UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 28, 1997
or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 0-19542
APPLE SOUTH, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Hancock at Washington, Madison, GA 30650
(Address of principal executive offices) (Zip Code)
706-342-4552
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
As of November 12, 1997, there were 38,761,685 shares of common stock of the
Registrant outstanding.
<PAGE>
APPLE SOUTH, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 1997
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings..........................3
Consolidated Balance Sheets..................................4
Consolidated Statements of Shareholders' Equity..............5
Consolidated Statements of Cash Flows........................6
Notes to Consolidated Financial Statements...................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...............11
Part II - Other Information
Item 1 - Legal Proceedings...........................................14
Item 2 - Changes in Securities and Use of Proceeds...................14
Item 6 - Exhibits and Reports on Form 8-K............................15
Signature ............................................................16
Page 2
<PAGE>
Part 1 - Financial Information
Item 1 - Financial Statements
<TABLE>
Apple South, Inc.
Consolidated Statements of Earnings
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Quarter Ended Nine Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Applebee's $ 114,122 95,911 341,796 280,438
Don Pablo's 54,542 36,603 143,400 96,471
McCormick & Schmick's 20,265 - 47,297 -
Hops 14,170 - 32,393 -
Canyon Cafes 8,082 - 8,082 -
Harrigan's 4,558 5,269 14,398 16,545
Other - 2,013 2,715 9,620
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales 215,739 139,796 590,081 403,074
- ------------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 59,457 38,467 163,710 110,585
Payroll and benefits 65,735 42,713 178,613 119,663
Depreciation and amortization 8,275 5,427 22,905 16,253
Other operating expenses 49,602 33,332 133,759 92,054
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 183,069 119,939 498,987 338,555
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses 10,380 6,748 28,773 19,925
Asset revaluation charges - 7,300 - 27,100
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 22,290 5,809 62,321 17,494
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (4,539) (3,455) (13,181) (7,521)
Distributions on preferred securities (2,012) - (4,400) -
Interest income 5 - 68 65
Other, primarily goodwill amortization (1,379) (491) (3,176) (1,511)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (7,925) (3,946) (20,689) (8,967)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 14,365 1,863 41,632 8,527
Income taxes 3,705 675 13,480 3,050
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 10,660 1,188 28,152 5,477
====================================================================================================================================
Primary earnings per common share $ 0.27 0.03 0.73 0.14
====================================================================================================================================
Fully diluted earnings per common share $ 0.26 0.03 0.70 0.14
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
Apple South, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 28, Dec. 29,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,801 3,923
Short-term investments 37 52
Accounts receivable 5,797 4,568
Inventories 9,485 6,364
Prepaid expenses and other 12,338 9,780
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 29,458 24,687
Premises and equipment, net 528,399 380,523
Franchise costs, net 6,109 5,880
Goodwill, net 174,550 36,351
Other assets 20,926 10,386
- ------------------------------------------------------------------------------------------------------------------------------------
$ 759,442 457,827
====================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 17,429 16,688
Accrued liabilities 33,791 22,887
Current installments of long-term debt 194 286
Income taxes 195 320
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 51,609 40,181
Long-term debt 351,151 215,891
Deferred income taxes 14,956 10,326
Other long-term liabilities 7,355 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 425,071 266,398
- ------------------------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities of subsidiary
Apple South Financing I, holding solely Apple South, Inc. 7% convertible
subordinated debentures due March 1, 2027 115,000 -
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized 75,000,000 shares;
40,478,760 issued in 1997 and 39,124,925 issued in 1996 405 391
Additional paid-in capital 145,086 132,976
Retained earnings 98,010 70,981
Treasury stock at cost; 1,759,775 shares in 1997 and 677,508
shares in 1996 (24,130) (12,919)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 219,371 191,429
- ------------------------------------------------------------------------------------------------------------------------------------
$ 759,442 457,827
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
Apple South, Inc.
