurant developer and operator, pursuant to which Glendola will develop five Units over a ten year
period in the United Kingdom and Ireland. Pursuant to this agreement, the Company will have the option to purchase, prior to the opening of the Unit, between 20% and 50% of the equity interest in any Unit developed by Glendola. The Company has purchased a 20% ownership interest in the London Unit for approximately $400,000 and has purchased a 49% ownership in the Manchester Unit for approximately $550,000.
Mexico. In October 1996, the Company entered into a License and Area Development Agreement with a subsidiary of Empresas de Comunicacion y Entretenimiento ("ECE"), a Mexican-based restaurant owner and operator, pursuant to which ECE will develop seven Units over a ten-year period in Mexico. Pursuant to this agreement, ECE has developed three Units through fiscal 1998, one in Cancun and two in Mexico City.
Canada. In March 1997, the Company entered a joint venture and exclusive license agreement with the Elephant and Castle Group ("E & C"), a Vancouver based owner and operator of Elephant and Castle pubs and restaurants. E & C and the Company agreed to develop five Rainforest Cafes in Canada over a four-year period. Under the terms of this agreement, the Company is also entitled to receive a warrant to purchase 600,000 shares of E & C stock at $8.00 per share exercisable for a period of five years. In addition, the Company and E & C have a 50% equity interest in the joint venture Canadian Rainforest Restaurants, Inc. ("CRRI"). The Company will have the option to purchase E & C's interest in CRRI after seven years based on a predetermined formula of cash flow and investment. CRRI opened its first Canadian Unit near Vancouver in June 1998 and its second Canadian Unit in Toronto in January 1999. Two openings are planned for Canada during 2000. The locations for these Units will be in Montreal and Niagara Falls. The Company will have an equity interest in the Montreal Unit as this Unit is being built by CRRI. The Company but will not have an ownership interest in the Niagara Falls Unit as this Unit will be subfranchised.
During the third quarter of 1999, the Company purchased a beneficial ownership of a 75% equity interest in Yorkdale Rainforest Restaurant, Inc. ("YRRI") (a Canadian federal corporation) which owns 100% of the Unit in the Yorkdale Shopping Centre located in North York, Ontario, Canada. Elephant and Castle is the beneficial owner of the 25% minority interest in YRRI. The purchase of 75% ownership investment in YRRI was approximately $2.5 million. The results of this entity are consolidated with the Company's other wholly-owned and majority owned subsidiaries.
Southeast Asia. In August 1997, the Company entered into a Master License Agreement with Rainforest Cafe Far East, Ltd. ("RFC Far East Ltd.") formerly Movie Dream Corporation, a subsidiary of Far East Holdings International Limited, a Singapore-based holding company. The agreement was amended as of January 1, 1999. Under the terms of the agreement, RFC Far East Ltd. will develop a minimum of three Units over ten years. Countries covered by this agreement include Singapore, which is scheduled to open in April 2000, Thailand and the Philippines. RFC Far East Ltd. has the right to establish sub-franchisees within the territory, subject to certain terms and conditions, which include a right of the Company to approve all investors and all other rights in the license agreement. Pursuant to this agreement, the Company will have the option to purchase, prior to the opening of any Unit, up to 20% of the equity interest in all Units developed by RFC Far East Ltd.. This license agreement also grants RFC Far East Ltd. an option for the development rights to India, Malaysia, and Indonesia, subject to meeting future performance criteria.
Hong Kong. In March 1998, the Company entered into a Master Franchise Agreement with Jungle Investment Limited ("JIL"), a Hong Kong based entity, to develop a minimum of two units in a territory including Hong Kong, Macau, Taiwan, and Shanghai. JIL has the right to establish sub-franchises within the territory, subject to certain terms and conditions, such as the Company's right to approve all shareholders of the sub-franchisee. Under the terms of this agreement, JIL will develop a minimum of two restaurants over the next 15 months. Pursuant to the agreement, the Company has a right to purchase, prior to the opening of each Unit, up to 20% of the equity interest in any unit developed, as well as 20% of JIL. In March, 1998, the Company purchased 20% ownership, for approximately $1.8 million, in both JIL and the first Unit which opened in Hong Kong in October 1998. A Unit in Shanghai, China is scheduled to open during the fourth quarter of 2000. This Unit was subfranchised by JIL, with approval from the Company, to Bright Billion Limited, a Hong Kong Company.
France. In September 1998, the Company entered into a franchise agreement to open a Unit at Disneyland Paris to be operated by Groupe Flo S.A.. The agreement requires the Unit to open within one year and
includes an option to open an additional Unit in France prior to July, 2002.
Argentina, Brazil, Chile and Puerto Rico. In December 1998, the Company entered into an Area Development Agreement with HR Sudamerica S.A. DE C.V ("Sudamerica") to develop five Units in Argentina, Brazil, Chile and Puerto Rico prior to December 2002. Under the terms of this agreement, the Company and Sudamerica will each own approximately 50% of the restaurants required to be developed under the agreement.
Japan. In January 2000, the Company entered into a franchise agreement between Oriental Land Co., Ltd., and Mitsubishi Corporation to develop a Unit at the Ikspiari Complex at the Tokoyo Disney Resort. The Unit is expected to open during third quarter of 2000. The Company anticipates a 20% ownership interest in this Unit.
RESTAURANT
For the fiscal year ended January 2, 2000, approximately 80% of the Company's total revenues were derived from Restaurant sales. The Company believes that Rainforest Cafes enjoy a high level of repeat business and customer diversity because of the Company's commitment to providing high quality food and customer service in an exciting and entertaining environment. Features of the Restaurant are as follows:
Menu. The Company considers its extensive menu selection to be an important factor in the appeal of its Restaurant, and accordingly continuous attention is devoted to the development of new menu items. The Restaurant features casual cuisine that caters to broad customer preferences. The menu presently offers several types of appetizers such as "Rainforest Pita Quesadillas" and "Chicken Rain Stix." The menu also offers different types of pastas, sandwiches, salads, pizzas, burgers and full-platter entrees, such as "Rasta Pasta" (pasta tossed in a garlic cream sauce with grilled chicken, broccoli and pesto), "Cedar Wood Salmon" (fresh salmon grilled on cedar wood) and "Rumble in the Jungle Turkey Pita" (grilled pita bread stuffed with fresh roasted turkey and Caesar salad). A children's menu and complete dessert selection are also available. Portions are generous and significant attention is placed on presentation and the quality of preparation. Lunch and dinner entrees range in price from $8.99 to $21.99. The Restaurant's full-service bar, the "Mushroom Bar," features a number of customized alcoholic and non-alcoholic drinks, such as the "Jungle Root" (carrot juice), the "Margarilla" (a margarita blended with orange sherbet) and the "Chocolate Covered Banana Blast" (fresh banana, chocolate syrup, vanilla yogurt blended with rum). Alcoholic beverages are primarily served to complement meals and accounted for approximately 9% of total restaurant sales for the fiscal year ended January 2, 2000. The average check per person for such period was approximately $13.50. Because the Unit's menu is not tied to any particular type of food or beverage, the Company can introduce and eliminate items based on local or current consumer trends without altering its rain forest theme.
Decor. Restaurant decor is divided into distinctive dining environments developed around the rain forest and other nature themes. Current themes include the Atlas and waterfall, gorillas, elephants, tropical fish and star gazing. Table decor complements the rain forest theme through the use of brilliantly-colored tables and upholstery with patterns of animals, wildlife and plant life. In an effort to enhance the dining experience, attempts are made to maximize restaurant seating near aquariums, waterfalls, sculpted rock formations or one of the Restaurant's several banyan trees. An integral part of the Restaurant is the "Mushroom Bar," the "stem" of which consists of the bar with a "cap" extending over the customers. Seating at the bar is provided by customized stools designed to resemble the legs of wild animals.
Staffing. An important part of the Company's mission is to ensure that during each visit to a Rainforest Cafe, customers receive excellent service. To extend the adventure theme, Restaurant customers are greeted at the entrance by "tour guides", food servers are known as "safari guides" and the bartenders are known as "navigators." The "tour guides" at the front desk are trained to communicate, via headsets, with the floor management staff who greet Restaurant customers and seat them at their tables. The Company believes that a customer's experience is enhanced by the attitude and attention of its personnel. Customer service is based on a team approach so that each customer is continually attended to, and employees go through extensive ongoing training to ensure consistent service. The Company endeavors to hire experienced chefs and invests substantial time training kitchen employees to maintain consistent food preparation.
RETAIL VILLAGE
For the fiscal year ended January 2, 2000, approximately 19% of the Company's total revenues were derived from retail sales. In order to enter the Restaurant, all customers must pass through the Unit's Retail Village. The Retail Village offers over 3,000 SKUs and includes apparel and gifts with the Rainforest Cafe logo and other items with a rain forest theme such as toys and educational games. The Company has also developed eight proprietary Animal Characters, each with a distinct personality, including Cha! Cha!, an adventuresome tree frog; Ozzie, a rascally orangutan; Rio, a colorful, tropical macaw; Tuki Makeeta, an imaginative baby elephant; Nile, a proud crocodile; Maya, a regal feline; Bamba, a gentle gorilla; and Iggy, a philosophical iguana. These Animal Characters are designed to appeal to a broad range of customers, thereby increasing retail sales and repeat business. The Company utilizes several Animal Characters for clothing and gifts. Custom designed t-shirts and sweatshirts with colorful animals spelling out the "Rainforest Cafe" logo and Animal Characters are signature items. By offering items featuring the Rainforest Cafe logo and Animal Characters, the Company believes it is continuing to develop "brand equity" in the Rainforest Cafe name that will allow it to attract more customers and to enhance its competitive retail position.
