Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the quarterly period ended April 19, 2009
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or
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o
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TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period from
to
Commission File Number: 0-49916
RED ROBIN GOURMET BURGERS,
INC.
(Exact name of
registrant as specified in its charter)
Delaware
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84-1573084
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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6312 S. Fiddlers Green
Circle, Suite 200N
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Greenwood Village, CO
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80111
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(Address
of principal executive offices)
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(Zip
Code)
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(303) 846-6000
(Registrants
telephone number, including area code)
(Former name,
former address and former fiscal year, if changed since last report)
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
o
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer, and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting
company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
Class
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Outstanding at May 19, 2009
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Common Stock, $0.001 par value per share
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15,526,207 shares
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Table of Contents
PART I FINANCIAL INFORMATION
Item 1.
Financial Statements
RED ROBIN GOURMET BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(Unaudited)
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April 19,
2009
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December 28,
2008
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Assets:
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Current Assets:
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Cash and cash equivalents
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$
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8,607
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$
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11,158
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Accounts receivable, net
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6,988
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5,611
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Inventories
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13,647
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13,123
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Prepaid expenses and other current assets
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5,825
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9,032
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Income tax receivable
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4,009
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6,208
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Deferred tax asset
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3,771
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3,366
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Restricted current assetsmarketing funds
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1,153
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1,590
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Total current assets
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44,000
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50,088
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Property and equipment, net
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443,545
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442,012
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Goodwill
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61,769
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60,982
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Intangible assets, net
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51,250
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51,990
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Other assets, net
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4,368
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4,665
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Total assets
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$
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604,932
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$
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609,737
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Liabilities and Stockholders Equity:
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Current Liabilities:
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Trade accounts payable
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$
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9,461
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$
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11,966
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Construction related payables
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7,030
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9,747
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Accrued payroll and payroll related liabilities
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26,829
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25,489
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Unredeemed gift certificates
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8,619
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11,997
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Accrued liabilities
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19,963
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20,385
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Accrued liabilitiesmarketing funds
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1,153
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1,590
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Current portion of term loan notes payable
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16,865
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10,313
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Current portion of long-term debt and capital lease obligations
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608
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696
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Total current liabilities
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90,528
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92,183
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Deferred rent
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28,555
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26,790
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Long-term portion of term loan notes payable
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113,324
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122,687
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Other long-term debt and capital lease obligations
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88,056
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88,876
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Other non-current liabilities
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10,220
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10,293
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Total liabilities
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330,683
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340,829
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Stockholders Equity:
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Common stock; $0.001 par value: 30,000,000 shares authorized; 17,018,503
and 16,954,205 shares issued; 15,526,223 and 15,461,925 shares outstanding
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17
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17
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Preferred stock, $0.001 par value: 3,000,000 shares authorized; no
shares issued and outstanding
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Treasury stock, 1,492,280 shares, at cost
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(50,125
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)
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(50,125
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)
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Paid-in capital
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167,386
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165,932
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Accumulated other comprehensive loss, net of tax
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(1,580
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)
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(1,622
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)
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Retained earnings
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158,551
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154,706
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Total stockholders equity
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274,249
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268,908
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Total liabilities and stockholders equity
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$
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604,932
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$
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609,737
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See notes to
condensed consolidated financial statements.
3
Table of Contents
RED ROBIN GOURMET BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands,
except per share data)
(Unaudited)
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Sixteen Weeks Ended
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April 19,
2009
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April 20,
2008
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Revenues:
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Restaurant revenue
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$
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266,595
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$
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250,902
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Franchise and royalty fees
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4,152
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4,634
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Rent revenue
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66
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57
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Total revenues
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270,813
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255,593
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Costs and expenses:
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Restaurant operating costs:
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Cost of sales
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65,283
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59,348
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Labor (includes $986 and $355 of stock-based compensation,
respectively)
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92,271
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85,139
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Operating
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43,018
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42,506
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Occupancy
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18,908
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16,002
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Depreciation and amortization
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17,637
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14,849
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General and administrative (includes $3,727 and $1,473 of stock-based
compensation, respectively)
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23,872
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22,475
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Pre-opening costs
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2,550
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2,563
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Total costs and expenses
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263,539
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242,882
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Income from operations
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7,274
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12,711
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Other expense:
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Interest expense, net
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2,114
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2,296
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Other
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10
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13
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Total other expenses
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2,124
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2,309
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Income before income taxes
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5,150
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10,402
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Provision for income taxes
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1,305
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3,149
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Net income
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$
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3,845
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$
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7,253
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Earnings per share:
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Basic
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$
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0.25
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$
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0.43
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Diluted
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$
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0.25
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$
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0.43
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Weighted average shares outstanding:
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Basic
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15,356
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16,736
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Diluted
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15,432
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16,946
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See notes to
condensed consolidated financial statements.
4
Table of Contents
RED ROBIN GOURMET BURGERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Sixteen Weeks Ended
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April 19,
2009
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April 20,
2008
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Cash Flows From Operating Activities:
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Net income
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$
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3,845
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$
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7,253
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Adjustments to reconcile net income to net cash provided by operating
activities:
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Depreciation and amortization
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17,637
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14,849
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Stock-based compensation expense
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4,713
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1,828
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Restaurant closure costs
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586
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Other, net
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(292
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)
|
82
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Changes in operating assets and liabilities
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(701
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)
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3,884
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Cash provided by operating activities
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25,788
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27,896
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Cash Flows From Investing Activities:
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Changes in marketing fund restricted cash
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26
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Acquisition of franchise restaurants, net of cash acquired of $0 and
$21,respectively
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(1,247
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)
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(1,097
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)
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Purchases of property and equipment
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(20,906
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)
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(23,627
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)
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Cash used in investing activities
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(22,153
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)
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(24,698
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)
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Cash Flows From Financing Activities:
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Borrowings of long-term debt
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54,000
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15,000
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Payments of long-term debt
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(56,919
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)
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(14,812
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)
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Payment for tender offer for stock options
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(3,498
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)
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Proceeds from exercise of stock options and employee stock purchase
plan
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338
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773
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Excess tax benefit related to exercise of stock options
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54
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|
128
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Payments of other debt and capital lease obligations
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(161
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)
|
(173
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)
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Cash provided (used) by financing activities
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(6,186
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)
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916
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|
|
|
|
|
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Net change in cash and cash equivalents
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|
(2,551
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)
|
4,114
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|
Cash and cash equivalents, beginning of period
|
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11,158
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|
12,914
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Cash and cash equivalents, end of period
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$
|
8,607
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$
|
17,028
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|
|
|
|
|
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|
Supplemental Disclosure of Cash Flow Information:
|
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|
|
|
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Income taxes paid
|
|
$
|
198
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$
|
90
|
|
Interest paid, net of amounts capitalized
|
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1,832
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|
2,273
|
|
|
|
|
|
|
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Supplemental Disclosure of Non-Cash Items:
|
|
|
|
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Capital lease obligations incurred for equipment purchases
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156
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Unrealized gain (loss) on cash flow hedge, net of tax
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(1,580
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)
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684
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|
See notes to condensed
consolidated financial statements.
5
Table of Contents
RED ROBIN
GOURMET BURGERS, INC. AND SUBSIDIARIES
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation and Recent
Accounting Pronouncements
Red Robin Gourmet Burgers, Inc. (Red Robin
or the Company), a Delaware corporation, develops and operates casual-dining
restaurants. At April 19, 2009, the Company operated 298 company-owned
restaurants located in 31 states. The Company also has franchises. As of April 19, 2009, there were 130
franchised-owned restaurants in 21 states and two Canadian provinces. The Company currently does not sell new
franchises, but does grant new territory to current franchisees from time to
time. The Company operates its business as one reportable segment.
Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements include the accounts of Red Robin and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation. The Companys financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with GAAP 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. Some of the more significant estimates
included in the preparation of these financial statements pertain to
recoverability of long-lived assets, fixed asset lives, recoverability of
goodwill, estimated useful lives of other intangible assets, bonus accruals,
self-insurance liabilities, stock-based compensation expense, legal
contingencies, fair value of assets acquired in a business combination and
income taxes. Actual results could differ from those estimates. The results of
operations for any interim period are not necessarily indicative of results for
the full year.
The accompanying condensed consolidated financial
statements of Red Robin have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in the Companys
annual consolidated financial statements on Form 10-K have been condensed
or omitted. The condensed consolidated balance sheet as of December 28, 2008
has been derived from the audited consolidated financial statements as of that
date, but does not include all disclosures required by generally accepted
accounting principles. For further information, please refer to and read these
interim condensed consolidated financial statements in conjunction with the
Companys audited consolidated financial statements included in the Companys
annual report on Form 10-K for the year ended December 28, 2008.
The Companys quarter which
ended April 19, 2009, is referred to as first quarter 2009, or the sixteen
weeks ended April 19, 2009; the first quarter ended April 20, 2008,
is referred to as first quarter 2008, or the sixteen weeks ended April 20,
2008.
Reclassifications
Certain
reclassifications have been made to prior year amounts in the condensed
consolidated statements of cash flows to conform to the current year
presentation to reflect the gross borrowings and repayments of long-term debt.
Recent Accounting Pronouncements
In April 2009,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Nos. 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial
Instruments,
(FSP
FAS 107-1). FSP FAS 107-1 amends Statement of Accounting Standards (SFAS)
No. 107,
Disclosures about Fair Value
of Financial Instruments
, and APB No. 28,
Interim
Financial Reporting
. FSP FAS
107-1 requires fair value disclosures on an interim basis for financial
instruments that are not reflected in the condensed consolidated balance sheets
at fair value. Prior to the issuance of FSP FAS 107-1, the fair values of
those financial instruments were only disclosed on an annual basis. FSP
FAS 107-1 is effective for interim reporting periods that end after June 15,
2009 (the Companys second quarter). The Company does not expect the
adoption of FSP FAS 107-1 to have a material impact on its consolidated
financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
,
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under
SFAS 141R and other Generally Accepted Accounting Principles (GAAP). The
requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure
requirements must be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years.
6
Table of Contents
The
adoption of FSP 142-3 at the beginning of fiscal 2009 did not have a material
impact on the Companys consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, (SFAS 161). SFAS 161 provides companies with
requirements for enhanced disclosures about derivative instruments and hedging
activities to enable investors to better understand their effects on a companys
financial position, financial performance and cash flows. These requirements
include the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. The Company adopted SFAS 161 at the
beginning of fiscal 2009.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations,
(SFAS 141R). SFAS 141R provides companies with principles and
requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. SFAS 141R also
requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. SFAS 141R is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. Accordingly, beginning in fiscal 2009, the
Company will record and disclose material business combinations under the
revised standard.
In December 2007, the FASB issued SFAS No. 160
, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
, (SFAS 160).
SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. The Company adopted SFAS 160 at the beginning of
fiscal 2009. The adoption of
SFAS 160 did not impact the Companys consolidated financial statements.
2.
Acquisition
of Red Robin Franchised Restaurants
During the second quarter 2008, the Company completed its acquisitions
of 15 existing Red Robin
®
franchised restaurants from three franchisees
for a combined purchase price of $30.0 million. The purchase price was
paid in cash, funded primarily through borrowings under the Companys credit
facility. In addition, on April 15, 2008, the Company completed the
purchase of an entity that owned a Red Robin
®
franchise
restaurant that was under construction in Eau Claire, Wisconsin, (Eau Claire)
which was then opened by the Company on May 5, 2008. The Company acquired
the outstanding stock of the entity in exchange for $247,000 in cash and the
assumption of indebtedness in the amount of approximately $850,000. In addition
to the above-described acquisitions of existing restaurants, the Company gained
access to development rights where these restaurants are locatedterritories
that were formerly subject to exclusivity provisions in the former area
development agreements with the selling franchisees. The financial results of
all 15 restaurants have been included in the Companys financial results from
their acquisition dates forward.
The acquisition of the 16 restaurants was accounted for using the
purchase method as defined in SFAS No. 141,
Business Combinations,
(SFAS 141). Based on a total
purchase price of $30.0 million, net of a $451,000 charge related to the
purchase of the restaurants, and the Companys estimates of the fair value of
net assets acquired, $4.7 million of goodwill was generated by the
acquisition, which is not amortizable for book purposes but is amortizable and
deductible for tax purposes. As a result
of the acquisition of the 16 restaurants, the Company incurred a total charge
in the second quarter of 2008 of $451,000, of which $402,000 is related to
avoided franchise fees.
Managed Restaurant
On December 31, 2008, the Company completed the acquisition of a
restaurant location owned by Morite of California that the Company had operated
under a management services agreement. The Company paid approximately $1.4
million for this restaurant location.
The Company had assumed management of the restaurant effective June 18,
2007. Under the terms of the management services agreement, the Company had
assumed all operating responsibilities of this restaurant in exchange for a
management fee equal to all the revenues from this restaurant. In accordance
with FASB Interpretation No. 46 (Revised December 2003)
Consolidation of Variable Interest Entities
,
management determined that the Company was the primary beneficiary of the
operations of this restaurant and therefore has consolidated its results of
operations with the Companys results since June 18, 2007, the date of the
management services agreement.
Pro Forma Results (unaudited)
The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the 2008
acquisition of the 15 existing Red Robin
®
franchised
restaurants occurred at the beginning of the period
presented as required by SFAS 141. The pro forma financial information is
presented for informational purposes only and is
7
Table of Contents
not indicative of the results of operations
that
would have been achieved if the acquisition had
taken place at the beginning of the period presented, nor is it indicative of
future operating results.
|
|
Sixteen Weeks
Ended
|
|
(In thousands, except per share data)
|
|
April 20, 2008
|
|
Revenue
|
|
$
|
267,786
|
|
Net income
|
|
7,945
|
|
Basic EPS
|
|
0.47
|
|
Diluted EPS
|
|
0.47
|
|
|
|
|
|
|
3.
Restaurant Closures
The Company closed four restaurants during the first quarter of 2009.
This decision was the result of an initiative to identify those restaurants,
new or aged, that are in declining trade areas, performing below acceptable
profitability levels and/or require significant capital expenditures. The
locations selected for closure represented older restaurants whose leases were
not extended, or were in need of significant capital improvement that are not
projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of
approximately $586,000 during the first quarter of 2009 related to lease
termination costs based on estimated remaining lease obligations, net of
estimated sublease income, and other closing related costs. This charge was recorded in the Companys
condensed consolidated statements of income as general and administrative
expense.
4.
Cash Tender Offer
On February 11, 2009, the Company completed a cash tender offer
for out-of-the-money stock options held by approximately 514 current employees
and officers. The stock options eligible for tender were granted prior to December 31,
2008 with an exercise price at or above $32.00 per share. Pursuant to the terms
of the tender offer, eligible employees who elected to participate were
required to tender all of their eligible options. As a result of the tender offer, the Company
incurred a one-time charge of approximately $4.0 million for all unvested
eligible options that were tendered. This charge is reflected in the first
quarter 2009 financial results and represents the compensation expense related
to the acceleration of vesting on the unvested options tendered in the offer,
which would otherwise have been expensed over their vesting period in the
future if they had not been tendered. The Company paid $3.5 million for
the approximate 1.6 million options tendered in the offer.
5.