Consolidated Statements of Shareholders' Equity
(In thousands, except per share amounts)
(Unaudited)
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Shareholders'
Shares Amount Capital Earnings Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 29, 1996 39,125 $391 $132,976 $70,981 ($12,919) $191,429
Net earnings - - - 7,268 - 7,268
Purchase of common stock - - - - (15,640) (15,640)
Issuance of common stock for acquisitions 1,298 13 16,323 - - 16,336
Common stock issued to ESOP and ESPP 23 - 300 - - 300
Exercise of options 10 - (4,374) - 4,992 618
Tax effect of exercise of options by employees - - 848 - - 848
Cash dividends ($0.008 per share) - - - (313) - (313)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 30, 1997 40,456 404 146,073 77,936 (23,567) 200,846
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 10,224 - 10,224
Purchase of common stock - - - - (7,355) (7,355)
Common stock issued to ESOP and ESPP 9 1 125 - - 126
Exercise of options - - (343) - 460 117
Tax effect of exercise of options by employees - - 29 - - 29
Cash dividends ($0.01 per share) - - - (405) - (405)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 29, 1997 40,465 405 145,884 87,755 (30,462) 203,582
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings - - - 10,660 - 10,660
Issuance of treasury stock for acquisitions - - (922) - 6,078 5,156
Common stock issued to ESOP and ESPP 14 - 124 - - 124
Exercise of options - - (21) - 254 233
Tax effect of exercise of options by employees - - 21 - - 21
Cash dividends ($0.01 per share) - - - (405) - (405)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 28, 1997 40,479 $405 $145,086 $98,010 ($24,130) $219,371
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
<TABLE>
Apple South, Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 28, Sept. 29,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,152 5,477
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 27,573 19,032
Deferred income taxes 4,630 (1,226)
Asset revaluation charges - 23,762
(Increase) decrease in assets:
Accounts receivable 744 (21)
Inventories (1,345) (1,040)
Prepaid expenses and other (2,146) (1,251)
Increase (decrease) in liabilities:
Accounts payable (6,687) 5,227
Accrued liabilities (7,922) 3,331
Income taxes 35 1,587
Other long-term liabilities 377 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 43,411 54,878
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (120,213) (88,823)
Acquisition of businesses, net of cash acquired (146,444) -
Proceeds from sale of land and equipment 4,178 429
Decrease in short-term investments 15 323
Additions to franchise costs (704) (823)
Additions to other assets (9,519) (7,017)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (272,687) (95,911)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements 134,500 (38,590)
Proceeds from issuance of preferred securities 115,000 -
Proceeds from issuance of long-term debt 823 125,000
Principal payments on long-term debt (569) (19,650)
Proceeds from issuance of common stock 1,518 2,525
Dividends declared and paid (1,123) (856)
Purchase of treasury stock (22,995) (30,048)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 227,154 38,381
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents during the period (2,122) (2,652)
Cash and cash equivalents at the beginning of the period 3,923 4,806
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 1,801 2,154
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 28, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 29, 1996,
except as disclosed herein. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 28, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 28, 1997.
NOTE 2 - BUSINESS COMBINATIONS
On July 17, 1997, the Company acquired Dallas-based Canyon Cafes, Inc. ("Canyon
Cafes") for $38.8 million, including $33.6 million in cash and 357,600 shares of
Apple South, Inc. common stock, plus the assumption of approximately $7.5
million in debt. The cash portion of the merger consideration included $30.8
million paid to the stockholders of Canyon Cafes, Inc., plus additional amounts
relating primarily to the exercise of an option to purchase certain property. At
the time of acquisition, Canyon Cafes operated 13 full-service casual dining
restaurants in six states plus Washington D.C. Canyon Cafe restaurants, which
operate under the names "Canyon Cafe" and "Sam's Cafe", emphasize an authentic
Southwestern theme through their menu and adobe-style decor.
On March 13, 1997, the Company acquired the Hops Grill & Bar restaurant system
("Hops Grill & Bar"), for $29.5 million, which included $16.3 million in cash
and 1.05 million shares of Apple South, Inc. common stock, plus the assumption
of approximately $28.9 million in debt. The accompanying consolidated financial
statements reflect minority interest equal to the proportionate share of the
subsidiary's net assets not owned by Apple South. The Florida-based company
operated 21 full-service casual dining restaurants in four states at the time of
acquisition.