The Retail Village also includes a large selection of colorful rocks, plush and animated toys and puppets, and educational and entertaining games and puzzles. Gift items and other artifacts suggesting the rain forest theme, including colorful animal figurines and prints, kitchen magnets, serving plates and other tableware, handmade wood products and other unique rain forest related home accessories, are also available. The Company varies its merchandise mix by season and location and has developed specific retail profiles for mall Units, discount center Units, and tourist Units.
OPERATIONS, MANAGEMENT AND EMPLOYEES
The Company's ability to manage complex operations, including high volume Restaurants and Retail Villages, has been, and will continue to be, central to its overall success. The Company believes that its management must include skilled personnel at all levels, including senior corporate management, Unit Managing Directors and other Unit employees. The Company's senior corporate management, including the Company's Chairman and Chief Executive Officer, Lyle Berman, has significant restaurant and retail experience. Charly Robinson, the Company's Senior Vice President of Operations has over 20 years of restaurant and hospitality experience. The Company's Managing Vice Presidents, each of whom have extensive experience in the restaurant industry, supervise the opening of new Units, monitor quality control and customer service, and are responsible for the financial performance of the Units within their respective regions. The Company believes that Unit management is important for the profitability of each Rainforest Cafe and accordingly, places particular emphasis on recruiting Managing Directors that have significant restaurant and management experience. The Company anticipates that, prior to opening a Unit, a Managing Director and executive chef will have been trained at one or more Rainforest Cafes for approximately six months and three months, respectively. All salaried Unit employees attend one week of culturalization training.
The Company strives to maintain quality and consistency in each of its Units through the careful training and supervision of personnel and the establishment of, and adherence to, high standards relating to personnel performance, food and beverage preparation, and maintenance of facilities. All managers must complete an eight-week training program during which they are instructed in areas such as food quality and preparation, customer service, and employee relations. New staff members participate in approximately three weeks of training under the close supervision of Company management. The Company has also prepared operations manuals relating to food and beverage quality and service standards. Management strives to instill enthusiasm and dedication in its employees, regularly solicits employee suggestions concerning Company operations and endeavors to be responsive to employees' concerns. In addition, the Company has extensive and varied programs designed to recognize and reward employees for superior performance. The Company believes that it has been able to attract high quality, experienced restaurant and retail management and personnel with its competitive compensation and bonus programs.
In general, each Unit has between 250 and 500 employees, although staffing levels vary according to the size of the Unit. As of February 28, 2000 the Company had approximately 6800 employees, including 150 employees at its corporate headquarters. The Company believes that its relationship with its employees is good.
PURCHASING
The Company strives to obtain consistent quality items at competitive prices from reliable sources. In order to maximize operating efficiencies and to provide the freshest ingredients for its food products while obtaining the lowest possible prices for the required quality, each Restaurant's management team includes a purchasing manager or kitchen manager who determines the daily quantities of food items needed and orders such quantities from major suppliers at prices often negotiated directly by the Company's corporate office. Most food and supplies are shipped directly to the Units. The Company purchases perishable food products locally. The Company does not maintain a central food product warehouse or commissary. With respect to retail products, the Company maintains over 3,000 SKUs, which it purchases from many suppliers. The Company maintains a centralized warehouse for retail product distribution. The Company has not experienced any significant delays in receiving restaurant or retail supplies and equipment. The Company is not dependent on any one supplier for any of its restaurant or retail goods. The Company is committed to private label manufacturing, which it believes will improve the Company's retail margins due to the lower cost of private label products.
MANAGEMENT INFORMATION SYSTEMS/ACCOUNTING
The Company uses integrated management information systems that are designed to accommodate significant expansion in the number of Units. These systems include a computerized restaurant point-of-sale system which facilitates the movement of customer food and beverage orders between the customer areas and kitchen operations, controls cash, handles credit card authorizations, keeps track of revenues on a per employee basis and provides management with revenue and inventory data. The point-of-sale system is accessed by service personnel who are assigned individual identification keys, guest orders are printed in the kitchen and bar areas which eliminates the need to read handwritten tickets. The Company's retail point of sale, merchandising and distribution system allows management to track retail inventory daily. The point-of-sale system electronically transfers data nightly to Company headquarters. The Company also uses a computerized time management system, which determines the time worked by each employee, allows management to gather data and schedule work hours, and produces payroll reports. Each Unit also uses computerized systems to control and gather data with respect to food, beverage, retail and supplies inventories. Each Unit has an on-site accountant who assists in the accumulation and processing of accounting data and performs other administrative functions.
The Company's automated Unit-level systems provide data for posting directly to the Company's general ledger and to other accounting subsystems. The automated general ledger system provides various management reports comparing current and prior operating results as well as measuring performance against predetermined operating budgets. The results are reported to and reviewed with Company management. Such reporting includes (i) weekly reports of revenues, cost of revenues and selected controllable Unit expenses, (ii) detailed monthly Unit performance reports of revenues and expenses and (iii) monthly reports of Unit- by-Unit and administrative and occupancy expense performance.
MARKETING AND PROMOTION
The Company has created a marketing plan with an objective of positioning the Company to reflect the following statement: Rainforest Cafe is an adventure that stimulates the mind, emotion and senses by delivering high quality proprietary entertainment, food and retail experiences to both children and adults. The Company has multiple strategies for marketing newer versus mature Rainforest Cafe Units in addition to Company-wide awareness strategies.
With respect to new Units, given that sales are frequently at or near capacity during such Unit's first year of operations, the Company places less emphasis on promotion of new Units during their first year of operations. Advertising of new Units is focused on recruitment of new employees and building brand awareness through public relations and regional print media. The Company has found that Rainforest Cafe grand openings are frequently an event that receives much local publicity. With respect to existing Units that have been open more than 12 months, the Company's objective and strategies are to increase same store sales through, among other things, promoting the Unit's reservations, offering a special weekday kid's menu and implementing a weekday lunch menu. With both new and existing Units, the Company strives to utilize its crewmembers to help develop repeat visits and build guest loyalty.
In addition to strategies utilized for new and mature Units, the Company intends to utilize the following to help build brand equity and create repeat visits:
- Loyalty clubs for adults and children designed to motivate guest visitation for occasions ranging from birthdays and anniversaries to exemplary report cards. - Year round promotions and events designed to help build off-peak hour business. - Advertising, primarily print and outdoor signage, to promote both the Company's brand and Rainforest Cafe special event. - Cross-marketing to certain businesses, organizations and individuals. - Continued public relations through the Company's off-site educational programs.
COMPETITION
The restaurant and specialty retail businesses are highly competitive. In the restaurant industry, competition is based primarily upon price, service, food quality and location. There are numerous well-established competitors, including national, regional and local restaurant chains, possessing substantially greater financial, marketing, personnel and other resources than the Company. The Company also competes on a general basis with a large variety of national and regional restaurant operations, as well as with locally owned restaurants, diners, and other establishments that offer moderately priced food. The Company directly competes with other theme restaurants in the highly competitive and developing theme restaurant market. Other restaurants and companies utilize the rain forest or related themes. Additionally, the Company competes with a number of well-established specialty retailers possessing substantially greater financial, marketing, personnel and other resources than the Company. In the retail industry, competition is based primarily upon merchandise selection, price and customer service. There can be no assurance that the Company will be able to respond to various competitive factors affecting the restaurant and retail industries.
The performance of individual Units may also be affected by factors such as traffic patterns, demographic considerations, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and employee benefit costs, and the availability of experienced management and hourly employees may also adversely affect the restaurant and retail industries in general and the Company's Units in particular. Restaurant and retail operating costs may be further affected by increases in food commodity prices, the minimum hourly wage, unemployment tax rates, real estate taxes and similar matters over which the Company has no control.
REGULATION
Restaurants are subject to licensing and regulation by state and local health, sanitation, safety, fire, and other authorities and are also subject to state and local licensing and regulation of the sale of alcoholic beverages and food. Additionally, businesses that maintain or sell animals are subject to additional levels of state and local health and sanitation regulations. Having tropical birds as part of the Rainforest Cafe concept requires the Company to adhere to stringent health codes that prohibit crossover between kitchen workers and animal handlers, and any exchange of air from the bird areas to the rest of the Unit. The Company overcame this problem at its existing Units that utilize live birds by installing specially designed air exhaust hoods for the birds' perch area. Additionally, a separate waste disposal system is provided for the birds. Although, to date, the Company has satisfied animal-related licensing authorities for its existing Units, no assurance can be given that the Company will be able to maintain such approvals or obtain such approvals at other locations. Difficulties or failure in obtaining required licenses and approvals will result in delays in, or cancellation of, the opening of Units. Retail establishments are also subject to licensing and regulation by safety, fire and other authorities on the state and local level.
