Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act. Yes [X] No [ ]
The aggregate market value of the voting stock held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are “affiliates” of the Registrant) of the Registrant was approximately $715.1 million based upon the last reported sale price in the Nasdaq National Market of $21.64 as of the last business day of the Registrant’s most recently completed second fiscal quarter.
As of December 28, 2003, the number of shares outstanding of the Registrant’s Common Stock, no par value, was 33,749,236 (excluding 292,500 shares held in the Company’s treasury).
Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 10, 2004 are incorporated by reference in Part III hereof.
Certain of the matters discussed in the following pages, particularly regarding estimates of the number and locations of new restaurants that RARE Hospitality International, Inc. and its subsidiaries (the “Company”) intend to open during fiscal 2004 and statements included in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “OUTLOOK FOR FUTURE OPERATING RESULTS”, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large restaurant base; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation affecting the restaurant industry; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks set forth in Exhibit 99(a) to this Form 10-K which are hereby incorporated by reference and other risks identified from time to time in the Company’s SEC reports, registration statements and public announcements. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Page
----
Part I
Item 1. Business 4
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 15
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 15
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 49
Item 9A. Controls and Procedures 49
Part III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 49
Item 12. Security Ownership of Certain Beneficial Owners
and Management 50
Item 13. Certain Relationships and Related Transactions 50
Item 14. Principal Accountant Fees and Services 50
Part IV
Item 15. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 50
Signatures 52
RARE Hospitality International, Inc. and subsidiaries (the “Company”) operates and franchises 239 restaurants as of March 3, 2004, including 194 LongHorn Steakhouse restaurants, 17 The Capital Grille restaurants and 26 Bugaboo Creek Steak House restaurants, as well as two additional restaurants (the “specialty restaurants”), Hemenway’s Seafood Grille & Oyster Bar (“Hemenway’s”) and The Old Grist Mill Tavern. The Company was incorporated in Georgia in December 1982.
LongHorn Steakhouse restaurants are casual dining, full-service establishments serving both lunch and dinner amidst an attractive and inviting atmosphere. With locations spread throughout 23 states in the Eastern half of the United States, LongHorn Steakhouse restaurants feature a variety of top quality menu items including signature steaks, as well as salmon, shrimp, chicken, ribs, pork chops, burgers and prime rib. Designed with an inviting décor reminiscent of the classic American West, LongHorn Steakhouse restaurants appeal to all ages with a unique combination of hospitable, attentive service, moderate price, high quality dishes and a comfortable atmosphere.
The Capital Grille, with locations in major metropolitan cities in the United States, boasts an atmosphere of power dining, relaxed elegance and style. Nationally acclaimed for dry aging steaks on premises, The Capital Grille serves classic steak house offerings such as chops, large North Atlantic lobsters and fresh seafood. The restaurants feature an award-winning wine list offering over 300 selections, personalized service, comfortable club-like atmosphere and premiere private dining rooms. The Capital Grille is the ideal dining choice for business meetings and social occasions.
Bugaboo Creek Steak House restaurants are designed as attractive, family-friendly establishments featuring moderately priced, flavorful food items and an offering of full liquor service. Primarily located in states on the Eastern seaboard, Bugaboo Creek Steak House restaurants attract guests of all ages with a rustic décor reminiscent of a Canadian Rocky Mountain lodge. Stressing a friendly and attentive service style, Bugaboo Creek Steak House restaurants offer a variety of menu offerings including signature seasoned steaks, prime rib, smoked baby-back ribs, spit roasted half chicken, grilled salmon and shrimp.
The following tables set forth the location of each existing restaurant and restaurants under construction by concept at March 3, 2004 and the number of restaurants in each area.
ALABAMA
Birmingham 1
Dothan 1
Huntsville 1
Mobile 2
Montgomery 2
FLORIDA
Daytona Beach 1
Destin 1
Ft. Myers 2
Jacksonville 7
Miami/Ft. Lauderdale 7
Ocala 1
Orlando 7
St. Augustine 1
Tallahassee 1
Tampa/ St. Petersburg 9
West Palm Beach 4
GEORGIA
Albany 1
Athens 1
Atlanta 29
Augusta 1
Cartersville 1
Columbus 1
Dalton 1
Macon 1
Rome 1
Savannah 1
Statesboro 1
Tifton 1
Valdosta 1
Warner Robbins 1
ILLINOIS
Fairview Heights 1
INDIANA
Indianapolis 3
KANSAS
Kansas City 2
KENTUCKY
Bowling Green 1
Florence 1
Lexington 1
Louisville 1
MAINE
Portland 1
MARYLAND
Baltimore 3
Waldorf 1
MASSACHUSETTS
Boston 6
Springfield 1
MICHIGAN
Detroit 1
MISSOURI
Kansas City 4
Jefferson City 1
St. Louis 5
NEW HAMPSHIRE
Concord 2
Nashua 1
NEW JERSEY
Edison 2
Flanders 1
Howell 1
Parsippany 1
Rochelle Park 1
NORTH CAROLINA
Burlington 1
Charlotte 7
Greensboro 1
Hickory 1
High Point 1
Winston-Salem 1
OHIO
Cincinnati 5
Cleveland 10
Columbus 5
Dayton 1
Toledo 1
PENNSYLVANIA
Erie 1
Philadelphia 3
RHODE ISLAND
Warwick 1
SOUTH CAROLINA
Anderson 1
Charleston 2
Columbia 3
Greenville 1
Spartanburg 1
Hilton Head 1
Rock Hill 1
TENNESSEE
Chattanooga 1
Jackson 1
Nashville 5
VERMONT
Montpelier 1
VIRGINIA
McLean 1
WEST VIRGINIA
Charleston 1
Total Existing Company-Owned/
Joint Venture Restaurants 191
PUERTO RICO
Bayamon 1
Carolina 1
San Patricio 1
Total Existing Franchisee-Owned Restaurants 3
Total LongHorn Steakhouse Restaurants 194
CONNECTICUT
Manchester 1
DELAWARE
Newark 1
DISTRICT OF COLUMBIA
Washington 1
GEORGIA
Atlanta 5
MAINE
Bangor 1
Portland 1
MARYLAND
Gaithersburg 1
MASSACHUSETTS
Boston 7
Seekonk 1
Shrewsbury 1
NEW HAMPSHIRE
Newington 1
NEW YORK
Albany 1
Poughkeepsie 1
Rochester 1
PENNSYLVANIA
Philadelphia 1
RHODE ISLAND
Warwick 1
Total Bugaboo Creek Steak House Restaurants 26
ARIZONA
Phoenix 1
COLORADO
Denver 1
DISTRICT OF COLUMBIA
Washington 1
FLORIDA
Miami 1
GEORGIA
Atlanta 1
ILLINOIS
Chicago 1
MASSACHUSETTS
Boston 2
MICHIGAN
Troy 1
MINNESOTA
Minneapolis 1
MISSOURI
Kansas City 1
NORTH CAROLINA
Charlotte 1
PENNSYLVANIA
Philadelphia 1
RHODE ISLAND
Providence 1
TEXAS
Dallas 1
Houston 1
VIRGINIA
McLean 1
Total The Capital Grille Restaurants 17
MASSACHUSETTS
The Old Grist Mill Tavern, Seekonk 1
RHODE ISLAND
Hemenway's Seafood Grille & Oyster Bar, Providence 1
Total Specialty Restaurants 2
FLORIDA
LongHorn Steakhouse, Jacksonville
LongHorn Steakhouse, Palm Harbor
The Capital Grille, Ft. Lauderdale
GEORGIA
Bugaboo Creek Steak House, Newnan
LongHorn Steakhouse, Dawsonville
INDIANA
LongHorn Steakhouse, Evansville
KANSAS
LongHorn Steakhouse, Speedway
LongHorn Steakhouse, Topeka
KENTUCKY
LongHorn Steakhouse, Frankfort
MAINE
LongHorn Steakhouse, Augusta
MARYLAND
LongHorn Steakhouse, Hagerstown
MICHIGAN
LongHorn Steakhouse, Auburn Hills
MISSOURI
LongHorn Steakhouse, Jefferson City
LongHorn Steakhouse, St. Peters
NEW HAMPSHIRE
LongHorn Steakhouse, Newington
NEW JERSEY
LongHorn Steakhouse, Woodbridge
NEW YORK
The Capital Grille, New York
NORTH CAROLINA
LongHorn Steakhouse, Wilmington
OHIO
LongHorn Steakhouse, West Chester
VIRGINIA
LongHorn Steakhouse, Chantilly
Total Restaurants Under Construction 20
The Company’s prototypical LongHorn Steakhouse has an average seating capacity of approximately 188 seats in approximately 5,400 square feet of space. The prototype has been modified over the years with the objective of increasing the Company’s return on investment on new LongHorn Steakhouse restaurants by increasing the sales capacity and reducing capital expenditures as a percentage of revenue. The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but 52 of its LongHorn Steakhouse restaurants in operation. The Company also owns five sites for restaurants under construction and owns the site for one restaurant with construction scheduled to begin later in 2004. Five of the 21 LongHorn Steakhouse restaurants opened in 2003 were located on property purchased at an average cost of approximately $932,000 per location. The average cash investment to construct a LongHorn Steakhouse restaurant in 2003 was approximately $1,702,000 excluding real estate costs and excluding pre-opening expenses of approximately $197,000.