On March 3, 1997, the Company acquired all of the outstanding shares of
McCormick & Schmick Holding Corp. ("McCormick & Schmick's"), an Oregon-based
restaurant company, for $53.3 million, including $50.1 million in cash and
248,139 shares of Apple South, Inc. common stock, plus the assumption of
approximately $15.0 million in debt. McCormick & Schmick's operated 16
full-service upper-end casual seafood restaurants in four states plus
Washington, D.C. at the time of acquisition.
All three acquisitions were accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to the
net assets acquired based on their estimated fair values. At September 28, 1997,
the Company had not finalized its evaluation of the fair value of tangible and
intangible assets acquired and liabilities assumed. Based on the preliminary
estimates, the aggregate fair value of tangible assets acquired and liabilities
Page 7
<PAGE>
assumed was $66.4 million and $34.7 million, respectively. The remaining
estimated excess of purchase price over net assets acquired, $141.3 million, was
recorded as goodwill and is being amortized on a straight-line basis over 40
years. The 40-year amortization period represents the estimated future periods
to be benefited and was determined to be appropriate based on the absence of any
legal or contractual provisions which would indicate a shorter useful life.
NOTE 3 - LONG-TERM DEBT
At September 28, 1997, approximately $224.0 million was outstanding under the
Company's $230.0 million unsecured revolving bank credit facilities. Subsequent
to September 28, 1997, the Company expanded its revolving credit agreements by
$20.0 million.
NOTE 4 - CONVERTIBLE PREFERRED SECURITIES
During the first quarter of 1997, Apple South Financing I (the "Trust") issued
2,300,000, $3.50 term convertible securities, Series A (the "Convertible
Preferred Securities"). Apple South Financing I, a statutory business trust, is
a wholly owned, consolidated subsidiary of the Company with its sole asset being
$115.0 million aggregate principal amount of 7% convertible subordinated
debentures due March 1, 2027 of Apple South, Inc. (the "Convertible
Debentures").
The Convertible Preferred Securities are convertible at an initial rate of
3.3801 shares of Apple South common stock for each security. The Company has
executed a guarantee with regard to the Convertible Preferred Securities. The
guarantee, when taken together with the Company's obligations under the
Convertible Debentures, the indenture pursuant to which the Convertible
Debentures were issued, and the declaration of trust of Apple South Financing I,
provides a full and unconditional guarantee of amounts due under the Convertible
Preferred Securities.
Proceeds to the Company, after deducting underwriters' fees and other offering
expenses of approximately $3.7 million, were $111.3 million. The proceeds were
used to repay revolving loan advances used for the acquisition of McCormick &
Schmick's and to finance the acquisition of Hops Grill & Bar, including in each
case, retirement of acquired company debt.
NOTE 5 - SHAREHOLDERS' EQUITY
Cash dividends declared and paid in the quarter ended September 28, 1997 were
$405,000, or $0.01 per share. On October 29, 1997, the Company declared a cash
dividend of $0.01 per share, payable on November 28, 1997 to shareholders of
record on November 14, 1997.
NOTE 6 - INCOME TAXES
The Company's estimated effective tax rate for the full year 1997 is expected to
approximate 32.4%, as compared to an effective rate of 35.8% on 1996 earnings
before asset revaluation charges. This decrease is due primarily to management's
assessment of the impact of the FICA tip credit and the allocation of earnings
among states associated with significant 1997 acquisitions.
Page 8
<PAGE>
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
For the nine months ended September 28, 1997 and September 29, 1996, the
following supplements the consolidated statements of cash flows (amounts in
thousands):
1997 1996
- --------------------------------------------------------------------------------
Interest paid $ 13,216 4,121
- --------------------------------------------------------------------------------
Distributions paid on preferred securities $ 3,912 -
- --------------------------------------------------------------------------------
Income taxes paid $ 8,074 1,541
- --------------------------------------------------------------------------------
Business acquisitions, net of cash acquired
Fair value of assets acquired, other than cash $ 63,261 -
Liabilities assumed (34,704) -
Merger consideration payable (1,890) -
Stock issued (21,492) -
Purchase price in excess of the net assets acquired 141,269 -
================================================================================
Net cash used for acquisitions $ 146,444 -
================================================================================
NOTE 8 - COMMITMENTS AND CONTINGENCIES
At September 28, 1997, the Company was obligated under development agreements
with Applebee's International, Inc., the franchisor of Applebee's restaurants,
to open 10 additional Applebee's restaurants by the end of 1997 and a total of
105 by the end of the year 2000.
