<PAGE>
RULE NO. 424(b)(4)
REGISTRATION NO. 33-60889
Prospectus
dated July 28, 1995
2,400,000 SHARES
LOGO
APPLEBEE'S INTERNATIONAL, INC.
COMMON STOCK
Of the 2,400,000 shares of Common Stock (the "Common Stock") offered hereby,
2,100,000 shares are being sold by Applebee's International, Inc. (the
"Company"), and 300,000 shares are being sold by the Selling Stockholders. The
Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. See "Principal and Selling Stockholders."
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "APPB." On July 27, 1995, the last sale price of the Common Stock as
reported by The Nasdaq Stock Market was $27.50 per share. See "Price Range of
Common Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2) SELLING STOCKHOLDERS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $26.50 $1.32 $25.18 $25.18
- ----------------------------------------------------------------------------------------------------------
Total (3)..................... $63,600,000 $3,168,000 $52,878,000 $7,554,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
at $300,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an aggregate of 360,000 additional shares
of Common Stock solely to cover over-allotments, if any, at the per share
Price to Public less the Underwriting Discount. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholders will be
$73,140,000, $3,643,200, $60,809,700 and $8,687,100, respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters
subject to prior sale when, as and if delivered to and accepted by the
Underwriters and subject to their right to reject orders in whole or in part.
It is expected that delivery of the certificates representing shares of Common
Stock will be made at the offices of Piper Jaffray Inc. in Minneapolis,
Minnesota on or about August 2, 1995.
PIPER JAFFRAY INC.
DILLON, READ & CO. INC.
MONTGOMERY SECURITIES
<PAGE>
[Pictures of Applebee's restaurants and food]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
STOCK MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements appearing elsewhere in this Prospectus or
incorporated by reference herein. Unless otherwise noted, the information in
this Prospectus does not give effect to the exercise of the Underwriters' over-
allotment option.
THE COMPANY
Applebee's International, Inc. (the "Company") develops, franchises and
operates casual dining restaurants principally under the name "Applebee's
Neighborhood Grill & Bar." The Applebee's system has grown rapidly since the
inception of the Company to become one of the largest casual dining restaurant
chains in the United States. As of June 25, 1995, the Applebee's system
included 576 restaurants in 43 states, one Canadian province and the Caribbean
island of Curacao. Of the 576 restaurants, 115 were owned and operated by the
Company and 461 were operated by franchisees.
Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately priced, high quality food and
beverage items, table service and a comfortable atmosphere. The restaurants
feature a broad selection of entrees, including beef, chicken, seafood and
pasta items, prepared in a variety of cuisines, as well as appetizers, salads,
sandwiches, specialty drinks and desserts. Company owned restaurants currently
have an average guest check, including alcoholic beverages, of approximately
$8.00 to $8.50. Applebee's restaurants appeal to a wide range of customers,
including families with children, young adults and senior citizens. The
Company's two current free-standing restaurant prototypes are approximately
5,000 and 5,400 square feet and seat approximately 175 and 200 patrons,
respectively. System-wide weighted average weekly sales for Applebee's
restaurants were $41,376 for the 13 weeks ended March 26, 1995.
Over the last six and a half years, the Company has expanded the Applebee's
system by more than 500 restaurants, from 73 restaurants at the end of 1988 to
576 restaurants as of June 25, 1995, primarily through exclusive franchise
arrangements with experienced multi-unit restaurant operators and also through
Company owned restaurant openings. The Company currently has approximately 60
franchisees, including four international franchisees. Since 1992, the Company
has accelerated the growth of its Company owned restaurant operations, both
through the opening of new restaurants in existing Company territories and
through the selective acquisition of franchise restaurants.
In 1994, the Company and its franchisees opened 23 and 122 Applebee's
restaurants, respectively. The Company expects to open at least 27 Applebee's
restaurants in 1995, of which 13 were open as of June 25, 1995, and
approximately 30 Applebee's restaurants in 1996. The Company expects
franchisees to open a minimum of 120 Applebee's restaurants in 1995, of which
58 were open and 34 were under construction as of June 25, 1995. Also as of
such date, an additional 98 restaurant sites were approved for franchise
development. During 1996, the Company expects franchisees to open more than 100
Applebee's restaurants. Based on these expectations, the Company anticipates
that there will be more than 780 domestic Applebee's restaurants in operation
by the end of 1996, and believes that the United States can ultimately support
approximately 1,200 to 1,500 Applebee's restaurants.
As part of its overall growth strategy, the Company acquired the Rio Bravo
Cantina chain of Mexican casual dining restaurants in March 1995. Rio Bravo
Cantina restaurants offer generous portions of fresh Tex-Mex and Mexican
cuisine at attractive prices. The menu includes traditional Mexican food items
such as burritos, enchiladas, tamales and tacos in addition to a wide variety
of other favorites such as beef, chicken and shrimp fajitas, quesadillas,
shrimp dishes and a variety of salads and desserts. The restaurants feature
tortillas made on the premises, fresh daily specials, a variety of signature
margaritas and distinctive Mexican architecture and interior decor which create
a festive atmosphere reminiscent of an authentic Mexican cantina. As of June
25, 1995, the Company operated 14 Rio Bravo Cantina restaurants in Florida,
Georgia and Tennessee. Weighted average weekly sales for Rio Bravo Cantina
restaurants were $63,326 for the 13 weeks ended March 26, 1995. The Company
expects to open four Company owned Rio Bravo Cantina restaurants in 1995, of
which two were open as of June 25, 1995, and five Company owned Rio Bravo
Cantina restaurants in 1996. In addition, the Company is currently preparing
the Rio Bravo Cantina concept for franchising.
3
<PAGE>
The Company's principal executive offices are located at 4551 West 107th
Street, Suite 100, Overland Park, Kansas 66207, and its telephone number is
(913) 967-4000. The Company is a Delaware corporation. All references to the
Company herein include the Company and its subsidiaries. "Applebee's
Neighborhood Grill & Bar" and "Rio Bravo Cantina" are registered trademarks of
the Company.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company.................. 2,100,000 shares
By the Selling Stockholders..... 300,000 shares
Total......................... 2,400,000 shares
Common Stock outstanding after the
offering......................... 30,448,046 shares(1)
Use of proceeds................... To repay certain outstanding indebtedness,
to fund the development of Company owned
restaurants and for general corporate
purposes. See "Use of Proceeds."
Nasdaq Stock Market symbol........ APPB
</TABLE>
- --------
(1) As of June 25, 1995. Does not reflect approximately 1,509,000 shares of
Common Stock subject to options outstanding as of June 25, 1995 granted
under the Company's 1989 Stock Option Plan and Equity Incentive Plan, of
which approximately 882,000 shares were subject to exercisable options.
SUMMARY CONSOLIDATED FINANCIAL AND RESTAURANT DATA
(IN THOUSANDS, EXCEPT PER SHARE AND RESTAURANT DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
---------------------------------------------------------------- -------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 26,
1990 1991 1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Company restaurant
sales.................. $65,000 $73,877 $85,459 $159,482 $222,445 $49,847 $66,021
Franchise income........ 7,524 9,464 14,319 21,324 31,419 6,658 9,418
------- ------- ------- -------- -------- ------- -------
Total operating
revenues.............. 72,524 83,341 99,778 180,806 253,864 56,505 75,439
Operating earnings(1)... 4,547 7,033 9,226 19,677 29,311 5,521 8,232
Pro forma net
earnings(1)(2)......... $ 2,781 $ 4,245 $ 6,335 $ 12,551 $ 17,823 $ 3,401 $ 4,253
Pro forma net earnings
per common share(1)(2). $ 0.14 $ 0.21 $ 0.26 $ 0.46 $ 0.64 $ 0.12 $ 0.15
Weighted average shares
outstanding............ 19,970 19,763 24,755 27,543 27,970 27,910 28,078
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, 1995
--------------------
AS
ACTUAL ADJUSTED(3)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Total assets........................................... $187,997 $227,267
Note payable and long-term obligations, including cur-
rent portion.......................................... 38,171 24,863
Stockholders' equity................................... 115,988 168,566
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
---------------------------------------------------------------- --------------------
DECEMBER 30, DECEMBER 29, DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 26,
1990 1991 1992 1993 1994 1994 1995
------------ ------------ ------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
RESTAURANT DATA(4):
Total system sales (in
thousands):
Applebee's............. $226,804 $287,713 $402,381 $604,813 $882,515 $194,992 $278,420
Rio Bravo Cantinas..... 18,071 20,944 22,583 24,962 36,679 7,975 10,385
Specialty
restaurants(5)........ 4,441 4,885 5,883 15,652 14,833 4,232 3,437
-------- -------- -------- -------- -------- -------- --------
Total................. $249,316 $313,542 $430,847 $645,427 $934,027 $207,199 $292,242
======== ======== ======== ======== ======== ======== ========
Restaurants open (end of period):
Applebee's:
Company owned or
operated(6).......... 35 33 42 75 97 77 105
Franchise............. 125 158 208 286 408 301 430
-------- -------- -------- -------- -------- -------- --------
Total Applebee's...... 160 191 250 361 505 378 535
Rio Bravo Cantinas..... 6 7 7 9 12 9 13
Specialty
restaurants(5)........ 1 1 4 6 4 6 4
-------- -------- -------- -------- -------- -------- --------
Total................. 167 199 261 376 521 393 552
======== ======== ======== ======== ======== ======== ========
Weighted average weekly
sales per restaurant:
Applebee's:
Company owned or
operated(6).......... $ 29,729 $ 29,892 $ 34,679 $ 40,146 $ 39,924 $ 39,745 $ 40,290
Franchise............. 32,920 32,203 36,424 39,852 41,010 40,967 41,639
Total Applebee's...... 32,235 31,759 36,150 39,904 40,789 40,717 41,376
Rio Bravo Cantinas..... 62,100 60,011 62,041 65,346 68,177 68,358 63,326
Change in comparable
restaurant sales(7):
Applebee's:
Company owned or
operated(6).......... (0.6)% 1.6% 12.6% 12.1% 3.7% 5.1% 3.7%
Franchise............. 4.4 (2.3) 10.4 7.6 3.1 4.1 2.2
Total Applebee's...... 3.0 (1.4) 10.9 8.5 3.2 4.3 2.6
Rio Bravo Cantinas..... 9.9 (2.0) 2.7 7.6 9.5 14.8 1.1
</TABLE>
- --------
(1) Includes merger costs of $920,000 (approximately $0.03 per share) for the
fiscal year ended December 25, 1994 and $1,770,000 (approximately $0.06 per
share) for the 13 weeks ended March 26, 1995. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(2) Reflects provisions for pro forma income taxes related to pooled companies
which were previously taxed as S corporations or limited partnerships for
federal and state income tax purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Adjusted to reflect the sale of 2,100,000 shares of Common Stock offered by
the Company hereby and the application of the net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(4) Sales data are composed of franchise restaurant sales, as reported by
franchisees to the Company, and Company restaurant sales.
(5) Specialty restaurants as of December 26, 1993 and March 27, 1994 included
two restaurants which were subsequently converted to Rio Bravo Cantina
restaurants.
(6) Company owned or operated data include certain Texas restaurants operated
by the Company under a management agreement since July 1990. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(7) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
5
<PAGE>
RISK FACTORS
In deciding whether to purchase shares of Common Stock offered hereby, a
prospective investor should consider all of the information contained in this
Prospectus and, in particular, the following factors:
Growth of Applebee's System. The Company has experienced rapid growth in the
Applebee's system in the last three years and expects such growth to continue
for the foreseeable future. The Company's continued growth will depend upon the
ability of the Company and its franchisees to open and operate additional
restaurants profitably. The opening of new restaurants, both by the Company and
its franchisees, will depend on a number of factors, many of which are beyond
the control of the Company and its franchisees. These factors include, among
others, the availability of management, restaurant staff and other personnel,
the cost and availability of suitable restaurant locations, acceptable leasing
or financial terms, cost effective and timely construction of restaurants
(which construction can be delayed due to, among other reasons, labor disputes,
local zoning and licensing matters, and weather conditions), and securing
required governmental permits. There can be no assurance that the Company or
its franchisees will be successful in opening the number of restaurants
anticipated, or that new restaurants opened by the Company or its franchisees
will be operated profitably. See "Business--Expansion Strategy."
In the course of expansion of the Applebee's concept, the Company and its
franchisees enter new or more highly competitive geographic regions or local
markets in which they may have limited operating experience. There can be no
assurance of the level of success of the Applebee's concept in these regions or
particular local markets. New Company owned restaurants typically operate with
below normal profitability and incur certain additional costs in the process of
achieving operational efficiencies during the first several months of
operation. When the Company enters highly competitive new markets or
territories in which the Company has not yet established a market presence,
such as the Texas and southern California markets (in which the Company opened
a significant number of new restaurants in 1994), the adverse effects on sales
and profit margins may be greater and more prolonged. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's expansion has and will continue to require the implementation
of enhanced operational systems. The Company regularly evaluates the adequacy
of its current policies, procedures, systems and resources, including financial
controls, management information systems, field and restaurant management, and
vendor capacities and relations. There can be no assurance that the Company
will adequately address all of the changing demands that its planned expansion
will impose on such systems, controls, and resources.
Reliance on Franchisees. The continued growth of the Company is, in part,
dependent upon its ability to retain qualified domestic Applebee's franchisees
and to attract franchisees for international markets and the ability of its
Applebee's franchisees to maximize penetration of their designated markets and
to operate their restaurants successfully. Although the Company has established
criteria to evaluate prospective franchisees, there can be no assurance that
the Company's existing or future franchisees will have the business abilities
or access to financial resources necessary to open the required number of
Applebee's restaurants or that they will successfully develop or operate these
restaurants in their franchise areas in a manner consistent with the Company's
standards.
The rights of a franchisee to continued area exclusivity under its
development agreement are contingent upon, among other things, the franchisee
meeting its development schedule. If the development agreement is terminated
due to non-development, any franchise agreements entered into with the
franchisee prior to termination remain in effect. When delays in development
are anticipated or have been due to reasons acceptable to the Company, the
Company has granted extensions to franchisees. Because of delays by franchisees
in meeting their development obligations, the Company has historically reviewed
and, where appropriate, renegotiated the development obligations for a
significant number of its franchisees. The majority of the recent negotiations
resulted in less aggressive development schedules.
6
<PAGE>
Although the Company has no obligation to assume the management or operation
of any franchise restaurant, in order to stabilize a market, the Company has
occasionally undertaken the operation of franchise restaurants or provided
financial assurances to lenders and other creditors when, as a result of
financial difficulties, the franchisee is unable to continue operating its
restaurants. Financial difficulties of franchisees may also from time to time
require the Company to stop accruing franchise fees, to establish reserves with
respect to amounts due, or both. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's largest franchisee, Apple South, Inc. ("Apple South"), operated
146 Applebee's restaurants as of June 25, 1995, which constituted 32% of all
franchise restaurants. On June 30, 1995, Apple South acquired an additional 18
franchise restaurants for a total of 164 Applebee's restaurants, or 36% of all
franchise restaurants. The ability of Apple South to operate its restaurants
successfully and meet its development schedule will have an impact on the
Company's future growth and results of operations. See "Business--Applebee's
Franchise System."
The Company intends to continue its efforts to franchise restaurants in
certain international territories. There can be no assurance that the Company
will be able to attract qualified franchisees or that such franchisees will be
able to open and operate Applebee's restaurants successfully. See "Business--
International Franchise Arrangements."
Acquisitions. Since 1992, the Company has acquired 37 Applebee's franchise
restaurants, 13 Rio Bravo Cantina restaurants, and four specialty restaurants.
The future success of acquired restaurants depends primarily on the Company's
ability to maintain sales and profitability of the restaurants and to retain
and attract qualified management personnel. Such acquisitions also involve
risks of unforeseen liabilities or other conditions relating to the acquired
operations. A portion of the proceeds of this offering may be used to acquire
additional Applebee's franchise restaurants. Such future acquisitions, should
they occur, will present these same uncertainties and risks.
The Company intends to develop and franchise the Rio Bravo Cantina concept.
There can be no assurance, however, that the Company will be successful in
developing this concept as a franchising vehicle, identifying and attracting
franchisees, or operating multiple restaurant concepts. See "Business--Rio
Bravo Cantina Restaurants."
Competition. Competition in the casual dining segment of the restaurant
industry is expected to remain intense with respect to price, service,
location, concept, and the type and quality of food. There is also intense
competition for real estate sites, qualified management personnel, and hourly
restaurant staff. The Company's competitors include national, regional and
local chains as well as local owner-operated restaurants. Some of these
restaurant chains have greater financial resources and market presence than the
Company and its franchisees. See "Business--Competition."
Restaurant Industry. The restaurant industry is affected by changes in
consumer tastes and by national, regional, and local economic conditions,
demographic trends, traffic patterns, and the type, number, and location of
competing restaurants. Multi-unit chains such as the Company can also be
adversely affected by publicity resulting from food quality, illness, injury or
other health concerns or operating issues stemming from one restaurant or a
limited number of restaurants. Dependence on fresh produce and meats also
subjects restaurant companies such as the Company to the risk that shortages or
interruptions in supply, caused by adverse weather or other conditions, could
adversely affect the availability, quality or cost of ingredients. In addition,
factors such as inflation, increased food, labor, and employee benefit costs,
and the availability of qualified management and hourly employees may also
adversely affect the restaurant industry in general and the Company's
restaurants in particular. The continued success of the Company will depend in
part on the ability of the Company's management to identify and respond
appropriately to changing conditions. See "Business--Competition."
7
<PAGE>
Government Regulation. The restaurant industry is subject to extensive state
and local governmental regulations relating to the sale of food and alcoholic
beverages and to sanitation, public health, fire, and building codes.
Termination of the liquor license for any restaurant would adversely affect the
revenues of that restaurant. Restaurant operating costs are also affected by
other government actions that are beyond the Company's control, including
increases in the minimum hourly wage requirement, workers' compensation
insurance rates, and unemployment and other taxes. The Company may be subject
in certain states to "dram-shop" statutes, which generally provide a person
injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. The Company is also subject to federal regulation and certain state
laws which govern the offer and sale of franchises. Many state franchise laws
impose substantive requirements on any franchise agreement, including
limitations on noncompetition provisions and the termination or nonrenewal of a
franchise. See "Business--Government Regulation."
Stock Price Volatility. The market price of the Common Stock could be subject
to significant fluctuations in response to variations in quarterly operating
results and other factors. In addition, the securities markets have experienced
significant price and volume fluctuations from time to time in recent years
that have often been unrelated or disproportionate to the operating performance
of particular companies. These broad fluctuations may adversely affect the
market price of the Common Stock. See "Price Range of Common Stock."
Certain Anti-Takeover Effects. The Company's Certificate of Incorporation and
Bylaws, as amended, contain certain provisions which may render more difficult
an unfriendly tender offer, proxy contest, merger, or change in control of the
Company, which could be in the best interests of the Company's stockholders.
These provisions include the ability to issue "blank check" preferred stock, a
classified Board of Directors, and a stockholder rights plan under which all
stockholders have a right to purchase shares of Series A Participating
Cumulative Preferred Stock on certain conditions relating to an acquisition by
a person or group of more than 15% of the outstanding Common Stock or the
commencement of a tender offer which could result in such ownership.
Shares Eligible for Future Sale. Pursuant to registration rights granted to
the Selling Stockholders, 716,500 shares of Common Stock will be available for
sale subsequent to the offering pursuant to a previously filed registration
statement. Mr. Richard J. Ferris, a Selling Stockholder not affiliated with the
Company, has agreed to refrain from selling any of his portion of such shares
until the earlier of 45 days after the consummation of this offering or October
31, 1995. The other Selling Stockholder, Mr. Burton M. Sack, is a director and
executive officer of the Company and will be subject to a 90-day lock-up
period. See "Principal and Selling Stockholders."
The Company issued approximately 2,630,000 shares of Common Stock in
connection with the acquisition of the Rio Bravo Cantina concept. Approximately
703,000 of these shares will become eligible for sale, on the first business
day after the Company files its Form 10-Q for the second quarter (anticipated
to be August 4, 1995). Approximately 1,927,000 of such shares will be eligible
for sale, subject to Rule 144 (except for the holding period requirement), upon
expiration of 90-day lock-up agreements executed by directors and certain
officers of the Company.