The Capital Grille restaurant development strategy includes the use of sites that are historic or unique in nature. Accordingly, the Company utilizes methods to balance control of the construction costs with the retention of the unique ambiance of each location. The Company currently leases all of its The Capital Grille sites, but intends to purchase land in those circumstances it believes are cost-effective. Two The Capital Grille restaurants were opened in 2003. The average cash investment to construct a Capital Grille restaurant in 2003 was approximately $2,487,000 (net of landlord allowances of $547,000) and excluding pre-opening expenses of approximately $364,000.
The Company has continued to develop and refine the Bugaboo Creek Steak House restaurant design with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants opened in 2003. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype for restaurants to be opened in the future.
Three Bugaboo Creek Steak House restaurants were opened in 2003. The average cash investment to construct a Bugaboo Creek Steak House in 2003 was approximately $2,503,000, excluding real estate costs and excluding pre-opening expenses of approximately $221,000. Two of the three Bugaboo Creek Steak House restaurants opened in 2003 were located on leased property. The Company paid approximately $856,000 for the one property purchased for a Bugaboo Creek Steak House site in 2003.
The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but three of its Bugaboo Creek Steak House restaurant in operation. The Company also owns the site for one restaurant under construction.
The Company plans to expand through the development of additional Company-owned LongHorn Steakhouse and Bugaboo Creek Steak House restaurants in existing markets and in selected new markets in the Eastern half of the United States. The Company believes that clustering in existing and new markets enhances its ability to supervise operations, market the Company’s concepts and distribute supplies. The Company, however, also intends to open single restaurants in smaller markets in sufficiently close proximity to the Company’s other markets to enable the Company to efficiently supervise operations and distribute supplies. LongHorn Steakhouse restaurants are currently located in the Eastern half of the United States, and Bugaboo Creek Steak House restaurants are located primarily in states on the Eastern seaboard.
The Company plans to expand through the development of additional Company-owned The Capital Grille restaurants in selected metropolitan markets nationwide.
The Company’s restaurant development objective is to increase earnings by expanding market share in existing markets and by developing restaurants in new markets. The Company currently plans to open 28 to 31 Company-owned restaurants in 2004; 23 or 24 LongHorn Steakhouse restaurants; three or four Bugaboo Creek Steak House restaurants and two or three The Capital Grille restaurants. Of the restaurants proposed for 2004, the Company has opened four LongHorn Steakhouse restaurants, one Bugaboo Creek Steak House restaurant and has 20 restaurants under construction in Florida, Georgia, Indiana, Kansas, Kentucky, Maine, Maryland, Michigan, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio and Virginia, and has signed leases, purchased land, or signed agreements to purchase land for 17 additional restaurants as of March 3, 2004. The Company expects that all of the restaurants to be opened in 2004 will be Company-owned.
The Company will continue to evaluate suitable acquisitions in the restaurant industry as they are identified. The Company will continue to evaluate franchising of either LongHorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants in markets in which the Company would not otherwise expand.
The Company considers the location of a restaurant to be a critical factor to the unit’s long-term success, and the Company devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on trade area demographics, the success or failure of relevant competitive restaurants operating in the area, population growth rates, as well as specific site characteristics, such as visibility, accessibility and traffic volumes. Senior management inspects and approves each restaurant site. It typically takes approximately 120 to 140 days to construct and open a new LongHorn Steakhouse restaurant, approximately 140 to 160 days to construct and open a new Bugaboo Creek Steak House restaurant and approximately 170 to 185 days to construct and open a new The Capital Grille restaurant. Currently the Company owns 63 of its restaurant sites (including one specialty restaurant site, six Company owned sites for restaurants currently under construction and one Company owned site for a restaurant with construction scheduled to begin later in 2004).
The Company has modified its LongHorn Steakhouse prototype restaurant design over the years to an average of approximately 188 seats in approximately 5,400 square feet of space for prototypical LongHorn Steakhouse restaurants opened in 2003. An expanded kitchen design incorporating equipment needed for a broader menu is also part of the prototype. The Company believes its kitchen design simplifies training, lowers costs and improves the consistency and quality of the food. The prototype restaurant design also includes cosmetic changes that provide a total restaurant concept intended to be inviting and comfortable while maintaining the ambiance of a Western-style steakhouse.
The Company has renovated and remodeled some of the older LongHorn Steakhouse restaurants to include cosmetic improvements such as repainting and refinishing, new booths, new lighting and various decor adjustments. Exterior improvements encompassed repainting and additional lighting designed to convey a more inviting image.
The Company developed a Bugaboo Creek Steak House restaurant design, which served as the prototype for the three Bugaboo Creek Steak House restaurants constructed in 2003. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype, with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants to be opened in the future.