An action titled John Bryant, et al. v. Apple South, Inc., et al., Civil Action
No. 3:97-CV-83(DF) was filed on September 22, 1997 in the United States District
Court for the Middle District of Georgia. An action titled Artel Foam
Corporation Pension Trust, et al. v. Apple South, Inc., et al., Civil Action No.
CV-97-6189 was filed on October 28, 1997 in the United States District Court for
the Eastern District of New York. Each of these lawsuits was filed by a person
who seeks to represent a class of shareholders of the Company who purchased
shares of the Company's common stock between May 26, 1995 and September 24,
1996. Each plaintiff named the Company and certain of its officers and directors
as defendants. The complaints alleged acts of fraudulent misrepresentation by
the defendants which induced the plaintiffs to purchase the common stock and
alleged illegal insider trading by certain of the defendants, each of which
allegedly resulted in losses to the plaintiffs and similarly situated
shareholders of the Company. The complaints seek damages and other relief.
Although the ultimate outcome of these lawsuits cannot be determined at this
time, based on its preliminary analysis the Company believes that the
allegations therein are without merit and intends to vigorously defend itself.
Page 9
<PAGE>
NOTE 9 - EARNINGS PER SHARE
Primary earnings per common share equals net earnings divided by the weighted
average number of common shares outstanding after giving effect to dilutive
stock options. Fully diluted earnings per common share is computed by giving
effect to dilutive stock options and by adjusting both net earnings and shares
outstanding as if the Convertible Preferred Securities had been converted at the
date of issuance. The number of shares used in the primary earnings per share
computations for the nine months ended September 28, 1997 and September 29, 1996
was 38,657,000 and 39,625,000, respectively. The number of shares used in the
fully diluted earnings per share computations for the nine months ended
September 28, 1997 and September 29, 1996 was 44,505,000 and 39,690,000,
respectively.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires all entities to provide dual disclosure of
earnings per share, basic and diluted. Basic earnings per share equals net
earnings divided by the weighted average number of common shares outstanding and
does not include the dilutive effect of stock options. Diluted earnings per
share is essentially the same as fully diluted as under APB 15 as discussed
above. The Company has evaluated the impact of this pronouncement for 1997 and
expects a slight increase in basic earnings per share, as compared to primary
earnings per share, and no impact on diluted earnings per share.
Page 10
<PAGE>
Item 2.
APPLE SOUTH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 28, 1997
Comparison of Historical Results - Fiscal quarters ended September 28, 1997 and
September 29, 1996
Restaurant sales for the third quarter and the nine months ended September 28,
1997 increased 54% and 46%, respectively, over the comparable periods of 1996.
The increased sales are primarily attributable to increases in the number of
restaurant operating weeks through both restaurant openings and acquisitions, as
well as increases in average weekly sales over the prior year comparable
periods. For the third quarter and nine-month period ended September 28, 1997,
operating weeks increased by 19% and 20%, respectively, at Applebee's and 49%
and 45%, respectively, at Don Pablo's as compared to the same periods of the
prior year. The increase in operating weeks is due to 37 Applebee's and 29 Don
Pablo's opened since September 29, 1996 and 16 McCormick & Schmick's and 21 Hops
Grill & Bar restaurants acquired during the first quarter of 1997. In addition,
third quarter revenues include three months of sales for 13 Canyon Cafe
restaurants which were acquired during July 1997. The sales increases resulting
from the opening of new restaurants and acquisitions were slightly offset by
sales related to 15 Tomato Rumba's restaurants closed in March 1996 and six
additional locations closed in July 1996. In addition, two Harrigan's
restaurants were closed during the first quarter of 1997 and, during the second
quarter of the current year, the Company completed the sale of its 10-unit
Hardee's division and closed one Applebee's restaurant.