The Company, its executive officers, directors and certain other officers
have agreed to refrain from selling any shares of Common Stock for a period of
90 days after the date of this Prospectus, except that the Company may issue
shares pursuant to the over-allotment option and certain employee stock option
plans. See "Underwriting."
8
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,100,000 shares of
Common Stock offered hereby will be $52,578,000 ($60,510,000 if the
Underwriters' over-allotment option is exercised in full) after deducting
underwriting discounts and estimated offering expenses. The net proceeds will
be used (i) to retire approximately $12,500,000 of secured debt assumed in
certain recent acquisitions, which debt bears interest at floating rates and
has various maturity dates ranging from on demand through the year 2000, (ii)
to repay the outstanding balance of the Company's revolving credit facility,
which as of July 27, 1995 was $5,000,000, and which bears interest at LIBOR
plus 0.60%, or the prime rate, at the Company's option, (iii) to fund the
development of Company owned restaurants, and (iv) for general corporate
purposes, including possible acquisitions of franchise restaurants. The Company
is not currently engaged in any acquisition negotiations. The Company will
receive none of the proceeds from the sale of the Common Stock by the Selling
Stockholders.
DIVIDEND POLICY
The holders of the Common Stock are entitled to receive dividends when and as
declared by the Board of Directors. The Company paid annual dividends for 1993
and 1994 of $0.04 and $0.05 per share of Common Stock, respectively. Future
dividends will depend upon future earnings, results of operations, capital
requirements, the financial condition of the Company and certain other factors.
There can be no assurance as to the amount of net earnings that the Company
will generate in 1995 or future years and, accordingly, there can be no
assurance as to the amount that will be available for the declaration of
dividends, if any. In addition, the Company has entered into debt agreements
that contain covenants restricting the amount of retained earnings available
for the payment of cash dividends. The Company does not expect these
restrictions to materially affect its dividend policy.
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company is traded on The Nasdaq Stock Market under
the symbol "APPB." The table below sets forth for the fiscal quarters indicated
the reported high and low last sale prices of the Company's Common Stock, as
reported on The Nasdaq Stock Market.
<TABLE>
<CAPTION>
HIGH LOW
1993 ------ ------
<S> <C> <C>
First quarter............................................ $ 9.38 $ 7.42
Second quarter........................................... 13.00 8.50
Third quarter............................................ 14.75 12.33
Fourth quarter........................................... 21.08 14.50
1994
First quarter............................................ $25.00 $18.75
Second quarter........................................... 25.25 11.00
Third quarter............................................ 19.75 11.25
Fourth quarter........................................... 20.25 12.75
1995
First quarter............................................ $22.00 $13.38
Second quarter........................................... 26.50 20.50
Third quarter (through July 27, 1995).................... 27.50 23.50
</TABLE>
On July 27, 1995, the last sale price of the Common Stock on The Nasdaq Stock
Market was $27.50.
9
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company at March 26, 1995, and as adjusted to reflect the sale of 2,100,000
shares of Common Stock offered by the Company hereby and the application of the
net proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 26, 1995
(IN THOUSANDS)
------------------
AS
ACTUAL ADJUSTED
-------- --------
<S> <C> <C>
Note payable and current portion of long-term obligations.. $ 3,428 $ 1,229
======== ========
Long-term obligations, less current portion(1)............. $ 34,743 $ 23,634
Stockholders' equity:
Preferred stock--par value $0.01 per share: authorized--
1,000,000 shares;
no shares issued........................................ -- --
Common stock--par value $0.01 per share; authorized--
125,000,000 shares; issued--28,435,693 shares;
30,535,693 shares, as adjusted(2)....................... 284 305
Additional paid-in capital............................... 81,571 134,128
Retained earnings........................................ 34,952 34,952
Unrealized gain on short-term investments, net of income
taxes................................................... 30 30
Treasury stock--281,772 shares, at cost.................. (849) (849)
-------- --------
Total stockholders' equity............................. 115,988 168,566
-------- --------
Total capitalization................................... $150,731 $192,200
======== ========
</TABLE>
- --------
(1) As of March 26, 1995, there were no amounts outstanding under the Company's
$20,000,000 revolving credit facility. As of July 27, 1995, $5,000,000 was
outstanding.
(2) Does not reflect approximately 1,554,000 shares of Common Stock subject to
options outstanding as of March 26, 1995 granted under the Company's 1989
Stock Option Plan, of which approximately 969,000 shares were subject to
exercisable options.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods and the dates indicated,
selected consolidated financial data of the Company. The selected consolidated
financial data for the three fiscal years in the period ended December 25,
1994 have been derived from audited financial statements which appear
elsewhere in this Prospectus. The selected consolidated financial data of the
Company for the 13 weeks ended March 27, 1994 and March 26, 1995 have been
derived from unaudited financial statements (which include all normal,
recurring adjustments necessary for a fair presentation of the financial data
for such periods). Results of operations for the 13 weeks ended March 26, 1995
are not necessarily indicative of the results that may be expected for the
remainder of fiscal 1995. The following should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
-------------------------------------- -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 26,
1992 1993 1994 1994 1995
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA:
Revenues:
Company restaurant
sales................. $85,459 $159,482 $222,445 $49,847 $66,021
Franchise income....... 14,319 21,324 31,419 6,658 9,418
------- -------- -------- ------- -------
Total operating reve-
nues................ 99,778 180,806 253,864 56,505 75,439
------- -------- -------- ------- -------
Cost of Company restau-
rant sales:
Food and beverage...... 26,028 46,757 64,819 14,821 18,908
Labor.................. 27,663 50,950 70,777 16,237 21,068
Direct and occupancy... 20,489 37,283 53,883 12,319 15,378
Pre-opening expense.... 768 1,588 2,093 136 633
------- -------- -------- ------- -------
Total cost of Company
restaurant sales.... 74,948 136,578 191,572 43,513 55,987
------- -------- -------- ------- -------
General and administra-
tive expenses.......... 14,573 22,526 29,167 6,874 8,909
Merger costs(1)......... -- -- 920 -- 1,770
Amortization of intangi-
ble assets............. 1,031 1,934 2,033 547 515
Loss on disposition of
restaurants and equip-
ment................... -- 91 861 50 26
------- -------- -------- ------- -------
Operating earnings...... 9,226 19,677 29,311 5,521 8,232
------- -------- -------- ------- -------
Other income (expense):
Investment income...... 1,623 1,675 1,065 306 237
Interest expense....... (599) (1,075) (2,029) (299) (614)
Other income........... 33 179 253 60 82
------- -------- -------- ------- -------
Total other income
(expense)........... 1,057 779 (711) 67 (295)
------- -------- -------- ------- -------
Earnings before income
taxes.................. 10,283 20,456 28,600 5,588 7,937
Income taxes............ 3,472 6,693 9,453 1,904 3,611
------- -------- -------- ------- -------
Net earnings............ 6,811 13,763 19,147 3,684 4,326
Pro forma provision for
income taxes of pooled
companies(2)........... 476 1,212 1,324 283 73
------- -------- -------- ------- -------
Pro forma net earn-
ings(2)................ $ 6,335 $ 12,551 $ 17,823 $ 3,401 $ 4,253
======= ======== ======== ======= =======
Pro forma net earnings
per common share(2).... $ 0.26 $ 0.46 $ 0.64 $ 0.12 $ 0.15
======= ======== ======== ======= =======
Weighted average shares
outstanding............ 24,755 27,543 27,970 27,910 28,078
</TABLE>
<TABLE>
<CAPTION>
MARCH 26, 1995
--------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, AS
1992 1993 1994 ACTUAL ADJUSTED(3)
------------ ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Total assets... $92,383 $138,680 $180,014 $187,997 $227,267
Note payable
and long-term
obligations,
including cur-
rent portion.. 10,212 19,845 38,697 38,171 24,863
Stockholders'
equity........ 68,561 92,680 108,788 115,988 168,566
</TABLE>
- --------
(1) Includes merger costs of $920,000 (approximately $0.03 per share) for the
fiscal year ended December 25, 1994 and $1,770,000 (approximately $0.06
per share) for the 13 weeks ended March 26, 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Reflects provisions for pro forma income taxes related to pooled companies
which were previously taxed as S corporations or limited partnerships for
federal and state income tax purposes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Adjusted to reflect the sale of 2,100,000 shares of Common Stock offered
by the Company hereby and the application of the net proceeds therefrom.
See "Use of Proceeds" and "Capitalization."
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 per restaurant opened). Beverage sales include sales of alcoholic
beverages, while non-alcoholic beverages are included in food sales. Certain
expenses (food and beverage, labor, direct and occupancy costs, and pre-opening
expenses) relate directly to Company restaurants, and other expenses (general
and administrative and amortization expenses) relate to both Company
restaurants and franchise operations. The Company's policy is to expense pre-
opening costs as incurred.
Beginning in fiscal 1995, the cost of meals provided to employees and other
complimentary meals have been classified as labor costs and direct and
occupancy costs, respectively. Previously, the retail price of such meals was
reflected in Company restaurant sales with corresponding amounts reflected as
labor or direct and occupancy costs. The consolidated financial statements for
all periods presented have been reclassified to conform to the presentation
adopted in fiscal 1995, the effects of which were not material.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday
in December. The Company's fiscal years ended December 27, 1992, December 26,
1993 and December 25, 1994 each contained 52 weeks, and are referred to
hereafter as 1992, 1993 and 1994, respectively. The Company's fiscal quarters
ended March 27, 1994 and March 26, 1995 each contained 13 weeks, and are
referred to hereafter as the "1995 quarter" and the "1994 quarter,"
respectively.
RECENT ACQUISITIONS
During 1993, the Company acquired 14 franchise restaurants in Minnesota,
effective for financial reporting purposes on February 27, 1993. The Minnesota
acquisition was accounted for as a purchase and, accordingly, the results of
operations of such restaurants are included in the Company's consolidated
statements of earnings subsequent to February 26, 1993 and are hereafter
referred to as the "Minnesota operations."
On October 24, 1994, a wholly-owned subsidiary of the Company merged with and
into Pub Ventures of New England, Inc. ("PVNE"), the Company's franchisee for
the New England area, referred to herein as the "PVNE Merger." As a result of
the PVNE Merger, PVNE became a wholly-owned subsidiary of the Company. The PVNE
Merger was accounted for as a pooling of interests and, accordingly, the
accompanying consolidated financial statements include the accounts and
operations of the merged entities for all periods presented. At the time of the
PVNE Merger, PVNE operated 14 Applebee's restaurants.
On March 23, 1995, a wholly-owned subsidiary of the Company merged with and
into Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein as the
"IRC Merger." As a result of the IRC Merger, IRC became a wholly-owned
subsidiary of the Company. The IRC Merger was accounted for as a pooling of
interests and, accordingly, the accompanying consolidated financial statements
include the accounts and operations of the merged entities for all periods
presented. At the time of the IRC Merger, IRC operated 17 restaurants,
including 13 Rio Bravo Cantina restaurants, and four other specialty
restaurants, comprised of Ray's on the River, two Green Hills Grille
restaurants, and the Rio Bravo Grill. During 1993, IRC acquired six Casa
Gallardo restaurant sites which were subsequently converted to Rio Bravo
Cantina restaurants. The four specialty restaurants and the Casa Gallardo
restaurants prior to their conversion to Rio Bravo Cantina restaurants are
included in "specialty restaurants."
On April 3, 1995, the Company acquired the operations and assets of five
franchise restaurants in the Philadelphia metropolitan area, referred to herein
as the "Philadelphia Acquisition." The acquisition was
12
<PAGE>
accounted for as a purchase and, accordingly, the results of operations of such
restaurants will be reflected in the 1995 financial statements for periods
subsequent to the date of acquisition.
Prior to September 7, 1994, PVNE was classified as an S Corporation and
accordingly, stockholders were responsible for paying their proportionate share
of federal and certain state income taxes. In addition, the combined earnings
of IRC included earnings of limited partnerships which were not taxable
entities for federal and state income tax purposes. The accompanying
consolidated statements of earnings reflect provisions for income taxes on a
pro forma basis as if the Company had been liable for federal and state income
taxes on PVNE's earnings prior to September 7, 1994 and the earnings of IRC's
limited partnerships at statutory rates.
SECOND QUARTER 1995 RESULTS
Based on preliminary information, net earnings for the second quarter ended
June 25, 1995 are estimated to be approximately $0.24 per share, an increase of
60% as compared with pro forma net earnings of $0.15 per share for the second
quarter ended June 26, 1994. For the 26 weeks ended June 25, 1995, pro forma
net earnings are estimated to be approximately $0.39 per share. This represents
an increase of 44% as compared with pro forma net earnings of $0.27 per share
for the comparable period in 1994. Excluding one-time merger costs of
approximately $1,770,000 related to the Company's acquisition of IRC, pro forma
net earnings are estimated to be approximately $0.45 per share for the 26 weeks
ended June 25, 1995. This represents an increase of 67% as compared with pro
forma net earnings of $0.27 per share for the comparable period in 1994.
Applebee's total system sales for the second quarter of 1995 were $300.2
million, an increase of approximately 42% from total system sales of $210.8
million for the second quarter of 1994. System-wide comparable sales increased
1.9% in the 1995 second quarter. Comparable sales of Company owned and operated
Applebee's restaurants increased 0.3% and comparable franchisee sales increased
2.3% for the quarter. Total operating revenues for the second quarter of 1995
were $83.8 million, an increase of 35% as compared with $62.2 million for the
second quarter of 1994.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
derived from the Company's consolidated statements of earnings expressed as a
percentage of total operating revenues, except where otherwise noted.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
-------------------------------------- -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 26,
1992 1993 1994 1994 1995
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Company restaurant
sales................ 85.6% 88.2% 87.6% 88.2% 87.5%
Franchise income...... 14.4 11.8 12.4 11.8 12.5
----- ----- ----- ----- -----
Total operating rev-
enues.............. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
Cost of Company
restaurant sales (as a
percentage of Company
restaurant sales):
Food and beverage..... 30.4% 29.3% 29.1% 29.7% 28.6%
Labor................. 32.4 31.9 31.8 32.6 31.9
Direct and occupancy.. 24.0 23.4 24.2 24.7 23.3
Pre-opening expense... 0.9 1.0 1.0 0.3 1.0
----- ----- ----- ----- -----
Total cost of Com-
pany restaurant
sales.............. 87.7% 85.6% 86.1% 87.3% 84.8%
===== ===== ===== ===== =====
General and administra-
tive expenses.......... 14.6% 12.5% 11.5% 12.2% 11.8%
Merger costs............ -- -- 0.4 -- 2.3
Amortization of intangi-
ble assets............. 1.0 1.1 0.8 1.0 0.7
Loss on disposition of
restaurants and
equipment.............. -- 0.1 0.3 0.1 --
----- ----- ----- ----- -----
Operating earnings...... 9.2 10.9 11.6 9.8 10.9
----- ----- ----- ----- -----
Other income (expense):
Investment income..... 1.6 0.9 0.4 0.5 0.3
Interest expense...... (0.6) (0.6) (0.8) (0.5) (0.8)
Other income.......... 0.1 0.1 0.1 0.1 0.1
----- ----- ----- ----- -----
Total other income
(expense).......... 1.1 0.4 (0.3) 0.1 (0.4)
----- ----- ----- ----- -----
Earnings before income
taxes.................. 10.3 11.3 11.3 9.9 10.5
Income taxes (including
pro forma provision for
income taxes).......... 4.0 4.4 4.3 3.9 4.9
----- ----- ----- ----- -----
Pro forma net earnings.. 6.3% 6.9% 7.0% 6.0% 5.6%
===== ===== ===== ===== =====
</TABLE>
14
<PAGE>
The following table sets forth certain unaudited restaurant data relating to
Company restaurants and franchise restaurants, as reported to the Company by
franchisees.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED 13 WEEKS ENDED
-------------------------------------- -------------------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 27, MARCH 26,
1992 1993 1994 1994 1995
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Number of restaurant
openings:
Applebee's:
Company owned or op-
erated............. 8 17 23 2 8
Franchise........... 52 96 122 15 22
------- ------- ------- ------- -------
Total Applebee's.... 60 113 145 17 30
Rio Bravo Cantinas.... -- 2 3 -- 1
Restaurants open (end of
period):
Applebee's:
Company owned or op-
erated(1).......... 42 75 97 77 105
Franchise........... 208 286 408 301 430
------- ------- ------- ------- -------
Total Applebee's.... 250 361 505 378 535
Rio Bravo Cantinas.... 7 9 12 9 13
Specialty
restaurants(2)........ 4 6 4 6 4
------- ------- ------- ------- -------
Total............... 261 376 521 393 552
======= ======= ======= ======= =======
Weighted average weekly
sales per restaurant:
Applebee's:
Company owned....... $35,869 $41,166 $40,405 $40,485 $40,559
Company owned or op-
erated(1).......... 34,679 40,146 39,924 39,745 40,290
Franchise........... 36,424 39,852 41,010 40,967 41,639
Total Applebee's.... 36,150 39,904 40,789 40,717 41,376
Rio Bravo Cantinas.... 62,041 65,346 68,177 68,358 63,326
Change in comparable
restaurant sales(3):
Applebee's:
Company owned....... 13.3% 12.5% 4.0% 5.7% 3.6%
Company owned or op-
erated(1).......... 12.6 12.1 3.7 5.1 3.7
Franchise........... 10.4 7.6 3.1 4.1 2.2
Total Applebee's.... 10.9 8.5 3.2 4.3 2.6
Rio Bravo Cantinas.... 2.7 7.6 9.5 14.8 1.1
</TABLE>
- --------
(1) Company owned or operated data include certain Texas restaurants operated
by the Company under a management agreement since July 1990 (three at the
end of 1992, 1993 and the 1994 quarter and two at the end of 1994 and the
1995 quarter).
(2) Specialty restaurants as of December 26, 1993 and March 27, 1994 included
two restaurants which were subsequently converted to Rio Bravo Cantina
restaurants.
(3) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
15
<PAGE>
1995 QUARTER COMPARED TO 1994 QUARTER
Company Restaurant Sales. Company restaurant sales increased $16,174,000
(32%) from $49,847,000 in the 1994 quarter to $66,021,000 in the 1995 quarter.
Company restaurant sales for Applebee's restaurants increased $14,559,000 (39%)
from $37,640,000 in the 1994 quarter to $52,199,000 in the 1995 quarter. Sales
for the Rio Bravo Cantina restaurants were $7,975,000 and $10,385,000 in the
1994 quarter and the 1995 quarter, respectively, and sales for the specialty
restaurants were $4,232,000 and $3,437,000 in the 1994 quarter and the 1995
quarter, respectively. The increases in sales for the Applebee's and Rio Bravo
Cantina restaurants resulted primarily from Company restaurant openings and
increases in comparable restaurant sales. The decrease in sales for the
specialty restaurants was due to the conversion of two Casa Gallardo
restaurants to Rio Bravo Cantina restaurants subsequent to the end of the 1994
quarter.
Comparable restaurant sales at Company owned Applebee's restaurants increased
by 3.6% in the 1995 quarter. When computing comparable restaurant sales,
restaurants open for at least 18 months are compared from period to period. The
increase in comparable restaurant sales was due in part to a menu price
increase implemented in mid-July 1994 in selected markets for certain menu
items. The Company does not expect to achieve such comparable restaurant sales
increases for the remainder of the 1995 fiscal year for Company owned
Applebee's restaurants, as many of its restaurants are operating near sales
capacity and are experiencing increased competition in certain markets.
Weighted average weekly sales at Company owned Applebee's restaurants increased
slightly from $40,485 in the 1994 quarter to $40,559 in the 1995 quarter.
Excluding the southern California and Texas markets, weighted average weekly
sales at Company owned Applebee's restaurants increased 5.0% from $42,017 in
the 1994 quarter to $44,101 in the 1995 quarter.
Comparable restaurant sales for the Rio Bravo Cantina restaurants increased
by 1.1% in the 1995 quarter, although weighted average weekly sales declined
from $68,358 in the 1994 quarter to $63,326 in the 1995 quarter. The decrease
in weighted average weekly sales was due primarily to the lower than average
sales volumes of three of the four new restaurants open in the 1995 quarter
that were not open in the first quarter of 1994. Two of the restaurants were
opened in a market where there was already an existing Rio Bravo Cantina
restaurant and one of the other new restaurants is open only for dinner.