Management and Employees. The management staff of a typical Company restaurant consists of one general manager or managing partner, one to four assistant managers and one or two kitchen managers. In addition, a typical LongHorn Steakhouse restaurant employs approximately 40 to 80 staff members, a typical Bugaboo Creek Steak House restaurant employs approximately 50 to 85 staff members, and a typical The Capital Grille restaurant employs approximately 60 to 80 staff members. The general manager or managing partner of each restaurant has primary responsibility for the day-to-day operation of the restaurant and is responsible for maintaining Company-established operating standards. The Company employs LongHorn Steakhouse regional managers, who each have responsibility for the operating performance of four to eight Company-owned LongHorn Steakhouse restaurants or joint venture restaurants, and report directly to one of the five Regional Vice Presidents for the LongHorn Steakhouse concept. The Regional Vice Presidents report to the Vice President of Operations of the LongHorn Steakhouse division. The Vice President of Operations of the LongHorn Steakhouse division reports to the President of the LongHorn Steakhouse division. The Company employs Bugaboo Creek Steak House regional managers, who have responsibility for the operating performance of three to five Bugaboo Creek Steak House restaurants and The Old Grist Mill Tavern. All of these regional managers report directly to the Director of Operations for the Bugaboo Creek Steak House concept. The Director of Operations for the Bugaboo Creek Steak House concept reports to the President of the Bugaboo Creek Steak House division. The Company also employs regional directors who have responsibility for four to five The Capital Grille restaurants and Hemenway’s Seafood Grille & Oyster Bar, all reporting directly to the Director of Operations for The Capital Grille. The Director of Operations for The Capital Grille reports to the Vice President of The Capital Grille.
The Company seeks to recruit managers with appropriate restaurant experience. The Company selects its restaurant personnel utilizing a selection process which includes psychological and analytical testing designed to identify individuals with traits the Company believes are important to achieving success in the restaurant industry. The Company requires new managers to complete an intensive training program focused on both on-the-job training as well as a rigorous in-house classroom-based educational course. The program is designed to encompass all phases of restaurant operations, including the Company’s philosophy, management strategy, policies, procedures and operating standards. Through its management information systems, senior management receives daily reports on sales, and weekly reports on guest counts, payroll, cost of sales and other restaurant operating expenses. Based upon these reports, management believes that it is able to closely monitor the Company’s operations.
The Company maintains performance measurement and incentive compensation programs for its management-level employees. The performance programs reward restaurant management teams with cash bonuses for meeting sales and profitability targets. The Company has also implemented a managing partner program in which qualifying general managers receive cash compensation and restricted stock awards based upon individual performance. During 2003, restricted stock awards were made to 107 restaurant-level managing partners in compliance with their respective managing partner agreements.
Management Information Systems. The Company utilizes a Windows-based accounting software package and a network that enables electronic communication throughout the Company. In addition, all of the Company’s restaurants utilize touch screen POS systems and the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants employ a theoretical food costing program. During 2003, the Company completed the installation of a new point-of-sales system in each of its restaurants and implemented satellite communication and electronic gift card systems. The Company utilizes its management information systems to develop pricing strategies, identify food cost issues, monitor new product reception and evaluate restaurant-level productivity. The Company expects to continue to develop its management information systems in each concept to assist restaurant management in analyzing their business and to improve efficiency.
Purchasing. The Company establishes product quality standards for beef and other protein products, then negotiates directly with suppliers to obtain the lowest possible prices for the required quality. The Company also utilizes longer-term contracts on certain items to avoid short-term cost fluctuations. For the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants, beef is aged at the facility of the Company's supplier or distributor, who delivers the beef to the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants when the age reaches specified guidelines. This arrangement is closely monitored by Company personnel, and management believes it provides for efficient and cost-effective meat processing and distribution, while maintaining the Company's control and supervision of purchasing and aging. The Company purchases a majority of its protein products under fixed price contracts with its primary suppliers. The failure of any of these suppliers to honor the prices under these contracts would have an adverse effect on the Company's results of operations to the extent that the then current market prices exceed the prices under the contracts. The Company's management negotiates directly with suppliers for most other food and beverage products to ensure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases these other products, and supplies from a sufficient number of approved suppliers such that the loss of any one supplier would not have a material adverse effect on the Company's results of operations or financial condition.
The Company utilizes one primary distributor for all of its restaurants, which delivers approximately 70-75% of the products (other than alcoholic beverages) and supplies that the Company utilizes in the operation of its restaurants. In the event of a disruption of service from the Company’s primary distributor, management believes that alternative distribution channels could be arranged such that there would not be a material adverse effect on the Company’s financial condition.
Seasonality. Although individual restaurants have seasonal patterns of performance that depend on local factors, aggregate sales by the Company's restaurants have not displayed pronounced seasonality other than lower sales during the Company's third fiscal quarter. Extreme weather, especially during the winter months, may adversely affect sales.
The Company’s interests in its restaurants are divided into three categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised restaurants.
Company-owned restaurants. As of March 3, 2004, 188 LongHorn Steakhouse restaurants, all Bugaboo Creek Steak House restaurants, all The Capital Grille restaurants, Hemenway’s Seafood Grille & Oyster Bar and The Old Grist Mill Tavern are owned and operated by the Company. The general manager or managing partner of each of these restaurants is employed and compensated by the Company. See “Restaurant Operations - Management and Employees” above.
Joint Venture Restaurants.The Company is a partner in joint ventures that, in the aggregate, operate three LongHorn Steakhouse restaurants as of March 3, 2004. These restaurants are located in Central Florida and owned by joint ventures managed by the Company. The joint venture pays management fees to the Company at the rate of 4% of monthly restaurant sales, and the Company controls its joint ventures’ use of the Company’s service marks.
Franchised Restaurants.The Company has one unaffiliated franchisee with an area development agreement with the right to operate franchised LongHorn Steakhouse restaurants in Puerto Rico. As of March 3, 2004, this franchisee operated three LongHorn Steakhouse restaurants in Puerto Rico.
The franchise agreements are granted with respect to individual restaurants and are either for a term of ten years with a right of the franchisee to acquire a successor franchise for an additional ten-year period if specified conditions are met or for a period of twenty years. The franchise agreements provide for a franchise fee of $60,000, which amount is reduced for subsequent franchises acquired by the same franchisee. The franchise fees are payable in full upon execution. The franchise agreements provide for royalties with respect to each restaurant of 4% of gross sales and require the franchisee to expend on local advertising during each calendar month an amount equal to at least 1.5% of gross sales and, if the Company establishes an advertising fund, to contribute an additional amount of 0.5% of gross sales to such fund or up to 4.5% of the restaurant’s gross sales during the conduct of a market, regional or national advertising campaign.
The franchisee has the right to terminate its franchise agreements upon default by the Company. The Company also retains the right to terminate a franchise for a variety of reasons, including the franchisee’s failure to pay amounts due under the agreement or to otherwise comply with the terms of the franchise agreement.
An important element of the Company’s franchise program is the training the Company provides for each franchisee. With respect to each new franchisee restaurant, the Company provides the same training program provided to the Company’s management and employees. In addition to this initial training, the Company provides supervision at the opening of the franchisee’s restaurants, beginning one week prior to opening, and routine supervision thereafter.
Franchisees are required to operate their restaurants in compliance with the Company’s methods, standards and specifications regarding such matters as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs. The franchisee has full discretion to determine the prices to be charged to all customers. In addition, all franchisees are required to purchase food, ingredients, supplies and materials that meet standards established by the Company or which are provided by suppliers approved by the Company. The Company does not receive fees or profits on sales by third-party suppliers to franchisees.
The franchise laws of many jurisdictions limit the ability of a franchisor to terminate or refuse to renew a franchise.