TRADEMARKS AND INTELLECTUAL PROPERTY
The Company's ability to implement successfully its Rainforest Cafe concept will depend in part on its ability to further establish "brand equity" through the use of its trademarks, service marks, trade dress and other proprietary intellectual property, including its name and logos, the Animal Characters and unique features of its rain forest theme decor. It is the Company's policy to seek to protect and to defend vigorously its rights to this intellectual property.
The Company's name "RAINFOREST CAFE" and the mark "A WILD PLACE TO SHOP AND EAT" are federally registered service marks for the Company's Restaurant and Retail Village. The Company also owns a federal registration for the mark "RAINFOREST" for the Company's restaurant services. The Company has filed and has pending several federal trademark applications for "RAINFOREST CAFE" in various formats and for a variety of goods and services. While the Company expects that these additional applications will result in registrations affording the Company additional protections, there is no assurance that all of these applications will issue as registrations.
There is also no assurance that any of the Company's rights in any of its intellectual property will be enforceable, even if registered, against any prior users of similar intellectual property or competitors of the Company who seek to utilize similar intellectual property in areas where the Company operates or intends to conduct operations. The failure to enforce any of the Company's intellectual property rights could have the effect of reducing the Company's ability to capitalize on its efforts to establish brand equity. The Company is aware of trademark applications, registrations and uses that may accord to third parties certain rights in the words "rain forest" or in certain elements of some of the proprietary Animal Character names and illustrations with respect to utilization of these marks on certain clothing and retail products. The existence of any such third party rights could result in claims of infringement against the Company with respect to its uses of "Rainforest Cafe" or its Animal Characters. The Company is currently involved in litigation with a party that alleges that the Company's restaurants infringe its trade dress rights. Although the Company believes these allegations are without merit and does not expect this lawsuit to have a materially adverse result on the Company or its business, in the event this matter is not successfully resolved, or in the event the Company encounters other claims of infringement, it is possible that the Company's operations could be materially limited or that the Company may have to pay damages.
CERTAIN FACTORS
In addition to the factors discussed elsewhere in Form 10-K such as competition, regulation and trademarks, and intellectual property, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.
SAME STORE SALES DECLINE
The Company's history indicates that a Unit's revenues frequently decrease during such Unit's subsequent years of operations. Sales for the fifteen Units opened eighteen months or more as of January 2, 2000 declined 10.9% in Fiscal 2000. Although the Company has undertaken a number of strategies to offset declining same store sales (such as revising the Restaurant's menu and discounting certain retail items) no assurance can be given that comparable same store sales will not continue to decline. In addition to negatively impacting the Company's revenues, declining same store sales has had a negative impact on the Company's stock price and resulted in stock price volatility. Furthermore, because a new Unit typically experiences higher revenues in the initial six to twelve months of operations, the opening of new Units may disproportionately impact revenue analysis.
GROWTH FACTORS/EXPANSION STRATEGY
Principally as a result of sales challenges in several of the Company's Mall Units, the Company has placed a moratorium on any future mall developments and on an overall basis, has adopted a "slow growth" strategy. In addition, failure to improve sales performance in certain existing Units may result in steps to close certain under performing units. The Company's primary strategy is to develop new Rainforest Cafes in urban entertainment centers, including the Unit currently under development at the Downtown Disney entertainment venue near Disneyland in Anaheim, California. Because of the relatively large size of each Rainforest Cafe and the Company's site selection criteria, the availability of desirable locations may be limited and the Company may be hindered in finding suitable locations for the development of new Units. Additionally, the Company's ability to open additional Units will depend upon a number of other factors including the ability of the Company to negotiate leases on acceptable terms, timely approval of local regulatory authorities, acceptance of the Rainforest Cafe concept in new markets, and the general state of the economy. Finally, the capital resources required to develop each new Unit are significant.
The Company's ability to open and successfully operate additional Units will also depend upon the hiring and training of skilled Unit management personnel and the general ability to successfully manage growth, including monitoring Units and controlling costs, food quality and customer service. Accordingly, there can be no assurance that the Company will be able to open new Units, at the planned rate of expansion, or on a timely basis, or that, if opened, those Units can be operated profitably.
LIMITED BASE OF OPERATIONS
The combination of the relatively small number of Unit locations and the significant investment associated with each new Unit may cause the operating results of the Company to fluctuate significantly and adversely affect the profitability of the Company. Poor operating results at any one Unit or a delay in the planned opening or non-opening of a Unit could materially affect the profitability of the entire Company. Furthermore, the Company is expected to derive a significant portion of its revenues from its Units located in Walt Disney World. Because of the substantial financial requirements associated with opening new Units, the investment risk related to any one Rainforest Cafe is much larger than that associated with most other companies' restaurant or retail revenues.
Some of the Company's Units, have been or will be developed at newly constructed shopping malls that have no operating history. As the Company continues to develop Units in newly constructed shopping malls, the Company could experience delays in openings similar to that experienced in the Burlington Mall Unit or the Palisades Center Unit, the anticipated opening of which had been delayed for approximately one year due to factors beyond the Company's control. The poor performance of these malls could also negatively impact these Units and the financial performance of the Company. Similarly, Disney's Animal Kingdom has limited operating history and the performance of this Unit is dependant on visitor attendance to the theme park.
STOCK PRICE VOLATILITY
Since the Company's initial public offering in April 1995, the market price of the Company's Common Stock fluctuated substantially and could fluctuate substantially in the future due to a variety of factors, including quarterly operating results of the Company or other restaurant and retail companies, market perception of the Company's ability to achieve successfully its planned rapid growth, the trading volume in the Company's Common Stock, changes in general conditions in the economy, the financial markets or the restaurant or retail industries, or other developments affecting the Company or its competitors. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies.
DEPENDENCE ON DISCRETIONARY CONSUMER SPENDING
The success of the Company's operations depends to a significant extent on a number of factors relating to discretionary consumer spending, including economic conditions affecting disposable consumer income, the overall success of the malls, entertainment centers and Disney theme parks in which Units are located and the continued popularity of theme restaurants generally and the Company's rain forest concept in particular. Theme restaurants are susceptible to shifts in consumer preferences and may experience a decline of revenue growth or of actual revenues as consumers tire of the related theme.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company has license agreements pursuant to which its licensees will develop Units in the United Kingdom and Ireland, Mexico, Canada, Southeast Asia, South America, France and Hong Kong and intends to enter into other license agreements in the future. The Company's concept is relatively untested outside of the United States, and no assurance can be given that any international location will be successful. The Company's success is also dependent to a substantial extent on its reputation, and its reputation may be affected by the performance of certain licensee-owned Units over which the Company will have limited control. In addition, the Company has invested equity capital in its Units in the U.K., Canada and Hong Kong and is likely to continue to invest equity capital in certain other of its international Units. Such investments are likely to range from approximately $400,000 to $2.5 million per Unit. Any international operations of the Company will also be subject to certain external business risks such as exchange rate fluctuations, political instability and a significant weakening of a local economy in which a foreign Unit is located. In addition, it may be more difficult to register and protect the Company's intellectual property rights in certain foreign countries.
LEASES
The Company has entered into long-term leases relating to each of its existing domestic Units and has entered into leases or letters of intent with respect to certain of its planned domestic Units. These leases are or will be non-cancelable by the Company (except in limited circumstances) and have or will have annual base rents ranging from $200,000 to $1.0 million (except for Leases related to certain Icon Units). Additional facilities developed by the Company are likely to be subject to similar long-term leases which are non-cancelable by the Company. If an existing or future Unit does not perform at a profitable level, and the decision is made to close the Unit which may be deemed a default under such Unit's lease, the Company may nonetheless be committed to perform its obligations under the applicable lease which would include, among other things, payment of the respective base rent for the balance of the respective lease term. The leases related to the Downtown Disney Marketplace, Disney's Animal Kingdom and the Disneyland Resort Units are cancelable by the landlord at any time upon sixty days notice and payment of the Company's unamortized value of leasehold improvements and an amount equal to the net operating income generated by such Unit for the previous lease year. With regard to certain of the Company's leases, in the event the Company fails to achieve specified gross sales by a certain date, such leases may be terminated by the landlord. If such a termination were to occur at these locations, the Company would lose a Unit without necessarily receiving an adequate return on its investment.
DEPENDENCE ON KEY PERSONNEL
The Company's future success will depend largely on the efforts and abilities of the Company's senior corporate management. Lyle Berman, the Company's Chairman and Chief Executive Officer, serves on five boards of public companies. Mr. Berman devotes approximately 15% of his time to the Company.
ITEM 2.
ITEM 2. PROPERTIES
The Company presently intends to lease the facilities for each of its Units. It has entered into long-term ten year leases with respect to its existing and planned Units except for an eleven year lease for the South Coast Plaza Unit and a fifteen year lease for its Downtown Chicago location. The Company's leases with Disney are cancelable by the landlord at any time upon 60 days notice and payment by Disney of the Company's unamortized value of leasehold improvements at the Downtown Disney Marketplace Unit, Disney's Animal Kingdom Unit and the planned Unit at the Disneyland Resort, respectively, and an amount equal to the net operating income generated by such Unit for the previous lease year. With regard to the Tysons Corner Center I and Cherry Creek Mall leases, in the event the Company fails to achieve specified gross sales by a certain date, the lease may be terminated by the landlords. The Company's leases typically have annual base rent, certain common area maintenance expense and percentage rents that range from 5 to 18 percent depending upon location and volume of sales.