Weighted average weekly sales at Company owned Applebee's restaurants
continue to be adversely affected by the southern California and Texas
territories where the weighted average weekly sales of Company owned Applebee's
restaurants were approximately $26,000 and $31,000, respectively, in the 1995
quarter. When entering highly competitive new markets, or territories where the
Company has not yet established a market presence, early sales levels and
profit margins are expected to be lower than in markets where the Company has a
concentration of restaurants or has established customer awareness. While
operating margins in the Texas market have been improving, the operations of
the Company owned restaurants in these markets negatively impacted overall cost
of sales excluding pre-opening expense (as a percentage of Company restaurant
sales) by approximately 2.0% in both the 1995 quarter and the 1994 quarter. The
Company believes that the opening of additional restaurants in these
territories will result in increased market penetration, advertising
effectiveness, and customer awareness, thereby ultimately increasing restaurant
sales levels and related margins.
Franchise Income. Franchise income increased $2,760,000 (41%), from
$6,658,000 in the 1994 quarter to $9,418,000 in the 1995 quarter, due primarily
to the increased number of franchise restaurants operating during the 1995
quarter as compared to the 1994 quarter. Franchise restaurant weighted average
weekly sales and comparable restaurant sales increased 1.6% and 2.2%,
respectively, in the 1995 quarter.
Cost of Company Restaurant Sales. Food and beverage costs decreased from
29.7% in the 1994 quarter to 28.6% in the 1995 quarter as a result of the menu
price increase implemented in mid-July 1994 at Applebee's restaurants and
increased operational efficiencies. Such decreases were partially offset by the
effect of the continued decline in beverage sales, as a percentage of overall
Company restaurant sales, from 21.7%
16
<PAGE>
in the 1994 quarter to 19.5% in the 1995 quarter, as margins on alcoholic
beverage sales are higher than those for food sales. Management believes that
the reduction in beverage sales is due in part to the continuation of the
overall trend toward increased awareness of responsible alcohol consumption. In
addition, the Company experienced temporary increases in food costs in the
second quarter of 1995 as a result of the winter flooding in California which
caused shortages of certain produce items and a significant increase in related
costs. The Company does not currently anticipate increasing its menu prices to
offset the effects of such increased costs.
Labor costs decreased from 32.6% in the 1994 quarter to 31.9% in the 1995
quarter. Labor costs, as a percentage of sales, were positively impacted by an
overall reduction in workers' compensation insurance costs due to favorable
historical claims experience, and improved hourly labor efficiency, but were
adversely affected by the lower sales volumes in the southern California and
Texas markets.
Direct and occupancy costs decreased from 24.7% in the 1994 quarter to 23.3%
in the 1995 quarter. The decrease was due primarily to lower levels of
advertising expenditures during the 1995 quarter. However, the southern
California and Texas markets continue to have a negative impact on overall
direct and occupancy costs due to the absorption of such expenses, which are
primarily fixed in nature, over a lower sales base in those markets.
General and Administrative Expenses. General and administrative expenses
decreased in the 1995 quarter to 11.8% from 12.2% in the 1994 quarter, due
primarily to the absorption of general and administrative expenses over a
larger revenue base. General and administrative expenses increased by
$2,035,000 during the 1995 quarter compared to the 1994 quarter due primarily
to the costs of additional personnel associated with the Company's development
efforts and system-wide expansion, higher incentive compensation expense, and
related fringe benefit costs. A portion of the increase was also due to an
increase in the Company's training costs relating to new Company and franchise
restaurant openings and the training of restaurant managers.
The Company continues to realize operating losses or nominal income for the
Texas restaurants it operates under an agreement with a former franchisee (two
in the 1995 quarter and three in the 1994 quarter). Income of $28,000 was
realized during the 1995 quarter while a loss of $162,000 was realized during
the 1994 quarter. Such amounts are included in general and administrative
expenses. The increase in profitability resulted primarily from the closing of
one of the three Texas restaurants during the second quarter of 1994. The
Company is continuing to evaluate its future strategies for the two remaining
restaurants.
The Company is using assets owned by a former Texas franchisee in the
operation of these restaurants under a purchase rights agreement which required
the Company to make certain payments to the franchisee's lender. In 1991, a
dispute arose between the lender and the Company over the amount of the
payments due the lender. Based upon a then current independent appraisal, the
Company offered to settle the dispute and purchase the assets for $1,000,000 in
1991. The lender rejected the Company's offer and claimed that the Company had
guaranteed the entire $2,400,000 debt of the franchisee. In November 1992, the
lender was declared insolvent by the FDIC and has since been liquidated. The
Company has been contacted by the FDIC, and in 1993, the Company offered to
settle the issue and purchase the assets for the three restaurants then being
operated for $182,000. The Company does not anticipate that the resolution of
this issue will have a material adverse effect on its financial position or
results of operations. However, in the event that the Company were to pay an
amount determined to be in excess of the fair market value of the assets, the
Company may be required to recognize a loss at the time of such payment.
In January 1991, the Company's franchisee in Houston, Texas declared
bankruptcy and as a result, the management of the five franchise restaurants
then operated was transferred to a prospective franchisee who subsequently
closed two restaurants. In August 1992, the prospective franchisee was granted
a development agreement for the Houston territory and franchise agreements for
such restaurants, and in October 1993, the Company provided certain financial
assistance to this franchisee in the form of a loan and a renegotiated royalty
payment obligation. The Company also subsequently provided a guarantee for an
equipment lease.
17
<PAGE>
The new franchisee filed for bankruptcy protection in late April 1995. The
Company has been monitoring the franchisee's performance and has established
reserves which it believes are adequate relating to any receivables from this
franchisee and does not anticipate that the franchisee's financial difficulties
will have a material adverse effect on the Company's financial position or
results of operations.
Merger Costs. The Company incurred merger costs of $1,770,000 in the 1995
quarter relating to the IRC Merger. The impact of these costs on pro forma net
earnings per common share was approximately $0.06 in the 1995 quarter.
Investment Income. Investment income decreased in the 1995 quarter compared
to the 1994 quarter primarily as a result of decreases in cash and cash
equivalents and short-term investments resulting from the Company's utilization
of such funds for capital expenditures. In addition, the 1994 quarter included
a gain of $101,000 on the sale of investments.
Interest Expense. Interest expense increased in the 1995 quarter compared to
the 1994 quarter primarily as a result of interest related to the $20,000,000
of senior unsecured notes issued in the second quarter of 1994.
Income Taxes. The effective income tax rate, as a percentage of earnings
before income taxes, was 46.4% in the 1995 quarter compared to 39.1% in the
1994 quarter. The increase in the Company's overall effective tax rate was due
to the non-deductibility of the merger costs incurred relating to IRC.
Excluding such merger costs, the effective income tax rate would have been
38.0% in the 1995 quarter. The Company's overall effective tax rate excluding
merger costs decreased as compared to the 1994 quarter due primarily to
increased tax credits in the 1995 quarter for FICA taxes paid by the Company on
employee tip income.
1994 COMPARED TO 1993
Company Restaurant Sales. Company restaurant sales increased $62,963,000
(39%) from $159,482,000 in 1993 to $222,445,000 in 1994. Company restaurant
sales for Applebee's restaurants increased $52,065,000 (44%) from $118,868,000
in 1993 to $170,933,000 in 1994. Sales from the Minnesota operations accounted
for $8,317,000 of the increase, due primarily to the inclusion of such
operations for the entire 1994 fiscal year while the 1993 fiscal year included
only 43 weeks of sales from the Minnesota operations. The remaining increase in
sales resulted primarily from Company restaurant openings, other acquisitions
in 1993 and 1994, and increases in comparable restaurant sales. Sales for the
Rio Bravo Cantina restaurants were $24,962,000 and $36,679,000 in 1993 and
1994, respectively, and sales for the specialty restaurants were $15,652,000
and $14,833,000 in 1993 and 1994, respectively.
Comparable restaurant sales at Company owned Applebee's restaurants increased
by 4.0% in 1994. The increase in comparable restaurant sales was due in part to
a menu price increase implemented in mid-July 1994 in selected markets for
certain menu items. Such increase was partially offset by lower guest check
averages resulting from the "triple choice" special offered as part of the
Company's 1994 "Summerfare" promotion. The "triple choice" special was a
combination of an appetizer, salad, and dessert for one relatively low price.
Weighted average weekly sales at Company owned Applebee's restaurants decreased
from $41,166 in 1993 to $40,405 in 1994. Excluding the southern California and
Texas markets, weighted average weekly sales at Company owned Applebee's
restaurants increased 4.2% from $41,668 in 1993 to $43,428 in 1994.
The increase in sales for the Rio Bravo Cantina restaurants of $11,717,000
resulted primarily from increases in sales volumes of existing restaurants, the
full year impact of two Casa Gallardo restaurants which were converted to Rio
Bravo Cantina restaurants during 1993, and the conversion of three additional
Casa Gallardo restaurants to Rio Bravo Cantina restaurants during 1994.
Comparable restaurant sales for the Rio Bravo Cantina restaurants increased by
9.5% in 1994 and weighted average weekly sales increased 4.3% from $65,346 in
1993 to $68,177 in 1994.
18
<PAGE>
Overall weighted average weekly sales for Applebee's restaurants were
adversely affected by the southern California and Texas territories where the
weighted average weekly sales of Company owned restaurants were approximately
$28,000 and $31,000, respectively, in 1994. Profitability in the southern
California and Texas markets was adversely affected by the lower sales volumes
and operating inefficiencies at recently opened restaurants. The operations of
the Company owned restaurants in these markets increased overall cost of sales
excluding pre-opening expense (as a percentage of Company restaurant sales) by
approximately 2.1% during 1994. As of December 25, 1994, the Company had eight
restaurants open in southern California, of which six opened in 1994. In
addition, the Company owned 15 restaurants in the Texas area, of which seven
were opened or acquired in 1994.
Franchise Income. Franchise income increased $10,095,000 (47%) from
$21,324,000 in 1993 to $31,419,000 in 1994. This increase was due primarily to
the increased number of franchise restaurants operating during 1994 as compared
to 1993. Weighted average weekly sales and comparable restaurant sales at
franchise restaurants increased 2.9% and 3.1%, respectively, in 1994, but were
adversely affected by lower guest check averages resulting from the "triple
choice" special offered as part of the Company's 1994 "Summerfare" promotion.
Cost of Company Restaurant Sales. Food and beverage costs decreased from
29.3% in 1993 to 29.1% in 1994 as a result of the menu price increase
implemented in mid-July 1994 at Applebee's restaurants and operational
efficiencies. Such decreases were partially offset by the effect of the
continued decline in beverage sales, as a percentage of overall Company
restaurant sales, from 21.9% in 1993 to 20.5% in 1994.
Labor costs decreased slightly from 31.9% in 1993 to 31.8% in 1994. Labor
costs were positively impacted by an overall reduction in workers' compensation
and medical insurance costs due to favorable claims experience, but these
decreases were offset, in part, by the effect of the lower sales volumes in the
southern California and Texas markets.
Direct and occupancy costs increased from 23.4% in 1993 to 24.2% in 1994. The
increase was due primarily to increased levels of advertising expenditures,
higher utility costs in certain newer markets, and higher depreciation expense
relating to new restaurants during 1994. In addition, the full year effect of
the Minnesota operations resulted in an increase in overall rent expense as the
Minnesota region has both a higher percentage of leased properties and higher
rental rates than the Company restaurants as a whole. The increase in direct
and occupancy costs, as a percentage of Company restaurant sales, was also due,
in part, to the absorption of such expenses, which are primarily fixed in
nature, over a lower sales base in the southern California and Texas markets.
Such increases were offset, in part, by a decrease in rent expense for the IRC
restaurants due to an increase in the proportion of its owned versus leased
properties.
General and Administrative Expenses. General and administrative expenses
decreased in 1994 to 11.5% from 12.5% in 1993, due primarily to the absorption
of general and administrative expenses over a larger revenue base. General and
administrative expenses increased by $6,641,000 during 1994 compared to 1993
due primarily to the costs of additional personnel associated with the
Company's development efforts and system-wide expansion, and related fringe
benefit costs. A portion of the increase was also due to an increase in the
Company's training costs relating to new Company and franchise restaurant
openings and the training of restaurant managers. Such increases in general and
administrative expenses were partially offset by a decrease resulting from
management fees associated with the Minnesota operations of $1,117,000 incurred
in 1993.
The Company realized operating losses of $284,000 and $326,000 during 1994
and 1993, respectively, for the Texas restaurants it operates under an
agreement with a former franchisee. The Company closed one of the three
restaurants during the second quarter of 1994 and recognized a loss of
$223,000, due primarily to the termination of the related lease agreement. The
operating results of this restaurant had deteriorated, and by closing this
restaurant and incurring the one-time costs of disposition, the Company avoided
potentially significant losses in the future.
Merger Costs. The Company incurred merger costs of $920,000 in the fourth
quarter of 1994 relating to the acquisition of PVNE. The impact of these costs
on pro forma net earnings per common share was approximately $0.03 in 1994.
19
<PAGE>
Loss on Disposition of Restaurants and Equipment. As discussed above, during
the second quarter of 1994, the Company recognized a loss of $223,000 resulting
from the closure and termination of the lease agreement of one of the Texas
restaurants. This loss was partially offset by a gain of $54,000 resulting from
the sale of one restaurant to a new franchisee. In addition, during 1994 the
Company replaced a majority of its restaurant point-of-sale systems with
upgraded systems technology which resulted in a write-off of approximately
$552,000 for the costs of the existing equipment in 1994.
Investment Income. Investment income decreased in 1994 compared to 1993
primarily as a result of decreases in cash and cash equivalents, short-term
investments and marketable securities resulting from the Company's utilization
of such funds for capital expenditures and for acquisitions in 1993 and 1994.
In addition, a gain of $312,000 was realized on the sale of investments in
1993, while a gain of only $112,000 was realized on a sale of investments in
1994.
Interest Expense. Interest expense increased in 1994 compared to 1993
primarily as a result of interest on the senior unsecured notes issued in the
second quarter of 1994 and borrowings under a line of credit.
Income Taxes. The effective income tax rate, as a percentage of earnings
before income taxes, was 37.7% in 1994 compared to 38.6% in 1993. The decrease
in the Company's overall effective tax rate in 1994 was due primarily to the
effect of tax benefits allowed by the Omnibus Budget Reconciliation Act of 1993
beginning in 1994 for FICA taxes paid by the Company on employee tip income. In
addition, the Company also earned increased tax credits in 1994 relating to the
Targeted Jobs Tax Credit. The effect of these items on the income tax rate was
partially offset by the non-deductibility of a majority of the merger costs
incurred relating to PVNE.
1993 COMPARED TO 1992
Company Restaurant Sales. Company restaurant sales increased $74,023,000
(87%) from $85,459,000 in 1992 to $159,482,000 in 1993. Company restaurant
sales for Applebee's restaurants increased $61,875,000 (109%) from $56,993,000
in 1992 to $118,868,000 in 1993. Sales from the Minnesota operations included
in 1993 accounted for $25,215,000 of the increase and the remaining increase of
$36,660,000 resulted from Company restaurant openings, other acquisitions in
1993 and 1992, and increases in sales volumes of existing restaurants. Sales
for the Rio Bravo Cantina restaurants were $22,583,000 and $24,962,000 in 1992
and 1993, respectively, and sales for the specialty restaurants were $5,883,000
and $15,652,000 in 1992 and 1993, respectively.
Higher sales volumes at existing Company owned Applebee's restaurants
resulted from an increase in weighted average weekly sales of 14.8% from
$35,869 in 1992 to $41,166 in 1993, and an increase in comparable restaurant
sales of 12.5%. The Company believes the increases in weighted average weekly
sales and comparable restaurant sales were attributable to increased
advertising in Company markets, several successful food promotions, improved
customer service, and continued increased customer awareness. In addition, such
increases were due, in part, to a menu price increase implemented in mid-
January 1993.
The increase in sales for the Rio Bravo Cantina restaurants of $2,379,000
resulted primarily from increases in sales volumes of existing restaurants and
from the conversion of two Casa Gallardo restaurants to Rio Bravo Cantina
restaurants during the year. Comparable restaurant sales for the Rio Bravo
Cantina restaurants increased by 7.6% in 1993 and weighted average weekly sales
increased 5.3% from $62,041 in 1992 to $65,346 in 1993. The increase in sales
for the specialty restaurants of $9,769,000 was due primarily to the
acquisition of two Green Hills Grille restaurants in November 1992 which
accounted for $4,455,000 of the increase, the acquisition of four Casa Gallardo
restaurants in May 1993 which accounted for $3,258,000 of the increase, and the
opening of the Rio Bravo Grill in December of 1992 which accounted for
$2,008,000 of the increase. The Casa Gallardo restaurants were acquired in
order to obtain locations which were subsequently converted to Rio Bravo
Cantina restaurants.
20
<PAGE>
Franchise Income. Franchise income increased $7,005,000 (49%) from
$14,319,000 in 1992 to $21,324,000 in 1993, due primarily to the increased
number of franchise restaurants operating during 1993 as compared to 1992.
Several successful national food promotions also led to increases of 9.4% in
weighted average weekly sales and 7.6% in franchise restaurant comparable sales
in 1993. The remaining increase in franchise income was due to an increase in
franchise fees of $1,345,000 (87%) from $1,548,000 in 1992 to $2,893,000 in
1993, resulting from an increase in the number of new franchise restaurant
openings from 52 in 1992 to 96 in 1993.
Cost of Company Restaurant Sales. Food and beverage costs decreased from
30.4% in 1992 to 29.3% in 1993, primarily due to the impact of the Minnesota
operations. The food and beverage costs of the Minnesota operations, as a
percentage of Minnesota sales, were 28.6% in 1993, due in part to a higher mix
of beverage sales at such restaurants. In addition, the menu price increase
implemented in mid-January 1993 had a positive impact on the food and beverage
costs, as a percentage of Company restaurant sales, on the Company's other
Applebee's restaurants. However, the effects of the menu price increase on food
and beverage costs were partially offset by the effects of the continued
increase in food sales as a percentage of total sales. Beverage sales, as a
percentage of overall Company restaurant sales, excluding the Minnesota
operations, were 21.1% in 1993 versus 23.8% in 1992.
Labor costs decreased from 32.4% in 1992 to 31.9% in 1993, primarily from the
lower labor costs of the Minnesota operations. Labor costs of the Minnesota
operations, as a percentage of Minnesota sales, were 29.4% in 1993. In
addition, labor costs for the Company Applebee's restaurants other than the
Minnesota operations, declined by 1.8% in 1993 compared to 1992, due to higher
sales volumes, improved labor efficiency, and a reduction in medical insurance
costs due to favorable claims experience in 1993. Such decreases were offset,
in part, by an increase in labor costs for the IRC restaurants due primarily to
the higher costs associated with the Casa Gallardo restaurants acquired in 1993
and the Green Hills Grille restaurants acquired in November 1992, as well as
the Rio Bravo Grill which opened in December 1992.
Direct and occupancy costs decreased from 24.0% in 1992 to 23.4% in 1993. The
decrease was due primarily to a decrease in rent expense for the IRC
restaurants due to an increase in the proportion of its owned versus leased
properties. This decrease was offset, in part, by increased levels of
advertising expenditures during 1993 for the Applebee's restaurants.
Pre-opening expense increased from $768,000 in 1992 to $1,588,000 in 1993.
During 1993, the Company changed its policy from amortizing certain pre-opening
costs over the first twelve months of operation of a new or relocated
restaurant beginning with the first full four weeks of operation to expensing
certain of such costs as incurred. Pre-opening costs incurred for the 17 new
Applebee's restaurants opened in 1993 and the two Rio Bravo Cantina restaurants
converted in 1993 using this method were $1,330,000. The cumulative effect of
the change in accounting method of $258,000 (before related income taxes of
$100,000) is included in pre-opening expense in the 1993 consolidated statement
of earnings.
General and Administrative Expenses. General and administrative expenses
decreased in 1993 to 12.5% from 14.6% in 1992 due, in part, to the absorption
of general and administrative expenses over a larger revenue base. General and
administrative expenses increased by $7,953,000 during 1993 compared to 1992
due to added personnel and related costs associated with the Company's
development efforts and system-wide expansion, including the acquisition of the
Minnesota operations, the costs of franchise services to support the increased
number of franchise restaurants, and higher incentive compensation expense. A
portion of the increase was also due to an increase in the Company's training
costs relating to new Company and franchise restaurant openings and the
training of restaurant managers. An additional portion of the increase resulted
from management fees associated with the Minnesota operations of $1,117,000
incurred in 1993.