Stock-Based Compensation
During the sixteen weeks ended April 19, 2009,
the Company issued approximately 338,000 options with a weighted average grant
date fair value of $5.94 per share and a weighted average exercise price of
$15.00 per share. Compensation expense for these options is
recognized over the remaining weighted average vesting period which is
approximately 1.9 years.
The fair value of options
at the grant date was estimated utilizing the Black-Scholes multiple
option-pricing model with the following weighted average assumptions for the
periods
presented:
|
|
Sixteen Weeks Ended
|
|
|
|
April 19,
2009
|
|
Risk-free interest rate
|
|
1.4
|
%
|
Expected years until exercise
|
|
3.7
|
|
Expected stock volatility
|
|
52.3
|
%
|
Dividend yield
|
|
0.0
|
%
|
Weighted-average Black-Scholes fair value per share at date of grant
|
|
$
|
5.94
|
|
|
|
|
|
|
During the sixteen weeks
ended April 19, 2009, the Company issued a total of 30,000 shares of
non-vested common stock to its executive management team under its Amended and
Restated 2007 Performance Incentive Plan (2007 Stock Plan). These awards have a weighted average grant
date fair value of $14.93 and vest in installments over four years on the
anniversary dates. Compensation expense
for the aggregate 152,500 shares of non-vested common stock outstanding at April 19,
2009, is recognized over the remaining weighted average vesting period which is
approximately 2.1 years.
8
Table of Contents
During the sixteen weeks
ended April 19, 2009, the Company issued approximately 36,000 restricted
stock units (RSUs) to certain employees under its
2007
Stock Plan with a weighted average grant date fair value of $14.93. The RSUs vest in equal installments over four
years on the anniversary date and upon vesting, one share of the Companys
common stock is issued for each RSU. The fair value of each RSU granted is
equal to the market price of the Companys stock at date of grant. Compensation expense for the RSUs is recognized over the
remaining weighted average vesting period which is approximately 2.3 years.
Included in restaurant
labor and general and administrative expenses
in the condensed
consolidated statements of incom
e for the sixteen weeks ended April 19, 2009, is
approximately $886,000 and $3.1 million respectively, of stock-based
compensation expense related to the cash tender offer discussed in Note 4.
Cash Tender Offer
.
This one-time charge
represents the compensation expense related
to the acceleration of vesting on the unvested options tendered in the offer,
which would otherwise have been expensed over their vesting period in the
future if they had not been tendered.
For the sixteen weeks
ended April 19, 2009 and April 20, 2008, $24,000 and $131,000 of
stock-based compensation was recognized, respectively, as capitalized
development and is included in property and equipment in the condensed
consolidated balance sheet. During the quarter ended April 19, 2009,
approximately 19,500 options to purchase common shares were exercised and approximately
1,605,000 options were cancelled due primarily to the cash tender offer
discussed in Note 4.
Cash Tender Offer.
6.
Earnings Per Share
Basic
earnings per share amounts are calculated by dividing net income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share amounts are calculated based upon the
weighted-average number of common and potentially dilutive common shares
outstanding during the period. Potentially dilutive shares are excluded from
the computation in periods in which they have an anti-dilutive effect. Diluted
earnings per share reflect the potential dilution that could occur if holders
of options exercised their options into common stock. During the sixteen weeks
ended April 19, 2009 and April 20, 2008, approximately 1.2 million
and 1.6 million, respectively, weighted stock options outstanding were not
included in the computation of diluted earnings per share because to do so
would have been anti-dilutive for the periods presented. The Company uses the treasury stock method to
calculate the impact of outstanding stock options. The computations for basic
and diluted earnings per share are as follows (in thousands, except per share
data):
|
|
Sixteen Weeks Ended
|
|
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Net income
|
|
$
|
3,845
|
|
$
|
7,253
|
|
Basic weighted-average shares outstanding
|
|
15,356
|
|
16,736
|
|
Dilutive effect of stock options and non-vested common stock
|
|
76
|
|
210
|
|
Diluted weighted-average shares outstanding
|
|
15,432
|
|
16,946
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
|
$
|
0.25
|
|
$
|
0.43
|
|
Diluted
|
|
$
|
0.25
|
|
$
|
0.43
|
|
7.
Advertising Costs
Costs
incurred in connection with the advertising and promotion of the Company are
included in operating expenses and expensed as incurred. Such costs amounted to $4.5 million and $6.9 million for the sixteen weeks ended April 19, 2009
and April 20, 2008, respectively.
Under the Companys franchise agreements, both the Company and the
franchise partners must contribute a minimum percentage of revenues to two
marketing and national media advertising funds (the Marketing Funds). These
Marketing Funds are used to develop and distribute Red Robin
®
branded marketing materials, for media
purchases and for administrative costs. The Companys portion of costs incurred
by the Marketing Funds is recorded as operating and general and administrative
expenses in the Companys financial statements. Restricted assets represent
contributed funds held for future use.
9
Table of Contents
8.
Derivative
and Hedging Activities
The Company enters into derivative instruments for
risk management purposes only, including derivatives designated as hedging
instruments under SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
(SFAS 133)
.
The Company uses interest
rate-related derivative instruments to manage its exposure to fluctuations of
interest rates. By using these instruments, the Company exposes itself,
from time to time, to credit risk and market risk. Credit risk is the
failure of the counterparty to perform under the terms of the derivative
contract. When the fair value of a derivative contract is positive, the
counterparty owes the Company, which creates credit risk for the Company.
The Company minimizes the credit risk by entering into transactions with
high-quality counterparties whose credit rating is evaluated on a quarterly
basis. The Companys counterparty in the interest rate swap is SunTrust
Bank, National Association (SunTrust). Market risk is the adverse effect
on the value of a financial instrument that results from a change in interest
rates, commodity prices, or the market price of the Companys common
stock. The Company minimizes market risk by establishing and monitoring
parameters that limit the types and degree of market risk that may be taken.
In March 2008,
the Company entered into a variable-to-fixed interest rate swap agreement with
SunTrust to hedge the Companys floating interest rate on an aggregate of up to $120 million of debt that is currently outstanding
under the Companys amended and restated credit facility. The interest rate swap has an effective date
of March 19, 2008 and a termination date of March 19, 2010 for $50
million of the initial $120 million and March 19, 2011 for the remaining
$70 million. The agreement was
designated as a cash flow hedge under which the Company is required to make
payments based on a fixed interest rate of 2.7925% calculated on an initial
notional amount of $120 million. In exchange the Company will receive interest
on a $120 million of notional amount at a variable rate that is based on the
3-month LIBOR rate.
The
Company entered into the above interest rate swap with the objective of
offsetting the variability of its interest expense that arises because of
changes in the variable interest rate for the designated interest
payments. Changes in the fair value of the interest rate swap are
reported as a component of accumulated other comprehensive income (AOCI).
The Company reclassifies gain or loss from accumulated other comprehensive
income, net of tax, on the Companys consolidated balance sheet to interest
expense on the Companys consolidated statement of income as the interest
expense is recognized on the related debt.
The
following table summarizes the fair value and presentation in the condensed
consolidated balance sheets of the interest rate swap designated as hedging
instruments under SFAS 133 as of April 19, 2009:
Balance Sheet Location
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
Accrued Liabilities
|
|
$
|
|
|
$
|
2,592
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the effect of the interest rate swap on the
condensed consolidated statements of income for the sixteen weeks ended April 19,
2009:
Amount of Loss
Recognized in
AOCI
(effective portion)
|
|
Location of
Loss
Reclassified
from AOCI
Income (effective portion)
|
|
Amount of Loss
Reclassified from
AOCI
to Income (effective
portion)
|
|
Location of
Loss Recognized
in Income
(ineffective portion)
|
|
Amount of Loss
Recognized
in Income (ineffective
portion)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2,592)
|
|
Interest expense, net
|
|
$
|
(483
|
)
|
N/A
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Table of Contents
9.