The Company's executive offices are located in Hopkins, Minnesota, under a lease, which terminates in October 2003.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant from time to time in routine lawsuits incidental to its business, which individually and in the aggregate, are not expected to have any material adverse effect on the Company. In addition, the company is party to the following:
EMANUEL MASSING V. LYLE BERMAN ET AL. LITIGATION
The Company and certain present and former executive officers of the Company are named as defendants in a purported class action complaint, Emanuel Massing vs. Lyle Berman, et al., alleging violations by the Company and such executive officers of certain Federal securities laws. The complaint was filed on May 3, 1999 in the United State District Court for the District of Minnesota. This action is a follow-up action to the previous shareholder action, In Re: Rainforest Cafe, Inc. Securities Litigation, which was dismissed without prejudice on December 21, 1998. The new complaint alleges that the defendants violated the 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 consisting of all persons who purchased the Company's Common Stock during the period between October 20, 1997 and January 6, 1998. On January 12, 2000, the United States Magistrate Judge issued a Report and Recommendation in which he recommended to the presiding judge that the action be dismissed with prejudice and that plaintiffs be ordered to pay sanctions of $3,000 to the defendants. By order filed on February 29, 2000, the presiding judge accepted the Report and Recommendation in its entirety and ordered that the action be dismissed with prejudice.
BILLIE MACK V. LYLE BERMAN, ET AL.; ROBERT FINK V. RAINFOREST CAFE, INC. ET AL.
The Company and certain directors are named as defendants in two purported class action lawsuits, Billie Mack v. Lyle Berman, et al., and Robert Fink v. Rainforest Cafe, Inc., et al., filed on December 23, 1999 and January 13, 2000, respectively. Both actions were filed in Hennepin County District Court of Minnesota, alleging that defendants breached their fiduciary duty and engaged in unfair dealing to the detriment of the holders of Rainforest Cafe common stock in connection with a proposed merger of the Company with Lakes Gaming, Inc. The Company has requested dismissal of the actions in light of the announcement that the proposed merger with Lakes Gaming has been terminated, thereby making plaintiffs' allegations moot.
See Part 1, Item 1, - Business: "Recent Developments."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year ended January 2, 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with respect to each person who is a director or executive officer of the Company:
Lyle Berman, age 58 has been Chairman of the Board and Chief Executive Officer of the Company since its inception in February 1994. Mr. Berman has been Chairman of the Board of Lakes Gaming since June 1998. Mr. Berman was Chief Executive Officer of Grand Casinos, Inc. from October 1990 to March, 1998 and had been Chairman of the Board of Grand Casinos, Inc. and its predecessor since October 1990. Mr. Berman is also a director of G-III Apparel Group, New Horizons Kids Quest, Inc., Park Place Entertainment Corporation and Wilsons-The Leather Experts, Inc. ("Wilsons"). Mr. Berman was Chief Executive Officer and Chairman of Stratosphere Corporation from July 1996 through July 1997. Stratosphere Corporation filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in January 1997.
Kenneth Brimmer, age 44 has been President of the Company since April 1997, a Director of the Company since August 1998, Treasurer since September 1995 and involved with the Company in various capacities since its inception. Mr. Brimmer was employed by Grand Casinos, Inc. and its predecessor from October 1990 to January 1998 as Special Assistant to the Chairman and Chief Executive Officer, Lyle Berman. Mr. Brimmer is also a director of New Horizons Kids Quest, Inc., Hypertension Diagnostics, Inc. and Oxboro Medical International, Inc.
Steven Schussler, age 44 has been Senior Vice President-Development of the Company since its inception and a director of the Company since January 1995. From 1983 to February 1992, Mr. Schussler was an officer of Juke Box Saturday Night of Minneapolis, Inc. ("JBSN"), a 1950's and 1960's theme restaurant and nightclub.
Ercu Ucan, age 44 has been Senior Vice President-Retail of the Company since its inception and a director of the Company since January 1995. From September 1992 until December 1993, Mr. Ucan served as President of the Orjin Textile Group in Istanbul, Turkey, a garment factory employing approximately 150 persons. From January 1989 until August 1992, Mr. Ucan served as Director of Trend Merchandising and Director of Product Development for Wilsons.
Charles Robinson, age 44 has been Senior Vice President - Operations of the Company since August 1998. Mr. Robinson joined Rainforest Cafe in January 1996 as the Director of Operations for the Downtown Disney Marketplace unit. In August 1997, he was named Regional Director of Operations for the eastern division, followed by a promotion to Vice President of International Operations in December 1997. Mr. Robinson has held executive positions in both the restaurant and hotel industries. He holds a Bachelor of Science degree in Restaurant, Hotel and Institutional Management from Purdue University.
Robert Hahn, age 44 has been Vice President and Chief Financial Officer since January 2000. Mr. Hahn joined Rainforest Cafe in March 1999 as controller. From 1995 to 1999 Mr. Hahn was a manager with the accounting firm KPMG. Mr. Hahn has held various executive positions in the retail industry and he is a certified public accountant.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the National Market tier of the NASDAQ Stock Market under the symbol RAIN. On February 28, 2000 there were approximately 1,300 shareholders of record. The following table sets forth for the quarters indicted the high and low sale prices of the Company's common stock, as reported by The Nasdaq Stock Market.
Since its intital public offering of common stock in April 1995, the Company has not paid dividends on its common stock, and has no plans to do so in the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Before extraordinary item (2) Before cumulative change in accounting principle
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW
The Company, founded in February 1994, owns, operates, and licenses themed restaurant/retail facilities (each a "Unit") under the name "Rainforest Cafe (R) - - A Wild Place to Shop and Eat(R)." As of February 28, 2000 the Company owned and operated 28 Units in the United States and licensed ten Units outside of the United States. Rainforest Cafe Units range in size from the Company's initial Unit opened on October 3, 1994 in the Mall of America in Bloomington, Minnesota, which is approximately 15,000 square feet, to the 34,000 square foot Unit located at Disney's Animal Kingdom at Walt Disney World(R) in Orlando, Florida.
The Company's revenue consists primarily of sales from its restaurant and retail operations that are combined within each of the Company's Units. Comparable Unit sales include the sales of units open for the full period of each period being compared. New Units enter the comparable sales base at the beginning of the nineteenth month of operation. As of February 28, 2000, the Company has opened one additional domestic Unit during the first quarter of 2000. No additional Units are planned for the remainder of the first quarter of 2000. Because the Company anticipates continued expansion, period to period comparisons may not be meaningful.
In addition to operations in the United States, the Company has pursued international growth opportunities through licensing arrangements. The Company has entered into eight exclusive license agreements to develop up to 28 Units, of which ten are currently open, over the next ten years in the United Kingdom and Ireland, Mexico, Canada, France, and certain cities and countries in Asia and South America. The Company intends to enter into additional license agreements in the future.
These agreements have per Unit development fees of at least $100,000 and royalties ranging from 3% to 10% of Unit sales. All agreements, with the exception of the agreement relating to the United Kingdom and Ireland, have area licensing fees that are proportionate to market size and economic potential. Certain agreements, such as the agreement relating to the United Kingdom and Ireland, allow the Company to become an equity participant of 20%-50% of each Unit developed. The agreement for Canadian development is a 50/50 joint venture with the Elephant and Castle Group located in Vancouver, Canada. In addition, during the third quarter of 1999, the Company purchased a beneficial ownership of a 75% equity interest in Yorkdale Rainforest Restaurant, Inc. (a Canadian federal corporation) which owns 100% of the Unit in the Yorkdale Shopping Centre located in North York, Ontario, Canada. Elephant and Castle is the beneficial owner of the 25% minority interest in Yorkdale Rainforest Restaurant, Inc.. The results of this entity are consolidated with the Company's other wholly-owned and majority owned subsidiaries. The Agreement with Jungle Investments Limited (JIL) to develop Hong Kong , Macau, Taiwan and Shanghai allowed the Company to purchase 20% equity in JIL as well as 20% equity in the Unit opened in Hong Kong.
Components of operating expenses include operating payroll and fringe benefits costs, occupancy costs, maintenance costs related to the bird habitat and aquariums, and advertising and promotion costs. Historically when a new Unit opens, it incurs higher than normal levels of labor and food costs as Unit personnel complete training. Management believes, however, that as new staff gain experience, hourly labor schedules over the ensuing 30-60 day period will gradually adjust because of operating efficiencies and will then be similar to those of established Units. Each of the Company's current leases includes both fixed rent and percentage rent provisions.
General, administrative and development expenses include all corporate and administrative functions that serve to support existing operations and provide an infrastructure to support future growth. In addition, certain expenses related to the recruiting and training of Unit management personnel are also included. Corporate management, supervisory and staff salaries, employee benefits, travel, information systems, finance, marketing, rent and office expenses are primary items of cost in this category.
The Company uses a 52- or 53- week fiscal year ending on the Sunday nearest December 31.
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total revenues (except where noted) were as follows:
(1) Percentage of restaurant sales (2) Percentage of retail sales (3) Percentage of unit sales (4) Effective December 29, 1997, the company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". The effect of this change was a charge to operations representing 1.8% of total revenues.