The Company realized operating losses for the three Texas restaurants it
operates under an agreement between the Company and its former franchisee.
These losses were $326,000 and $346,000 during 1993 and 1992, respectively.
21
<PAGE>
Amortization Expense. Amortization of intangible assets increased in 1993
compared to 1992, due primarily to amortization of goodwill and other
intangibles associated with the acquisitions of restaurants in 1993 and in late
1992.
Investment Income. Investment income increased in 1993 compared to 1992
primarily because of a $312,000 gain on the sale of investments in 1993. This
increase was partially offset by a decrease in investment income due to
decreases in cash and cash equivalents, short-term investments, and marketable
securities resulting from the Company's utilization of such funds for capital
expenditures and acquisitions.
Income Taxes. The effective income tax rate, as a percentage of earnings
before income taxes, was 38.6% in 1993 compared to 38.4% in 1992. The
provisions of the Omnibus Budget Reconciliation Act of 1993 did not have a
material overall effect on the Company's income tax expense for 1993.
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," for its 1993 fiscal year and did not restate
financial statements for prior periods. The adoption of Statement No. 109 did
not have a material impact on the Company's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table presents a summary of the Company's cash flows for 1992,
1993, 1994 and the 1995 quarter (in thousands):
<TABLE>
<CAPTION>
13 WEEKS
FISCAL YEAR ENDED ENDED
-------------------------------------- ---------
DECEMBER 27, DECEMBER 26, DECEMBER 25, MARCH 26,
1992 1993 1994 1995
------------ ------------ ------------ ---------
<S> <C> <C> <C> <C>
Net cash provided by operating
activities................... $ 11,617 $ 27,704 $ 30,828 $ 10,228
Net cash used by investing
activities.................... (41,937) (30,129) (45,624) (7,939)
Net cash provided by financing
activities.................... 31,476 6,490 16,376 999
-------- -------- -------- --------
Net increase in cash and cash
equivalents................... $ 1,156 $ 4,065 $ 1,580 $ 3,288
======== ======== ======== ========
</TABLE>
The Company's need for capital resources historically has resulted from and
for the foreseeable future is expected to relate primarily to the construction
and acquisition of restaurants. Such capital has been provided by public stock
offerings, debt financing, and ongoing Company operations, including cash
generated from Company and franchise operations, credit from trade suppliers,
real estate lease financing, and landlord contributions to leasehold
improvements. The Company has also used its common stock as consideration in
the acquisition of restaurants. In addition, the Company assumed debt or issued
new debt in connection with the Minnesota acquisition and the PVNE and IRC
Mergers.
Capital expenditures were $48,734,000 in 1994 (which includes the acquisition
of two franchise restaurants) and $8,039,000 in the 1995 quarter. In addition,
in April 1995, the Company completed the Philadelphia Acquisition for a total
cash purchase price of $9,500,000. The Company currently expects to open at
least 27 Applebee's restaurants and four Rio Bravo Cantina restaurants in 1995
and approximately 30 Applebee's restaurants and five Rio Bravo Cantina
restaurants in 1996. The Company presently anticipates capital expenditures,
including the Philadelphia Acquisition, of between $65,000,000 and $70,000,000
in 1995 and between $60,000,000 and $65,000,000 in 1996 primarily for the
development of new restaurants, refurbishments of and capital replacements for
existing restaurants, and enhancements to information systems for the Company's
restaurants and corporate office. The amount of actual capital expenditures
will be dependent upon the proportion of leased versus owned properties, among
other things. In addition, if the Company opens more restaurants than it
currently anticipates or acquires additional restaurants, its capital
requirements will increase accordingly.
22
<PAGE>
In June 1994, the Company completed a $20,000,000 senior unsecured private
debt placement with institutional lenders unaffiliated with the Company. In
addition, in February 1995, the Company obtained additional long-term debt
financing in the form of a $20,000,000 unsecured bank revolving credit facility
which expires on December 31, 1997. The debt agreements contain various
covenants and restrictions which, among other things, require the maintenance
of a stipulated fixed charge coverage ratio and minimum consolidated net worth,
as defined, and also limit additional indebtedness in excess of specified
amounts. The debt agreements also restrict the amount of retained earnings
available for the payment of cash dividends. At March 26, 1995, $22,769,000 of
retained earnings was available for the payment of cash dividends. The Company
has been and is currently in compliance with the covenants of all of its debt
agreements.
As of June 25, 1995, the Company held liquid assets totaling approximately
$9,000,000, and had $5,000,000 outstanding under the revolving credit facility.
Any borrowings outstanding under the revolving credit facility will be repaid
from the net proceeds of this offering. In addition, the Company will repay
approximately $12,500,000 of debt assumed in connection with the PVNE and IRC
Mergers from the net proceeds of this offering. The Company believes that the
proceeds from this offering, combined with borrowings available under the
$20,000,000 revolving credit facility, liquid assets, and cash generated from
operations, will provide sufficient funds for its capital requirements for the
foreseeable future.
INFLATION
Substantial increases in costs and expenses, particularly food, supplies,
labor and operating expenses could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
23
<PAGE>
BUSINESS
GENERAL
The Company develops, franchises and operates casual dining restaurants
principally under the name "Applebee's Neighborhood Grill & Bar." The
Applebee's system has grown rapidly since the inception of the Company to
become one of the largest casual dining restaurant chains in the United States.
As of June 25, 1995, the Applebee's system included 576 restaurants in 43
states, one Canadian province and the Caribbean island of Curacao. Of the 576
restaurants, 115 were owned and operated by the Company and 461 were operated
by franchisees.
Over the last six and a half years, the Company has expanded the Applebee's
system by more than 500 restaurants, from 73 restaurants at the end of 1988 to
576 restaurants as of June 25, 1995, primarily through exclusive franchise
arrangements with experienced multi-unit restaurant operators and also through
Company owned restaurant openings. The Company currently has approximately 60
franchisees, including four international franchisees. Since 1992, the Company
has accelerated the growth of its Company owned restaurant operations, both
through the opening of new restaurants in existing Company territories and
through the selective acquisition of franchise restaurants.
As part of its overall growth strategy the Company acquired the Rio Bravo
Cantina chain of Mexican casual dining restaurants in March 1995. Rio Bravo
Cantina restaurants offer generous portions of fresh Tex-Mex and Mexican
cuisine at attractive prices. As of June 25, 1995, the Company operated 14 Rio
Bravo Cantina restaurants in Florida, Georgia and Tennessee.
EXPANSION STRATEGY
The Company intends to continue expanding its position in the casual dining
industry through the following strategies:
. Development of Company owned Applebee's restaurants through the opening
of new restaurants in the Company's existing territories and
opportunistic acquisitions of Applebee's franchise restaurants.
. Active support of Applebee's franchisees in developing their franchise
territories and optimizing restaurant operating performance.
. Growth of the Applebee's franchise system into international markets,
initially certain areas of Canada, the Caribbean and northern Europe.
. Expansion of the Rio Bravo Cantina concept through franchising and the
development of Company owned restaurants.
In 1994, the Company and its franchisees opened 23 and 122 Applebee's
restaurants, respectively. The Company expects to open at least 27 Applebee's
restaurants in 1995, of which 13 were open as of June 25, 1995, and
approximately 30 Applebee's restaurants in 1996. The Company expects
franchisees to open a minimum of 120 Applebee's restaurants in 1995, of which
58 were open and 34 were under construction as of June 25, 1995. Also as of
such date, an additional 98 restaurant sites were approved for franchise
development. During 1996, the Company expects franchisees to open more than 100
Applebee's restaurants. Based on these expectations, the Company anticipates
that there will be more than 780 domestic Applebee's restaurants in operation
by the end of 1996 and believes that the United States can ultimately support
approximately 1,200 to 1,500 Applebee's restaurants.
The Company expects to open four Company owned Rio Bravo Cantina restaurants
in 1995, of which two were open as of June 25, 1995, and five Company owned Rio
Bravo Cantina restaurants in 1996. In addition, the Company plans to begin
selecting its initial franchisees for the Rio Bravo Cantina concept in late
1995 and currently expects that those franchisees would open their first
restaurants in the second half of 1996.
The following map shows the location by state and the number of Company owned
and franchise restaurants in the United States as of June 25, 1995:
24
<PAGE>
[MAP OF UNITED STATES]
25
<PAGE>
THE APPLEBEE'S SYSTEM
Concept. Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately priced, high quality food and
beverage items, table service and a comfortable atmosphere. Company owned
restaurants currently have an average guest check, including alcoholic
beverages, of approximately $8.00 to $8.50. Applebee's restaurants appeal to a
wide range of customers including families with children, young adults and
senior citizens.
Applebee's restaurants are designed according to Company specifications and
are located in free-standing buildings, end caps of strip shopping centers, and
shopping malls. The Company's two current free-standing restaurant prototypes
are approximately 5,000 and 5,400 square feet and seat approximately 175 and
200 patrons, respectively. Each Applebee's restaurant has a centrally located
bar and many restaurants offer patio seating. The decor of each restaurant
incorporates artifacts and memorabilia such as old movie posters, musical
instruments and sports equipment along with photographs and magazine and
newspaper articles highlighting local history and personalities, giving each
restaurant an individual, neighborhood identity.
Menu. Each Applebee's restaurant offers a diverse menu of high quality,
moderately priced food and beverage items consisting of traditional favorites
and innovative dishes. The restaurants feature a broad selection of entrees,
including beef, chicken, seafood and pasta items prepared in a variety of
cuisines, as well as appetizers, salads, sandwiches, specialty drinks and
desserts. The Company's core menu is supplemented by four food-specific
promotions each year. Most restaurants offer beer, wine, liquor and premium
specialty drinks. During 1994, alcoholic beverages accounted for 17.9% of
Company owned Applebee's restaurant sales. The Company continuously develops
and tests new menu items through regional consumer tastings and additional
tests in selected Company and franchise restaurants. Franchisees are required
to present a menu consisting of approximately 65% of selections from the
Company approved list of national core items and approximately 35% of
additional items selected from the Company approved list of optional items.
Restaurant Operations. All restaurants are operated in accordance with
uniform operating standards and specifications relating to the quality and
preparation of menu items, selection of menu items, maintenance and cleanliness
of premises, and employee conduct. The Company's operational standards are
based upon "QSCVC"--quality, service, cleanliness, value and courtesy. All
standards and specifications are developed by the Company, with input from
franchisees, and applied on a system-wide basis.
Training. The Company has an extensive 10 to 12 week restaurant operations
training course for general managers, kitchen managers and other restaurant
managers with development or supervisory responsibility over more than one
restaurant. The operations training course consists of in-store task-oriented
training and formal administrative, customer service, and financial training. A
team of Company employed trainers conducts hands-on training for all restaurant
employees to ensure compliance with Company standards.
The Company also operates Applebee University, which offers restaurant
managers specialized training programs, and conducts regular meetings that
emphasize leadership, quality of food preparation, and service. In 1994, the
Company conducted 12 Applebee University sessions consisting of approximately
four days of continuing education in a classroom setting. The Company,
generally through in-restaurant seminars and video presentations, provides
periodic training for its restaurant employees regarding topics such as the
responsible service of alcohol and food sanitation and storage.
Advertising. The Company concentrates its advertising and marketing efforts
primarily on four food-specific promotions each year. Each promotion features a
specific theme or ethnic cuisine. Two of the Company's most popular promotions
have been the current "Summerfare" and annual "Riblet" promotion. The Company
advertises on a national, regional and local basis, utilizing primarily
television, radio and print media. In 1994, the Company spent approximately
3.4% of Company owned restaurant's monthly gross sales on advertising,
including 1.5% contributed to the national advertising pool which develops and
funds the specific national promotions. All franchisees are also required to
contribute 1.5% to the national advertising account. The remainder of the
Company's advertising expenditures are focused on local advertising in areas
with Company owned restaurants.
26
<PAGE>
Purchasing. Maintaining high food quality and system-wide consistency is a
central focus of the Company's purchasing program. The Company mandates quality
standards for all products used in the restaurants and maintains a limited list
of approved suppliers from which the Company and its franchisees must select.
The Company has negotiated purchasing agreements with most of its approved
suppliers which result in volume discounts for the Company and its franchisees.
Beginning in late 1993, the Company addressed the need to assure sufficient
future supplies of Riblets, a successful specialty item on the Applebee's menu,
by purchasing large quantities and placing them in storage. The Company has
made such supplies of Riblets available to franchisees generally at its cost
through third-party distributors and expects to continue to do so.
COMPANY APPLEBEE'S RESTAURANTS
Company Restaurant Openings and Acquisitions. The Company's expansion
strategy is to cluster restaurants in targeted markets, thereby increasing
consumer awareness and enabling the Company to take advantage of operational,
distribution, and advertising efficiencies. The Company's experience in
developing markets indicates that market penetration through the opening of
multiple restaurants within a particular market results in increased average
restaurant sales in that market.
The Company has expanded from a total of 31 owned or operated restaurants as
of December 27, 1992 to a total of 115 as of June 25, 1995. The areas in which
the Company's restaurants are located and the areas where the Company opened
new restaurants or acquired restaurants from franchisees during 1994 and 1995
are set forth in the following table. The Company intends to continue
developing restaurants in all of the following areas, with the exception of
Atlanta, Georgia.
<TABLE>
<CAPTION>
COMPANY RESTAURANTS
COMPANY OPENED AND ACQUIRED IN COMPANY
RESTAURANTS ---------------------------- RESTAURANTS
AS OF 1995 AS OF
DECEMBER (THROUGH JUNE 25,
AREA 27, 1992 1993 1994 JUNE 25) 1995
- ---- ----------- ------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C>
North/Central Texas......... 6 6 7 1 18
Minneapolis/St. Paul, Minne-
sota....................... - 15 1 2 18
New England (includes
Massachusetts, Vermont, New
Hampshire, Rhode Island,
Maine and parts of
Connecticut)............... - - 15 2 17
Kansas City, Missouri....... 13 1 - 3 17
Detroit/Southern Michigan... - 6 7 1 14
San Diego/Southern Califor-
nia........................ 1 2 6 3 11
Atlanta, Georgia............ 8 - - - 8
Philadelphia, Pennsylvania.. - - - 5 5
Las Vegas/Reno, Nevada...... 3 - 1 - 4
Albuquerque, New Mexico..... - 1 - 1 2
Long Island, New York....... - - 1 - 1
--- ------- ------- ------- ---
31 31 38 18 115
=== ======= ======= ======= ===
</TABLE>
In addition, during 1994, the Company sold one restaurant in Texas to a new
franchisee, closed one restaurant in Texas which it had managed, and
transferred the operations of one California restaurant to a franchisee.
Restaurant Operations. The staff for a typical Applebee's restaurant consists
of one general manager, one kitchen manager, three assistant managers and
approximately 85 hourly employees. All managers of Company owned restaurants
receive a salary, performance bonus based on restaurant sales, profits and
adherence to Company standards, and an annual stock option grant. The Company
employs five Regional Vice Presidents of Operations/Directors of Operations and
21 District Managers, whose duties include regular restaurant visits and
inspections and the ongoing maintenance of the Company standards of quality,
27
<PAGE>
service, cleanliness, value, and courtesy. In addition to providing a
significant contribution to revenues and operating earnings, Company
restaurants are used for many purposes which are integral to the development of
the entire system, including testing of new menu items and training of
franchise restaurant managers and operating personnel. In addition, the
operation of Company restaurants enables the Company to develop and refine its
operating standards and specifications further and to understand and better
respond to day-to-day management and operating concerns of franchisees.
Unit Economics. For the 52 weeks ended March 26, 1995, the 72 Company owned
Applebee's restaurants opened prior to March 28, 1994 generated average sales
of approximately $2,134,000, average restaurant operating income of
approximately $364,000 (or 17.1% of sales), and average cash flow of $430,000
(or 20.1% of sales). The 23 Applebee's restaurants opened by the Company in
fiscal 1994 had an average cash investment of approximately $1,064,000 for
building, leasehold improvements, furniture, fixtures and equipment, excluding
land costs, pre-opening expense, and landlord contributions. The Company
anticipates that such average cash investment per restaurant will be
approximately $1,000,000 to $1,200,000 in 1995. The Company has historically
purchased the land for a portion of its new restaurants and leased the
remainder, depending upon factors such as land cost, site availability, and
lease terms. The Company purchased the land for approximately 60% of its
restaurants opened in 1994 with an average cost of approximately $525,000 per
site. The Company expects to continue to purchase a significant portion of its
sites.
THE APPLEBEE'S FRANCHISE SYSTEM
Franchise Territory and Restaurant Openings. The Company currently has
exclusive franchise arrangements with approximately 60 franchisees, including
four international franchisees. The Company has generally selected franchisees
that are experienced multi-unit restaurants operators who have been involved
with other restaurant concepts. The Company's franchisees operate Applebee's
restaurants in 36 states, one Canadian province and the Caribbean island of
Curacao. Virtually all territories in the contiguous 48 states have been
granted to franchisees or designated for Company development.
As of June 25, 1995, there were 461 franchise restaurants. Franchisees opened
96 restaurants in 1993, 122 restaurants in 1994, and, through June 25, 58
restaurants in 1995. The Company anticipates at least 120 franchise restaurant
openings in 1995 and more than 100 franchise restaurant openings in 1996.
Development of Restaurants. The Company makes available to franchisees the
physical specifications for a typical restaurant, retaining the right to
prohibit or modify the use of any plan. Each franchisee, with assistance from
the Company, is responsible for selecting the site for each restaurant within
its territory, subject to Company approval. The Company conducts a physical
inspection, reviews any proposed lease or purchase agreement, and makes
available demographic studies.
Domestic Franchise Arrangements. Each Applebee's franchise arrangement
consists of a development agreement and separate franchise agreements.
Development agreements grant the exclusive right to develop a number of
restaurants in a designated geographical area. The term of a domestic
development agreement is generally 20 years. A separate franchise agreement is
entered into by the franchisee relating to the operation of each restaurant
which has a term of 20 years and permits renewal for up to an additional 20
years in accordance with the terms contained in the then current franchise
agreement (including the then current royalty rates and advertising fees) and
upon payment of an additional franchise fee.
For each restaurant developed, a franchisee is currently obligated to pay to
the Company a royalty fee equal to 4% of the restaurant's monthly gross sales.
The Company's current form of development agreement requires an initial
franchise fee of $35,000 for each restaurant developed during its term. The
terms, royalties and advertising fees under a limited number of franchise
agreements and the franchise fees under older development agreements vary from
the currently offered arrangements.
The Company's largest franchisee is Apple South, Inc. ("Apple South")
headquartered in Madison, Georgia. Apple South is a publicly traded company and
operated 146 Applebee's restaurants as of June 25, 1995. On June 30, 1995,
Apple South acquired an additional 18 franchise restaurants for a total of 164
Applebee's restaurants. No other individual franchisee or group of affiliated
franchisees has more than 40
28
<PAGE>
restaurants. The Company recently entered into an agreement with Apple South
which allowed Apple South to acquire certain franchise and development rights
in Wisconsin and Chicago and imposed accelerated development schedules in Apple
South's existing territories. Under the agreement, Apple South is restricted
from opening or franchising any other casual dining restaurant concepts in the
Chicago and Wisconsin territories until its development of Applebee's
restaurants in those territories reaches specified targets. The agreement with
Apple South also acknowledges that, in view of the significant amount of
additional development territory acquired by Apple South in 1995, among other
things, it is highly unlikely that, during the next four years, the Company
will approve any transfers of Applebee's development territory to Apple South
from another franchisee or directly grant Apple South any new Applebee's
development territory.
Advertising. Domestic franchisees are required to spend at least 1.5% of
annual gross sales on local advertising and promotional activities, in addition
to their 1.5% annual contribution to the national advertising account.
Franchisees also promote the opening of each restaurant and the Company,
subject to certain conditions, reimburses the franchisee for 50% of the out-of-
pocket opening advertising expenditures, up to a maximum of $2,500. The Company
can increase the combined amount of the monthly advertising fee and the amount
required to be spent on local advertising and promotional activities to a
maximum of 5% of gross sales.