Average weekly sales at base restaurants (those open for a full 12 months at the
beginning of 1997) were approximately 3% higher at Don Pablo's and 2% higher at
Applebee's and Harrigan's in the third quarter of 1997 as compared with the same
period in 1996. The Company believes that the sales increases in its Applebee's
division are attributable to (i) initiatives begun in the third quarter of 1996
to enhance guest and employee satisfaction, (ii) an average menu price increase
of approximately 2.5% during the third quarter, and (iii) increased and improved
advertising strategies. Increases in the Don Pablo's division are attributable
to increased concept recognition and awareness in existing markets achieved
through market penetration and increased advertising.
For the third quarter of 1997, restaurant operating expenses as a percent of
sales decreased 0.9% to 84.9% as compared with 85.8% for the same period in
1996. The resulting increase in restaurant operating margins is principally due
to higher average unit volumes in the Applebee's, Don Pablo's and Harrigan's
divisions which increased operating leverage on fixed costs and a relative
decrease in royalty fees due to a greater percentage of revenues being generated
by Don Pablo's and the newly acquired divisions which are not operated under
franchise agreements.
During the nine months ended September 29, 1996, the Company recorded an asset
revaluation charge related to the decision to redeploy the assets in its Tomato
Rumba's division and to accelerate its efforts to sell the Hardee's division.
The resulting pre-tax charge of $27.1 million consisted primarily of asset
impairment loss recorded in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of" and included certain operating losses
related to the Tomato Rumba's division.
Page 11
<PAGE>
Interest expense for the quarter ended September 28, 1997 increased to $4.5
million compared to $3.5 million for the same quarter of 1996 primarily due to
higher average borrowings in support of the Company's expansion. Interest
expense was favorably impacted by (i) an interest rate contract which was
marked-to-market during the third quarter, (ii) higher levels of capitalized
interest on construction in process, and (iii) slightly lower weighted average
interest rates. At September 28, 1997, the market value of the interest rate
contract was $1.0 million.
In March 1997, the Company issued $115.0 million of 7.0% Convertible Preferred
Securities to finance acquisitions (see Note 4). Distributions on the preferred
securities were $2.0 million for the quarter ended September 28, 1997.
The Company's estimated effective tax rate for the full year 1997 is expected to
approximate 32.4%, as compared to an effective rate of 35.8% on 1996 earnings
before asset revaluation charges. This decrease is due primarily to management's
assessment of the impact of the FICA tip credit and the allocation of earnings
among states associated with significant 1997 acquisitions.
Liquidity and Capital Resources
Substantially all restaurant sales are for cash, and accounts payable are
generally due in 15 to 45 days. As such, the Company is able to operate with
negative working capital. The increases in inventory, premises and equipment,
franchise costs, and accrued liabilities are primarily attributable to the
restaurants opened during the first nine months of the year. In addition, the
1997 acquisitions of McCormick & Schmick's, Hops Grill & Bar and Canyon Cafes
also had a significant impact on balance sheet accounts, resulting in increases
to accounts receivable, inventories, premises and equipment, goodwill, accounts
payable and accrued liabilities. The increase in other assets is principally due
to issuance costs related to the Convertible Preferred Securities and an
increase in cash surrender value of an officer's life insurance policy. Other
long-term liabilities represents deferred rent incentives related to the Canyon
Cafe division and the interest of minority partners for the portion of Hops
Grill & Bar not owned by the Company. Further increases in current assets and
liabilities are expected with the addition of new restaurants.
Capital expenditures for the first nine months of 1997 were $120.2 million as
compared to $88.8 million for the same period of 1996. Capital expenditures
include purchases of land for new restaurants, new restaurant construction, and
purchases of new and replacement furniture and equipment. Capital expenditures
are expected to be approximately $40.0 million for the remainder of fiscal 1997
and $225.0 million in 1998, of which $50.0 million is expected to be financed
through a master equipment lease which was established during the third quarter.
The Company has available unsecured revolving bank credit agreements totaling
$230.0 million with interest payable at a margin above LIBOR or at prime. At
September 28, 1997, approximately $224.0 million was outstanding under the
revolving bank credit agreements. Subsequent to September 28, 1997, the Company
Page 12
<PAGE>
expanded its revolving credit agreements by $20.0 million. Management believes
that cash flow from operations and remaining borrowings available under the
existing credit and lease facilities will provide funding sufficient to enable
the Company to carry out current expansion plans through 1997. Additional credit
facilities will be required in order for the Company to carry out its expansion
plans for 1998. The Company believes that additional credit sources will be
available on acceptable terms to carry out its expansion plans through 1998 and
maintain a capital structure with a debt to capital ratio in its target range of
40% to 60%.