FIFTY-TWO WEEKS ENDED JANUARY 2, 2000 COMPARED TO THE FIFTY-THREE WEEKS ENDED JANUARY 3, 1999
Results of operations for the fiscal year ended January 2, 2000 reflect the operations of twenty three Mall Units and four free-standing Units. Twenty one domestic Units and seven international Units were open the entire 1999 year. Six domestic Units and three international units were opened during the year.
Total revenues increased 23% to $262.7 million in 1999 from $213.9 million in 1998. Revenue growth resulted primarily from the addition of six domestic Units during 1999 which contributed revenues of $27.4 million and from a full year of operations of the seven Units which opened in 1998 and contributed an increase in revenues of $38.0 million in 1999. International Unit growth contributed $1.1 million additional revenues in 1999. These increases in revenues were partially offset by a decrease in sales of $21.0 million for Units which were opened prior to 1998. The Company's experience to date is that a Unit's sales frequently decrease on a comparable basis after the first year of operations. The comparable store sales base decreased 10.9% for 1999 as compared to 1998. Management believes that any such decreases result primarily from the fact that the Company's new Units typically open at or near full capacity.
Restaurant sales increased 27% to $209.3 million compared to $164.7 million in 1998. The comparable store restaurant sales base decreased 9.5% in 1999 compared to 1998. Retail sales increased 7% to $50.1 million from $47.0 million in 1998. The comparable store retail sales base decreased 15.8% in 1999 as compared to 1998. The retail sales decrease was primarily due to a large decrease in Beanie Baby sales. Sales of Beanie Babies in 1999 decreased by $2.3 million compared to 1998 despite an increase in the number of Units. Comparable retail sales not including Beanie Babies decreased 7% in 1999 compared to 1998. The decrease in Beanie Baby sales was primarily due to the manufacturer announcing the discontinuance of the product. Sales of Beanie Babies were ahead of 1998 for the first quarter of 1999 before the announcement of the discontinuance of this product.
Food and beverage costs increased 28% to $49.5 million in 1999 compared to $38.8 million in 1998. The increase in food and beverage costs was consistent with the increase in restaurant sales. Food and beverage costs remained relatively stable as a percent of sales. Cost of retail goods sold increased 12% to $24.3 million from $21.7 million in 1998. The increase in cost of retail goods sold was primarily due to the increase in retail sales from additional Units. Cost of retail goods sold as a percentage of retail sales increased by 2.3% of sales in 1999 compared to 1998 primarily due to more frequent in-store promotions and greater discounts offered in 1999.
Restaurant and retail operating expenses increased 34% to $136.0 million for 1999 from $101.4 million for 1998, primarily due to Unit expansion. Restaurant operating expenses increased as a percentage of restaurant sales from 52.0% in 1998 to 55.6% in 1999. Retail operating expenses increased as a percentage of retail sales from 33.5% in 1998 to 39.3% in 1999. The increase in restaurant and retail operating expenses as a percentage of applicable restaurant and retail sales is primarily due to the combination of increased expenditures for repairs and maintenance and sales and marketing, while the same store sales base decreased. Expenditures for sales and promotions increased at most Units and the investment in corporate sales personnel at most Units contributed to higher costs.
Depreciation and amortization increased 44% to $18.9 million in 1999 from $13.1 million for the comparable period in 1998. Preopening expenses decreased 56% from $9.7 million in 1998 to $4.3 million in 1999. The increase in depreciation and amortization was primarily due to Unit expansion and capital additions and improvements to existing Units. Depreciation and amortization as a percentage of restaurant and retail sales increased to 7.2% for the 1999 fiscal year from 6.2% for 1998 due to increased costs of new Unit development, capital improvements in existing Units and decreased comparable store sales in certain Units. Preopening expenses decreased as a percentage of restaurant and retail sales from 4.6% in 1998 to 1.6% in 1999. The decrease as a percentage of sales is primarily due to a decrease in average Unit preopening costs in 1999 and the addition of only six new Units in 1999, compared to 8 new Units in 1998. In addition as more Units are opened the sales base increases in comparison to new openings.
The Company took a non-cash asset impairment charge of $6.7 million during the fourth quarter of 1999. This impairment charge represented the write-down to fair value of the long-lived assets of the Aventura Mall Unit in Miami, Florida. This Unit's comparable store sales decreased 25% in 1999. As a result, an impairment was recognized as the future undiscounted cash flows for this Unit was estimated to be insufficient to recover the related carrying value of the long-lived assets relating to this Unit. The assets were written down to their estimated fair value, based on the Company's estimates of future discounted cash flows.
General, administrative and development expenses increased 26% to $15.5 million in 1999 from $12.3 million in 1998. The increase in general, administrative and development expenses was primarily due to the addition of corporate employees, an increase in regional Unit management and the development of marketing and advertising programs. General, administrative and development expenses as a percentage of revenues increased to 5.9% of revenues of 1999 from 5.7% of revenues for 1998.
Interest income of $2.9 million for 1999 was generated primarily by investing the proceeds from the Company's two follow-on public offerings completed in January and September, 1996. Interest income decreased by 52% from $5.9 million in 1998 to $2.9 million for fiscal year 1999.
On December 22, 1999, the Company announced that it had an agreement to merge with Lakes Gaming, Inc.. On January 24, 2000 the two parties mutually agreed to terminate the merger agreement and the costs associated with the proposed merger of $.9 million, or .3% of revenue, were charged to operations during the fourth quarter of 1999. On February 9, 2000, the Company announced the execution of a definitive merger agreement to be acquired by Landry's Seafood Restaurants, Inc. (NYSE: LNY), for approximately $125 million to be paid by Landry's in a combination of common stock (65%) and cash (35%) (based on an assumed value of $9.00 per share of Landry's common stock), however, the transaction value to the Company's shareholders will increase or decrease depending upon fluctuations in Landry's common stock.
The provision for income taxes in the 1999 and 1998 fiscal years are both based upon the Company's estimated effective tax rate, including tax-exempt interest income. The effective tax rate for 1999 was increased to 34.5% from 34% in 1998, reflecting the reduction in tax exempt interest in comparison to operating income for 1999 compared to 1998. The Company increased its estimated tax rate to 35% during the second quarter of 1999 from 34% for 1998 and the first quarter of 1999.
Income before cumulative effect of change in accounting principle was $5.7 million, or $.23 per diluted share, for the 52-week 1999 fiscal year compared with $14.7 million, or $.57 per diluted share, for the 53-week 1998 fiscal year. Effective December 29, 1998, the company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires companies to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets. The effect of this accounting change was a charge to operations of $3.9 million; net of $2.2 million of related tax benefit for the unamortized balance of preopening costs and other start-up expenses for the fiscal year 1998. The decrease in net income for fiscal 1999 was primarily due to decreasing same store sales and the asset impairment charge taken during fourth quarter of 1999.
FIFTY-THREE WEEKS ENDED JANUARY 3, 1999 COMPARED TO THE FIFTY-TWO WEEKS ENDED DECEMBER 28, 1997
Results of operations for the fiscal year ended January 3, 1999 reflect the operations of seventeen Mall Units and four free-standing Units. Thirteen domestic Units and three international Units were open in the entire 1998 year. Eight domestic Units and four international units were opened during the year.
Total revenues increased 98% to $213.9 million in 1998 from $108.1 million in 1997. Revenue growth resulted primarily from the addition of eight domestic Units during 1998 which contributed revenues of $45.8 million and from a full year of operations of the seven Units which opened in 1997 and contributed an increase in revenues of $65.9 million in 1998. International Unit growth contributed $1.5 million additional revenues in 1998. These increases in revenues were offset by a decrease in sales of $7.4 million for Units which were opened prior to 1997. The Company's experience to date is that a Unit's sales frequently decrease on a comparable basis after the first year of operations. The comparable store sales base decreased 9% for the fiscal year 1998 as compared to 1997. Management believes that any such decreases result primarily from the fact that the Company's new Units typically open at or near full capacity.
Food and beverage costs increased 96% to $38.8 million in 1998 compared to $19.8 million in 1997. The increase in food and beverage costs was consistent with the increase in restaurant sales. Food and beverage costs remained relatively stable as a percent of sales. Cost of retail goods sold increased 99% to $21.7 million from $10.9 million in 1997. The increase in cost of retail goods sold was primarily due to the increase in retail sales from additional Units. Cost of retail goods sold as a percentage of retail sales increased by 0.5% of sales in 1998 compared to 1997 primarily due to more frequent in-store promotions and greater discounts offered in 1998.
Restaurant and retail operating expenses increased 108% to $101.4 million for 1998 from $48.7 million for 1997, primarily due to Unit expansion. Restaurant operating expenses increases as a percentage of restaurant sales from 49.0% in 1997 to 52.0% in 1998. Retail operating expenses increased as a percentage of retail sales from 32.4% in 1997 to 33.5% in 1998. The increase in restaurant and retail operating expenses as a percentage of applicable restaurant and retail sales is primarily due to increased expenditures on repairs and maintenance, sales and marketing, and increased costs of restaurant labor. The restaurant labor increase is partially due to the payment of higher union wage rates at the Company's Unit at MGM Grand Hotel and Casino located in Las Vegas, Nevada. Expenditures on sales and promotions increased at most Units and the initial investment in corporate sales personnel in Las Vegas, South Florida, Orlando and Chicago contributed to higher costs. A high level of operating expenses at the Aventura Mall Unit combined with low sales volume also contributed to the percentage increase in restaurant and retail operating expenses.