The Company has registered LONGHORN STEAKS and design, LONGHORN STEAKHOUSE and design, BUGABOO CREEK STEAK HOUSE and design, THE CAPITAL GRILLE and design, and HEMENWAY’S SEAFOOD GRILLE & OYSTER BAR and design as service marks with the United States Patent and Trademark Office. The Company has additional registered marks used in connection with the operation of its various restaurants. The Company regards its service marks as having significant value and as being important factors in the marketing of its restaurants. The Company is aware of names and marks similar to the service marks of the Company used by other persons in certain geographic areas; however, the Company believes such uses will not adversely affect the Company. It is the Company’s policy to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks.
The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors, both steakhouses and non-steakhouses, with substantially greater financial and other resources than the Company. Such competitors include a large number of national and regional restaurant chains. Some of the Company’s competitors have been in existence for a substantially longer period than the Company and may be better established in the markets where the Company’s restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company’s restaurants in particular.
The Company is subject to various federal, state and local laws affecting its business. Each of the Company’s restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. In addition, most municipalities in which the Company’s restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. The Company is also subject to federal and state environmental regulations, but they have not had a material effect on the Company’s operations.
During 2003, approximately 14.1% of the Company’s restaurant sales were attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company’s restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not experienced and does not presently anticipate experiencing any significant delays or other problems in obtaining or renewing licenses or permits to sell alcoholic beverages; however, the failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations.
The Company and its franchisees are subject in each state in which they operate restaurants to “dram shop” statutes or case law interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance.
The Company is also subject to Federal and state laws regulating the offer and sale of franchises administered by the Federal Trade Commission and various similar state agencies. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. These laws often apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise.
The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company designs its restaurants to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.
The Company’s restaurant operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, overtime and tip credits. A significant number of the Company’s food service and preparation personnel receive gratuities and are paid at rates related to the federal minimum wage. Significant additional government-imposed increases in minimum wages, paid leaves-of-absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities would have an adverse effect on the profitability of the Company.
The Company operates under a Tip Rate Alternative Commitment (“TRAC”) agreement with the Internal Revenue Service. Through increased educational and other efforts in the restaurants, the TRAC agreement reduces the likelihood of potential Company-wide employer-only FICA assessments for unreported tips.
As of March 3, 2004, the Company employed approximately 15,000 persons, 209 of whom were corporate personnel, 1,186 of whom were restaurant management personnel and the remainder of whom were hourly personnel. Of the 209 corporate employees, 134 are in management positions and 75 are administrative or office employees. None of the Company’s employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.
The Company’s primary website can be found at www.rarehospitality.com. The Company makes available, free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934. These reports are made available on the website as soon as reasonably practical after their filing with, or furnishing to, the Securities and Exchange Commission. Furthermore, the Company also makes available on its website, and in print to any shareholder who requests it, the Company’s Corporate Governance Policy, the Committee Charters for Audit, Compensation, and Governance/Nominating Committees, as well as the Code of Conduct that applies to all directors, officers, employees and those that do business with the Company. Amendments to these documents or waivers related to the Code of Conduct will be made available on the Company’s website as soon as reasonably practicable after their execution.
As of March 3, 2004, 180 of the Company’s restaurants were located in leased space (in addition, the Company has leased the space for 14 restaurants under construction and 14 sites for restaurants with construction scheduled to begin later in 2004). Initial lease expirations typically range from ten to fifteen years, with the majority of these leases providing for an option to renew for at least one additional term of three to 15 years. All of the Company’s leases provide for a minimum annual rent, and approximately half of the leases call for additional rent based on sales volume (generally 2.0% to 8.0%) at the particular location over specified minimum levels. Generally the leases are net leases, which require the Company to pay the costs of insurance, taxes and a portion of lessors’ operating costs.
The leases on the existing Company-owned restaurants will expire over the period from 2004 through 2038 (assuming exercise of all renewal options).
The Company owns four office buildings in Atlanta, Georgia aggregating 40,000 square feet in which its corporate offices and central training facility are located. In addition, the Company leases approximately 1,973 square feet of space in Westborough, Massachusetts to house staff to support the operation of Bugaboo Creek Steak House restaurants. The locations of the Company’s restaurants are listed in Item 1 of this report.
The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these incidental actions will have a material adverse effect on the Company’s results of operations or financial condition.
There were no matters submitted for a vote of security holders during the fourth quarter of 2003.
The Company’s common stock trades on the Nasdaq National Market under the symbol “RARE”. The table below sets forth the high and low sales prices of the Company’s common stock, as reported on the Nasdaq National Market, during the periods indicated as adjusted for the three-for-two stock split paid in the form of a 50% stock dividend on September 2, 2003:
FISCAL YEAR ENDED DECEMBER 28, 2003 HIGH LOW
First Quarter $20.61 $16.89
Second Quarter 21.86 17.81
Third Quarter 27.24 21.49
Fourth Quarter 27.95 21.68
FISCAL YEAR ENDED DECEMBER 29, 2002 HIGH LOW
First Quarter $18.36 $14.13
Second Quarter 19.83 15.63
Third Quarter 18.67 13.83
Fourth Quarter 19.13 14.60
The closing price of a share of the Company’s common stock on March 3, 2004, was $28.49. As of March 3, 2004, there were approximately 505 holders of record of the Company’s common stock.
Since the Company’s initial public offering in 1992, the Company has not declared or paid any cash dividends on its capital stock. The Company does not intend to pay any cash dividends on its common stock in the foreseeable future, as the current policy of the Company’s Board of Directors is to retain all earnings to support operations and finance expansion. The Company’s existing revolving line of credit restricts the payment of cash dividends without prior lender approval. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company’s earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors.
The following table provides information about the common stock that may be issued under all of the Company’s existing equity compensation plans as of December 28, 2003. Details of the plans are discussed in Note 10 to the Company’s Consolidated Financial Statements. The table does not include information with respect to shares subject to outstanding options granted under the Bugaboo Creek Steak House, Inc. 1994 Stock Option Plan, which is described in note 8 to this table.
Number of Securities to Weighted Average Number of Securities
be Issued Upon Exercise Exercise Price of Remaining Available
Plan Category of Outstanding Options Outstanding Options for Future Issuance
Equity Compensation 1,112,260 (1) $18.65 1,120,222 (6)
Plans Approved by 1,484,410 (2) $12.03 40,228 (7)
Stockholders 137,811 (3) $12.58 56,251
843,997 (4) $8.12 --
Equity Compensation Plans
not Approved by Stockholders 146,614 (5) $8.31 --
--------- ------ ---------
Total 3,725,092 $13.00 1,216,701
========= ====== =========
Following is selected consolidated financial data as of and for each of the fiscal years in the five-year period ended December 28, 2003. The Consolidated Financial Statements as of December 28, 2003 and December 29, 2002 and for each of the years in the three-year period ended December 28, 2003 and the independent auditors’ report thereon are included in this Form 10-K. All sales, restaurant operating expenses, and general and administrative expenses have been restated to conform to the presentation requirements of the consensus of the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board on EITF Issue 01-9, “Accounting for Consideration Given by a Vendor to a Customer ” (see Note 1 to consolidated financial statements). All share and per share amounts have been restated to give retroactive effect to the Company’s 50% stock dividends in 2003 and 2000 (see Note 1 to consolidated financial statements). The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” also included in this Form 10-K.