At September 28, 1997, the Company was obligated, under development agreements
with Applebee's International, Inc., the franchisor of Applebee's restaurants,
to open 105 additional Applebee's restaurants by the end of the year 2000,
including a total of 34 required to be opened during 1997. As of September 28,
1997, the Applebee's division had opened 24 new restaurants, and expects to open
10 additional restaurants by the end of the year.
During July 1997, the Company acquired all of the outstanding shares of Canyon
Cafes, Inc. and merged Canyon Cafes, Inc. into the Company. Canyon Cafes, Inc.,
based in Texas and consisting of 13 Southwestern theme restaurants at the time
of the merger, was acquired for $38.8 million, including $33.6 million in cash
and 357,600 shares of Apple South, Inc. common stock, plus the assumption of
approximately $7.5 million in debt. The cash portion of the merger consideration
included $30.8 million paid to the stockholders of Canyon Cafes, Inc., plus
additional amounts relating primarily to the exercise of an option to purchase
certain property.
New Accounting Pronouncement
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"("SFAS
128"), is effective for financial statements issued for periods ending after
December 15, 1997. SFAS 128 requires all entities to provide dual disclosure of
earnings per share, basic and diluted. Basic earnings per share equals net
earnings divided by the weighted average number of common shares outstanding and
does not include the dilutive effect of stock options. Diluted earnings per
share is essentially the same as fully diluted as under APB 15 (see Note 9). The
Company has evaluated the impact of this pronouncement for 1997 and expects a
slight increase in basic earnings per share, as compared to primary earnings per
share, and no impact on diluted earnings per share.
Effect of Inflation
Management believes that inflation has not had a material effect on earnings
during the past several years. Inflationary increases in the cost of labor, food
and other operating costs could adversely affect the Company's restaurant
operating margins. In the past, however, the Company generally has been able to
modify its operations to offset increases in its operating costs.
Forward-Looking Information
Certain information contained in this Form 10-Q, particularly information
regarding future economic performance and finances, development plans, and
objectives of management, is forward looking. In some cases, information
regarding certain important factors that could cause actual results to differ
materially from any such forward-looking statement appear together with such
statement. In addition, the following factors, in addition to other possible
Page 13
<PAGE>
factors not listed, could affect the Company's actual results and cause such
results to differ materially from those expressed in forward-looking statements.
These factors include competition within the casual dining restaurant industry,
which remains intense; changes in economic conditions such as inflation or a
recession; consumer perceptions of food safety; weather conditions; changes in
consumer tastes; labor and benefit costs; legal claims; the continued ability of
the Company to obtain suitable locations and financing for new restaurant
development; government monetary and fiscal policies; laws and regulations;
governmental initiatives such as minimum wage rates and taxes; and other factors
set forth in Exhibit 99.
Part II. Other Information
Item 1. Legal Proceedings
An action titled John Bryant, et al. v. Apple South, Inc., et al., Civil Action
No. 3:97-CV-83(DF) was filed on September 22, 1997 in the United States District
Court for the Middle District of Georgia. An action titled Artel Foam
Corporation Pension Trust, et al. v. Apple South, Inc., et al., Civil Action No.
CV-97-6189 was filed on October 28, 1997 in the United States District Court for
the Eastern District of New York. Each of these lawsuits was filed by a person
who seeks to represent a class of shareholders of the Company who purchased
shares of the Company's common stock between May 26, 1995 and September 24,
1996. Each plaintiff named the Company and certain of its officers and directors
as defendants. The complaints alleged acts of fraudulent misrepresentation by
the defendants which induced the plaintiffs to purchase the common stock and
alleged illegal insider trading by certain of the defendants, each of which
allegedly resulted in losses to the plaintiffs and similarly situated
shareholders of the Company. The complaints seek damages and other relief.
Although the ultimate outcome of these lawsuits cannot be determined at this
time, based on its preliminary analysis the Company believes that the
allegations therein are without merit and intends to vigorously defend itself.