Depreciation and amortization increased 132% to $13.1 million in 1998 from $5.6 million for the comparable period in 1997. Preopening expenses increased 215% from $3.1 million in 1997 to $9.7 million in 1998. The increase in depreciation and amortization was primarily due to Unit expansion and capital additions and improvements to existing Units. Depreciation and amortization as a percentage of restaurant and retail sales increased to 6.2% for the 1998 fiscal year from 5.3% for 1997 due to increased costs of new Unit development, capital improvements in existing Units and decreased comparable store sales in certain Units. Preopening expenses increased as a percentage of restaurant and retail sales from 2.9% in 1997 to 4.6% in 1998. The increase as a percentage of sales is primarily due to an increase in average Unit preopening costs and the addition of eight new Units in 1998, whose preopening costs were expensed during the year, and not capitalized as in the past due to a change in accounting principle as discussed below.
General, administrative and development expenses increased 66% to $12.3 million in 1998 from $7.4 million in 1997. The increase in general, administrative and development expenses was primarily due to the addition of corporate employees, an increase in regional Unit management and the development of marketing and advertising programs. General, administrative and development expenses as a percentage of revenues decreased to 5.7% of revenues of 1998 from 6.9% of revenues for 1997.
Interest income of $5.9 million for 1998 was generated primarily by investing the proceeds from the Company's two follow-on public offerings completed in January and September, 1996, and capital gains on investments realized during 1998. Interest income of $9.0 million for 1997 was generated primarily by investing the proceeds of the Company's two 1996 follow-on public offerings.
The provision for income taxes in the 1998 and 1997 fiscal years are both based upon the Company's estimated effective tax rate, including tax-exempt interest income. The effective tax rate for 1998 was reduced to 34% from 36% in 1997, reflecting the addition of more Units in lower tax states such as Nevada and Florida.
Income before cumulative effect of change in accounting principle was $14.7 million, or $.57 per diluted share, for the 53-week 1998 fiscal year compared with $12.3 million, or $.46 per diluted share, for the 52-week 1997 fiscal year. Effective December 29, 1997, the company adopted Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires companies to expense as incurred all start-up and preopening costs that are not otherwise capitalizable as long-lived assets. The effect of this accounting change was a charge to operations of $3.9 million; net of $2.2 million of related tax benefit for the unamortized balance of preopening costs and other start-up expenses as of December 28. 1997. Net income was $10.7 million or $.42 per diluted share for the 1998 fiscal year compared with $12.3 million or $.46 per diluted share for fiscal 1997.
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 5,175,000 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. On January 2, 2000, the Company had working capital of approximately $53.2 million and marketable securities of $24.0 million, consisting principally of investment grade, fixed income securities.
The following table represents a summary of the Company's key liquidity measurements for the 52-week year ended January 2, 2000, the 53-week year ended January 3, 1999 and the 52-week year ended December 27, 1997:
(Dollar amounts in millions)
The Company generated $27.5 million in cash flow from operating activities for 1999, compared to $27.9 million for 1998. Additionally, for 1999 the Company generated $0.2 million from the exercise of stock options, compared with $.6 million for the comparable period in 1998. In 1999, the Company generated approximately $1.0 million cash from the sale of put options on approximately 2.1 million shares of the Company's common stock at exercise prices ranging from $5.00 - $6.75 per share. In 1998, the Company generated approximately $2.5 million in cash from the sale of put options on approximately 2.2 million shares of the Company's Common Stock at exercise prices ranging from $5.00 to $15.00 per share.) The sale of the put options was executed as part of a stock repurchase program announced in January 1997 and amended January, 1998 and January, 1999 pursuant to which up to a total of 6.5 million shares of the Company's Common Stock may be repurchased over a one year period. During 1999, 1.5 million shares of Common Stock were repurchased through put option assignments and open market repurchases for $9.8 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 capital purposes.
The average investment to open the Company's seventeen Mall Units was $5.8 million per Unit, net of landlord contributions, which averaged $1.7 million. Additionally, the Company averaged approximately $760,000 in preopening expenses and purchased an average of $240,000 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 contributions, which averaged $0.9 million. Preopening expenses incurred for these Units were approximately $1.1 million and the initial inventory purchased was approximately $400,000.
The Company expects future domestic Mall Units to cost between $5.5 million and $6.5 million to develop, net of anticipated landlord contributions. In addition, the Company expects that it will incur approximately $700,000 in per Unit preopening costs and purchase approximately $225,000 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, and Disneyland Resorts in Anahiem, California which may cost significantly more. In connection with the construction of existing Units, the Company has received landlord contributions, which reduced the cost of opening these Units. There can be no assurance, however, that landlord contributions will be available in the future.
The Company contemplates that the development and opening of each of its Units 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.
NEW ACCOUNTING STANDARDS
In June, 1998 the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." For further information on SFAS No. 133, see note 1 of Notes to Consolidated Financial Statements.
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 and 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 and beverage and labor costs. Management does not anticipate any significant labor cost increases as a result of the minimum wage increases enacted in 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 taxes, maintenance, repairs and utilities. The Company believes low inflation rates have contributed to relatively stable costs. There is no assurance, however, that low inflation rates will continue.
FORWARD LOOKING DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this annual report and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company) contain statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities as well as other capital spending, financial sources and the effects of competition. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to development and construction activities, including delays in opening new Units, acceptance of the Rainforest Cafe concept, the quality of the Company's restaurant and retail operations, dependence on discretionary consumer spending, the Company's failure to defend its intellectual property rights, dependence on existing management, general economic conditions, changes in federal or state laws or regulations.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to market risk related to its investments in marketable securities. As of January 2, 2000, the Company held $24.0 million in marketable securities. A hypothetical 10% decline in the market value of these securities would result in a $2.4 million unrealized loss and a corresponding decline in fair value of a like amount. This hypothetical decline would not effect cash flow from operations and would not have an impact on net income until the securities were sold.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rainforest Cafe, Inc.:
We have audited the accompanying consolidated balance sheets of Rainforest Cafe, Inc. (a Minnesota corporation) as of January 2, 2000 and January 3, 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the three years in the period ended January 2, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Rainforest Cafe, Inc. as of January 2, 2000 and January 3, 1999 and the results of its operations and its cash flows for the three years in the period ended January 2, 2000 in conformity with generally accepted accounting principles.
As explained in Note 1 to the Financial Statements, effective December 29, 1997, the Company changed its method of accounting for preopening costs.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota, February 4, 2000
RAINFOREST CAFE, INC.
Consolidated Balance Sheets
(In Thousands)
The accompanying notes are an integral part of these consolidated balance sheets
RAINFOREST CAFE, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
RAINFOREST CAFE, INC.
Consolidated Statements of Shareholders' Equity
(In Thousands, Except Share Data)
The accompanying notes are an integral part of these consolidated financial statements.
RAINFOREST CAFE, INC.
Consolidated Statements of Cash Flows
(In Thousands)
The accompanying notes are an integral part of these consolidated financial statements.
RAINFOREST CAFE, INC.
Notes to Consolidated Financial Statements
January 2, 2000, January 3, 1999 and December 28, 1997
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
Rainforest Cafe, Inc. (the Company) owns, operates, and licenses themed restaurant/retail facilities (each a Unit). As of January 2, 2000, the Company owned and operated 27 Rainforest Cafe Units in the United States and licensed ten Units internationally. The first international licensed Unit opened in London, England in June, 1997. Nine additional units are located in Cancun, Mexico, Mexico City, Mexico (2 units), Manchester, England, Vancouver, Canada, Toronto, Canada (2 units), Hong Kong, Peoples' Republic of China and Paris, France. The Company intends to open three additional units in the United States during 2000.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of Rainforest Cafe, Inc and its wholly-owned and majority-owned foreign subsidiaries. Investments in 20 percent to 50 percent-owned affiliates are accounted for using the equity method. Intercompany transactions have been eliminated in consolidation.
FISCAL YEAR
The Company has adopted a 52-53-week year ending on the Sunday nearest December 31 of each year. All references herein to "1999" represent the 52-week year ended January 2, 2000. All references to "1998" and "1997" represent the 53-week year ended January 3, 1999 and the 52-week year ended December 28, 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company includes as cash equivalents all highly liquid investments with original maturities of three months or less when purchased, which are recorded at the lower of cost or market.
MARKETABLE SECURITIES
Marketable Securities consist of mutual funds, fixed corporate and municipal income securities, convertible fixed income securities, government securities, preferred stock and common stock. Marketable securities are stated at fair value based generally on quoted market price of each security at the balance sheet date. All marketable securities are defined as trading securities or available-for-sale securities under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
The Company determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. As of January 2, 2000 and January 3, 1999, all securities were designated as available for sale. Available for sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity, if significant.