Fair Value
Measurement and Other Comprehensive Income
The fair market
value of the Companys credit facility as of April 19, 2009 and
December 28, 2008 was approximately $203.7 million and
$200.0 million, respectively. There
is $6.7 million of outstanding borrowings recorded for the Companys
capital leases as of April 19, 2009, which have an estimated fair value of
$7.9 million. At December 28, 2008, the carrying amount of the
Companys capital lease obligations was $7.6 million and the fair value
was $8.8 million. Both the fair values of the Companys credit facility in
2009 and capital leases have been estimated using Level 2 inputs consistent
with discounted cash flow analyses based on market rates obtained from independent
third parties for similar type debt.
The Companys
deferred compensation plan is a nonqualified deferred compensation plan which
allows highly compensated employees to defer a portion of their base salary,
bonuses and commissions each plan year. At April 19, 2009 and December 28,
2008, a liability for participant contributions and investment income thereon
of $1.5 million and $1.7 million, respectively, is included in other
non-current liabilities. To fund this plan the Companys plan administrator purchases
corporate-owned whole-life insurance contracts on the related team
members. The cash surrender value of these policies at April 19, 2009 and
December 28, 2008, of $1.6 million, is included in other assets, net.
The carrying value of both the liability for participant contributions and
investment income and the cash surrender value asset are equal to their fair
value. These agreements are required to be measured at fair value on a
recurring basis and are valued using Level 2 inputs.
The interest rate
swap discussed in Note 8 above falls into the Level 2 category under the
guidance of SFAS No. 157,
Fair Value
Measurements
. The fair market value of the interest rate swap, which is measured on a recurring bases, was an
unrealized loss of $2.6 million, $1.6 million net of tax, as of April 19,
2009 and an unrealized gain of $1.1 million, $684,000 net of tax as of April 20,
2008, which is recorded in accrued liabilities and other assets, respectively,
in the Companys condensed consolidated balance sheet. The fair market value of the interest rate
swap was an unrealized loss of $2.8 million, $1.6 million net of tax, as of
December 28, 2008. The unrealized gain
(loss) associated with this cash flow hedging instrument is recorded in
accumulated other comprehensive income (loss), net of tax, on the Companys
condensed consolidated balance sheet.
Comprehensive income
consisted of (in thousands):
|
|
Sixteen Weeks Ended
|
|
|
|
April 19, 2009
|
|
April 20, 2008
|
|
Net income
|
|
$
|
3,845
|
|
$
|
7,253
|
|
Unrealized gain (loss) on cash flow hedge, net of tax
|
|
(1,580
|
)
|
684
|
|
Total comprehensive income
|
|
$
|
2,265
|
|
$
|
7,937
|
|
10.
Commitments and
Contingencies
In the normal course of
business, there are various other claims in process, matters in litigation and
other contingencies. These include claims resulting from slip and fall
accidents, employment related claims and claims from guests or team members
alleging illness, injury or other food quality, health or operational concerns.
To date, no claims of these types of litigation, certain of which are covered
by insurance policies, have had a material effect on us. While it is not
possible to predict the outcome of these other suits, legal proceedings and
claims with certainty, management is of the opinion that adequate provision for
potential losses associated with these other matters has been made in the
financial statements and that the ultimate resolution of these other matters
will not have a material adverse effect on our financial position and results
of operations.
11
Table of
Contents
Item 2.
Managements Discussion and
Analysis of Financial Condition and Results of Operations
Managements Discussion and Analysis of Financial Condition and Results of Operations provides a
narrative of our financial performance and condition that should be read in
conjunction with the accompanying condensed consolidated financial
statements. All comparisons under this
heading between 2009 and 2008 refer to the sixteen week periods ending April 19,
2009 and April 20, 2008, respectively, unless otherwise indicated.
Overview
The following summarizes the operational and financial
highlights during the first sixteen weeks of fiscal 2009:
·
New Restaurant Openings
.
We opened seven
company-owned restaurants during the sixteen weeks ended April 19, 2009
versus nine opened in the first quarter of 2008. We plan to open an additional seven to eight
company-owned restaurants in 2009, three of which have already opened in the
second quarter of 2009. We believe all
2009 restaurants will be funded from our operating cash flows.
·
Comparable Restaurant Sales.
For the sixteen weeks ended April 19,
2009, the 244 restaurants in our current comparable base experienced an 8.1%
decrease in sales from these same restaurants last year. This decrease was
driven by a 10.2% decrease in guest counts partially offset by a 2.1% increase
in the average guest check. We expect
overall comparable restaurant sales to decline in fiscal 2009 based on the
current macroeconomic environment and the significant reduction in our national
cable advertising from prior years levels.
·
Food Cost.
We
continue to see upward pricing pressures in almost all of our food costs
categories including meat, hamburger and steak fries during the sixteen weeks
ended April 19, 2009. In 2009, we
believe our two largest cost pressures are for ground beef used in our
hamburgers and potatoes that are used to make our steak fries. In 2008, we had
favorable fixed pricing for ground beef, well below the market spot rate. In 2009, we expect an increase in ground beef
prices above our 2008 contract price, as we have fixed approximately 70% of our
ground beef volume at prices above the 2008 contract price. The cost of our steak fries will increase in
2009 as many farmers planted other higher profit crops during the 2008 planting
season and, in turn, reduced the potato supply available for our steak fries.
·
Marketing
Efforts.
In 2009, our marketing strategy is focused on
expanding our national on-line and digital media advertising efforts as well as
introducing a targeted direct mail campaign to support product specific news
with limited support through national cable advertising. In the first quarter of 2009, we successfully
launched the direct mail campaign to drive incremental guest traffic through
the promotion of our limited time only Burnin Love burger. This campaign was supported with a strong
on-line promotion. Additional marketing
efforts in 2009 include a focus on driving gift card sales in the restaurants
and with third party retailers, expanding our guest satisfaction survey program
and supporting new menu offerings. In an
environment where consumers are pulling back on retail and restaurant spending,
and our desire to reduce costs, we are doing more targeted and local
initiatives and purchasing significantly less national cable advertising in
2009. This reduced national advertising
spending is expected to reduce restaurant operating costs by approximately
1.25% of restaurant revenue in fiscal 2009.
·
Restaurant Closings.
The Company closed four restaurants during the first quarter
of 2009. This decision was the result of identifying those restaurants, new or
aged, that are in declining trade areas, performing below acceptable
profitability levels and/or require significant capital expenditures. The
locations selected for closure represented older restaurants whose leases were
not extended, or were in need of significant capital improvement that are not
projected to provide acceptable returns in the foreseeable future. The Company recognized a charge of
approximately $586,000 during the sixteen weeks ended April 19, 2009
related to lease termination costs based on estimated remaining lease
obligations, net of estimated sublease income, and other closing related
costs. This charge is recorded in
general and administrative expense in our condensed consolidated statements of
income
·
Cash
Tender Offer
. On February 11,
2009 we completed a cash tender offer for out-of-the-money stock options held
by approximately 514 current employees and officers. As a result of the tender offer, we incurred
a one-time charge of approximately $4.0 million for all unvested eligible
options that were tendered in the first quarter 2009. This one-time charge represents the
compensation expense related to the acceleration of vesting on the unvested
options tendered in the offer, which would otherwise have been expensed over
their vesting period in the future if they had not been tendered. Approximately $0.9 million of the $4.0
million charge is recorded in labor expense and approximately $3.1 million is
recorded in general and administrative expense in our condensed consolidated
statements of income. We paid
$3.5 million in cash for the approximate 1.6 million options tendered
in the offer.
