ITEM 1. BUSINESS.
As of December 30, 1996, Chart House Enterprises, Inc. (the "Company") operated 64 restaurants, consisting of 63 Chart Houses and one Peohe's. In addition, the Company operates a wholesale bakery under the name Solana Beach Baking Company. The Company sold its Paradise Bakery subsidiary in December 1995, and in May 1996, the Company sold its Islands restaurant operations. The Company was incorporated in Delaware on July 25, 1985. The Company's principal executive offices are located at 115 South Acacia Avenue, Solana Beach, California 92075, and its telephone number is (619) 755-8281.
The following discussion describes the Company's operations.
OPERATIONS
Chart House operations commenced in 1961 with the opening of the first Chart House in Aspen, Colorado by a predecessor of the Company. Today, there are 63 Chart House restaurants located in 22 states, Puerto Rico and the U.S. Virgin Islands.
Chart House restaurants are full-service, casual dinner houses with a menu featuring fresh fish, seafood, steaks, chicken, prime rib, pasta dishes and as much salad and bread as the customer desires. Many of the Chart House restaurants feature an elaborate salad bar where the customer prepares his or her own salad and some Chart Houses have a seafood bar which offers various appetizers.
The Company places great emphasis upon the location and exterior and interior design of each Chart House restaurant. Each Chart House is unique and designed to fit within and complement its surroundings. The restaurant buildings are environmentally sensitive and functional in design. Representative exteriors of Chart House restaurants range from the restored 1887 Victorian boathouse on Coronado Island in San Diego Bay to the modern three-tiered glass restaurant in Philadelphia overlooking the Delaware River. With a few exceptions, Chart House restaurants are free-standing buildings with dinner seating capacities ranging from 92 to 350 and an average seating capacity of 196. The restaurant interiors are casual in design and decor and are accentuated by nautical-themed and action/adventure oriented artwork.
In 1996 the annual sales for Chart House restaurants currently in operation ranged from $846,000 to$7.2 million with an average annual sales per Chart House restaurant of $2.3 million. The average dinner check was approximately $24 per person, excluding alcoholic beverages. Almost all Chart House restaurants accept dinner reservations. The operating hours for Chart House restaurants are typically 5:00 p.m. to 11:00 p.m. on weekdays and 5:00 p.m. to 1:00 a.m. on weekends.
Alcoholic beverages are available at all Chart House locations. The sale of alcoholic beverages accounted for approximately 22% of the revenues generated by Chart House restaurants during each of the past three years.
Each Chart House restaurant is managed by one general manager and between one and six assistant managers, depending on the operating characteristics and size of the restaurant. On average, general managers possess approximately ten years experience with Chart House. The assistant managers generally are required to participate in a comprehensive management development program with progressive management assignments. In addition, each general manager is required to comply with an extensive operations manual which contains procedures to ensure uniform operations, consistently high quality products and service and proper accounting for restaurant operations. The general manager and his or her assistants are responsible for training restaurant employees.
There are seven Chart House regional directors of operations, each of whom is responsible for eight to ten Chart House restaurants in a given area. The regional directors of operations report to the Vice President--Operations who is based in Connecticut, and who reports directly to the Executive Vice President--Operations of the Company. The duties of the directors of operations include supervising and assisting the managerial and staff employees of all Chart House restaurants.
Peohe's
The Company opened its Peohe's restaurant in January 1988 in Coronado, California overlooking San Diego Bay and the San Diego city skyline. Although similar to the Company's Chart House restaurants in many respects, Peohe's opened under a different name in part to minimize confusion and competition with nearby Chart House restaurants and also to provide Chart House management a suitable vehicle for experimentation and development of different menu items, restaurant design and operating concepts. Peohe's has a more extensive and higher priced menu, higher level of service and greater variety of cooking techniques than the typical Chart House restaurant.
Solana Beach Baking Company
The Company operates a wholesale bakery in a leased facility located in Carlsbad, California under the trade name "Solana Beach Baking Company." The wholesale bakery supplies bread and other baked goods to Chart House restaurants and also supplies muffins, croissants and other bakery products to several hotels, food service distributors and other third party accounts. In late-1994, the wholesale bakery began supplying cookies, cinnamon rolls and other baked goods to Starbucks retail coffee outlets throughout Southern California.
Site Development
The cost of opening a Chart House restaurant varies significantly from restaurant to restaurant, depending upon, among other things, the location of the site and whether the land, building, furniture, fixtures and equipment are purchased or leased. For example, the Alexandria, Virginia restaurant, a building which was constructed in 1990 on leased land, required total capital expenditures of approximately $4.8 million, while the Longboat Key, Florida restaurant, which involved construction of leasehold improvements to an existing structure in 1989, required total capital expenditures of approximately $955,000. Capital expenditures for the new Chart House in Newport, Kentucky, which was constructed on leased land and opened in April 1996, totaled about $2.9 million.