INVENTORIES
Inventories consist primarily of retail goods for resale and food and beverages used in restaurant operations and are recorded at the lower of cost or market value as determined by the retail inventory method on the first-in, first-out basis for retail goods and average cost for food and beverages. Inventories consisted of the following as of (in thousands):
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost. Improvements are capitalized, while repair and maintenance costs are charged to operations when incurred. Furniture, fixtures and equipment are depreciated using the straight-line method over their estimated useful lives of 3 to 15 years. Leasehold improvements are amortized using the straight-line method over the shorter of their estimated useful lives or the initial lease term. In the event that facts and circumstances indicate that the carrying amount of property may not be recoverable, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value is required.
Property and equipment consisted of the following as of (in thousands):
LICENSING FEES
The Company has entered into eight exclusive license agreements to develop an aggregate of at least 21 Units over a ten year period in the United Kingdom and Ireland, Mexico, Canada, and certain countries in Asia and Europe. As of January 2, 2000, ten units were open. In many of the existing international license agreements, the Company is entitled to receive up-front area licensing fees and is entitled to receive a per Unit development fee as well as royalties ranging from 3% to 10% of gross revenues. Area licensing fees received are deferred and recognized on a pro rata basis as the licensed units subject to the area development agreements begin operations. Development fees are recognized when a licensed Unit begins operations, at which time the Company has performed its obligations related to such fees. Area licensing fees are nonrefundable. Licensing royalties are recognized as earned. Certain license agreements allow the Company to become an equity participant of up to 50% of each Unit developed.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return and separate state returns. Deferred income taxes are provided for differences between the financial reporting basis and tax basis of the Company's assets and liabilities at currently enacted tax rates.
EARNINGS PER COMMON SHARE
Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing net income by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options had been issued. Also included as common stock equivalents for diluted earnings are outstanding put options that are "in the money" and require the Company to repurchase its own common stock. The dilutive effect of these put options is computed using the reverse treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates.
COMPREHENSIVE INCOME
On December 29, 1997, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income, foreign currency translation gains (losses) and unrealized investment gains (losses). The adoption of SFAS No. 130 requires only additional disclosures in the financial statements; it does not effect the Company's financial position or results of operations.
PREOPENING COSTS
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. The effect of this accounting change was a charge to operations of $3.9 million, net of $2.2 million of related tax benefit for the unamortized balance of preopening costs and other start-up expenses as of December 28, 1997. Also, $2.4 million of preopening costs capitalized during 1998 have been expensed as preopening costs in the accompanying statements of operations.
RECLASSIFICATIONS
Certain reclassifications have been made in the financial statements for prior years to conform to the current presentation. Such reclassifications had no effect on net income.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Company is not required to adopt SFAS No. 133 until January 1, 2001, since SFAS No. 137. "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," amended the effective date of SFAS No. 133 to apply for all fiscal quarters of all fiscal years beginning after June 15, 2000. As the Company does not currently engage or plan to engage in derivative or hedging activities, there will be no impact to the Company's results of operations, financial position or cash flows upon adoption of this standard.
2. WRITE-OFF OF DEVELOPMENT AND TRANSACTION COSTS:
TERMINATION OF PLANNED UNITS
Subsequent to December 29, 1996 the Company determined that due to local building restrictions, future negotiations with Trump Taj Mahal would not result in a mutually agreeable space by both parties for the planned unit. The Company also determined that, due to Stratosphere's announcement that it was seeking a bankruptcy reorganization, the required space for such unit would not be delivered according to the required timeline. As such, on March 3, 1997, the Company announced that it would write off development costs related to previously planned units at Trump Taj Mahal (Atlantic City, New Jersey) and Stratosphere (Las Vegas, Nevada). The nonrecurring, pre-tax charge to earnings of approximately $1.9 million ($0.05 per share after taxes) was recorded during the first quarter of fiscal 1997.
CONVERTIBLE DEBT OFFERING
On December 3, 1997 the Company filed a registration statement with the Securities and Exchange Commission for a proposed public offering of $100,000,000 aggregate principal amount of Convertible Subordinated Notes due 2003. On January 8, 1998 the Company withdrew the registration statement and wrote off all costs associated with the proposed debt offering ($295,000) during the fourth quarter of 1997.
TERMINATION OF MERGER AGREEMENT
On December 22, 1999, the Company announced that it had an agreement to merge with Lakes Gaming, Inc. Under the terms of the agreement, Rainforest Cafe shareholders were to receive .55 shares of Lakes common stock for each Rainforest share they owned. On January 24, 2000, the two parties mutually agreed to terminate the merger agreement. Costs associated with the proposed merger of $877,000 were charged to operations during the fourth quarter of 1999. The termination agreement called for a $2,000,000 termination fee payable to Lakes. While the merger agreement was terminated by mutual agreement, the fee continues to be payable if the Company consummates another merger within six months of the termination date.
3. MARKETABLE SECURITIES:
A summary of securities classified as available for sale as of January 2, 2000 and January 3, 1999 is set forth below (in thousands):
Gross gains of $526,000, $3,190,000 and $953,000 were realized during 1999, 1998 and 1997, respectively. Gross losses of $518,000, $2,461,000 and $71,000 were realized during 1999, 1998 and 1997, respectively.
Scheduled maturities of debt securities classified as available for sale as of January 2, 2000 were as follows (in thousands):
4. LONG-TERM DEBT:
The Company has an unsecured $6 million line of credit with a bank under a commercial revolving note, expiring June 2000, bearing interest at the bank's prime rate of interest, 8 1/2% at January 2, 2000. During fiscal 1999, 1998 and 1997 there were no cash borrowings on the line. As of January 2, 2000, $1.0 million in letters of credit were outstanding under this credit facility.
5. RELATED PARTY TRANSACTIONS
At January 2, 2000, the Company holds a note receivable with a balance of $1,721,363 from an officer/director of the Company. The note arose from an advance made to such officer/director during the fourth quarter of 1999. The note bears an interest rate based on the broker loan rate of a national investment firm. The note is due on demand and at January 2, 2000 the interest rate on this note was 7.75%. The note is collaterized by 930,000 shares of the Company's common stock beneficially owned by such officer/director.
6. SHAREHOLDERS' EQUITY:
STOCK SPLITS
On November 18, 1997, the Company's board of directors approved a three-for-two stock split in the form of a 50% stock dividend on its no par value common stock. The split was payable to shareholders of record as of December 26, 1997 and was effective January 15, 1998. All references to earnings per share, number of shares and share amounts have been retroactively restated throughout the accompanying financial statements to reflect these stock splits.
STOCK REPURCHASE PLAN
In January 1997 and as amended in January 1998, the Company's board of directors authorized, subject to certain business and market conditions, the purchase of up to 3.0 million shares of the Company's common stock. In January 1999, the Company's Board of Directors amended its stock repurchase program to provide that up to 2.0 million additional shares may be repurchased over a one-year period. Through January 2, 2000, the number of shares purchased under this plan was 3,378,000.
PUT OPTIONS
The Company utilizes put options as a part of its stock repurchase program. At January 2, 2000, put options to acquire approximately 1,300,000 shares of the Company's common stock were outstanding at exercise prices between $5.00 and $6.75 per share. The put options are callable on specific dates during 2000, and give a third party the right to sell shares of the Company's common stock at contractually specified prices to the Company. During 1999 and 1998, the Company settled put option obligations of 1,517,000 and 1,861,000 shares for cash of $9,757,000 and $23,256,000, respectively. The proceeds from the issuance of the put options were accounted for as additional paid-in-capital. The put option obligation on the balance sheet is the amount the Company would be obligated to pay if all the outstanding put options that were in-the-money at January 2, 2000 were exercised at the strike price without a cash settlement. As of January 2, 2000, and January 3, 1999, the cash settlement amount for all put options sold and outstanding would be approximately $7.2 and $7.1 million, respectively.
7. ASSET IMPAIRMENT CHARGE
Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company recorded a non-cash asset impairment charge of $6,738,000 during the fourth quarter of 1999. The charge relates to the write-down of the long-lived assets at its Aventura Mall Unit in Miami, Florida. An impairment was recognized as the future undiscounted cash flow from this Unit and was estimated to be insufficient to recover the related carrying value of the long-lived assets related to this Unit. As a result, the carrying values of these assets were written-down to their estimated fair value, based on the Company's estimates of future discounted cash flows.
8. INCOME TAXES:
The provision for income taxes consisted of the following (in thousands):
The differences between the effective tax rate and income taxes computed using the federal statutory rate were as follows:
The Company has recorded the following net deferred income taxes as of (in thousands):
The tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows (in thousands):
9. STOCK OPTIONS:
STOCK OPTION AND COMPENSATION PLAN
The Company has a Stock Option and Compensation Plan as Amended (the Plan), pursuant to which options and other awards to acquire an aggregate of 3,750,000 shares of the Company's common stock may be granted to full-time employees of the Company. Stock options, stock appreciation rights, restricted stock, other stock and cash awards may be granted under the Plan. The Plan is administered by the Company's compensation committee which has the discretion to determine the number and purchase price of shares subject to stock options, which exercise prices may not be below 100% of the fair market value of the common stock on the date granted, the term of each option, and the time or times during its term when the option becomes exercisable. The Company has granted options on 2,326,000 shares through January 2, 2000, with vesting periods ranging from three to five years and maximum option terms of ten years.