FISCAL YEARS ENDED
--------------------------------------------------------------------------------
DEC 28, DEC 29, DEC 30, DEC 31, DEC 26,
2003 2002 2001 2000 1999
--------------------------------------------------------------------------------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Restaurant sales $680,458 $584,159 $519,998 $453,284 $371,751
Franchise revenues 374 345 328 380 195
-------- -------- -------- -------- --------
Total revenues 680,832 584,504 520,326 453,664 371,946
Costs and expenses:
Cost of restaurant sales 245,094 211,006 189,869 166,421 137,416
Operating expenses-- restaurants 298,978 257,252 228,340 194,874 161,924
Provision for asset impairments,
restaurant closings, and other
charges -- 495 2,802 -- 1,800
Depreciation and amortization--
restaurants 26,508 23,920 21,248 17,022 15,249
Pre-opening expense 5,782 3,802 3,764 3,318 3,051
General and administrative expenses 40,515 34,933 31,675 30,723 25,547
-------- -------- -------- -------- --------
Total costs and expenses 616,877 531,408 477,698 412,358 344,987
-------- -------- -------- -------- --------
Operating income 63,955 53,096 42,628 41,306 26,959
Interest expense, net 1,015 1,718 2,128 4,159 3,866
Early termination of interest
rate swap agreement -- 1,540 1,100 -- --
Provision for litigation settlement -- -- -- 1,000 --
Minority interest 300 448 639 1,407 1,609
-------- -------- -------- -------- --------
Earnings before income taxes and
cumulative effect of change in
accounting principle 62,640 49,390 38,761 34,740 21,484
Income tax expense 20,363 15,951 12,603 11,480 7,060
-------- -------- -------- -------- --------
Earnings before cumulative effect
of change in accounting principle 42,277 33,439 26,158 23,260 14,424
Cumulative effect of change in
accounting principle (net of tax
benefit of $760) -- -- -- -- 1,587
-------- -------- -------- -------- --------
Net earnings $ 42,277 $ 33,439 $ 26,158 $ 23,260 $ 12,837
========= ========= ========= ========= =========
Basic earnings per common share before
cumulative effect of change in
accounting principle $ 1.27 $ 1.03 $ $0.83 $ 0.85 $ 0.53
Cumulative effect per common share
of change in accounting principle -- -- -- -- 0.06
-------- -------- -------- -------- --------
Basic earnings per common share $ 1.27 $ 1.03 $ 0.83 $ 0.85 $ 0.47
========= ========= ========= ========= =========
Diluted earnings per common share
before cumulative effect of change
in accounting principle $ 1.21 $ 0.98 $ 0.79 $ 0.80 $ 0.51
Cumulative effect per common share of
change in accounting principle -- -- -- -- 0.06
-------- -------- -------- -------- --------
Diluted earnings per common share $ 1.21 $ 0.98 $ 0.79 $ 0.80 $ 0.45
Weighted average common shares ========= ========= ========= ========= =========
outstanding (basic) 33,162 32,586 31,503 27,407 27,072
Weighted average common shares ========= ========= ========= ========= =========
outstanding (diluted) 34,843 34,268 33,216 29,124 28,229
========= ========= ========= ========= =========
-------------------------------------------------------------------
FISCAL YEARS ENDED
-------------------------------------------------------------------
DEC 28, DEC 29, DEC 30, DEC 31, DEC 26,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(in thousands)
BALANCE SHEET DATA:
Working capital (deficit) $ 7,849 $ 2,617 $(4,931) $(23,114) $(11,031)
Total assets 464,542 389,309 352,456 295,381 237,118
Debt, net of current installments -- -- 10,000 51,000 40,000
Obligations under capital leases,
net of current installments 27,462 22,406 20,867 20,925 9,732
Minority interest 1,371 1,411 1,329 1,469 3,982
Total shareholders' equity 352,055 300,132 256,530 167,257 137,584
The Company’s revenues are derived primarily from restaurant sales from Company-owned LongHorn Steakhouse, The Capital Grille, and Bugaboo Creek Steak House restaurants. The Company also derives a small percentage of its total revenue from two Company-owned specialty restaurants and franchise revenues from three franchised LongHorn Steakhouse restaurants. Cost of restaurant sales consists of food and beverage costs for all restaurants other than the three franchised LongHorn Steakhouse restaurants. Operating expenses – restaurants consist of other costs incurred by the Company to operate its restaurants, including the cost of labor, advertising, operating supplies, rent, and utilities. Depreciation and amortization restaurants includes the depreciation attributable to restaurant-level capital expenditures. The depreciation and amortization relating to non-restaurant level capital expenditures is included in general and administrative expenses.
Preopening costs include direct and incremental costs such as payroll, food and beverage costs, and trainer payroll and travel expenses incurred prior to opening of new restaurants. General and administrative expenses include restaurant supervision expenses, accounting, finance, management information systems and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Interest expense, net includes interest on capital lease obligations and amortization of loan issue costs partially offset by capitalized construction period interest and interest income. Minority interest consists of the partner’s 50% share of earnings in the three LongHorn Steakhouse restaurants that are operated as joint venture restaurants.
The Company’s management believes in the importance of building incremental top line sales at each restaurant to support the longer-term profitability of the Company. The change in year-over-year sales for the comparable restaurant base is referred to as “same store sales.” The Company defines the comparable restaurant base to include those restaurants open for a full 18 months prior to the beginning of each fiscal quarter. Same store sales increases can be generated by an increase in guest traffic counts (“guest counts”) or by increases in guest average check amount (“average check”). The average check can be affected by menu price changes and the mix of menu items sold (“menu mix”). The Company gathers sales data daily and regularly analyzes the guest counts and menu mix for each concept to assist in developing menu pricing, product offering and promotion strategies. Management believes that increases in guest counts are an indication of the long-term health of a concept, while increases in average check and menu mix contribute more significantly to current period profitability. The Company works to balance the pricing and product offerings with other initiatives to achieve the long-term goal of sustainable increases in same store sales.
Average weekly sales are defined as total restaurant sales divided by restaurant weeks. A “restaurant week” is one week during which a single restaurant is open, so that two restaurants open during the same week constitutes two restaurant weeks. Growth in average weekly sales includes the effect of newer restaurants that are not yet included in the same store sales base. Growth in average weekly sales in excess of growth in same store sales is generally an indication that newer restaurants are operating with sales levels in excess of the system average. Conversely, growth in average weekly sales less than growth in same store sales is generally an indication that newer restaurants are operating with sales levels lower than the system average. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normalized sales volumes and then to experience a drop off in sales after initial customer trials.
The incremental sales generated as a result of increases in same store sales make a significant contribution to the Company’s profitability. Many restaurant level expenses are relatively fixed in nature and do not increase at the same rate as same store sales increases. With sales increasing and certain restaurant-level expenses staying fixed or semi-variable (rising more slowly than incremental sales), the incremental sales measured by these same store sales increases should be the Company’s most profitable. When new restaurants are opened, there are preopening costs and certain relatively fixed costs including expense items such as management labor, rent and depreciation that must be absorbed. Additionally, it generally takes some period of time after opening before restaurant margins normalize. Accordingly, the sales at newly opened restaurants do not make a significant contribution to profitability in their initial months of operation.