Item 2. Changes in Securities and Use of Proceeds
On July 17, 1997, the Company issued 357,600 shares of Apple South, Inc. common
stock, $0.01 value per share, to Canyon (1997) Investment Limited Partnership,
one of the stockholders of Canyon Cafes, Inc., as partial consideration for a
merger transaction whereby Canyon Cafes, Inc. was acquired and merged into the
Company. The Company also paid approximately $30.8 million in cash to the
stockholders of Canyon Cafes, Inc. These shares of the Company's common stock
were issued in an unregistered, non-public offering in which no underwriters
participated. These shares were issued under Sections 4(2) and 4(6) of the
Securities Act of 1933 and Rule 506 promulgated thereunder. The shares were
issued only to an accredited investor without any general solicitation or
advertising, and the Company took reasonable care to assure that the purchaser
was not an underwriter. See Note 2 to the Notes to Financial Statements for
additional information regarding this transaction.
Page 14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Exhibit Description Page Number
2.1 Agreement and Plan of Merger among Apple South, Inc., *
Coyote Acquisition Corp., and Canyon Cafes, Inc., et al.,
dated June 19, 1997.
11.1 Computation of Earnings per Common Share 17
27.1 Financial Data Schedule 18
99.1 Safe Harbor Under the Private Securities Litigation *
Reform Act of 1995
* Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 29, 1997, as
amended by a Form 10-Q/A filed on August 27, 1997.
(b) Reports on Form 8-K.
None
Page 15
<PAGE>
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.
Apple South, Inc.
(Registrant)
Date: November 12, 1997 By: /s/ Erich J. Booth
-------------------
Erich J. Booth
Chief Financial Officer, Treasurer
/s/ Philip L. Ammons
-------------------
Philip L. Ammons
Chief Accounting Officer
Page 16
<TABLE>
Exhibit 11
Computation of Earnings Per Share
(In thousands, except per share data)
<CAPTION>
Quarter Ended Nine Months Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 38,636 38,549 38,568 38,830
Shares issuable pursuant to employee stock option plans
less shares assumed repurchased at the average price 164 598 89 795
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of common shares used in primary calculation 38,800 39,147 38,657 39,625
Net additional shares issuable pursuant to employee stock
option plans at period-end market price 255 41 352 65
Shares issuable upon conversion of company-obligated
mandatorily redeemable preferred securities 7,774 - 5,496 -
- ------------------------------------------------------------------------------------------------------------------------------------
Average number of common shares used in fully diluted calculation 46,829 39,188 44,505 39,690
====================================================================================================================================
Net income for computation of primary earnings per common share $ 10,660 1,188 28,152 5,477
Distribution savings on assumed conversion of company-
obligated mandatorily redeemable preferred securities 1,361 - 2,975 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income for computation of fully diluted earnings per common share $ 12,021 1,188 31,127 5,477
====================================================================================================================================
Primary earnings per common share $ 0.27 0.03 0.73 0.14
====================================================================================================================================
Fully diluted earnings per common share $ 0.26 0.03 0.70 0.14
====================================================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10Q FOR THE PERIOD ENDING JUNE 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.)
</LEGEND>
<CIK> 0000849101
<NAME> Apple South, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-28-1997
<PERIOD-START> Dec-30-1997
<PERIOD-END> Sep-28-1997
<CASH> 1,801
<SECURITIES> 37
<RECEIVABLES> 5,797
<ALLOWANCES> 0
<INVENTORY> 9,485
<CURRENT-ASSETS> 29,458
<PP&E> 528,399
<DEPRECIATION> 0
<TOTAL-ASSETS> 759,442
<CURRENT-LIABILITIES> 51,609
<BONDS> 351,151
115,000
0
<COMMON> 405
<OTHER-SE> 218,966
<TOTAL-LIABILITY-AND-EQUITY> 759,442
<SALES> 590,081
<TOTAL-REVENUES> 590,081
<CGS> 163,710
<TOTAL-COSTS> 498,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,181
<INCOME-PRETAX> 41,632
<INCOME-TAX> 13,480
<INCOME-CONTINUING> 28,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,152
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.70
</TABLE>