Training and Support. The Company provides ongoing advice and assistance to
franchisees in connection with the operation and management of each restaurant
through training sessions, meetings, seminars, on-premises visits, and by
written or other material. Such advice and assistance relates to revisions to
operating manual policies and procedures, and new developments, techniques, and
improvements in restaurant management, food and beverage preparation, sales
promotion, and service concepts.
Quality Control. The Company continuously monitors franchisee operations and
inspects restaurants, principally through its 19 full-time employed franchise
consultants who report to the Company's two Directors of Franchise Operations.
The Company makes both scheduled and unannounced inspections of restaurants to
ensure that only approved products are in use and that Company prescribed
practices and procedures are being followed. A minimum of three planned visits
are made each year, during which a representative of the Company conducts an
inspection and consultation at each restaurant. Franchisees must comply with
the Company's high standards of quality, service, cleanliness, value, and
courtesy. The Company has the right to terminate a franchise if a franchisee
does not operate and maintain a restaurant in accordance with the Company's
requirements.
Franchise Business Council. The Company maintains a Franchise Business
Council which provides advice to the Company regarding operations, marketing,
product development and other aspects of restaurant operations for the purpose
of improving the franchise system. The Franchise Business Council consists of
seven franchisee representatives and two members of the Company's management.
One of the franchisee representatives is a permanent member and any franchisee
who operates at least 10% of the total number of system restaurants is reserved
a seat (currently one franchisee). The remaining franchisee representatives are
elected prior to and announced at the annual franchise convention.
International Franchise Agreements. The Company has begun pursuing
international franchising of the Applebee's concept under a long-term strategy
of controlled expansion. This strategy includes seeking highly qualified
franchisees with the resources to open multiple restaurants in each territory
and the familiarity with the specific local business environment. The Company
will initially focus on international franchising in Canada, the Caribbean, and
northern Europe. In this regard, franchisees opened restaurants in Winnipeg,
Manitoba, and the Caribbean island of Curacao during 1994, and in Puerto Rico
in July 1995. In addition, the Company entered into a development agreement
with its first European franchisee during 1994. The Company anticipates the
first franchise restaurant in the Netherlands under this agreement to open in
the fall of 1995. The success of further international expansion will be
dependent upon, among other things, foreign acceptance of the Applebee's
concept, and the Company's ability to attract qualified franchisees and
operating personnel, to comply with the regulatory requirements of foreign
jurisdictions, and to supervise international franchisee operations
effectively.
29
<PAGE>
Franchise Financing. Although financing is the sole responsibility of the
franchisee, the Company makes available to franchisees the names and addresses
of financial institutions interested in financing the costs of restaurant land,
building and equipment for qualified franchisees. None of these financial
institutions is an affiliate or agent of the Company, and the Company has no
control over the terms or conditions of any financing arrangement offered by
these financial institutions. Under a previous franchise financing program, the
Company provided a limited guaranty of loans made to certain franchisees. See
Notes to Consolidated Financial Statements of the Company included elsewhere
herein. On infrequent occasions, when the Company believes it is necessary to
support franchise development in a strategic territory, the Company has made
secured loans to franchisees, agreed to defer collection of royalties, or
guaranteed equipment leases.
RIO BRAVO CANTINA RESTAURANTS
General. As part of its overall growth strategy, the Company acquired the Rio
Bravo Cantina chain of Mexican casual dining restaurants in March 1995. As of
June 25, 1995, the Company operated 14 Rio Bravo Cantina restaurants in
Florida, Georgia and Tennessee.
Expansion. The Company is in the process of developing the franchising
program for the Rio Bravo Cantina concept and the related Company support
systems. The Company anticipates that the franchise preparation process will be
completed and that the initial Rio Bravo Cantina franchisees will be selected
in late 1995. Franchise restaurants are anticipated to begin opening in the
second half of 1996.
Additionally, the Company will continue developing Rio Bravo Cantina
restaurants in the market areas where it currently has Rio Bravo Cantinas and
will begin to open restaurants in other selected markets. The Company expects
to open four Company owned Rio Bravo Cantina restaurants in 1995, of which two
were open as of June 25, 1995, and five Company owned Rio Bravo Cantina
restaurants in 1996.
Concept. Rio Bravo Cantina restaurants offer generous portions of fresh Tex-
Mex and Mexican cuisine at attractive prices. The restaurants feature tortillas
made on the premises, fresh daily specials, a variety of signature margaritas
and distinctive Mexican architecture and interior decor which create a festive
atmosphere reminiscent of an authentic Mexican cantina. The design of the
restaurants incorporates materials such as exposed brick, barn wood, Mexican
tile floors and stucco walls embellished with various signs, inscriptions and
other items depicting a rustic border motif.
Rio Bravo Cantina restaurants can be located in either free-standing
buildings or strip shopping centers and are adaptable to conversions of pre-
existing restaurant sites. Existing locations, many of which are conversions of
other restaurants, range in size from 6,600 to 10,300 square feet and seat
between 225 and 450 customers. Most of the restaurants have a patio area
providing additional seating during much of the year. The Company is currently
refining a free-standing prototype, which is expected to be approximately 6,900
square feet, and will seat approximately 240 people with an optional outdoor
patio area that seats approximately 45 patrons.
Menu. Rio Bravo Cantina restaurants are open for lunch and dinner seven days
a week. The menu includes traditional Mexican food items such as burritos,
enchiladas, tamales and tacos. In addition, the menu offers a wide variety of
other favorites such as beef, chicken and shrimp fajitas, quesadillas, shrimp
dishes, and a variety of salads and desserts. A large variety of Mexican and
domestic beers, Sangria, and signature margaritas are also featured. The lunch
menu offers entrees priced from $4.55 to $7.75 and dinner entrees priced from
$5.50 to $12.99. Rio Bravo Cantina restaurants currently have an average guest
check, including alcoholic beverages, of between $11.75 and $12.75. During
1994, alcoholic beverages accounted for approximately 32% of total restaurant
sales.
30
<PAGE>
SPECIALTY RESTAURANTS
In connection with the acquisition of the Rio Bravo Cantina concept, the
Company also acquired four specialty restaurants, comprised of two Green Hills
Grille restaurants in Nashville, Tennessee and Huntsville, Alabama, an upscale
Rio Bravo Cantina called the Rio Bravo Grill in Atlanta, Georgia and Ray's on
the River, in Atlanta, Georgia. The Company currently does not intend to expand
any of the specialty restaurant concepts.
COMPETITION
The restaurant industry is highly competitive with respect to price, service,
location, concept and food type and quality, and competition is expected to
intensify. There are a number of well-established competitors with
substantially greater financial and other resources than the Company. Some of
the Company's competitors have been in existence for a substantially longer
period than the Company and may be better established in the markets where the
Company's restaurants are or may be located. The restaurant business is often
affected by changes in consumer tastes, national, regional or local economic
conditions, demographic trends, traffic patterns, the availability and cost of
suitable locations, and the type, number, and location of competing
restaurants. The Company has begun to experience increased competition in
attracting and retaining qualified management level operating personnel. In
addition, factors such as inflation, increased food, labor and benefits costs,
and the availability of and competition for hourly employees may adversely
affect the restaurant industry in general and the Company's restaurants in
particular.
SERVICE MARKS
The Company owns the rights to the "Applebee's Neighborhood Grill & Bar" and
"Rio Bravo Cantina" service marks and certain variations thereof in the United
States and, with respect to the Applebee's mark, in various foreign countries.
The Company is aware of names and marks similar to the service marks of the
Company used by third parties in certain limited geographical areas. The
Company does not know of any infringing uses that it believes would materially
affect its business. The Company intends to protect its service marks by
appropriate legal action where and when necessary.
EMPLOYEES
At June 25, 1995, the Company employed approximately 12,600 full and part-
time employees, of whom approximately 250 were corporate personnel, 800 were
restaurant managers or manager trainees and 11,550 were employed in non-
management full and part-time restaurant positions. Of the 250 corporate
employees, 70 were in management positions and 180 were general office
employees, including part-time employees.
The Company considers its employee relations to be good. Most employees,
other than restaurant management and corporate personnel, are paid on an hourly
basis. The Company believes that it provides working conditions and wages that
compare favorably with those of its competition. The Company has never
experienced a work stoppage due to labor difficulty and the Company's employees
are not covered by a collective bargaining agreement.
PROPERTIES
At June 25, 1995, the Company owned or operated 115 Applebee's restaurants,
of which it leased the land and building for 57 sites, owned the building and
leased the land for 21 sites, and owned the land and building for 37 sites. The
Company also owned 18 other restaurants (including 14 Rio Bravo Cantinas and
four specialty restaurants), of which it leased the land and building for 10
sites and owned the land and building for eight sites. In addition, as of June
25, 1995, the Company owned five sites for future development of restaurants
and had entered into 10 lease agreements for restaurant sites the Company plans
to open during 1995 or 1996. The Company's leases generally have an initial
term of 10 to 25 years, with renewal terms of 5 to 20 years, and provide for a
fixed rental plus, in certain instances, percentage rentals based on gross
sales.
31
<PAGE>
The Company owns an 80,000 square foot office building in which its corporate
offices are headquartered in Overland Park, Kansas, located in the metropolitan
Kansas City area. Approximately 40% of the building is currently leased to
third parties until such time as the Company may need additional office space.
The Company also leases office space in certain of the regions in which it
operates restaurants.
GOVERNMENT REGULATION
The Company's restaurants are subject to numerous federal, state, and local
laws affecting health, sanitation and safety standards, as well as to state and
local licensing regulation of the sale of alcoholic beverages. Each restaurant
requires appropriate licenses from regulatory authorities allowing it to sell
liquor, beer, and wine, and each restaurant requires food service licenses from
local health authorities. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to assure compliance with all applicable codes and
regulations.
The Company is subject to a variety of federal and state laws governing
franchise sales and the franchise relationship. In general, these laws and
regulations impose certain disclosure and registration requirements prior to
the sale and marketing of franchises. Recent decisions of several state and
federal courts and recently enacted or proposed federal and state laws
demonstrate a trend toward increased protection of the rights and interests of
franchisees against franchisors. Such decisions and laws may limit the ability
of franchisors to enforce certain provisions of franchise agreements or to
alter or terminate franchise agreements. Due to the scope of the Company's
business and the complexity of franchise regulations, minor compliance problems
may be encountered in the future; however, the Company does not believe any
such compliance problems will have a material adverse effect on its business.
Under certain court decisions and statutes, owners of restaurants and bars in
some states in which the Company owns or operates restaurants may be held
liable for serving alcohol to intoxicated customers whose subsequent conduct
results in injury or death to a third party, and no assurance can be given that
the Company will not be subject to such liability. The Company believes its
insurance presently provides adequate coverage for such liability.
32
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Abe J. Gustin, Jr.................. 60 Chairman of the Board of Directors
and Chief Executive Officer
Lloyd L. Hill...................... 51 President, Chief Operating Officer,
and Director
Ronald B. Reck..................... 46 Executive Vice President and
Chief Administrative Officer
Burton M. Sack..................... 57 Executive Vice President and Director
George D. Shadid................... 41 Executive Vice President and
Chief Financial Officer
Robert A. Martin................... 64 Senior Vice President of Marketing
and Director
Stuart F. Waggoner................. 49 Senior Vice President of Operations
D. Patrick Curran.................. 51 Director
Eric L. Hansen..................... 46 Director
Jack P. Helms...................... 42 Director
Kenneth D. Hill.................... 61 Director
Johyne H. Reck..................... 46 Director
Raymond D. Schoenbaum.............. 49 Director
</TABLE>
Abe J. Gustin, Jr. has been a director of the Company since September 1983
when the Company was formed. He served as Chairman of the Board of Directors of
the Company from September 1983 until January 1988 and was again elected as
Chairman in September 1992. He was Vice President from November 1987 to January
1988, and from January 1988 until December 1994, he served as President of the
Company. Mr. Gustin continues to serve as Chief Executive Officer of the
Company. From 1983 to 1990, he also served as Chairman of Juneau Holding Co., a
Kansas City, Missouri-based franchisee which operated Taco Bell restaurants.
Mr. Gustin has over 15 years of experience in the restaurant industry. Mr.
Gustin has an employment agreement with the Company that expires in December
1995.
Lloyd L. Hill was elected a director of the Company in August 1989 and was
appointed Executive Vice President and Chief Operating Officer of the Company
in January 1994. In December 1994, he assumed the role of President in addition
to his role as Chief Operating Officer. From 1980 to 1994, he served as
President and a director of Kimberly Quality Care, a home health care and nurse
personnel staffing company. Mr. Lloyd Hill and Mr. Kenneth Hill are not
related. Mr. Hill has an employment agreement with the Company that
automatically renews for successive one-year terms unless otherwise terminated
as provided in the agreement.
Ronald B. Reck was employed by the Company in March 1991. He served as
Executive Vice President of Human Resources and Training until January 1993
when he was named Executive Vice President and Chief Administrative Officer.
From 1987 until March 1991, he was a self-employed consultant to the Company in
the personnel, human resources and corporate development areas. During the
period from 1984 through 1990, he was President of Aero-Mark Services, Inc., a
temporary health care personnel leasing service company located in Kansas City,
Missouri. Mr. Reck's employment agreement with the Company expires on December
31, 1995, and he has indicated he will be leaving the Company in early 1996.
Mr. Reck is the husband of Johyne Reck, a director of the Company.
33
<PAGE>
Burton M. Sack was elected a director and appointed an Executive Vice
President of the Company effective October 24, 1994. Mr. Sack was the principal
shareholder, a director and the president of Pub Ventures of New England, Inc.,
a former franchisee of the Company which was acquired by the Company in October
1994. Mr. Sack is on the board of advisors of Restaurant Associates, Inc. Mr.
Sack has an employment agreement with the Company that expires in October 1995.
George D. Shadid was employed by the Company in August 1992, and served as
Senior Vice President and Chief Financial Officer until January 1994 when he
was promoted to Executive Vice President and Chief Financial Officer. From 1985
to 1987, he served as Corporate Controller of Gilbert/Robinson, Inc., at which
time he was promoted to Vice President, and in 1988 assumed the position of
Vice President and Chief Financial Officer, which he held until joining the
Company. In November 1991, Gilbert/Robinson, Inc. filed a petition for
bankruptcy, which was discharged in December 1992. From 1976 until 1985, Mr.
Shadid was employed by Deloitte & Touche LLP. Mr. Shadid has an employment
agreement with the Company that expires in December 1996.
Robert A. Martin was elected a director of the Company in August 1989. In
April 1991, he became Vice President of Marketing, and in January 1994, he was
promoted to Senior Vice President of Marketing. From January 1990 to April
1991, he served as President of Kayemar Enterprises, a Kansas City-based
marketing consulting firm. From 1983 to January 1990, he served as the
President, Chief Operating Officer and a director of Juneau Holding Co., of
which Mr. Gustin, Chief Executive Officer of the Company, was Chairman. From
July 1977 to June 1981, he served as President of United Vintners Winery and
prior to that time was employed for 25 years by Schlitz Brewing Company, most
recently in the position of Senior Vice President of Sales and Marketing. Mr.
Martin has more than 12 years of experience in the restaurant industry.
Stuart F. Waggoner has been an employee of the Company since December 1988
and served as the Executive Director of Franchise Operations until March 1991,
when he became Vice President of Franchise Operations. In December 1994, Mr.
Waggoner assumed the newly created position of Senior Vice President of
Operations, with overall responsibility for franchise and Company owned
Applebee's restaurant operations and international development. From October
1987 to December 1988, Mr. Waggoner was Vice President of Operations for
Eateries', Inc., a restaurant company based in Oklahoma City, Oklahoma. From
1985 to July 1987, Mr. Waggoner was President of Pendleton's Bar & Grill in
Dallas, Texas. From October 1974 to March 1985, Mr. Waggoner was Vice President
of Restaurant Administration for TGI Friday's, Inc., in Dallas, Texas. Mr.
Waggoner has more than 25 years of restaurant experience.
D. Patrick Curran became a director of the Company in November 1992. He has
served as Chief Executive Officer of the Curran Companies, a specialty chemical
company, in North Kansas City, Missouri since August 1979. Mr. Curran serves as
a member of the Board of Directors of Sealright Co., Inc., Unitog Company, and
American Safety Razor Company, all of which are publicly traded corporations.
Eric L. Hansen was elected a director of the Company in January 1991. He is
presently a shareholder in the Kansas City law firm of Holman, McCollum and
Hansen, P.C., a professional association. From September 1984 to December 1990,
he served as a tax partner at Deloitte & Touche LLP, and from September 1974 to
September 1984, he was a certified public accountant with Deloitte & Touche
LLP.
Jack P. Helms became a director of the Company in March 1994. He is presently
President, CEO and a member of the Board of Directors in the investment banking
firm of Goldsmith, Agio, Helms and Company in Minneapolis, Minnesota. Mr. Helms
also serves as a member of the Board of Directors for HPG International, Inc.
From May 1978 to January 1986, Mr. Helms was a lawyer in the law firm of
Fredrikson & Byron, P.A. in Minneapolis, Minnesota.
Kenneth D. Hill became a director of the Company in November 1992. He was
employed by the Company in April 1991, serving as Executive Vice President and
Chief Operating Officer until January 1994, when he was named President of
International Development. Effective February 28, 1995, Mr. Hill resigned
34
<PAGE>
as an employee and officer of the Company and is currently a consultant to the
Company. From May 1990 to March 1991 he was President and Chief Executive
Officer of Creative Restaurant Management. In March 1992, Creative Restaurant
Management filed a petition for bankruptcy, and the bankruptcy proceeding has
not yet been discharged. Mr. Hill served as President and Chief Executive
Officer of T.J. Cinnamons, Ltd., a gourmet bakery concept, from 1985 to 1990.
He was President of Gilbert/Robinson, Inc. from 1973 to 1985. Mr. Hill has over
38 years of restaurant industry experience and is an honorary director of the
National Restaurant Association.
Johyne H. Reck was elected a director of the Company in May 1985. Ms. Reck
currently serves as a consultant to the Company. She previously served as
Secretary from May 1985 to January 1990, as Treasurer from May 1985 to December
1989, and as an Executive Vice President from March 1988 until April 1991. From
March 1983 to 1991, she served as a director and President of Corner and Main
Advertising, Inc., an advertising agency which she owned. Ms. Reck is the wife
of Ronald B. Reck, Executive Vice President and Chief Administrative Officer of
the Company.
Raymond D. Schoenbaum was elected a director of the Company effective March
24, 1995 and serves as a consultant to the Company. He was the founder,
majority shareholder, and chairman of the board of directors of Innovative
Restaurant Concepts, Inc., operator of the Rio Bravo Cantina restaurant
concept, prior to its acquisition by the Company in March 1995. Mr. Schoenbaum
served as Vice Chairman of Restaurant Systems, Inc., a franchisee of Wendy's
International, Inc., from 1974 until 1986 and was a Shoney's franchisee from
1971 until 1974.
35
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of June 25, 1995, regarding
the beneficial ownership of Common Stock by (i) each director and executive
officer, (ii) all executive officers and directors of the Company as a group,
(iii) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, and (iv) each Selling Stockholder. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY
BENEFICIALLY OWNED OWNED AFTER
PRIOR TO OFFERING(1) SHARES OFFERING
-------------------- BEING --------------------
NUMBER PERCENT(%) OFFERED NUMBER PERCENT(%)
--------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Burton M. Sack(2)............ 2,203,000 7.8 100,000 2,103,000 6.9
Abe J. Gustin, Jr.(3)........ 1,582,000 5.6 -- 1,582,000 5.2
Raymond D. Schoenbaum(4)..... 1,556,759 5.5 -- 1,556,759 5.1
Ronald B. Reck(3)............ 575,940 2.0 -- 575,940 1.9
Lloyd L. Hill(3)............. 119,000 * -- 119,000 *
Johyne H. Reck(3)............ 80,500 * -- 80,500 *
Robert A. Martin(3).......... 76,000 * -- 76,000 *
Kenneth D. Hill(3)........... 74,000 * -- 74,000 *
Stuart F. Waggoner(3)........ 71,450 * -- 71,450 *
George D. Shadid(3).......... 70,101 * -- 70,101 *
D. Patrick Curran(3)......... 41,000 * -- 41,000 *
Eric L. Hansen(3)............ 32,350 * -- 32,350 *
Jack P. Helms(3)............. 19,500 * -- 19,500 *
All executive officers and
directors as a group
(13 persons)(3)............. 6,501,600 22.4 100,000 6,401,600 20.5
Massachusetts Financial 2,532,200 8.9 -- 2,532,200 8.3
Services Company(5).........