12
Table of Contents
In view of the foregoing, the Company is making
efforts to manage controllable costs and streamline operations, while our
restaurant teams focus on driving traffic through the quality and value of our guest
experience. Our reduced levels of new
restaurant openings and limited capital expenditures are expected to result in
significant free cash flow, the majority of which will be used to reduce
outstanding indebtedness.
Restaurant
Data
The following table details restaurant unit data for
our company-owned and franchise locations for the periods
indicated.
|
|
Sixteen Weeks Ended
|
|
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Company-owned:
|
|
|
|
|
|
Beginning of period
|
|
294
|
|
249
|
|
Opened during period
|
|
7
|
|
9
|
|
Acquired during period
|
|
1
|
|
|
|
Closed during period
|
|
(4
|
)
|
|
|
End of period
|
|
298
|
|
258
|
|
|
|
|
|
|
|
Franchised:
|
|
|
|
|
|
Beginning of period
|
|
129
|
|
135
|
|
Opened during period
|
|
2
|
|
1
|
|
Closed or sold during period
|
|
(1
|
)
|
(1
|
)
|
End of period
|
|
130
|
|
135
|
|
|
|
|
|
|
|
Total number of Red Robin® restaurants
|
|
428
|
|
393
|
|
On December 31, 2008, we acquired a restaurant that was managed by
the Company under a management agreement since June 2007 with a
franchisee.
13
Table of Contents
Results of Operations
Operating results for each period presented below are expressed
as a percentage of total revenues, except for the
components of restaurant operating costs, which are expressed as a percentage
of restaurant revenues.
This information has been prepared on a basis
consistent with the audited 2008 annual financial statements and, in the
opinion of management, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. Our operating
results may fluctuate significantly as a result of a variety of factors, and
operating results for any period presented are not necessarily indicative of
results for a full fiscal year.
|
|
Sixteen Weeks Ended
|
|
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Revenues:
|
|
|
|
|
|
Restaurant
|
|
98.4
|
%
|
98.2
|
%
|
Franchise royalties and fees
|
|
1.6
|
|
1.8
|
|
Rent revenue
|
|
0.0
|
|
0.0
|
|
Total revenues
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
Costs and Expenses:
|
|
|
|
|
|
Restaurant operating costs:
|
|
|
|
|
|
Cost of sales
|
|
24.5
|
|
23.7
|
|
Labor (includes 0.4% and 0.1% of stock-based compensation expense,
respectively)
|
|
34.6
|
|
33.9
|
|
Operating
|
|
16.1
|
|
16.9
|
|
Occupancy
|
|
7.1
|
|
6.4
|
|
Total restaurant operating costs
|
|
82.3
|
|
80.9
|
|
Depreciation and amortization
|
|
6.5
|
|
5.8
|
|
General and administrative (includes 1.4% and 0.6% of stock-based
compensation expense, respectively)
|
|
8.8
|
|
8.8
|
|
Pre-opening costs
|
|
0.9
|
|
1.0
|
|
Income from operations
|
|
2.7
|
|
5.0
|
|
Interest expense, net
|
|
0.8
|
|
0.9
|
|
Income before income taxes
|
|
1.9
|
|
4.1
|
|
Provision for income taxes
|
|
0.5
|
|
1.2
|
|
Net income
|
|
1.4
|
%
|
2.9
|
%
|
Certain
percentage amounts in the table above do not sum due to
rounding as well as the fact that restaurant operating costs are expressed as a
percentage of restaurant revenues, as opposed to total revenues.
14
Table of Contents
Total Revenues
|
|
Sixteen Weeks Ended
|
|
|
|
(Revenues in thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Restaurant revenue
|
|
$
|
266,595
|
|
$
|
250,902
|
|
6.3
|
%
|
Franchise royalties and fees
|
|
4,152
|
|
4,634
|
|
(10.4
|
)
%
|
Rent revenue
|
|
66
|
|
57
|
|
15.8
|
%
|
Total revenues
|
|
$
|
270,813
|
|
$
|
255,593
|
|
6.0
|
%
|
Average weekly sales volumes:
|
|
|
|
|
|
|
|
Comparable restaurants
|
|
$
|
58,079
|
|
$
|
64,543
|
|
(10.0
|
)
%
|
Non-comparable restaurants
|
|
55,245
|
|
55,165
|
|
0.1
|
%
|
2007 Acquired Restaurants (1)
|
|
|
|
61,396
|
|
|
|
2008 Acquired Restaurants (2)
|
|
52,555
|
|
|
|
|
|
(1)
2007 Acquired Restaurants
refers to 16 franchised Red Robin
®
restaurants
we acquired during 2007 and one restaurant that we operated under a management
agreement with a franchisee until we acquired it on December 31, 2008.
Beginning the third quarter of 2008, these restaurants entered into the
comparable restaurant population and their average weekly sales volume, from that
time forward, are included in the comparable restaurant category.
(2)
2008 Acquired Restaurants
refers to 15 franchised Red Robin® restaurants we acquired during 2008.
Restaurant revenue, which is comprised almost entirely of food and
beverage sales, increased by $15.7 million, or 6.3%, from the first
quarter of 2008. The factors contributing to the increase in restaurant revenue
were restaurant openings and prior year acquisitions. Sales for non-comparable
restaurants contributed an increase of $25.8 million, of which
$5.6 million was attributable to seven restaurants opened during the
sixteen weeks ended April 19, 2009. Sales in the comparable restaurant
base experienced a sales decrease of approximately $22.6 million or 9.2%
during the first quarter 2009. The decrease in comparable
restaurant sales in the first quarter 2009 was primarily the result of the
lower guest counts driven by the macroeconomic environment and our decision not
to advertise on national cable media in 2009.
This decrease was partially offset by an increase in the average
guest check. We anticipate that our full
year fiscal 2009 comparable sales will be negative. The 2008 Acquired Restaurants contributed
$12.5 million of restaurant revenue during the sixteen weeks ended April 19,
2009.
Average weekly sales volumes represent the total restaurant revenue for
a population of restaurants in both a comparable and non-comparable category for each time period presented divided by the number
of operating weeks in the period. Comparable restaurant average weekly sales
volumes include those restaurants that are in the comparable base at the end of
each period presented. At the end of the first quarter 2009, there were 244
comparable restaurants compared to 200 comparable restaurants at the end of the
first quarter 2008. Non-comparable restaurants presented include those
restaurants that had not yet achieved the five full quarters of operations
during the periods presented. At the end of the first quarter 2009, there were
41 non-comparable restaurants versus 42 at the end of the first quarter 2008.
Fluctuations in average weekly sales volumes for comparable restaurants reflect
the effect of same store sales changes as well as the performance of new
restaurants entering the comparable base during the period.
Franchise royalties and
fees, which consist primarily of royalty income and
initial franchise fees, decreased 10.4% for the sixteen weeks ended April 19,
2009. This decrease is primarily attributable to the $517,000 quarter over
quarter reductions in franchise royalties from the 2008 Acquired
Restaurants. Our franchisees reported
that comparable restaurant sales decreased 7.2% for U.S. restaurants and
increased 0.8% for Canadian restaurants in the first quarter of 2009 compared
to the first quarter of 2008.
Cost
and Expenses
Cost
of Sales
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Cost of sales
|
|
$
|
65,283
|
|
$
|
59,348
|
|
10.0
|
%
|
As a percent of restaurant revenue
|
|
24.5
|
%
|
23.7
|
%
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
15
Table of
Contents
Cost of sales, comprised of food and beverage
expenses, are variable and generally fluctuate with sales volume. For the
sixteen weeks ended April 19, 2009, cost of sales increased as a
percentage of restaurant revenues over prior year due to
higher raw material costs, particularly meat, hamburger and steak fries,
partially offset by menu price increases taken in early 2008. Higher ground beef and potato prices are
expected to continue through fiscal 2009 given higher fixed contract pricing in
2009 compared to lower contracted fixed prices in 2008.