The Company’s revenues and expenses can be affected significantly by the number and timing of the opening of additional restaurants. For instance, preopening expenses for any particular period may reflect expenses associated with restaurants to be opened in future periods, in addition to those restaurants opened during the current period. The timing of restaurant openings also can affect the average weekly sales and other period-to-period comparisons.
The following table sets forth the percentage relationship to total revenues of the listed items included in the Company’s consolidated statements of operations, except as indicated:
FISCAL YEARS ENDED
-------------------------------------------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 30,
2003 2002 2001
Revenues: -------------------------------------------------------------------------
Restaurant sales:
LongHorn Steakhouse 71.6% 71.3% 70.5%
The Capital Grille 15.0 15.2 15.3
Bugaboo Creek Steak House 12.2 12.2 12.8
Other restaurants 1.1 1.2 1.4
------ ------ ------
Total restaurant sales 99.9 99.9 99.9
Franchise revenues 0.1 0.1 0.1
------ ------ ------
Total revenues 100.0 100.0 100.0
Costs and expenses:
Cost of restaurant sales(1) 36.0 36.1 36.5
Operating expenses--restaurants(1) 43.9 44.0 43.9
Provision for asset impairments,
restaurant closings, and other charges -- 0.1 0.5
Depreciation and amortization--restaurants(1) 3.9 4.1 4.1
Pre-opening expense - restaurants(1) 0.8 0.7 0.7
General and administrative expenses 6.0 6.0 6.1
------ ------ ------
Total costs and expenses 90.6 90.9 91.8
------ ------ ------
Operating income 9.4 9.1 8.2
Interest expense, net 0.1 0.3 0.4
Early termination of interest rate swap agreement -- 0.3 0.2
Minority interest -- 0.1 0.1
------ ------ ------
Earnings before income taxes 9.2 8.5 7.4
Income tax expense 3.0 2.7 2.4
------ ------ ------
Net earnings 6.2% 5.7% 5.0%
====== ====== ======
(1)
Cost of restaurant sales, restaurant operating expenses, depreciation and amortization and
pre-opening expense are
expressed as a percentage of total restaurant sales.
Year Ended December 28, 2003 Compared to Year Ended December 29, 2002
Total revenues increased 16.5% to $680.8 million for 2003, compared to $584.5 million for 2002.
Sales in the LongHorn Steakhouse restaurants increased 16.9% to $487.2 million for 2003, compared to $416.9 million for 2002. The increase reflects a 9.8% increase in restaurant operating weeks in 2003 as compared to 2002, resulting from an increase in the restaurant base from 170 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2002 to 187 restaurants at the end of 2003. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2003 were $52,570, a 6.4% increase over 2002. Same store sales for LongHorn Steakhouse restaurants increased 4.6% in 2003 as compared to 2002. The increase in same store sales for 2003 at LongHorn Steakhouse was attributable to an increase in guest counts of approximately 2.5% and the remainder was due to an increase in average check. Management believes a number of factors have contributed to the increased guest counts including a more effective use of media advertising resulting from the concentration of restaurants; menu evolution with more appealing menu offerings; and improved restaurant-level execution; all of which work together to provide a better overall customer experience.
Sales in The Capital Grille restaurants increased 15.5% to $102.4 million for 2003, compared to $88.6 million for 2002. The increase reflects a 5.3 % increase in restaurant operating weeks in 2003 as compared to 2002, resulting from the two new The Capital Grille restaurants opened during 2003, bringing the total The Capital Grille restaurants in operation to 17. Average weekly sales for The Capital Grille restaurants in 2003 were $124,743, a 9.8 % increase from 2002. Same store sales for The Capital Grille restaurants increased 10.9% in 2003, as compared to 2002. The increase in comparable restaurant sales at The Capital Grille restaurants is primarily attributable to an increase in guest counts, which management believes was driven principally by better execution at the restaurant level.
During 2003, average weekly sales increased at a rate slightly less than the increase in same store sales. The Capital Grille restaurants have historically opened at lower sales volumes and not experienced the drop off in sales after an initial honeymoon period commonly characteristic in casual dining restaurant concepts. Accordingly, sales volumes at the Company’s two new The Capital Grille restaurants opened during 2003 had the impact of reducing average weekly sales for the overall concept.
Sales in the Bugaboo Creek Steak House restaurants increased 17.0% to $83.3 million for 2003, compared to $71.2 million for 2002. The increase reflects a 15.4% increase in restaurant weeks in 2003 as compared to 2002, resulting from an increase in the restaurant base from 22 Bugaboo Creek Steak House restaurants at the end of 2002 to 25 restaurants at the end of 2003. Average weekly sales for the Bugaboo Creek Steak House restaurants in 2003 were $69,553, a 1.4% increase from 2002. Same store sales for the Bugaboo Creek Steak House restaurants increased 2.6% in 2003, as compared to 2002. The increase in same store sales at Bugaboo Creek Steak House restaurants is attributable to an increase in average check offset by a slight decrease in guest counts. During 2003, average weekly sales increased at a rate slightly less than the increase in same store sales due to lower average weekly sales at restaurants opened in new competitive markets.
The Company has a franchisee that operates three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $374,000 and $345,000 in franchise revenue in 2003 and 2002, respectively. Franchise revenue is computed based on a fixed percentage of the franchisee’s sales; therefore, the increase in 2003 franchise revenue over the prior year was due to the 8.7% increase in same store sales for the Company’s franchised restaurants.
Cost of restaurant sales, as a percentage of total restaurant sales, decreased to 36.0 % in 2003 from 36.1% in 2002. Contract pricing on certain protein and other products during 2003 was favorable as compared to the prior year. However, cost of sales increased in the second half of 2003 as compared to the prior year due to i) increases in the beef costs for certain contracts as they were renewed and ii) higher prices on beef purchases made when sales growth exceeded contracted quantities.
Restaurant operating expenses decreased as a percentage of total restaurant sales in 2003 to 43.9%, from 44.0% in 2002. The increased average weekly sales rate in 2003 leveraged fixed and semi-variable expenses (principally management labor and rent) as a percentage of total restaurant sales. The leveraging of these fixed expenses was partially offset by an increase in advertising spending, credit card fees and utility costs as a percentage of total restaurant sales. Advertising increased by approximately 0.3% of total restaurant sales but was within the Company’s historical targeted spending range of 2.8% to 3.2% of total restaurant sales. Increased credit card usage by customers caused credit card processing fees to increase by 0.1% as a percentage of total restaurant sales. Additionally, utilities expenses increased by approximately 9.5% per operating week in 2003 as compared to 2002 principally due to rate increases, resulting in a 0.1% increase as a percentage of total restaurant sales.
Depreciation and amortization – restaurants increased to $26.5 million in 2003, from $23.9 million in 2002, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants. The amount of depreciation expense per operating week was approximately the same in 2003 as it was in 2002.
Pre-opening expense increased to $5.8 million or 0.8% of total restaurant sales in 2003 from $3.8 million or 0.7% of total restaurant sales in 2002. This increase was the result of the Company opening a total of 26 new restaurants in 2003 as compared to opening 20 restaurants in 2002. The amount of pre-opening expense per new restaurant in 2003 was approximately equal to preopening expense per new restaurant in 2002.