While identifying and developing restaurant sites, particular emphasis is placed on a potential site's physical location, with a preference for locations near water and within major metropolitan areas. Sales and profit projections are then prepared to determine whether the proposed restaurant will provide a targeted return on investment. The Company accords great importance to the selection of and coordination with the architect to ensure that the proposed restaurant structure fits the Chart House restaurant image. Where a new free-standing building is required to be built, up to 2 1/2 years may elapse from site selection to restaurant opening. However, where the Company is able to locate a suitable restaurant for conversion to a Chart House, the development period is generally six to 12 months.
Strategic Plan
Over the past few years, the Company scaled back development of new Chart House restaurants, in large part due to the redirection of expansion efforts and capital to the development of Islands restaurants. In the fourth quarter of 1995, the Company adopted a new strategic plan to improve shareholder value by refocusing on its core business--Chart House restaurants. The new strategic plan called for selling the company's Paradise Bakery and Islands operations, and modernizing, revitalizing and expanding the Chart House concept. Key to
the strategy were the upgrading of facilities, enhancement of menu offerings and increased marketing efforts at the Chart House restaurants. In addition, the Company planned, on a long-term basis, for management succession and reorganization, the selective disposition of restaurants that did not meet performance criteria, and the building of new Chart House restaurants at a moderate pace.
The Company sold Paradise Bakery in December 1995, and in May 1996 completed the disposition of the Islands operations.
The Company implemented major areas of the strategic plan in late 1995 and 1996. The Company remains, however, in the early stages of the program to revitalize and upgrade the restaurant facilities, pending resolution of current financing issues and other matters.
ISLANDS
In May, 1996, the Company completed the sale of a 75% interest in its Islands restaurant operations to two affiliated partnerships of Islands Restaurants, L.P., the owner/licensor of the Islands concept, for a total price of $23 million in notes. The notes bear interest at a rate of 9% and are secured by restaurant assets. The Company has a 25% interest as a limited partner in each of the partnerships, and is entitled to periodic distributions based on available cash flows, as provided in the partnership agreements.
As part of the transaction, the existing area development agreement and license and management agreement between the Company's subsidiary, Islands Restaurants, Inc. and Islands Restaurants, L.P. terminated, thereby relieving the Company of its obligation to continue developing Islands restaurants, and reverting the license and development rights back to Islands Restaurants, L.P., which also reassumed responsibility for managing its Islands restaurants in the Los Angeles and Dallas markets as well as the restaurants acquired from the Company.
PROCUREMENT OF FOOD AND SUPPLIES
The Company's ability to maintain consistent quality throughout its restaurants depends in part upon the ability to acquire food products and related items from reliable sources in accordance with Company specifications. Chart House restaurants have purchased virtually all of the meat and frozen seafood used in the restaurants on a national basis from one distributor for the past 27 years. Management believes that adequate alternative sources of supply are readily available.
EMPLOYEES AND LABOR RELATIONS
As of December 30, 1996, the Company employed approximately 4,550 persons, of whom approximately 4,250 were hourly restaurant or clerical employees and approximately 300 were salaried, managerial employees engaged in administrative and supervisory capacities. A majority of the hourly employees are employed on a part-time basis to provide services necessary during peak periods of restaurant operations. None of the Company's employees is covered by a collective bargaining agreement. The Company has never experienced a work stoppage and believes its labor relations to be good.
COMPETITION
In general, the restaurant business is highly competitive and can be affected by competition created by similar restaurants in a geographic area, changes in the public's eating habits and preferences and local and national economic conditions affecting consumer spending habits, population trends and traffic patterns. Key competitive factors in the industry are the quality and value of the food products offered, quality of service, cleanliness, name identification, restaurant locations, price and attractiveness of facilities. The Company's
strategy is to differentiate itself from its competitors by providing consistently high quality products, and efficient and friendly service in a unique setting.
MARKETING
The Company has developed an extensive, coordinated marketing communications program. Prior to 1993, Chart House had not utilized any significant advertising other than yellow pages and selected local print advertising and limited test marketing programs in 1991 and 1992. The 1993 program developed for Chart House consisted of a national print media brand awareness campaign, and the implementation of the Aloha Club, a frequent diner program, in October 1993. Efforts in the past three years were devoted to various local and national advertising and promotional campaigns and to supporting the Aloha Club, which has a current enrollment of approximately 15,000 active members.