Labor
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Labor
|
|
$
|
92,271
|
|
$
|
85,139
|
|
8.4
|
%
|
As a percent of restaurant revenue
|
|
34.6
|
%
|
33.9
|
%
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Labor costs
include restaurant hourly wages, fixed management salaries, stock-based
compensation, bonuses, taxes and benefits for restaurant team members. For the
sixteen weeks ended April 19, 2009, labor costs as a
percentage of restaurant revenue increased from prior year due primarily to
increased stock based compensation expense due to an $886,000, or 0.3% of
restaurant revenue, charge related to the stock option tender offer, increased
fixed expenses such as managers salaries, higher benefit costs and increased
minimum wage that was effective January 1, 2009. This year over year increase is partially
offset by improved productivity of hourly labor for non-management team members
and restaurant-level bonuses, as well as lower vacation expense.
Operating
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Operating
|
|
$
|
43,018
|
|
$
|
42,506
|
|
1.2
|
%
|
As a percent of restaurant revenue
|
|
16.1
|
%
|
16.9
|
%
|
(0.8
|
)
%
|
|
|
|
|
|
|
|
|
|
|
Operating costs include variable costs such as
contributions to the advertising funds, local marketing expenses, restaurant
supplies, travel costs, and fixed costs such as repairs
and maintenance and utility costs. For the sixteen
weeks ended April 19, 2009, operating costs
decreased as a percentage of restaurant revenue due primarily to a 1.25%
effective decrease in 2009 contributions to the national advertising fund
partially offset by higher utility costs and repairs and maintenances costs.
Occupancy
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Occupancy
|
|
$
|
18,908
|
|
$
|
16,002
|
|
18.2
|
%
|
As a percent of restaurant revenue
|
|
7.1
|
%
|
6.4
|
%
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
Occupancy costs include fixed rents, percentage rents,
common area maintenance charges, real estate and personal property taxes,
general liability insurance and other property costs. As
a percentage of restaurant revenue, occupancy costs for the sixteen
weeks ended April 19, 2009 increased over the prior
year period due to a decline in average restaurant revenues on partially fixed
costs and higher fixed rents related to new and acquired restaurants for both
the land and building. Many of the
restaurants acquired from franchisees are build to suit locations that
typically bear a higher occupancy cost as a percentage of restaurant
revenue. We believe occupancy costs for
the remainder of 2009 as a percentage of restaurant revenue will exceed 2008
costs.
Depreciation
and Amortization
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Depreciation and amortization
|
|
$
|
17,637
|
|
$
|
14,849
|
|
18.8
|
%
|
As a percent of total revenues
|
|
6.5
|
%
|
5.8
|
%
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
16
Table of Contents
Depreciation and amortization includes depreciation on
capital expenditures for restaurants and corporate assets as well as amortization of acquired intangible assets and
liquor licenses. Depreciation and amortization expense increased as a
percentage of total revenues for the sixteen weeks ended April 19, 2009
compared to prior year due primarily to increased depreciation and amortization
expense related to new and acquired restaurants and lower average restaurant
sales volumes. We expect higher
depreciation and amortization expense as a percentage of total revenues to
continue for the remainder of fiscal 2009.
General and Administrative
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
General and administrative
|
|
$
|
23,872
|
|
$
|
22,475
|
|
6.2
|
%
|
As a percent of total revenues
|
|
8.8
|
%
|
8.8
|
%
|
|
%
|
|
|
|
|
|
|
|
|
|
|
General and administrative costs include all corporate and administrative functions that support existing restaurant operations, franchises, and provide infrastructure to facilitate our future growth. Components of this category include corporate management, supervisory and staff salaries, bonuses, stock-based compensation and related employee benefits, travel, information systems, training, office rent, franchise administrative support, legal, leadership conference, professional and consulting fees and marketing costs. For the sixteen weeks ended April 19, 2009, general and administrative costs decreased as a percentage of total revenues due primarily to lower salary costs, decreased marketing expenses and decreased training expenses. These decreases were partially offset by the impact of increased stock-based compensation expense due to a $3.1 million, or 1.2% of total revenue, charge related to the stock tender offer in February 2009 as well as a restaurant closure charge of $586,000, or 0.2% of total revenue, in first quarter 2009 related to the closure of four restaurants.
Pre-opening Costs
|
|
Sixteen Weeks Ended
|
|
|
|
(In thousands, except percentages)
|
|
April 19,
2009
|
|
April 20,
2008
|
|
Percent
Change
|
|
Pre-opening costs
|
|
$
|
2,550
|
|
$
|
2,563
|
|
(0.5
|
)
%
|
As a percent of total revenues
|
|
0.9
|
%
|
1.0
|
%
|
(0.1
|
)
%
|
Average per restaurant pre-opening costs
|
|
$
|
275
|
|
$
|
294
|
|
(6.5
|
)
%
|
Pre-opening costs, which are expensed as incurred,
consist of the costs of labor, hiring and training the initial work force for
our new restaurants, travel expenses for our training teams, the cost of food
and beverages used in training, marketing costs, lease
costs incurred prior to opening and other direct costs related to the opening
of new restaurants. Pre-opening costs for the sixteen weeks ended April 19,
2009 and April 20, 2008, reflect the opening of
seven and nine new restaurants, respectively in each period presented. For the sixteen weeks ended April 19,
2009, the average per restaurant pre-opening costs decreased over prior year
due primarily to lower pre-opening occupancy expenses, labor costs and
marketing expense partially offset by higher utility costs.
Interest Expense, net
Interest expense was $2.1 million and $2.3 million for
the sixteen weeks ended April 19, 2009 and April 20, 2008,
respectively. Interest expense in the first quarter 2009 decreased from prior year due
to a lower average interest rate of 3.0% versus 4.9% in 2008.
Provision for Income
Taxes
The effective income tax rate for the first quarter 2009 was 25.3%
compared to 30.3% for the first quarter 2008.
This decrease from 2008 is primarily due to
federal income tax credits. We
anticipate that our full year fiscal 2009 effective tax rate will be
approximately 25.3%.
Liquidity and Capital Resources
Financial Condition and
Future Liquidity.
We require capital principally to grow the
business through new restaurant construction, as well as to maintain, improve
and refurbish existing restaurants, support for infrastructure needs, and for
general operating purposes. In addition, we have and may continue to use
capital to acquire franchise restaurants or repurchase our common stock. Our
primary short-term and long-term sources of liquidity are expected to be cash
flows from operations and to a lesser extent, our revolving credit facility.
Based upon current levels of operations and our anticipated new restaurant
opening schedule, we expect that cash flows from operations will be sufficient
to meet debt
17
Table of Contents
service,
capital expenditures and working capital requirements for at least the next
twelve months. The Company and the restaurant industry in general maintain
relatively low levels of accounts receivable and inventories, and vendors
generally grant trade credit for purchases, such as food and supplies. We also
continually invest in our business through the addition of new restaurants and
refurbishment of existing restaurants, which are reflected as long-term assets
and not as part of working capital.
Credit Facility.