General and administrative expenses increased to $40.5 million in 2003, from $34.9 million in 2002, but remained flat at 6.0% as a percent of total revenue in 2003 and 2002. The increased amounts expensed in 2003 were primarily compensation related, associated with increased bonuses, payroll and other costs of building the infrastructure necessary to support the Company’s growth.
Interest expense, net decreased to $1.0 million in 2003, from $1.7 million in 2002. The decrease in interest expense, net was due to lower average borrowings under the Company’s revolving credit facility and increased interest income earned as the balances of cash and short-term investments increased in 2003 as compared to 2002.
Minority interest decreased to $300,000 in 2003, from $448,000 in 2002. This reflects a decrease in the average number of joint venture restaurants in 2003 compared to 2002 resulting primarily from the purchase of the joint venture partner’s interest in two restaurants during 2003 and seven joint venture restaurants during 2002. The Company currently has three joint venture LongHorn Steakhouse restaurants remaining.
Income tax expense in 2003 was 32.5% of earnings before income taxes. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.
Net income of $42.3 million in 2003, as compared to net income of $33.4 million in 2002, reflects the net effect of the items discussed above.
Year Ended December 29, 2002 Compared to Year Ended December 30, 2001
Total revenues increased 12.3% to $584.5 million for 2002, compared to $520.3 million for 2001.
Sales in the LongHorn Steakhouse restaurants increased 13.8% to $416.9 million for 2002, compared to $366.5 million for 2001. The increase reflects a 10.2% increase in restaurant operating weeks in 2002 as compared to 2001, resulting from an increase in the restaurant base from 154 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2001 to 170 restaurants at the end of 2002. Average weekly sales for all company-owned and joint venture LongHorn Steakhouse restaurants in 2002 were $49,392, a 3.2% increase over 2001. Sales for the comparable LongHorn Steakhouse restaurants increased 2.7% in 2002 as compared to 2001. The increase in comparable restaurant sales for 2002 at LongHorn Steakhouse was attributable to an increase in average check and guest counts.
Sales in The Capital Grille restaurants increased 10.6% to $88.6 million for 2002, compared to $80.1 million for 2001. The increase reflects a 5.3% increase in restaurant operating weeks in 2002 as compared to 2001, resulting from the full-year 2002 impact of the three The Capital Grille restaurants that opened in 2001. Average weekly sales for all The Capital Grille restaurants in 2002 were $113,637, a 5.1% increase from 2001. Sales for the comparable The Capital Grille restaurants increased 4.9% in 2002, as compared to 2001. The increase in comparable restaurant sales at The Capital Grille restaurants is attributable primarily to an increase in guest counts.
Sales in the Bugaboo Creek Steak House restaurants increased 7.7% to $71.2 million for 2002, compared to $66.1 million for 2001. The increase reflects a 7.7% increase in restaurant weeks in 2002 as compared to 2001, resulting from an increase in the restaurant base from 19 Bugaboo Creek Steak House restaurants at the end of 2001 to 22 restaurants at the end of 2002. Average weekly sales for all Bugaboo Creek Steak House restaurants in 2002 were $68,609, a 2.5% increase from 2001. Sales for the comparable Bugaboo Creek Steak House restaurants increased 1.9% in 2002, as compared to 2001. The increase in comparable restaurant sales at Bugaboo Creek Steak House restaurants is attributable primarily to an increase in average check.
The Company’s franchise revenue increased to $345,000 in 2002 from $328,000 in 2001 due to a 5.2% increase in same store sales for the Company’s three franchised LongHorn Steakhouse restaurants.
Cost of restaurant sales, as a percentage of restaurant sales, decreased to 36.1% in 2002 from 36.5% in 2001. Contract pricing on certain protein and other products during 2002 were favorable as compared to the prior year.
Restaurant operating expenses increased as a percentage of restaurant sales in 2002 to 44.0%, from 43.9% in 2001. This was due to an increase in restaurant management and hourly labor as a percentage of restaurant sales, partially offset by greater sales leverage of fixed and semi-fixed expenses (principally advertising and rent).
The provision for asset impairments, restaurant closings, and other charges of $495,000 in 2002 consisted of the write down of one LongHorn Steakhouse restaurant. The amount of the charge was determined under SFAS No. 144 by comparing discounted future cash flows to the carrying value of impaired assets.
Depreciation and amortization – restaurants increased to $23.9 million in 2002, from $21.2 million in 2001, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants.
Pre-opening expense remained flat at $3.8 million or 0.7% of total restaurant sales in both 2002 and 2001. The amounts charged to pre-opening expense in any year are dependent upon the number of restaurants opened and the restaurant concept.
General and administrative expenses increased to $34.9 million in 2002, from $31.7 million in 2001, but decreased as a percent of total revenues to 6.0% in 2002 from 6.1% in 2001. The increased costs in 2002 were primarily compensation related, associated with increased accruals for management bonuses, payroll and the cost of building the infrastructure necessary to support the Company’s growth. General and administrative expenses, as a percent of total revenues, decreased principally due to greater leverage of fixed and semi-fixed expenses resulting from increased sales at existing restaurants and new restaurants.
Interest expense, net decreased to $1.7 million in 2002, from $2.1 million in 2001. The decrease in interest expense, net is due to the repayment of amounts outstanding under the Company’s revolving credit facility and an increase in interest income in 2002.
Concurrent with amending and restating the Company’s $100.0 million revolving credit agreement, the Company repaid all amounts outstanding under the credit agreement and terminated an associated interest rate swap agreement that had been accounted for as a hedge. The Company paid $1,540,000 resulting in an after-tax expense of $961,000 associated with terminating the interest rate swap agreement. The repayment of amounts outstanding under the credit agreement combined with the termination of the associated hedge created an ineffective hedge relationship, which resulted in the $1,540,000 charge to earnings in 2002.
Minority interest decreased to $448,000 in 2002, from $639,000 in 2001. This reflects a decrease in the number of joint venture restaurants in 2002 compared to 2001 resulting primarily from the purchase of the joint venture partner’s interest in seven restaurants during 2002 and one joint venture restaurant during 2001.
Income tax expense in 2002 was 32.3% of earnings before income taxes. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.
Net income of $33.4 million in 2002, as compared to net income of $26.2 million in 2001, reflects the net effect of the items discussed above.
The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. The Company’s principal financing sources in 2003 were cash flow from operations ($84.7 million), and proceeds from the exercise of employee stock options ($7.1 million). The primary uses of funds consisted of costs associated with expansion, principally leasehold improvements, equipment, land and buildings associated with the construction of new restaurants ($76.9 million) and the purchase of short-term investments ($6.3 million).
Since substantially all sales in the Company’s restaurants are for cash or credit card receipts, which are generally settled in three days, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital.
The increases in accounts receivable, inventory, prepaid expenses, accounts payable and accrued expenses are principally due to the new restaurants which were opened during 2003 and the result of generally higher average unit volumes experienced during 2003. Further increases in current asset and liability accounts are expected as the Company continues its restaurant development program.
Due to the relatively short time period (less than 30 days) between the ordering of inventories, preparation for sale, collection of payment and subsequent payment for inventories, there are no material changes in the underlying drivers of cash flows that are not clearly identifiable in the Company’s consolidated statement of cash flows.