The Company has a Directors' Stock Option Plan, whereby stock options granted to the Company's outside directors to acquire an aggregate of 300,000 shares of the Company's common stock. The Company has issued options on 32,000 shares as of January 2, 2000.
The Company also has a Non-executive Stock Option Plan, whereby stock options are granted to non-officer employees to acquire an aggregate of 2,500,000 shares of the Company's common stock. The Company has granted options on 2,057,000 shares through January 2, 2000.
A summary of the status of the Company's various stock option plans for the three-year period ended January 2, 2000 is presented in the table and narrative below:
The Company accounts for these plans under Accounting Principles Board (APB) Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and diluted EPS would have been decreased to the following pro forma amounts:
At January 2, 2000, 795,187 of the 4,851,696 options outstanding have exercise prices between $0.01 and $5.00, with a weighted average exercise price of $1.02 and a weighted average remaining contractual life of 6.0 years. The remaining 4,056,509 options have exercise prices between $5.01 and $16.00, with a weighted average exercise price of $8.55 and a weighted average remaining contractual life of 8.1 years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998, and 1997: risk-free interest rates of 6.4% 4.8% and 5.8%, no expected dividend yields; expected lives of 6, 6 and 7 years; and expected volatility of 50%, 50%, and 60% respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company also has an Employee Stock Purchase Plan which allows employees to contribute up to 15% of their earnings, subject to certain limitations, for the purchase of the Company's common stock. Shares are purchased quarterly under this Plan at a price equal to 85% of the lesser of the market price on either the first or last day of the quarter. During 1999, 1998 and 1997, 59,000, 72,000 and 32,000 shares, respectively, were issued under the 1996 Plan, and at January 2, 2000, 170,000 shares were available for future issuance. The average price per share was $4.96, $8.96 and $17.57 in 1999, 1998 and 1997, respectively.
10. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into various operating leases for its existing and future units which typically have an initial lease term of ten to fifteen years with an option for renewal. All of these leases contain provisions for contingent rentals based on a percentage of gross revenues, as defined, and contain renewal options and provisions for payments of real estate taxes, insurance and common area costs. In addition, certain of these leases provide for tenant inducements and rent abatements. Total rent expense, including common area costs, real estate taxes and percentage rent, was $ 35,436,000, $26,983,000 and $10,942,000, for the years 1999, 1998 and 1997, respectively.
Future minimum rental payments (including four units which are not yet open and excluding percentage rents) are as follows as of January 2, 2000 (in thousands):
BUILDING COMMITMENTS
At January 2, 2000, the Company was constructing four Units in which a lease has been executed. Construction costs to complete these four Units is estimated to be approximately $37,000,000. All of these Units are expected to be completed by January 3, 2001.
LOAN GUARANTY
The Company has guaranteed the borrowings of one of its foreign affiliates in which the Company has a 49% interest. The amount of the guaranty is limited to approximately $1,200,000. Borrowings by the affiliate under this agreement were approximately $1,700,000 at January 2, 2000.
LITIGATION
The Company is involved in various legal actions rising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or the results of its operations.
RETIREMENT SAVINGS PLAN
The Company offers a 401(k) savings and investment plan (the Plan) to employees who meet certain eligibility requirements such as 1 year of service, 1,000 hours worked during the year and age of 21. The Company makes matching contributions to the Plan up to a maximum percentage of each participating employee's annual investment. Matching and discretionary contributions to the Plan are authorized by the Company's compensations committee. The expense for the Plan was $235,000, $179,000 and $144,000 in 1999, 1998 and 1997, respectively.
11. QUARTERLY DATA (UNAUDITED):
The following is a summary of quarterly consolidated results of operations for 1999 and 1998 (unaudited, in thousands, except per share data):
12. SALE OF COMPANY
On February 9, 2000, Rainforest Cafe, Inc. and Landry's Seafood Restaurants, Inc. announced the signing of a definitive merger agreement. The agreement calls for each share of Rainforest common stock to be converted into $5.23 in cash, or .5816 shares of Landry's common stock, subject to mandatory proration. Cash payments shall not exceed 35% of the total purchase price of which, based upon an assumed value of $9.00 per share of Landry's common stock, would approximate $125,000,000. The merger will be accounted for under the purchase method, whereby the purchase price will be allocated to the underlying assets and liabilities of Rainforest Cafe, based upon their estimated fair value. The transaction is subject to customary conditions including, among others, approval of Rainforest's shareholders and regulatory approvals and consents. Provided the transaction closes by July 24, 2000, the $2,000,000 termination fee included in the Lakes Gaming, Inc. Merger Agreement will be due to Lakes upon closing.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information beginning immediately following the caption "Election of Directors" to, but not including, the caption "Executive Compensation" in the Company's Proxy Statement, in connection with the Company's 2000 annual meeting of shareholders, if required, (the "2000" Proxy Statement") forwarded to stockholders prior to the Company's 2000 Annual Meeting of Shareholders, if required, is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2000 Proxy Statement, if required, beginning immediately following the caption "Executive Compensation" to, but not including, the caption "Compensation Committee Interlocks and Insider Participation," is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2000 Proxy Statement, if required, beginning immediately following the caption "Voting Securities and Principal Holders Thereof" to, but not including, the caption "Election of Directors," is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2000 Proxy Statement, if required, under the caption "Certain Transactions" is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants Consolidated Balance Sheets at January 2, 2000 and January 3, 1999 Consolidated Statements of Operations for the three years ended January 2, 2000 Consolidated Statements of Shareholders' Equity for the three years ended January 2, 2000 Consolidated Statements of Cash Flows for the three years ended January 2, 2000
Notes to Consolidated Financial Statements
(3) Exhibits
2.1 Agreement and Plan of Merger dated as of February 9, 2000, by and among Rainforest Cafe, Inc., a Minnesota corporation, Landry's Seafood Restaurants, Inc., a Delaware corporation, and LSR Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Landry's. (Incorporated herein by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K dated February 9, 2000)
3.1 Articles of Incorporation, as amended (Incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form SB-2, File No. 33-89256C (the "SB-2")) 3.2 By-laws (Incorporated herein by reference as Exhibit 3.2 of the SB-2) 10.1 Lease Agreement by and between Mall of America, Inc. and the Company dated March 31, 1994. (Incorporated herein by reference as Exhibit 10.1 of the SB-2) 10.2 Lease Agreement by and between the Company and Walt Disney World dated September 6, 1995. (Incorporated herein by reference to Exhibit 10.3 of the Company's Registration Statement on Form S-1, File No. 33-99836 (the "S-1")) 10.3 Company's 1995 Stock Option and Compensation Plan. (Incorporated herein by reference as Exhibit 10.3 of the SB-2) 10.4 Indemnification Agreement dated April 6, 1995 by and between the Company and Steven Schussler. (Incorporated herein by reference as Exhibit 10.16 of the SB-2) 10.5 Form of Director Stock Option Agreement dated April 7, 1995. (Incorporated herein by reference as Exhibit 10.1 of the SB-2) 10.6 Lease Agreement by and between the Company and Trump Taj Mahal Associates dated December 6, 1995. (Incorporated herein by reference to Exhibit 10.10 of the S-1) 10.7 Company's 1996 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.12 of the Company's Form 10-K for the fiscal year ended December 29, 1996) 10.8 Company's 1997 Director Stock Option Plan (Incorporated herein by reference to Exhibit 10.11 to the Company's Form 10-K for the fiscal year ended December 28, 1997) 10.9 Company's 1998 Non-Executive Stock Option Plan. (Incorporated herein by reference to exhibit 10.9 of the Company's Form 10-K for the fiscal year ended January 3, 1999) 10.10 Termination agreement dated January 24, 2000 by and between the Company and Lakes Gaming, Inc.(Incorporated herein by reference to exhibit 10 to the Company's Current Report on Form 8-K dated January 24, 2000) 21. Subsidiaries of Company. 23.1 Consent of Independent Public Accountants
(b) Reports on Form 8-K.
On December 23, 1999, during the last quarter of the period covered by this Form 10-K, the Company filed one report on Form 8-K. The Form related to the Merger Agreement between Lakes Gaming, Inc. and the Company. The report included, as exhibits, (i) the Agreement and Plan of Merger outlining the terms of the proposed merger and (ii) the press release issued by Lakes Gaming, Inc. and Rainforest Cafe, Inc. announcing the Merger Agreement.
On January 25, 2000, the Company filed a report on Form 8-K. The Form related to the termination of the Merger Agreement between Lakes Gaming, Inc and the Company. The report included as exhibits (1) the Termination Agreement and (ii) the press release issued by Lakes Gaming, Inc and Rainforest Cafe, Inc announcing the termination agreement.
On February 18, 2000 the Company filed a report on Form 8-K. The Form related to the Merger Agreement between Landry's Seafood Restaurants, Inc. and the Company dated February 9, 2000. The reported included, as exhibits, (i) Agreement and Plan of Merger outlining the terms of the proposed merger and (ii) the press release issued by the Company announcing the Merger Agreement.
27. Financial Data Schedule.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
RAINFOREST CAFE, INC. Registrant
Date: February 28, 2000 By: /s/ Lyle Berman ---------------------------------------- Name: Lyle Berman Title: Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 28, 2000.