O
ur existing credit facility permits us to have a more
flexible capital structure and facilitates our growth plans. The credit facility is comprised of (i) a
$150 million revolving credit facility maturing on June 15, 2012, and (ii) a
$150 million term loan maturing on June 15, 2012, both with rates based on
the London Interbank Offered Rate (LIBOR) plus 1.00% currently. The credit
agreement also allows us, subject to lender participation which is at their
sole discretion, to increase the revolving credit facility by up to an
additional $100 million in the future. As part of the credit agreement, we may
also request the issuance of up to $15 million in letters of credit, the
outstanding amount of which reduces the net borrowing capacity under the
agreement. The credit facility requires the payment of an annual commitment fee
based upon the unused portion of the credit facility. The credit facilitys
interest rates and the annual commitment rate are based on a financial leverage
ratio, as defined in the credit agreement. Our obligations under the credit
facility are secured by first priority liens and security interests in the
capital stock of subsidiaries of the Company. Additionally, the credit
agreement includes a negative pledge on all tangible and intangible assets
(including all real and personal property) with customary exceptions. Our credit facility is with a consortium of
banks that include Wells Fargo Bank N.A., Bank of America N.A., Keybank N.A.
and Suntrust Bank N.A among others.
With regard to the term
loan facility, we are required to repay the principal amount of the term loan
in consecutive quarterly installments which began September 30, 2007 and
will end on the maturity date of the term loan. At April 19, 2009, we had
$130.2 million of borrowings outstanding under our term loan,
$82.0 million of borrowings and $4.4 million of letters of credit
outstanding under our revolving credit facility. Loan origination costs
associated with the credit facility and the net outstanding balance of costs
related to the original and subsequent amendments to the credit facility are
$1.1 million and are included as deferred costs in other assets, net in
the accompanying consolidated balance sheet as of April 19, 2009. In
addition to the required repayments on the term loan, we expect to utilize
excess cash flow after capital expenditures to reduce our debt during 2009.
Covenants.
We are subject
to a number of customary covenants under our various credit agreements,
including limitations on additional borrowings, acquisitions, and dividend
payments. In addition, we are required to maintain two financial ratios: a
leverage ratio calculated as our debt outstanding including issued standby
letters of credit divided by the last twelve months earnings before interest,
taxes, depreciation and amortization (EBIDTA) adjusted for certain non-cash
charges; and a fixed charge ratio calculated as our consolidated cash flow
divided by our consolidated debt service obligations. As of April 19,
2009, we were in compliance with all debt covenants.
Inflation
The primary
inflationary factors affecting our operations are food, labor costs, energy
costs, and materials used in the construction of new restaurants. A large
number of our restaurant personnel are paid at rates based on the applicable
minimum wage, and recent increases in applicable minimum wage levels have
directly affected our labor costs. Many of our leases require us to pay taxes,
maintenance, repairs, insurance and utilities, all of which
are generally subject to inflationary increases. We believe inflation has had a
negative impact on our financial condition and results of operations in the
current year, due primarily to increased commodity prices for certain foods we
purchase at market rates including fuel surcharges, increased labor costs,
higher energy costs, higher costs for certain supplies and petroleum based
products, higher costs for materials and labor related to construction of our
new restaurants. Uncertainties related to higher costs, including energy costs,
commodity prices, annual indexed wage increases and construction materials make
it difficult to predict what impact inflation may continue to have on our
business during 2009.
Seasonality
Our business is subject to seasonal fluctuations.
Historically, sales in most of our restaurants have been higher during the
summer months and winter holiday season. Our quarterly and annual operating
results and comparable restaurant sales may fluctuate significantly as a result
of seasonality and other factors. Accordingly, results for any one quarter are
not necessarily indicative of results to be expected for any other quarter or
for any year and comparable restaurant sales for any
particular future period may decrease.
Off
Balance Sheet Arrangements
Except for operating leases (primarily restaurant
ground leases), we do not have any off balance sheet arrangements.
18
Table of Contents
Critical
Accounting Policies and Estimates
Critical
accounting policies and estimates are those that we believe are both
significant and that require us to make difficult, subjective or complex
judgments, often because we need to estimate the effect of inherently uncertain
matters. We base our estimates and judgments on historical experiences and
various other factors that we believe to be appropriate under the
circumstances. Actual results may differ from these estimates, and we might
obtain different estimates if we used different assumptions or conditions. We
had no significant changes in our critical accounting policies and estimates
since our last annual report. Our critical accounting estimates are contained
in our annual report on Form 10-K for the year ended December 28,
2008.
Recent Accounting
Pronouncements
In April 2009,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) Nos. 107-1 and Accounting Principles Board (APB) 28-1,
Interim Disclosures about Fair Value of Financial
Instruments,
(FSP
FAS 107-1). FSP FAS 107-1 amends Statement of Accounting Standards (SFAS)
No. 107,
Disclosures about Fair Value
of Financial Instruments
, and APB No. 28,
Interim
Financial Reporting
. FSP FAS
107-1 requires fair value disclosures on an interim basis for financial
instruments that are not reflected in the condensed consolidated balance sheets
at fair value. Prior to the issuance of FSP FAS 107-1, the fair values of
those financial instruments were only disclosed on an annual basis. FSP
FAS 107-1 is effective for interim reporting periods that end after June 15,
2009 (the Companys second quarter). We do not expect the adoption of FSP
FAS 107-1 to have a material impact on our consolidated financial position,
results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful Life of Intangible Assets
,
(FSP 142-3). FSP 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life
of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). This change is intended to improve the consistency between the
useful life of a recognized intangible asset under SFAS 142 and the period
of expected cash flows used to measure the fair value of the asset under
SFAS 141R and other Generally Accepted Accounting Principles (GAAP). The
requirement for determining useful lives must be applied prospectively to
intangible assets acquired after the effective date and the disclosure
requirements must be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. FSP 142-3 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The adoption of FSP 142-3
at the beginning of fiscal 2009 did not have a material impact on our
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
, (SFAS 161). SFAS 161 provides companies with
requirements for enhanced disclosures about derivative instruments and hedging
activities to enable investors to better understand their effects on a companys
financial position, financial performance and cash flows. These requirements
include the disclosure of the fair values of derivative instruments and their
gains and losses in a tabular format. We adopted SFAS 161 at the beginning
of fiscal 2009.
In December 2007, the FASB issued SFAS No. 141
(revised 2007),
Business Combinations,
(SFAS 141R). SFAS 141R provides companies with principles and
requirements on how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree as well as the recognition and
measurement of goodwill acquired in a business combination. SFAS 141R also
requires certain disclosures to enable users of the financial statements to
evaluate the nature and financial effects of the business combination.
Acquisition costs associated with the business combination will generally be
expensed as incurred. SFAS 141R is effective for business combinations
occurring in fiscal years beginning after December 15, 2008. Accordingly we will record and disclose
business combinations occurring in fiscal 2009 and thereafter under the revised
standard beginning December 29, 2008.
In December 2007, the FASB issued SFAS No. 160
, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
, (SFAS 160).
SFAS 160 changes the accounting and reporting for minority interests,
which will be recharacterized as noncontrolling interests and classified as a
component of equity. We adopted SFAS 160 at the beginning of fiscal
2009. The adoption of SFAS 160 did
not impact our consolidated financial statements.
19
Table of Contents
Forward-Looking Statements
Certain
information and statements contained in this report that reflect the Companys current expectations regarding, among
other things, future results of operations, economic performance, liquidity and
capital resources, financial condition and achievements of the Company, are
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. Forward-looking statements include statements
regarding our expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. These
statements may be identified, without limitation, by the use of forward-looking
terminology such as anticipate, believe, estimates, expect, intend, plan,
will, would or comparable and similar terms or the negative thereof.