500 Boylston Street
Boston, MA 02116
Putnam Investments, Inc.(5).. 2,300,782 8.1 -- 2,300,782 7.6
One Post Office Square
Boston, MA 02109
Richard J. Ferris(6)......... 955,000 3.4 200,000 755,000 2.5
1436 Ridge Road
Northbrook, IL 60062
</TABLE>
- --------
*Amounts are less than one percent.
(1) The mailing address for each person is 4551 W. 107th Street, Suite 100,
Overland Park, Kansas 66207, unless otherwise shown.
(2) Includes shares held of record by family trusts and a family partnership of
which Mr. Sack may be deemed the beneficial owner.
(3) Includes certain shares subject to options exercisable as of June 25, 1995,
or within 60 days thereafter: 82,000 shares for Mr. Gustin, 99,500 shares
for Mr. Reck, 119,000 shares for Lloyd L. Hill, 80,500 shares for Ms. Reck,
59,000 shares for Mr. Martin, 73,500 shares for Kenneth D. Hill, 63,500
shares for Mr. Waggoner, 70,101 shares for Mr. Shadid, 36,000 shares for
Mr. Curran, 27,000 shares for Mr. Hansen, 18,000 shares for Mr. Helms, and
728,101 shares for all executive officers and directors as a group.
(4) Includes 114,826 shares held in escrow resulting from the recent merger of
the Company with Innovative Restaurant Concepts, Inc. and its affiliates.
(5) Based on information contained on Schedule 13G for the year ended December
31, 1994.
(6) Includes shares held of record by a family partnership of which Mr. Ferris
may be deemed the beneficial owner.
36
<PAGE>
Mr. Gustin is a party to a voting agreement that binds Mr. Reck, pursuant to
which they have agreed to vote all voting securities of the Company held by
them at any time (i) to maintain the size of the Board of Directors at ten
members unless otherwise mutually agreed, (ii) to vote for the election of Mr.
Gustin and Ms. Reck as directors of the Company at each election of directors,
(iii) to vote against the removal of Mr. Gustin and Ms. Reck as directors of
the Company, and (iv) to vote their shares so that the Board of Directors has
at least two independent directors at all times. In addition, in the event of
the death of any of the parties, the voting agreement contains provisions
relating to voting for the election of a successor director of the deceased
party. The voting agreement terminates upon the death of any two of the
parties. The voting agreement terminates in 1999, and does not apply to any
voting securities transferred to a third party in a public transaction.
Mr. Ferris and Mr. Sack were owners of PVNE, which merged with and into the
Company in a transaction completed in October 1994. Mr. Sack became a Director
and an Executive Vice President of the Company, and entered into a one-year
employment contract with the Company. Mr. Ferris, Mr. Sack and certain related
entities were granted the right to participate in offerings of the Company's
Common Stock, subject to certain restrictions, and to demand registration of up
to 825,000 shares of Common Stock issued to them in the merger. These
stockholders have exercised their demand registration rights, and, as a result,
the Company has caused a registration statement on Form S-3 (the "Selling
Stockholder Registration Statement") to become and remain effective for 824,000
shares held by these stockholders. The Selling Stockholders' demand
registration rights were amended to allow the sale of 1,200,000 shares, less
any shares sold in this offering and shares previously sold under the Selling
Stockholder Registration Statement. Accordingly, subsequent to this offering,
716,500 shares will be available for sale under the Selling Stockholder
Registration Statement. Mr. Ferris has agreed to refrain from making sales
pursuant to the Selling Stockholder Registration Statement or otherwise until
the earlier of 45 days after the consummation of this offering or October 31,
1995. Mr. Sack, as a director of the Company, will have a 90 day lock-up
period. See "Underwriting." The Company has agreed to maintain the
effectiveness of the Selling Stockholder Registration Statement until 105 days
after the expiration of Mr. Ferris' lock-up period, which will permit the
Selling Stockholders to sell the remaining 716,500 shares upon expiration of
their respective lock-up periods.
37
<PAGE>
UNDERWRITING
The Company and the Selling Stockholders have entered into a Purchase
Agreement (the "Purchase Agreement") with the underwriters listed in the table
below (the "Underwriters"). Subject to the terms and conditions set forth in
the Purchase Agreement, the Company and the Selling Stockholders have agreed to
sell to the Underwriters, and each of the Underwriters has severally agreed to
purchase, the number of shares of Common Stock set forth opposite each
Underwriter's name in the table below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Piper Jaffray Inc............................................... 800,000
Dillon, Read & Co. Inc.......................................... 800,000
Montgomery Securities .......................................... 800,000
---------
Total....................................................... 2,400,000
=========
</TABLE>
Subject to the terms and conditions of the Purchase Agreement, the
Underwriters have agreed to purchase all of the Common Stock being sold
pursuant to the Purchase Agreement if any is purchased (excluding shares
covered by the over-allotment option granted therein). In the event of a
default by any Underwriter, the Purchase Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or decreased or the Purchase Agreement may be terminated.
The Underwriters have advised the Company and the Selling Stockholders that
they propose to offer the Common Stock directly to the public initially at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not more than $0.72 per
share. Additionally, the Underwriters may allow, and such dealers may reallow,
a concession not in excess of $0.10 per share to certain other dealers. After
the public offering, the public offering price and other selling terms may be
changed by the Underwriters.
In connection with this offering, certain Underwriters may engage in passive
market making transactions in the Common Stock on The Nasdaq Stock Market
immediately prior to the commencement of sales in this offering, in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934. Passive market
making consists of displaying bids on The Nasdaq Stock Market limited by the
bid prices of independent market makers and purchases limited by such prices
and effected in response to order flow. Net purchases by a passive market maker
on each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified prior
period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable by the Underwriters within 30 days after the date of the
Purchase Agreement, to purchase up to an additional 360,000 shares of Common
Stock at the same price per share to be paid by the Underwriters for the other
shares offered hereby. If the Underwriters purchase any of such additional
shares pursuant to this option, each Underwriter will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
table above. The Underwriters may exercise the option only for the purpose of
covering over-allotments, if any, made in connection with the distribution of
the Common Stock offered hereby.
The Company, its executive officers, directors, and certain other officers
have agreed that they will not sell, offer to sell, issue, distribute or
otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of the
Underwriters, except that the Company may issue shares pursuant to the over-
allotment option. Richard J. Ferris, one of the Selling Stockholders, has
agreed that he will not sell, offer to sell, issue, distribute or otherwise
dispose of any shares of Common Stock until the earlier of 45 days after the
consummation of this offering or October 31, 1995. See "Principal and Selling
Stockholders."
38
<PAGE>
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters and their controlling persons against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
the Underwriters may be required to make in respect thereof.
EXPERTS
The consolidated financial statements of Applebee's International, Inc. and
subsidiaries (the "Company"), except for Pub Ventures of New England, Inc.
("PVNE") for the fiscal years ended December 31, 1993 and 1992 and Innovative
Restaurant Concepts, Inc. and subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real
Estate, L.P. and CG Restaurant Partners, Ltd. ("IRC"), included and
incorporated by reference in this Prospectus have been audited by Deloitte &
Touche LLP, as stated in their report appearing and incorporated by reference
herein. The financial statements of PVNE for the year ended December 31, 1993
(consolidated with those of the Company) have been audited by Coopers & Lybrand
L.L.P., and the financial statements of PVNE for the year ended December 31,
1992 (consolidated with those of the Company) have been audited by Kennedy &
Lehan, P.C., as stated in their reports included and incorporated by reference
herein. The combined financial statements of IRC as of December 25, 1994 and
December 26, 1993 and for each of the three years in the period ended December
25, 1994 (consolidated with those of the Company and incorporated by reference
herein) have been audited by Arthur Andersen LLP, as stated in their report
included and incorporated by reference herein. Such financial statements of the
Company (which include PVNE for the fiscal years ended December 31, 1993 and
1992 and IRC for the fiscal years ended December 25, 1994, December 26, 1993
and December 27, 1992), and such separate combined financial statements of IRC
are included or incorporated by reference herein in reliance upon the
respective reports of such firms given upon their authority as experts in
accounting and auditing. All of the foregoing are independent auditors.
LEGAL OPINION
The validity of the Common Stock offered hereby will be passed upon for the
Company by Robert T. Steinkamp, counsel to the Company. Certain legal matters
in connection with this offering will be passed upon for the Underwriters by
Faegre & Benson Professional Limited Liability Partnership, Minneapolis,
Minnesota and for the Company by Blackwell Sanders Matheny Weary & Lombardi
L.C., Kansas City, Missouri.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and, in accordance therewith, files periodic reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission located at Seven
World Trade Center, New York, New York 10048 and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Commission at prescribed rates by
addressing written requests for such copies to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such reports,
proxy statements and other information can also be inspected at the offices of
the National Association of Securities Dealers, Inc., 1735 K Street,
Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form S-
3 (the "Registration Statement") under the Securities Act of 1933, as amended,
with respect to the Common Stock being offered in this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain
39
<PAGE>
all of the information set forth in the Registration Statement and in the
exhibits and schedules thereto to which reference is hereby made. For further
information regarding the Company and the Common Stock, reference is hereby
made to the Registration Statement and to the exhibits and schedules filed as a
part thereof. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is hereby made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto may be inspected without charge at the
office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies thereof may be obtained from the Commission at prescribed rates.
INCORPORATION BY REFERENCE
The following documents which have been filed with the Commission by the
Company are hereby incorporated by reference in this Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 25, 1994 (except for the consolidated financial statements which
have been superseded by the consolidated financial statements included in
the Company's Current Report on Form 8-K dated May 15, 1995 and in the
Registration Statement).
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 26, 1995.
3. The Company's Current Reports on Form 8-K dated December 8, 1994,
March 1, 1995, March 23, 1995, and May 15, 1995.
4. The description of the Company's Common Stock contained in the
Company's Registration Statement on Form 8-A effective September 27, 1989.
5. The description of the Company's Rights to purchase Series A
Participating Cumulative Preferred Stock contained in the Company's
Registration Statement on Form 8-A dated September 12, 1994.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the shares offered hereby shall be deemed to be
incorporated by reference in this Prospectus and to be made a part hereof from
the date of filing such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any or all of the documents incorporated herein by reference, other
than exhibits to such documents. Such requests should be directed to the
Company, 4551 West 107th Street, Suite 100, Overland Park, Kansas 66207,
Attention: Robert T. Steinkamp, Secretary, telephone (913) 967-4000.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FISCAL YEARS ENDED DECEMBER 25, 1994, DECEMBER 26, 1993 AND DECEMBER 27,
1992:
Independent Auditors' Reports........................................... F-2
Consolidated Balance Sheets as of December 25, 1994 and December 26,
1993................................................................... F-6
Consolidated Statements of Earnings for the Fiscal Years Ended December
25, 1994,
December 26, 1993 and December 27, 1992................................ F-7
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended
December 25, 1994, December 26, 1993 and December 27, 1992............. F-8
Consolidated Statements of Cash Flows for the Fiscal Years Ended Decem-
ber 25, 1994,
December 26, 1993 and December 27, 1992................................ F-9
Notes to Consolidated Financial Statements.............................. F-11
13 WEEKS ENDED MARCH 26, 1995 AND MARCH 27, 1994 (UNAUDITED):
Consolidated Balance Sheets as of March 26, 1995 and December 25, 1994.. F-26
Consolidated Statements of Earnings for the 13 Weeks Ended March 26,
1995 and
March 27, 1994......................................................... F-27
Consolidated Statement of Stockholders' Equity for the 13 Weeks Ended
March 26, 1995......................................................... F-28
Consolidated Statements of Cash Flows for the 13 Weeks Ended March 26,
1995 and
March 27, 1994......................................................... F-29
Notes to Consolidated Financial Statements.............................. F-30
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Applebee's International, Inc.:
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 25, 1994
and December 26, 1993 and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 25, 1994. The consolidated financial statements give
effect to the merger on March 23, 1995 of a wholly-owned subsidiary of
Applebee's International, Inc. with and into Innovative Restaurant Concepts,
Inc., which has been accounted for using the pooling of interests method as
described in Note 4 to the consolidated financial statements. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the financial
statements of Pub Ventures of New England, Inc. for the fiscal years ended
December 31, 1993 and 1992, which financial statements reflect total assets
constituting approximately 7% of the related consolidated financial statement
total for 1993 and which reflect total operating revenues constituting
approximately 15% and 17% of the related consolidated financial statement
totals for the fiscal years ended December 26, 1993 and December 27, 1992,
respectively. We also did not audit the combined financial statements of
Innovative Restaurant Concepts, Inc., which financial statements reflect total
assets constituting approximately 16% and 18% of the related consolidated
financial statement totals for 1994 and 1993, respectively, and which reflect
total operating revenues constituting approximately 20%, 22% and 29% of the
related consolidated financial statement totals for each of the fiscal years
ended December 25, 1994, December 26, 1993 and December 27, 1992, respectively.
The financial statements of Pub Ventures of New England, Inc. and the combined
financial statements of Innovative Restaurant Concepts, Inc. and subsidiaries,
Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P., and CG Restaurant Partners,
Ltd. (collectively referred to as "IRC") were audited by other auditors, whose
reports thereon have been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts indicated for Pub Ventures of New England,
Inc. and IRC in the consolidated financial statements, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the aforementioned reports of other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Applebee's International, Inc. and subsidiaries at December 25, 1994 and
December 26, 1993, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended December 25, 1994
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
May 15, 1995
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Innovative Restaurant Concepts, Inc. and
the Partners of Cobb/Gwinnett Rio, Ltd.,
Rio Real Estate, L.P., and
CG Restaurant Partners, Ltd.:
We have audited the accompanying combined balance sheets of INNOVATIVE
RESTAURANT CONCEPTS, INC. (a Georgia corporation) AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD. (a Georgia limited partnership), RIO REAL ESTATE, L.P.
(a Georgia limited partnership), AND CG RESTAURANT PARTNERS, LTD. (a Georgia
limited partnership) as of December 25, 1994 and December 26, 1993 and the
related combined statements of operations, stockholders' equity and partners'
capital, and cash flows for each of the three years in the period ended
December 25, 1994. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovative Restaurant
Concepts, Inc. and subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real Estate,
L.P., and CG Restaurant Partners, Ltd., as of December 25, 1994 and December
26, 1993 and the results of their operations and their cash flows for each of
the three years in the period ended December 25, 1994 in conformity with
generally accepted accounting principles.
As discussed in Note 9 to the financial statements, the stockholders and
partners of the Companies entered into an agreement on October 14, 1994 to
exchange 100% of the outstanding common stock and partnership units of the
Companies for common stock of an unrelated entity.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 22, 1995
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pub Ventures of New England, Inc.:
We have audited the balance sheet of Pub Ventures of New England, Inc. as of
December 31, 1993 and the related statements of income, retained earnings and
cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pub Ventures of New England,
Inc. as of December 31, 1993 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND
Boston, Massachusetts
January 29, 1994
F-4
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Pub Ventures of New England, Inc.
Weston, Massachusetts
We have audited the balance sheet of Pub Ventures of New England, Inc. at
December 31, 1992 and the related statements of income, retained earnings and
cash flows for the year then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pub Ventures of New England,
Inc. at December 31, 1992 and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The Company changed its method of accounting for startup costs during the
year ended December 31, 1992.