GOVERNMENT REGULATION
Each of the Company's restaurants is subject to various federal, state and local laws, regulations and administrative practices affecting its business and must comply with provisions regulating health and sanitation standards, equal employment, public accommodations for disabled patrons, minimum wages, worker safety and compensation and licensing for the sale of food and alcoholic beverages. Difficulties or failures in obtaining or maintaining required liquor licenses, or other required licenses or approvals, could delay or prevent the opening of new restaurants or adversely affect the operations of existing restaurants.
Federal and state environmental regulations have not had a material effect on the Company's operations but more stringent and varied requirements of local governmental bodies with respect to zoning, land use and environmental factors could delay construction of new restaurants and add to their cost.
The Company is also subject to the Fair Labor Standards Act, which governs such matters as minimum wages, overtime and other working conditions. A significant number of the Company's food service personnel are paid at rates related to federal and state minimum wage requirements and, accordingly, increases in the minimum wage or decreases in the allowable tip credit will increase the Company's labor cost. There can be no assurance that future legislation covering, among other matters, mandated health insurance, will not be enacted which could have a significant effect on the Company.
The Company believes it is operating in substantial compliance with applicable laws and regulations governing its operations.
TRADEMARKS AND SERVICE MARKS
The "Chart House" logo and trademark were registered with the United States Patent and Trademark Office (the "USPTO") in 1972 and 1977, respectively. The "Peohe's" logo and trademark were registered with the USPTO in 1988. The "Aloha Club" trademark and logo were registered with the USPTO in 1996. Applications to register a new corporate trademark and logo are pending with the USPTO.
The "Chart House" trademark and logo are licensed by the Company to the operator of one Chart House restaurant located in Honolulu, Hawaii, and to the operator of a Chart House restaurant in Queensland, Australia.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about the executive officers of the Company. Unless otherwise indicated, all positions are with Chart House Enterprises, Inc.
Executive officers of the Company are appointed annually by the Board of Directors and serve at the Board's discretion.
William R. Kuntz, Jr. has been Executive Vice President--Finance and Administration, General Counsel and Secretary since July 1996. He became chief financial officer in July 1996 and assumed, with Mr. McGillin, the duties and responsibilities of president and chief executive officer in November 1996. He was Executive Vice President, General Counsel and Secretary from February 1996 to July 1996. He joined the Company as Vice President, General Counsel and Secretary in June 1988. Mr. Kuntz was previously a partner in the Los Angeles and San Diego offices of Morgan, Lewis & Bockius, a national law firm.
Stephen J. McGillin was named Executive Vice President--Operations of the Company in November 1996 and at that time assumed, with Mr. Kuntz, the duties and responsibilities of president and chief executive officer. From May 1996 to November 1996, he was Senior Vice President--Operations. Mr. McGillin has been an officer with the Chart House restaurant organization since 1991. Mr. McGillin has been with the Chart House restaurant organization continuously for the past 22 years.
Roy S. Bream has been a Vice President of the Company since February 1993, and was named Senior Vice President--Real Estate and Development in July 1996. Mr. Bream was Vice President--Real Estate and Development of the Company from January 1994 to July 1996. From May 1992 to December 1993, he was President and Chief Operating Officer of the Company's subsidiary, Paradise Bakery, Inc. He was Director of Real Estate and Development of Paradise Bakery, Inc. from October 1990 to May 1992. Mr. Bream has been with the Chart House restaurant organization continuously for the last nine years.
Pamela J. Robertson joined the Company in August 1996 as Senior Vice President--Human Resources. Ms. Robertson has been a human resources professional for 16 years and has been the senior human resources officer for Panda Management Company, Family Restaurants, The Wherehouse and the Federal Reserve Bank of San Francisco.
Randall P. McNamara was named Vice President--Operations of the Company in March 1997. Mr. McNamara has been an officer of the Chart House restaurant organization since 1988. Mr. McNamara has been with the Chart House restaurant organization continuously for the last 22 years.
ITEM 2.

ITEM 2. PROPERTIES.
A majority of the restaurant properties used by the Company are leased from others. The following table sets forth the number of restaurants owned, leased and operated pursuant to ground leases and the average
remaining lease term (including renewal options) in years as of December 30, 1996. The table does not include owned properties or leases under which the Company was not engaged in restaurant operations at year end.