The Company has a revolving credit facility, which allows the Company to borrow up to $100.0 million through its maturity in November 2007. The terms of the revolving credit facility, as amended, require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 1.25% to 1.75% (depending on the Company’s leverage ratio) or the administrative agent’s prime rate of interest, at the Company’s option, and pay a commitment fee of 0.3% to 0.4% (depending on the Company’s leverage-ratio) per year on any unused portion of the facility. No amounts were outstanding, and $100.0 million was available, under the Company’s revolving credit agreement on December 28, 2003. As of December 28, 2003, terms of the revolving credit facility provide for interest to be accrued at LIBOR plus 1.25% or the prime rate and payment of the commitment fee at a rate of 0.30% per year on any unused portion of the facility.
The revolving credit facility contains various covenants and restrictions which, among other things, require the maintenance of stipulated leverage and fixed charge coverage ratios and minimum consolidated net worth, as defined, and also limit additional indebtedness in excess of specified amounts. The Company is currently in compliance with such covenants.
The Company currently plans to open 23 or 24 LongHorn Steakhouse restaurants, three or four Bugaboo Creek Steak House restaurants and two or three The Capital Grille restaurants in 2004. The Company estimates that its capital expenditures will be approximately $83 to $88 million in 2004. The capital expenditure estimate for 2004 includes the estimated cost of developing 28 to 31 new restaurants, ongoing refurbishment in existing restaurants, costs associated with obtaining real estate for year 2005 planned openings and continued investment in improved management information systems.
In September 2001, the Company’s Board of Directors authorized the Company to use up to $15.0 million to purchase shares of its common stock through open market transactions, block purchases or in privately negotiated transactions. In July 2002, the Board of Directors extended this program through April 2003. During the first quarter of 2003, the Company purchased 150,000 shares of its common stock under this program for a total purchase price of $2.625 million (average price of $17.50 per share). In July 2003, the Company’s Board of Directors authorized the Company to use up to $25.0 million to purchase shares of its common stock from time to time through May 2005. No purchases have been made under this program.
The Company expects that available borrowings under the Company’s revolving credit facility, together with cash on hand and cash provided by operating activities, will provide sufficient funds to finance its expansion and share repurchase plans through the year 2006.
Revenues. The Company plans to grow revenues by opening additional restaurants and by increasing average unit volumes at both existing and new restaurants. The Company's new restaurant development plans for 2004 are summarized in the section entitled "LIQUIDITY AND CAPITAL RESOURCES". Based upon current economic conditions and the Company's business trends, the Company is targeting same store sales growth in 2004 of 3% to 4% for all three concepts, compared with 2003. The Company anticipates that this same store sales increase will be comprised of an approximate 2% to 3% increase in average check and 1% to 2% increase in guest counts. New restaurant development and the targeted same store sales growth are expected to result in an increase in total revenue of approximately 17% to 18%.
Cost of restaurant sales. The Company is anticipating increased commodity prices in 2004 based primarily on higher protein pricing particularly with respect to beef. The Company is under fixed price contracts with its primary suppliers for the majority of its anticipated usage of protein products in 2004; however, the Company pays market prices for other products such as produce and fresh seafood and for any protein purchases in excess of contracted amounts. Based on the fixed prices negotiated for its protein products partially offset by current and anticipated menu price increases, the Company expects its costs of goods sold as a percentage of total restaurant sales to increase by 0.6% to 0.7% in 2004 as compared with 2003.
Operating expenses – restaurants. For the last several years, the Company has experienced wage rate pressure for both restaurant management and hourly positions, resulting from a tight labor market for skilled positions in the restaurant industry. Based upon labor market conditions that exist today, the Company expects this trend to continue in 2004. In addition, the Company expects that both (i) an increase in the cost of employee health insurance coverage and (ii) an increase in unemployment insurance expense will contribute to upward pressure on overall labor costs as a percentage of total restaurant sales. The Company’s targeted growth in same store sales of 3% to 4%, if achieved, will greatly mitigate these cost pressures resulting in a slight amount of leveraging of operating expenses as a percentage of total restaurant sales.
Pre-opening expense. Pre-opening costs are expensed as incurred and are expected to approximate $190,000 for each LongHorn Steakhouse restaurant, $200,000 for each Bugaboo Creek Steak House restaurant, and $375,000 for each The Capital Grille restaurant. Restaurant pre-opening expenses may vary materially from period to period depending on when restaurants open. As a result of the planned opening of more new restaurants in 2004, as compared to 2003, the Company anticipates that pre-opening expenses will be higher in 2004 by approximately $800,000 to $1,100,000.
Depreciation and amortization – restaurants. The Company expects depreciation to increase as it invests in the development of new restaurants, the ongoing refurbishment in existing restaurants, and due to the full-year effect of the installation of a new point of sale system in all existing restaurants during 2003. Due to greater leverage of this fixed expense resulting from expected average weekly sales increases in 2004, the Company expects depreciation and amortization to decrease slightly as a percentage of restaurant sales.
General and administrative expenses. To support the Company’s expected increase in the number of new restaurants in 2004, the Company plans to increase total general and administrative expenses by approximately 16% to 17%, compared with 2003. This percentage growth in general and administrative expense is expected to be slightly less than the percentage growth in revenue causing this expense category to decrease slightly as a percentage of total revenue in 2004 as compared to 2003.
Interest expense, net. The Company does not plan to have any amounts outstanding under its revolving credit facility during 2004. However, due to the addition of capital leases during 2003 and 2004 the Company expects net interest expense to increase in 2004 compared with 2003 by approximately $200,000 to $300,000.
Income tax expense. The Company expects its effective income tax rate for 2004 to be approximately 33.25% of earnings before income taxes. In years subsequent to 2004, the company expects its effective income tax rate to increase slightly each year.
Earnings per share. Based upon the net effect of the items discussed above, the Company expects 2004 diluted earnings per common share in a range of $1.36 to $1.38.
The preceding discussion of liquidity and capital resources and outlook for future operating results contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large restaurant base; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation affecting the restaurant industry; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks set forth in Exhibit 99(a) to this Form 10-K which are hereby incorporated by reference and other risks identified from time to time in the Company’s SEC reports, registration statements and public announcements. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
The Company has not entered into any transactions with unconsolidated entities, that are financial guarantees, retained or contingent interests in transferred assets, derivative instruments, or obligations arising out of a variable interest entity that provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company and that have a material current effect, or that are reasonably likely to have a material future effect, on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The table below summarizes the Company’s significant contractual obligations, by maturity, as of December 28, 2003 (in thousands):
LESS
THAN 1 1 - 3 4 - 5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
Bank revolving credit facility $ -- $ -- $ -- $ -- $ --
Capital lease obligations 63,203 2,593 5,403 5,632 49,575
Operating leases 118,963 17,228 30,776 23,858 47,101
Purchase obligations 21,544 21,544 -- -- --
-------- ------- ------- ------- -------
Total contractual cash obligations $203,710 $41,365 $36,179 $29,490 $96,676
======== ======= ======= ======= =======
Management believes that inflation has not had a material effect on earnings during the past several years. Inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company’s restaurant operating margins. In the past, however, the Company generally has been able to modify its operations and increase menu prices to