KENNEDY & LEHAN
Quincy, Massachusetts
January 28, 1993
F-5
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 9,634 $ 8,054
Short-term investments, at market value in 1994 and
amortized cost in 1993 (amortized cost of $9,046
in 1994 and market value of $11,178 in 1993)...... 8,893 10,557
Receivables (less allowance for bad debts of $740
in 1994 and $322 in 1993)......................... 7,396 6,295
Inventories........................................ 5,159 2,280
Prepaid and other current assets................... 2,887 1,671
-------- --------
Total current assets............................. 33,969 28,857
Property and equipment, net.......................... 114,729 77,260
Goodwill, net........................................ 21,113 22,403
Franchise interest and rights, net................... 6,401 7,009
Other assets......................................... 3,802 3,151
-------- --------
$180,014 $138,680
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note and current portion of notes payable... $ 3,505 $ 1,934
Current portion of obligations under noncompetition
and consulting agreement.......................... 220 244
Accounts payable................................... 10,750 9,457
Accrued expenses and other current liabilities..... 16,713 11,444
Accrued dividends.................................. 1,269 879
Accrued income taxes............................... 1,169 2,365
-------- --------
Total current liabilities........................ 33,626 26,323
-------- --------
Non-current liabilities:
Notes payable--less current portion................ 34,312 16,787
Franchise deposits................................. 1,355 1,263
Obligations under noncompetition and consulting
agreement--less current portion................... 660 880
Deferred income taxes.............................. 715 258
-------- --------
Total non-current liabilities.................... 37,042 19,188
-------- --------
Total liabilities................................ 70,668 45,511
Minority interest in joint venture................... 558 489
Commitments and contingencies (Notes 6, 7 and 11)
Stockholders' equity:
Preferred stock--par value $0.01 per share: autho-
rized--1,000,000 shares; no shares issued......... -- --
Common stock--par value $0.01 per share: autho-
rized--125,000,000 shares as adjusted; issued--
28,295,479 shares in 1994 and 28,185,720 shares in
1993.............................................. 283 282
Additional paid-in capital......................... 78,675 73,397
Retained earnings.................................. 30,775 19,850
Unrealized loss on short-term investments, net of
income taxes...................................... (96) --
-------- --------
109,637 93,529
Treasury stock--281,772 shares in 1994 and 1993, at
cost.............................................. (849) (849)
-------- --------
Total stockholders' equity....................... 108,788 92,680
-------- --------
$180,014 $138,680
======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Company restaurant sales.............. $222,445 $159,482 $85,459
Franchise income...................... 31,419 21,324 14,319
-------- -------- -------
Total operating revenues............ 253,864 180,806 99,778
-------- -------- -------
Cost of Company restaurant sales:
Food and beverage..................... 64,819 46,757 26,028
Labor................................. 70,777 50,950 27,663
Direct and occupancy.................. 53,883 37,283 20,489
Pre-opening expense................... 2,093 1,588 768
-------- -------- -------
Total cost of Company restaurant
sales.............................. 191,572 136,578 74,948
-------- -------- -------
General and administrative expenses..... 29,167 22,526 14,573
Merger costs............................ 920 -- --
Amortization of intangible assets....... 2,033 1,934 1,031
Loss on disposition of restaurants and
equipment.............................. 861 91 --
-------- -------- -------
Operating earnings...................... 29,311 19,677 9,226
-------- -------- -------
Other income (expense):
Investment income..................... 1,065 1,675 1,623
Interest expense...................... (2,029) (1,075) (599)
Other income (expense)................ 253 179 33
-------- -------- -------
Total other income (expense)........ (711) 779 1,057
-------- -------- -------
Earnings before income taxes............ 28,600 20,456 10,283
Income taxes............................ 9,453 6,693 3,472
-------- -------- -------
Net earnings............................ 19,147 13,763 6,811
Pro forma provision for income taxes of
pooled companies....................... 1,324 1,212 476
-------- -------- -------
Pro forma net earnings.................. $ 17,823 $ 12,551 $ 6,335
======== ======== =======
Pro forma net earnings per common share. $ 0.64 $ 0.46 $ 0.26
======== ======== =======
Weighted average shares outstanding..... 27,970 27,543 24,755
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL LOSS ON TOTAL
----------------- PAID-IN RETAINED SHORT-TERM TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS STOCK EQUITY
---------- ------ ---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 29,
1991................... 6,682,114 $ 67 $28,440 $ 3,074 $-- $(849) $ 30,732
Issuance of common
stock from public of-
fering................ 2,085,000 21 29,322 -- -- -- 29,343
Dividends on common
stock, at a rate of
$0.03 per share....... -- -- -- (613) -- -- (613)
Stock options exer-
cised................. 110,361 1 1,174 -- -- -- 1,175
Income tax benefit upon
exercise of stock op-
tions................. -- -- 365 -- -- -- 365
Transactions of pooled
companies prior to
acquisition, net...... -- -- 1,490 (742) -- -- 748
Pro forma provision for
income taxes of pooled
companies............. -- -- -- 476 -- -- 476
Pro forma net earnings. -- -- -- 6,335 -- -- 6,335
---------- ---- ------- ------- ---- ----- --------
Balance, December 27,
1992................... 8,877,475 89 60,791 8,530 -- (849) 68,561
Effect of stock splits. 17,754,950 187 -- (187) -- -- --
Issuance of common
stock in connection
with acquisition of
restaurants........... 1,276,596 4 9,996 -- -- -- 10,000
Dividends on common
stock, at a rate of
$0.04 per share....... -- -- -- (879) -- -- (879)
Stock options exer-
cised................. 276,699 2 1,230 -- -- -- 1,232
Income tax benefit upon
exercise of stock op-
tions................. -- -- 801 -- -- -- 801
Transactions of pooled
companies prior to
acquisition, net...... -- -- 579 (1,377) -- -- (798)
Pro forma provision for
income taxes of pooled
companies............. -- -- -- 1,212 -- -- 1,212
Pro forma net earnings. -- -- -- 12,551 -- -- 12,551
---------- ---- ------- ------- ---- ----- --------
Balance, December 26,
1993................... 28,185,720 282 73,397 19,850 -- (849) 92,680
Dividends on common
stock, at a rate of
$0.05 per share....... -- -- -- (1,269) -- -- (1,269)
Stock options exer-
cised................. 109,759 1 661 -- -- -- 662
Income tax benefit upon
exercise of stock op-
tions................. -- -- 215 -- -- -- 215
Unrealized loss on
short-term invest-
ments, net of income
taxes................. -- -- -- -- (96) -- (96)
Transactions of pooled
companies prior to
acquisition, net...... -- -- 4,402 (6,953) -- -- (2,551)
Pro forma provision for
income taxes of pooled
companies............. -- -- -- 1,324 -- -- 1,324
Pro forma net earnings. -- -- -- 17,823 -- -- 17,823
---------- ---- ------- ------- ---- ----- --------
Balance, December 25,
1994................... 28,295,479 $283 $78,675 $30,775 $(96) $(849) $108,788
========== ==== ======= ======= ==== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
DECEMBER 25, DECEMBER 26, DECEMBER 27,
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Pro forma net earnings.......................... $ 17,823 $ 12,551 $ 6,335
Adjustments to reconcile pro forma net earnings
to net cash
provided by operating activities:
Depreciation and amortization................. 8,997 6,159 3,738
Amortization of intangible assets............. 2,033 1,934 1,031
Gain on sale of investments................... (112) (312) --
Deferred income tax provision (benefit)....... 100 (271) 71
Loss on disposition of restaurants and equip-
ment......................................... 661 91 115
Pro forma provision for income taxes of pooled
companies.................................... 1,324 1,212 476
Changes in assets and liabilities (exclusive of
effects of
acquisitions other than pooled companies):
Receivables................................... (1,101) (1,699) (2,230)
Inventories................................... (2,879) (1,008) (160)
Prepaid and other current assets.............. (802) (509) (452)
Assets held for resale........................ -- 725 (725)
Accounts payable.............................. 1,293 5,068 1,716
Accrued expenses and other current liabili-
ties......................................... 5,269 4,268 1,242
Accrued income taxes.......................... (672) 1,631 (392)
Franchise deposits............................ 92 189 471
Other......................................... (1,198) (2,325) 381
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 30,828 27,704 11,617
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............. (8,306) (4,961) (33,685)
Maturities and sales of short-term investments.. 9,942 25,575 21,035
Purchases of marketable securities.............. -- (499) (14,836)
Maturities and sales of marketable securities... -- 5,142 --
Purchases of property and equipment............. (45,419) (45,664) (13,156)
Acquisitions of restaurants..................... (3,315) (12,800) --
Investment in joint venture interest............ -- -- (1,295)
Proceeds from sale of restaurants and equipment. 1,474 3,078 --
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES......... (45,624) (30,129) (41,937)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock from pub-
lic offering................................... -- -- 29,343
Dividends paid.................................. (879) (613) (276)
Cash transactions of pooled companies prior to
acquisition, net............................... (2,543) (1,018) (517)
Issuance of common stock upon exercise of stock
options........................................ 662 1,232 1,175
Income tax benefit upon exercise of stock op-
tions.......................................... 215 801 365
Proceeds from issuance of notes payable......... 27,116 13,709 6,696
Payments on notes payable....................... (8,020) (7,675) (5,321)
Payments under noncompetition and consulting
agreement...................................... (244) -- --
Minority interest in net earnings of joint ven-
ture........................................... 69 54 11
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES..... 16,376 6,490 31,476
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 1,580 4,065 1,156
CASH AND CASH EQUIVALENTS, beginning of period.... 8,054 3,989 2,833
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period.......... $ 9,634 $ 8,054 $ 3,989
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................. $ 9,806 $ 5,114 $ 3,501
======== ======== ========
Interest...................................... $ 1,927 $ 849 $ 598
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with IRC's acquisition of an unrelated restaurant company
during 1992, a pooled company issued common stock having a fair value of
approximately $1,265,000.
In connection with the acquisition of 14 restaurants during 1993, the Company
issued or assumed notes payable aggregating $2,463,000, entered into a
noncompetition and consulting agreement in the amount of $1,124,000 and issued
additional common stock aggregating $10,000,000 (see Note 4).
Marketable securities of $10,505,000 were reclassified to short-term
investments during 1993.
A two-for-one stock split effected as a 100% stock dividend was declared and
distributed during 1993 and a three-for-two stock split effected as a 50% stock
dividend was declared in 1993 and distributed in January 1994, resulting in
adjustments of $187,000 to common stock and retained earnings (see Note 12).
During 1993, the Company recorded additional goodwill and income tax
liabilities of $1,000,000 resulting from changes in the purchase price
allocations of previous business combinations. During 1994, this amount was
reduced by $524,000 as a result of the IRS settlement (see Note 10).
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
See notes to consolidated financial statements.
F-10
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Applebee's International, Inc. (the "Company") develops, operates and
franchises a national chain of casual dining restaurants under the name
"Applebee's Neighborhood Grill & Bar." As of December 25, 1994, there were 505
Applebee's restaurants, of which 408 were operated by franchisees and 97 were
owned or operated by the Company. Such restaurants were located in 43 states,
one Canadian province, and the Caribbean island of Curacao. After giving
retroactive effect to the merger with Innovative Restaurant Concepts, Inc.
discussed in Note 4, the Company also operated 16 other restaurants, including
12 Rio Bravo Cantinas, as of December 25, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The consolidated financial statements have been
prepared to give retroactive effect to the merger with Innovative Restaurant
Concepts, Inc. ("IRC") on March 23, 1995 (see Note 4). Beginning in fiscal
1995, the cost of meals provided to employees and other complimentary meals
have been classified as labor costs and direct and occupancy costs,
respectively. Previously, the retail price of such meals was reflected in
Company restaurant sales with corresponding amounts reflected as labor costs or
direct and occupancy costs. The consolidated financial statements for all
periods presented have been reclassified to conform to the presentation adopted
in fiscal 1995, the effects of which were not material.
Principles of consolidation: The consolidated financial statements include
the accounts of the Company, its wholly-owned subsidiaries and its controlled-
interest joint venture. All material intercompany profits, transactions and
balances have been eliminated.
Fiscal year: The Company's fiscal year ends on the last Sunday of the
calendar year. The fiscal years ended December 25, 1994, December 26, 1993 and
December 27, 1992 each contained 52 weeks, and are referred to hereafter as
1994, 1993 and 1992, respectively.
Short-term investments and marketable securities: Short-term investments and
marketable securities are comprised of U.S. government and agency securities,
certificates of deposit, state and municipal bonds and preferred stocks. Such
securities are classified based upon the Company's intent and ability to hold
these securities. Gains and losses from sales are determined using the specific
identification method.
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," as of the
beginning of its 1994 fiscal year, the cumulative effect of which was not
material. Statement No. 115 addresses the accounting and reporting for certain
investments in debt and equity securities by requiring such investments to be
classified in hold-to-maturity, available-for-sale, or trading categories. In
accordance with Statement No. 115, prior years' financial statements have not
been restated to reflect the change in accounting method. At December 26, 1993,
marketable securities were carried at the lower of amortized cost or aggregate
market.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Pre-opening costs: The Company expenses direct training and other costs
related to opening new or relocated restaurants as incurred. IRC's method of
accounting for pre-opening costs has been conformed with the Company's method
of accounting for such costs in the consolidated financial statements.
Property and equipment: Property and equipment are stated at cost.
Depreciation is provided primarily on a straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized
F-11
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the shorter of the estimated useful life or the lease term of the related
asset. The general ranges of original depreciable lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings.......................... 20
Leasehold improvements............. 5-20
Furniture and equipment............ 3-7
</TABLE>
Goodwill: Goodwill represents the excess of cost over fair market value of
net assets acquired by the Company. Goodwill is being amortized over periods
ranging from 15 to 20 years on a straight-line basis. Accumulated amortization
at December 25, 1994 and December 26, 1993 was $2,275,000 and $1,135,000,
respectively.
Franchise interest and rights: Franchise interest and rights represent
allocations of purchase price to either the purchased restaurants or franchise
operations acquired. The allocated costs are amortized over the estimated life
of the restaurants or the franchise agreements on a straight-line basis ranging
from 7 to 20 years. Accumulated amortization at December 25, 1994 and December
26, 1993 was $4,549,000 and $3,927,000, respectively.
Franchise revenues: Franchise revenues are recognized in accordance with
Statement of Financial Accounting Standards No. 45 which requires deferral
until substantial performance of franchisor obligations is complete. Initial
franchise fees, included in franchise income in the consolidated statements of
earnings, totaled $3,753,000, $2,893,000 and $1,548,000 for 1994, 1993 and
1992, respectively.
Earnings per share: Earnings per share are computed based on the weighted
average number of common shares outstanding. The shares issuable under the
Employee Stock Option Plan (see Note 13) are excluded from the computations,
because their dilutive effect is not material. All references to the number of
shares and per share amounts have been restated to reflect all stock splits
declared by the Company (see Note 12).
3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," the following methods
were used in estimating fair value disclosures for significant financial
instruments of the Company. The carrying amount of cash and cash equivalents
approximates fair value because of the short maturity of those instruments. The
carrying amount of short-term investments is based on quoted market prices. The
fair value of the Company's notes payable is estimated based on quotations made
on similar issues.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents.............. $ 9,634 $ 9,634 $ 8,054 $ 8,054
Short-term investments................. $ 8,893 $ 8,893 $10,557 $10,557
Notes payable.......................... $37,817 $36,567 $18,721 $18,721
</TABLE>
F-12
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACQUISITIONS
IRC Merger: On March 23, 1995, a wholly-owned subsidiary of the Company
merged with and into Innovative Restaurant Concepts, Inc. ("IRC"), referred to
herein as the "IRC Merger". Immediately prior to the IRC Merger, IRC's
affiliated limited partnerships, Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P.
and CG Restaurant Partners, Ltd., were liquidated, and contemporaneously with
the IRC Merger, the Company acquired the interests of the limited partners in
the distributed assets of these partnerships. As a result of the IRC Merger,
IRC became a wholly-owned subsidiary of the Company. A total of approximately
2,630,000 shares of the Company's newly-issued common stock was issued to the
shareholders and limited partners of IRC, including IRC shares issued in 1995
upon the exercise of IRC stock options prior to the IRC Merger. IRC employees
also exchanged pre-existing stock options for options to purchase approximately
147,000 shares of the Company's common stock. Of such shares and options, 7.5%
were placed in escrow to address potential adjustments during the escrow period
that will end December 23, 1995. In addition, the Company assumed approximately
$13,700,000 of IRC indebtedness, of which $1,270,000 was repaid at closing. At
the time of the IRC Merger, IRC operated 17 restaurants, 13 of which were Rio
Bravo Cantinas, a Mexican restaurant concept, and four were other specialty
restaurants.
The IRC Merger was accounted for as a pooling of interests and accordingly,
the accompanying consolidated financial statements have been restated to
include the accounts and operations of the merged entities for all periods
presented. All share amounts have been restated to reflect the total number of
shares issued in the IRC Merger for all periods presented. Separate results of
the two entities for the fiscal years ended December 25, 1994, December 26,
1993, and December 27, 1992 were as follows (amounts in thousands):
<TABLE>
<CAPTION>
COMPANY PRO
(INCLUDING PRO FORMA FORMA
PVNE) IRC ADJUSTMENTS COMBINED
---------- ------- ----------- --------
<S> <C> <C> <C> <C>
1994:
Net sales....................... $170,933 $51,512 $ -- $222,445
Net earnings.................... $ 15,780 $ 2,242 $(199) $ 17,823
1993:
Net sales....................... $118,868 $40,614 $ -- $159,482
Net earnings.................... $ 11,375 $ 1,222 $ (46) $ 12,551
1992:
Net sales....................... $ 56,993 $28,466 $ -- $ 85,459
Net earnings.................... $ 5,819 $ 612 $ (96) $ 6,335
</TABLE>
Adjustments have been made to eliminate the impact of intercompany balances
and to record provisions for pro forma income taxes for certain affiliates of
IRC. Merger costs of $1,770,000 relating to the IRC merger have been expensed
in the first quarter of 1995. Merger costs include investment banking fees,
legal and accounting fees, and other merger related expenses.
PVNE Merger: On October 24, 1994, a wholly-owned subsidiary of the Company
merged with and into Pub Ventures of New England, Inc. ("PVNE"), referred to
herein as the "PVNE Merger". As a result of the PVNE Merger, PVNE became a
wholly-owned subsidiary of the Company. The shareholders of PVNE received an
aggregate of 3,300,000 shares of the Company's newly-issued common stock. At
the time of the PVNE Merger, PVNE operated 14 Applebee's restaurants, and
several restaurant sites were under development. The PVNE Merger was accounted
for as a pooling of interests. Merger costs of $920,000, which were expensed
upon completion of the PVNE Merger in the fourth quarter of 1994, have been
included in the Company's consolidated statement of earnings for 1994. Merger
costs include investment banking fees, legal and accounting fees, and severance
and benefits-related costs. The impact of these costs on pro forma net earnings
per common share was approximately $0.03 in 1994.
F-13
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Minnesota restaurant acquisition: Effective February 26, 1993, the Company
entered into an agreement to acquire 14 franchise restaurants and certain
restaurant sites under development in Minnesota, all of which were owned and
operated by a franchisee through a limited partnership (the "Partnership"). The
above transaction is referred to herein as the "Minnesota Acquisition."
While the transaction remained in escrow (February 27, 1993 through August
15, 1993), an affiliate of the Partnership managed the restaurants. Under this
management arrangement, the Partnership paid management fees to its affiliate
in an amount equal to 8% of the Partnership's net sales (as defined in the
management agreement). For financial reporting purposes, the Minnesota
Acquisition was determined to have occurred as of February 26, 1993, with the
earnings of the acquired restaurants accruing to the Company since that date.
The Minnesota Acquisition has been recorded under the purchase method of
accounting and, accordingly, the 1993 financial statements reflect the
Minnesota Acquisition, the related purchase accounting adjustments and the
results of operations of the acquired restaurants subsequent to February 26,
1993. Management fees paid to the Partnership's affiliate totaling
approximately $1,117,000 are included in "general and administrative expenses"
in the accompanying statement of earnings for 1993.
The Minnesota Acquisition purchase price, including related transaction
costs, aggregated $23,548,000, composed of (i) cash payments of $10,741,000,
(ii) newly issued promissory notes totaling $1,664,000, (iii) a promissory note
of the Partnership in the amount of $799,000, which has been assumed by the
Company, and (iv) $10,000,000 of aggregate value of the Company's common stock
(1,276,596 shares).
The Minnesota Acquisition purchase price has been allocated to the fair value
of net assets acquired, and goodwill totaling $17,959,000 has been recorded in
connection with the Acquisition and is being amortized over 20 years on a
straight-line basis. The Minnesota Acquisition purchase price has been
allocated in the financial statements as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment........... $ 6,491
Inventories...................... 243
Deferred income taxes............ (1,145)
Goodwill......................... 17,959
-------
Total........................ $23,548
=======
</TABLE>
The Company also entered into a noncompetition and consulting agreement with
certain affiliates of the Partnership. This agreement provides for annual
payments over a five year term aggregating $1,124,000, which have been recorded
as an asset and liability in the consolidated balance sheet as of December 26,
1993. The asset, included in "other assets," is being amortized over a five-
year period and the amortization is included in "amortization of intangible
assets" in the consolidated statement of earnings for 1993.
The following summarized unaudited pro forma results of operations of the
Company (in thousands, except per share amounts) for 1993 and 1992 assume the
Minnesota Acquisition occurred as of the beginning of the respective periods.
The pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations which would actually
have resulted had the Minnesota Acquisition been effected as of the dates
indicated, or which may result in the future.
<TABLE>
<CAPTION>
1993 1992
-------------------- --------------------
PRO PRO
AS REPORTED FORMA AS REPORTED FORMA
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Company restaurant sales.......... $159,482 $164,322 $85,459 $109,997
Earnings before income taxes...... $ 20,456 $ 21,545 $10,283 $ 11,355
Pro forma net earnings............ $ 12,551 $ 13,147 $ 6,335 $ 6,597
Pro forma net earnings per common
share............................ $ 0.46 $ 0.47 $ 0.26 $ 0.25
Weighted average shares outstand-
ing.............................. 27,543 27,753 24,755 26,031
</TABLE>
F-14
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other restaurant acquisitions: During 1992, IRC issued common stock in
exchange for substantially all the operating assets and liabilities of an
unrelated restaurant company. The aggregate purchase price, including
associated costs and liabilities assumed of approximately $1,579,000, totaled
approximately $2,868,000. This acquisition has been accounted for as a
purchase, and accordingly, the acquired assets and liabilities have been
recorded at their estimated fair values at the date of acquisition. The
acquisition resulted in goodwill of approximately $1,799,000, which is being
amortized on a straight-line basis over 20 years. The operating results of the
acquired company are included in the statements of operations beginning on the
date of acquisition.
During 1993, the Company acquired the operations of two franchise restaurants
and the related leasehold improvements, furniture and fixtures and rights to
future development of restaurants in the franchise territories. The Company
also acquired the land and building related to one of the restaurants. The
total purchase price, for financial reporting purposes, was approximately
$1,903,000 (including cash payments to the seller of $1,800,000). The purchase
price has been allocated to the fair value of net assets acquired, and resulted
in an allocation to goodwill of approximately $612,000. The 1993 financial
statements reflect the results of operations of such restaurants subsequent to
the date of acquisition.
In addition, during 1994 the Company acquired the operations of two franchise
restaurants and the related land, furniture and fixtures. The total purchase
price was approximately $3,315,000 and has been allocated to the fair value of
net assets acquired, and resulted in an allocation to goodwill of $515,000. The
1994 financial statements reflect the results of operations of such restaurants
subsequent to the date of acquisition.