Certain forward-looking statements are included in this Form 10-Q,
principally in the sections captioned Financial Statements and Managements
Discussion and Analysis. All forward-looking statements included in this Form 10-Q
are based on information available to the Company on the date hereof. Such
statements speak only as of the date hereof and we undertake no obligation to
update any such statement to reflect events or circumstances arising after the
date hereof. These statements are based on assumptions believed by us to be
reasonable, and involve known and unknown risks and uncertainties that could
cause actual results to differ materially from those described in the
statements. These risks and uncertainties include, but are not limited to, the
following: potential fluctuation in our quarterly operating results due
to economic conditions, seasonality and other factors; downturn in general economic
conditions including severe volatility in financial markets and decreasing
consumer confidence, resulting in changes in consumer preferences, or consumer
discretionary spending; changes in availability of capital or credit
facility borrowings to us and to our franchisees; the continued adequacy of
cash flows generated by our business to fund operations and growth
opportunities; the concentration of our restaurants in the Western United
States and the associated disproportionate impact of macroeconomic factors; the
availability and costs of food; changes in labor and energy costs and changes
in the ability of our vendors to meet our supply requirements; lack of
awareness of our brand in new markets; higher percentage of operating weeks
from non-comparable restaurants; concentration of less
mature restaurants in the comparable restaurant base; effectiveness of our
initiative to normalize new restaurant operations; the effectiveness of our
national advertising strategy; health concerns about our food products and food
preparation; the effectiveness of our internal controls over financial
reporting; future changes in financial accounting standards; and other risk
factors described from time to time in the Companys Annual Report on Form 10-K
for 2008 filed with the SEC on February 26, 2009.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Under our credit agreement, amended in June 2007, we are exposed
to market risk from changes in interest rates on borrowings, which bear
interest at one of the following rates we select: an Alternate Base Rate (ABR),
based on the Prime Rate plus 0.00% to 0.25%, or a LIBOR, based on the relevant
one, two, three or six-month LIBOR, at our discretion, plus 0.50% to 1.00%. The
spread, or margin, for ABR and LIBOR loans under the credit agreement is
subject to quarterly adjustment based on our then current leverage ratio, as
defined by the credit agreement. As of April 19, 2009, we had
$92.2 million of borrowings subject to variable interest rates, and a plus
or minus 1.0% change in the effective interest rate applied to these loans
would have resulted in pre-tax interest expense fluctuation of $922,000 on an
annualized basis.
Our objective in managing exposure to interest rate changes is to limit
the impact of interest rate changes on earnings and cash flows and to lower
overall borrowing costs. To achieve this objective, we use an interest rate
swap and may use caps to manage our net exposure to interest rate changes
related to our borrowings.
During March 2008, the Company entered into a variable-to-fixed
interest rate swap agreement with SunTrust Bank, National Association
(SunTrust) to mitigate our floating interest rate on an aggregate of up to
$120 million of our debt that is currently or expected to be outstanding
under our amended and restated credit facility. The interest rate swap has an
effective date of March 19, 2008 and a termination date of March 19,
2010 for $50 million of the initial $120 million and March 19,
2011 for the remaining $70 million. The agreement was designated as a cash
flow hedge under which we are required to make payments based on a fixed
interest rate of 2.7925% calculated on an initial notional amount of
$120 million, in exchange we will receive interest on a $120 million
of notional amount at a variable rate. The variable rate interest we receive is
based on the 3-month LIBOR rate. This hedge is highly effective as defined by
SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities.
The Company reclassifies gain or loss from accumulated other
comprehensive income, net of tax, on our consolidated balance sheet to interest
expense on our consolidated statement of income as the interest expense is
recognized on the related debt. As
of April 19, 2009, the $1.6 million unrealized loss, net of taxes, on
cash flow hedging instrument is reported in accumulated other comprehensive
income (loss).
Primarily all of our transactions are conducted, and our accounts are
denominated, in United States dollars. Accordingly, we are not exposed to
significant foreign currency risk.
20
Table of Contents
Many of the food products purchased by us are affected by changes in
weather, production, availability, seasonality and other factors outside our
control. In an effort to control some of this risk, we have entered into some
fixed price product purchase commitments some of which exclude fuel surcharges
and other fees. In addition, we believe that almost all of our food and
supplies are available from several sources, which helps to control food
commodity risks.
Item 4.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports under the
Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is
accumulated and communicated to the management of Red Robin Gourmet Burgers, Inc.
(Management), including the Companys Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, Management recognizes that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
achieving the desired control objectives. As a result, the Companys CEO and
CFO have concluded that, based upon the evaluation of disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Exchange Act), the Companys disclosure controls and procedures were effective
as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The Companys
Management, with the participation of the CEO and CFO, have evaluated whether
any change in the Companys internal control over financial reporting occurred
during the fiscal quarter ended April 19, 2009. Based on that evaluation,
Management concluded that there has been no change in the
Companys internal control over financial reporting during the fiscal quarter
ended April 19, 2009 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
In the normal course of
business, there are various other claims in process, matters in litigation and
other contingencies. These include claims resulting from slip and fall
accidents, employment related claims and claims from guests or team members
alleging illness, injury or other food quality, health or operational concerns.
To date, no claims of these types of litigation, certain of which are covered
by insurance policies, have had a material effect on us. While it is not
possible to predict the outcome of these other suits, legal proceedings and
claims with certainty, management is of the opinion that adequate provision for
potential losses associated with these other matters has been made in the
financial statements and that the ultimate resolution of these other matters
will not have a material adverse effect on our financial position and results
of operations.
Item 1A.
Risk Factors
A
description of the risk factors associated with our business is contained in
Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal
year ended December 28, 2008 filed with the Securities and Exchange
Commission on February 26, 2009. There have
been no material changes in our Risk Factors disclosed in our 2008 Annual
Report on Form 10-K.
21
Table of Contents
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds.
During the fiscal quarter
ended April 15, 2009, the Company did not have any sales of securities in
transactions that were not registered under the Securities Act of 1933, as
amended, that have not been reported in a Form 8-K. The table below
provides a summary of the Companys purchases of its own common stock during
first quarter 2009.
Date
|
|
Total Number of
Shares (or Units)
Purchased
|
|
Average Price Paid
per Share (or Unit)
(3)
|
|
Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs (4)
|
|
Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May Yet
Be Purchased Under the Plans
or Programs (4)
|
|
December 31, 2008 (1)
|
|
10,270
|
|
$
|
16.83
|
|
|
|
|
|
February 26, 2009 (2)
|
|
226
|
|
$
|
13.84
|
|
|
|
|
|
Total
|
|
10,496
|
|
|
|
|
|
|
|
(1)
Consists of
shares delivered back to the Company by the Companys chief executive officer
to satisfy tax withholding obligations that arose upon the vesting of 25,000
shares of restricted stock which were granted on April 17, 2007 under the
Companys 2004 Performance Incentive Plan.
The Company, pursuant to certain of its equity award agreements, gives
participants the opportunity to turn back to the Company the number of shares
from the award sufficient to satisfy the persons tax withholding obligations
that arise upon the termination of restrictions.
(2)
Consists of
shares delivered back to the Company by certain members of the Companys
management team to satisfy tax withholding obligations that arose upon the
vesting of 624 shares of restricted stock which were granted on February 26,
2008 under the Companys
2007 Performance Incentive Plan
.
(3)
The stated
price does not include any commission paid.
(4)
These sections
are not applicable as the above-described repurchase was not made pursuant to a
publicly announced stock repurchase plan or program of the Company.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
10.1
|
|
Form of Restricted
Stock Agreement
|
|
|
|
10.2
|
|
Form of Restricted
Stock Unit Grant Agreement
|
|
|
|
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a) Certification
of Chief Financial Officer
|
|
|
|
32.1
|
|
Section 1350
Certifications of Chief Executive Officer and Chief Financial Officer
|
22
Table
of Contents
SIGNATURE
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
|
Red
Robin Gourmet Burgers, Inc.
|
|
|
|
May 22,
2009
|
|
/s/
Katherine L. Scherping
|
(Date)
|
|
Katherine
L. Scherping
|
|
|
Chief
Financial Officer
|
23
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