- -------- (1) The Company leases restaurant properties (a) pursuant to standard lease or sublease arrangements and (b) under "build-to-suit" arrangements pursuant to which the landowner/landlord builds a restaurant to the Company's specifications. Each restaurant property is owned by the landowner/landlord and at the expiration or termination of the lease term, the Company will have no interest in the restaurant or any other material improvements constructed on the real property. (2) Under ground lease arrangements, the Company, as tenant, leases undeveloped real property and is responsible for constructing all or substantially all improvements on the real property. In a typical ground lease, the improvements constructed by the Company are owned by the Company and the landowner/landlord has no interest in the improvements constructed by the Company until the expiration or termination of the lease, at which time the improvements become the property of the landowner/landlord. (3) Includes renewal options.
The amount of rent paid to lessors and the methods of computing rent vary considerably from lease to lease. Most leases contain a provision for a rental equal to the greater of a fixed minimum amount or a percentage of restaurant sales at the leased premises.
Substantially all of the owned Chart House restaurants and certain of the leased Chart House restaurants are subject to mortgages in favor of certain lenders. See Note 6 of the Notes to Consolidated Financial Statements as of December 30, 1996 for information with respect to security agreements and obligations under mortgages.
The Company operates one Chart House restaurant under a management agreement with the owner of the property. The restaurant, located in Weehawken, New Jersey, covers approximately 22,000 square feet.
Solana Beach Baking Company leases approximately 17,000 square feet of space in a building in Carlsbad, California for use as a wholesale bakery. The extended term of the lease expires in June 1998 and there is an option for an additional six month term.
The Company's principal executive offices occupy approximately 20,400 square feet of office space in a building located in Solana Beach, California, which is owned and used by the Company.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
Management of the Company believes that there are no material legal proceedings pending or threatened to which the Company is or may be a party or to which any of its property is subject. The Company is involved in various lawsuits incidental to its business. Management does not believe that the outcome of such litigation will have a material adverse effect upon the consolidated operations or financial condition of the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information appearing under the caption "Common Stock Information" on page 29 of the Company's Annual Report to Stockholders for the year ended December 30, 1996 (the "Annual Report") is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data for the Company and its subsidiaries on page 15 of the Annual Report is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of Operations appears on pages 10 through 14 of the Annual Report and is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and its subsidiaries, listed under Item 14, appear on pages 16 through 27 of the Annual Report and are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors. The information appearing under the caption "Election of Directors" on pages 30, 31 and 32 of the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 20, 1997 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers. The information with respect to executive officers appearing under the caption "Executive Officers of the Company" is included in Item 1 of this Annual Report on Form 10-K on page 5 and is incorporated herein by reference pursuant to general instruction G and instruction 3 to Item 401(b) of Regulation S-K.
Compliance with Section 16(a) of the Exchange Act. The information appearing under the caption "Security Ownership of Management--Compliance with Section 16(a) of the Exchange Act" on page 40 of the Proxy Statement is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information appearing under the caption "Executive Compensation" commencing on page 33 of the Proxy Statement is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing under the captions "Principal Stockholders" on page 29 and "Security Ownership of Management" on page 39 of the Proxy Statement is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements:
Included in Part II of this report are the following financial statements incorporated herein by reference to the following pages of the Annual Report.
(2) Financial Statement Schedules:
All schedules have been omitted since the information required to be submitted has been included in the consolidated financial statements or notes thereto or have been omitted as not applicable or not required.
(3) Exhibits:
- -------- (1) Filed as an exhibit to the Company's Registration Statement on Form S-1 dated August 27, 1987 or amendments thereto dated October 6, 1987 and October 14, 1987 (Registration No. 33-16795). (2) Filed as an exhibit to the Company's Registration Statement on Form S-1 dated July 20, 1989 or amendment thereto dated August 25, 1989 (Registration No. 33-30089). (3) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1989. (4) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1990. (5) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1991. (6) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1992. (7)Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1993. (8) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1994. (9) Filed as an exhibit to Form 8-K dated January 12, 1996, for the event reported as of December 31, 1995. (10) Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1995. (11) Filed as an exhibit to Form 10-Q for the quarterly period ended April 1, 1996. (12) Filed as an exhibit to Form 8-K dated May 28, 1996, for the event reported as of May 14, 1996. (13) Filed as an exhibit to Form 10-Q for the quarterly period ended September 30, 1996.
(b) Reports on Form 8-K. No reports on Form 8-K have been filed by the Company during the fourth quarter of the fiscal year covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHART HOUSE ENTERPRISES, INC. Date: March 28, 1997 By WILLIAM R. KUNTZ, JR. ------------------------------------- William R. Kuntz, Jr. Executive Vice President--Finance and Administration, General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the dates indicated.
Samuel Zell