5. RECEIVABLES
Receivables are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Franchise royalty, advertising and trade re-
ceivables.................................... $5,598 $3,942
Franchise fee receivables..................... 536 412
Credit card receivables....................... 1,102 780
Interest and dividends receivable............. 143 277
Other......................................... 757 1,206
------ ------
8,136 6,617
Less allowance for bad debts.................. 740 322
------ ------
$7,396 $6,295
====== ======
</TABLE>
F-15
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Land.................... $ 25,492 $17,592
Buildings............... 47,106 27,365
Leasehold improvements.. 18,629 15,910
Furniture and equipment. 45,081 33,221
Construction in pro-
gress.................. 5,763 2,918
-------- -------
142,071 97,006
Less accumulated depre-
ciation and amortiza-
tion................... 27,342 19,746
-------- -------
$114,729 $77,260
======== =======
</TABLE>
The Company leases certain of its restaurants. All leases are accounted for
as operating leases and certain leases provide for contingent rent based upon
sales. Total rental expense for all operating leases is composed of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Minimum rent......................................... $5,797 $5,339 $3,534
Contingent rent...................................... 1,532 1,139 586
------ ------ ------
$7,329 $6,478 $4,120
====== ====== ======
</TABLE>
Future minimum lease payments under noncancelable leases (including leases
executed for sites to be developed in 1995) as of December 25, 1994 are as
follows (in thousands):
<TABLE>
<S> <C>
1995............................................................. $ 6,728
1996............................................................. 6,825
1997............................................................. 6,589
1998............................................................. 6,160
1999............................................................. 5,899
Thereafter....................................................... 42,059
-------
74,260
Less minimum amounts receivable under noncancelable sublease..... (487)
-------
$73,773
=======
</TABLE>
F-16
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. NOTES PAYABLE
Notes payable are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Unsecured notes payable; 7.70% interest per annum,
with principal payments beginning in 1998; due May
2004............................................... $20,000 $ --
Secured bank note; interest at the prime rate plus
0.75%; due in various monthly installments of prin-
cipal and interest with a final balloon payment due
December 1999...................................... 6,940 6,434
Secured bank note; interest at the prime rate; due
in equal monthly installments of principal and in-
terest through January 2000........................ 2,662 3,195
Secured bank note; 6.69% interest per annum at De-
cember 25, 1994; due in quarterly installments of
principal and interest through October 1998........ 2,400 3,000
Secured bank notes; interest ranging from the prime
rate to the prime rate plus 0.50%; due in various
monthly installments of principal and interest with
balloon payments due in July 1997, December 1997
and May 1998....................................... 2,069 2,321
Secured revolving credit facility; interest at the
prime rate; due on demand.......................... 584 36
Secured revolving credit facility; interest at the
prime rate; due October 1995....................... 800 476
Unsecured promissory notes issued in connection with
the acquisition of
restaurants; 8.00% interest per annum; due in an-
nual installments of
principal and interest through February 2000....... 2,180 2,463
Unsecured promissory note to stockholder; 8.00% in-
terest per annum; due in equal monthly installments
of principal and interest through October 1995..... 112 237
Unsecured promissory note to stockholder; 7.00% in-
terest per annum................................... -- 400
Other............................................... 70 159
------- -------
Total............................................... 37,817 18,721
Less demand note and current portion of notes pay-
able............................................... 3,505 1,934
------- -------
Non-current portion of notes payable................ $34,312 $16,787
======= =======
</TABLE>
The prime rate at December 25, 1994 and December 26, 1993 was 8.5% and 6.0%,
respectively.
During 1994, the Company completed a $20,000,000 senior unsecured private debt
placement with institutional lenders unaffiliated with the Company. The notes
bear interest at 7.70% annually with principal payments beginning in 1998
through 2004. The debt agreement contains various covenants and restrictions
which, among other things, require the maintenance of a stipulated fixed charge
coverage ratio and minimum consolidated net worth, as defined, and limit
additional indebtedness in excess of specified amounts. The debt agreement also
restricts the amount of retained earnings available for the payment of cash
dividends. At December 25, 1994, $20,643,000 of retained earnings was available
for the payment of cash dividends. The Company is currently in compliance with
the covenants of this debt agreement.
The secured bank note of $6,940,000 as of December 25, 1994 contains various
covenants and restrictions on the part of IRC which, among other things,
require the maintenance of a stipulated ratio of cash flow to current
maturities of long-term debt, total liabilities to net worth, and minimum net
worth. As of December 25, 1994, IRC was in compliance with these covenants.
IRC has a line-of-credit agreement with a bank which provides for borrowings
up to $700,000. This agreement expires December 31, 1999, and borrowings under
this agreement bear interest at the prime rate
F-17
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and are due on demand. Available borrowings under the line-of-credit were
approximately $116,000 and $664,000 at December 25, 1994 and December 26, 1993,
respectively.
During 1993, the Company used a portion of the proceeds of a $3,000,000,
6.69% term loan to extinguish debt under two installment notes which had a
balance of approximately $2,331,000 at December 27, 1992. In addition, the
Company obtained a $4,000,000 revolving credit facility with a bank which bears
interest on the outstanding borrowings at prime or LIBOR plus 1.25% at the
Company's option and requires the Company to pay a commitment fee of 3/8 of 1%
on any unused portion of the facility. The debt agreement contains various
covenants and restrictions which among other things, restrict additional
indebtedness and require the maintenance of certain financial ratios and
covenants.
The Company issued a $300,000, 7.00% note dated December 31, 1992 and a
$600,000, 7.00% note dated July 6, 1993 payable to a stockholder. Both notes
were paid in 1993. In addition, the Company had a $400,000 subordinated note
payable to a stockholder outstanding at December 26, 1993 which was paid in
1994.
Maturities of notes payable for each of the five fiscal years subsequent to
December 25, 1994, ending during the years indicated, are as follows (in
thousands):
<TABLE>
<S> <C>
1995 (including demand note of
$584)............................ $3,505
1996.............................. 1,973
1997.............................. 2,775
1998.............................. 5,210
1999.............................. 9,652
</TABLE>
8. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Compensation and related taxes.................. $ 6,240 $ 4,459
Gift certificates............................... 1,690 887
Sales and use taxes............................. 1,631 1,283
Insurance....................................... 1,237 1,053
Rent............................................ 1,355 1,176
Advertising..................................... 97 509
Other........................................... 4,463 2,077
------- -------
$16,713 $11,444
======= =======
</TABLE>
9. JOINT VENTURE
In October 1992, the Company entered into a joint venture arrangement with
its franchisee in Nevada for three existing restaurants and one additional
restaurant to be developed. In exchange for a 50% ownership and the rights to
operate such restaurants, the Company contributed approximately $1,299,000 in
cash to the joint venture. The transaction was recorded as a purchase for
financial reporting purposes and, based on its control over operating policies
of the joint venture, the Company has consolidated the joint venture from date
of acquisition for financial statement purposes. The Company has an option to
purchase the remaining 50% interest for $1,275,000, exercisable beginning in
October 1995.
F-18
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax
return. The Company adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" at the beginning of its 1993 fiscal year.
Previously, the Company recorded income tax provisions using the deferred
method. Statement No. 109 provides for the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been reported in the financial statements. The adoption of Statement No. 109
did not have a material impact on the Company's financial position or results
of operations. In addition, income tax expense and deferred income taxes were
adjusted during 1993 to reflect the impact of the Omnibus Budget Reconciliation
Act of 1993, the effects of which were not material.
Prior to September 7, 1994, PVNE, a pooled company, was classified as an S
Corporation and accordingly, stockholders were responsible for paying their
proportionate share of federal and certain state income taxes. In addition, the
combined earnings of IRC, a pooled company, included earnings of limited
partnerships which were not taxable entities for federal and state income tax
purposes. The accompanying consolidated statements of earnings reflect
provisions for income taxes on a pro forma basis as if the Company were liable
for federal and state income taxes on PVNE's earnings prior to September 7,
1994 and the earnings of IRC's limited partnerships at a statutory rate of 39%
in 1994 and 1993 and 38% in 1992.
The income tax provision (benefit) consists of the following (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Current provision:
Federal........................................ $ 7,934 $5,810 $2,649
State.......................................... 1,419 1,154 752
Deferred provision (benefit)..................... 100 (271) 71
Pro forma provision for income taxes of pooled
companies....................................... 1,324 1,212 476
------- ------ ------
Income taxes..................................... $10,777 $7,905 $3,948
======= ====== ======
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Franchise deposits............................... $ (36) $ (74) $ --
Depreciation..................................... 109 (4) 18
Allowance for bad debts.......................... (163) (39) --
Accrued expenses................................. (99) (128) (118)
Other............................................ 289 (26) 171
------- ------ ------
Deferred income tax provision (benefit).......... $ 100 $ (271) $ 71
======= ====== ======
</TABLE>
F-19
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation between the income tax provision and the expected tax
determined by applying the statutory Federal income tax rates to earnings
before income taxes follows (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------- ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rates............ $ 9,916 $7,022 $3,443
Increase (decrease) to income tax expense:
Amortization of goodwill....................... 267 209 20
State income taxes, net of federal benefit..... 1,039 748 469
Merger costs................................... 271 -- --
Tax exempt investment income................... (207) (377) (150)
Meals and entertainment disallowance........... 186 60 49
FICA tip tax credit............................ (641) -- --
Other.......................................... (54) 243 117
------- ------ ------
Income taxes..................................... $10,777 $7,905 $3,948
======= ====== ======
</TABLE>
The net current deferred tax asset amounts are included in "prepaid and other
current assets" in the accompanying consolidated balance sheets. The
significant components of deferred tax assets and liabilities and the related
balance sheet classifications are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 25, DECEMBER 26,
1994 1993
------------ ------------
<S> <C> <C>
Classified as current:
Allowance for bad debts....................... $ 289 $ 126
Accrued expenses.............................. 238 307
Other, net.................................... 88 (232)
------ -----
Net deferred tax asset........................ $ 615 $ 201
====== =====
Classified as non-current:
Depreciation differences...................... $1,171 $ 916
Franchise deposits............................ (529) (493)
Other, net.................................... 73 (165)
------ -----
Net deferred tax liability.................... $ 715 $ 258
====== =====
</TABLE>
As the result of a recent examination by the Internal Revenue Service ("IRS")
of the Company's 1990 and 1991 Federal income tax returns, the IRS proposed
adjustments to the Company's taxable income for such years. The adjustments
related to various matters, including the deductibility of certain intangible
assets recorded in connection with the Company's acquisition of the Applebee's
franchising and restaurant operations. During 1994, the Company and the IRS
reached a settlement, and the resolution of this matter did not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
11. COMMITMENTS AND CONTINGENCIES
Litigation: The Company is involved in various legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that the outcome of
these actions will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-20
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Franchise financing: The Company entered into an agreement in 1992 with a
financing source to provide up to $75,000,000 of financing to Company
franchisees to fund development of new franchise restaurants. Up to $25,000,000
of the $75,000,000 available under the agreement can be used by franchisees for
short-term construction financing. The Company provided a limited guaranty of
loans made under the agreement. The Company's recourse obligation of the
construction financing portion of the facility is capped at $2,500,000. When
the short-term construction loans are converted to long-term loans, the
Company's maximum recourse obligation is reduced from 10% to 6.7% of the
$75,000,000 facility. The Company's recourse obligations are reduced beginning
in the second year of each long-term loan and thereafter decrease ratably to
zero after the seventh year of each loan. At December 25, 1994, approximately
$41,133,000 had been funded through this financing source and various loans
were in process. The Company has not been apprised of any defaults by
franchisees. This agreement expired on December 31, 1994 and was not renewed,
although some loan commitments as of the termination date may thereafter be
funded.
Severance agreements: The Company has severance and employment agreements
with certain officers providing for severance payments to be made in the event
the employee resigns or is terminated related to a change in control (as
defined in the agreements). If the severance payments had been due as of
December 25, 1994, the Company would have been required to make payments
aggregating approximately $5,000,000. In addition, the Company has severance
and employment agreements with certain officers which contain severance
provisions not related to a change in control, and such provisions would have
required aggregate payments of approximately $2,700,000 if such officers had
been terminated as of December 25, 1994.
12. STOCKHOLDERS' EQUITY
On March 24, 1992, the Company completed a public offering of its common
stock. The public offering included 6,255,000 shares sold by the Company and
3,405,000 shares sold by certain stockholders of the Company (2,085,000 shares
and 1,135,000 shares, respectively, prior to adjustments for the stock splits
discussed below). Proceeds of approximately $29,343,000, after expenses, were
received from the offering.
On May 17, 1993, the Company declared a two-for-one stock split of its common
stock in the form of a 100% stock dividend, distributed on June 25, 1993 to
stockholders of record on June 4, 1993. On December 10, 1993, the Company
declared a three-for-two stock split of its common stock in the form of a 50%
stock dividend, distributed on January 28, 1994 to stockholders of record on
December 23, 1993. Except for shares authorized, all references to number of
shares and per share information in the consolidated financial statements and
notes have been adjusted to reflect both stock splits on a retroactive basis.
The two-for-one stock split and the three-for-two stock split resulted in
increases in common stock and reductions in retained earnings of $187,000.
An amendment to the Company's Certificate of Incorporation was approved at
the Annual Meeting of Stockholders held on May 25, 1994 which increased the
number of authorized shares of Common Stock from 25,000,000 shares to
125,000,000 shares.
On September 7, 1994, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "'Rights Plan") and declared a dividend, issued on September
19, 1994, of one Right for each outstanding share of Common Stock of the
Company (the "Common Shares"). The Rights become exercisable if a person or
group acquires more than 15% of the outstanding Common Shares, other than
pursuant to a Qualifying Offer (as defined) or makes a tender offer for more
than 15% of the outstanding Common Shares, other than pursuant to a Qualifying
Offer. Upon the occurrence of such an event, each Right entitles the holder
(other
F-21
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
than the acquiror) to purchase for $75 the economic equivalent of Common
Shares, or in certain circumstances, stock of the acquiring entity, worth twice
as much. The Rights will expire on September 7, 2004 unless earlier redeemed by
the Company, and are redeemable prior to becoming exercisable at $0.01 per
Right.
13. EMPLOYEE BENEFIT PLANS
Employee stock option plan: During 1989, the Company's Board of Directors
approved the 1989 Employee Stock Option Plan (the "Plan") which provides for
the grant of both qualified and nonqualified options as determined by a
committee appointed by the Board of Directors. The committee has discretion to
select the optionees and to establish the terms and conditions of each option,
subject to provisions of the Plan.
The Plan provides that the option price, for both qualified and nonqualified
options, as of the date granted cannot be less than the fair market value of
the Company's common stock. Options outstanding at December 25, 1994 were at
prices ranging from $3.02 to $20.67 per share. The options are granted for a
term of three to ten years and are generally exercisable one year from date of
grant. The Plan contains other restrictions relative to option terms and
maximum grant amounts to individual employees. The Plan, as amended, provides
for a total of up to 3,000,000 shares which may be granted under its provisions
and the Company has reserved such shares of common stock.
Transactions relative to the Plan are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- --------
<S> <C> <C> <C>
Options outstanding at beginning of peri-
od...................................... 1,149,388 916,573 917,956
Granted................................ 603,500 520,464 343,650
Exercised.............................. (109,759) (276,699) (331,083)
Canceled............................... (48,450) (10,950) (13,950)
--------- --------- --------
Options outstanding at end of period..... 1,594,679 1,149,388 916,573
========= ========= ========
Options exercisable at end of period..... 928,607 595,294 545,536
Options available for grant at end of pe-
riod.................................... 684,780 1,239,830 249,344
</TABLE>
Employee retirement plans: During 1992, the Company established a profit
sharing plan and trust in accordance with Section 401(k) of the Internal
Revenue code. The Company matches 25% of employee contributions, not to exceed
2% of the employee's total annual compensation, with the Company contributions
vesting at the rate of 20% each year beginning after the employee's second year
of service. During 1994, the Company established a non-qualified defined
contribution retirement plan for key employees. The Company's contributions
under both plans in 1994, 1993 and 1992 were approximately $127,000, $175,000
and $31,000, respectively.
14. RELATED PARTY TRANSACTIONS
The Company and certain franchisees have obtained restaurant equipment from a
company owned by an individual who is related to a director of the Company and
who is also related to an officer and stockholder of the Company. During 1994,
1993 and 1992, the Company paid $3,869,000, $369,000 and $784,000,
respectively, for equipment and services purchased from this company. In
addition, the Company had $194,000 and $565,000 in accounts payable to this
company at December 25, 1994 and December 26, 1993, respectively.
The Company leases a restaurant site from a corporation whose ownership is
composed of certain current and former stockholders, directors and officers of
the Company. The lease has a term of 20 years with two renewal options. The
lease provides for rentals in an amount equal to approximately 7% of gross
sales and
F-22
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
has an initial term of 20 years. Rents incurred under the lease were $173,000,
$152,000 and $150,000 for 1994, 1993 and 1992, respectively, and are included
in direct and occupancy costs in the consolidated statements of earnings.
The Company leases a restaurant site from a partnership in which a former
director who is related to a director of the Company and who is also related to
an officer and stockholder of the Company holds a 50% interest. The lease has a
term of 20 years with two options to renew. The lease provides for rentals in
an amount equal to approximately 7% of gross sales of the restaurant. Rents
incurred under the lease were $113,000 for each of 1994, 1993 and 1992,
respectively, and are included in direct and occupancy costs in the
consolidated statements of earnings.
IRC leases its office space under an operating lease with an outside party
related through common ownership. The lease expires in April 1998; however, the
Company has the option to terminate the lease at the end of 1995. Rents
incurred under the lease were $74,000, $55,000 and $52,000 for 1994, 1993 and
1992, respectively, and are included in general and administrative expenses in
the consolidated statements of earnings.
15. SUBSEQUENT EVENTS
In February 1995, the Company obtained a $20,000,000 unsecured bank revolving
credit facility which expires on December 31, 1997. The revolving credit
facility bears interest at LIBOR plus 0.60% or the prime rate, at the Company's
option, and requires the Company to pay a commitment fee of 0.15% on any unused
portion of the facility. As of March 26, 1995, no amounts were outstanding
under the facility. The debt agreement contains various covenants and
restrictions which, among other things, require the maintenance of a stipulated
fixed charge coverage ratio and minimum consolidated net worth, as defined, and
also limit additional indebtedness in excess of specified amounts. The debt
agreement also restricts the amount of retained earnings available for the
payment of cash dividends. The Company is currently in compliance with such
covenants.
In March 1995, IRC obtained a $2,000,000 note payable to a bank bearing
interest at the prime rate, payable in monthly installments of $25,000
including interest, beginning April 1, 1996 with a final balloon payment due
February 1, 1998. The note is collateralized by certain real and personal
property.
In April 1995, the Company acquired the operations of five franchise
restaurants and the related furniture and fixtures, certain land and leasehold
improvements. The total purchase price was approximately $9,500,000, of which
$9,250,000 was paid in cash at the time of closing and the remaining $250,000
was placed in escrow to address potential adjustments. The acquisition will be
accounted for as a purchase, and accordingly, the purchase price will be
allocated to the fair value of net assets acquired and the results of
operations of such restaurants will be reflected in the 1995 financial
statements subsequent to the date of acquisition.
F-23
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following presents the unaudited consolidated quarterly results of
operations for 1994 and 1993 (in thousands, except per share amounts). Merger
costs of $920,000 related to the PVNE Merger were expensed in the fourth
quarter of 1994.
<TABLE>
<CAPTION>
1994
-------------------------------------------------------
FISCAL QUARTER ENDED
-------------------------------------------------------
MARCH 27, JUNE 26, SEPTEMBER 25, DECEMBER 25,
1994 1994 1994 1994
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant
sales................ $49,847 $54,859 $58,457 $59,282
Franchise income...... 6,658 7,358 8,046 9,357
------- ------- ------- -------
Total operating rev-
enues.............. 56,505 62,217 66,503 68,639
------- ------- ------- -------
Cost of Company restau-
rant sales:
Food and beverage..... 14,821 16,056 16,768 17,174
Labor................. 16,237 17,426 18,585 18,529
Direct and occupancy.. 12,319 13,152 14,088 14,324
Pre-opening expense... 136 631 559 767
------- ------- ------- -------
Total cost of Com-
pany restaurant
sales.............. 43,513 47,265 50,000 50,794
------- ------- ------- -------
General and administra-
tive expenses.......... 6,874 7,040 6,923 8,330
Merger costs............ -- -- -- 920
Amortization of intangi-
ble assets............. 547 518 517 451
Loss on disposition of
restaurants and equip-
ment................... 50 461 222 128
------- ------- ------- -------
Operating earnings...... 5,521 6,933 8,841 8,016
------- ------- ------- -------
Other income (expense):
Investment income..... 306 185 302 272
Interest expense...... (299) (385) (673) (672)
Other income.......... 60 53 55 85
------- ------- ------- -------
Total other income
(expense).......... 67 (147) (316) (315)
------- ------- ------- -------
Earnings before income
taxes.................. 5,588 6,786 8,525 7,701
Income taxes............ 1,904 2,192 2,431 2,926
------- ------- ------- -------
Net earnings............ 3,684 4,594 6,094 4,775
Pro forma provision for
income taxes of pooled
companies.............. 283 337 678 26
------- ------- ------- -------
Pro forma net earnings.. $ 3,401 $ 4,257 $ 5,416 $ 4,749
======= ======= ======= =======
Pro forma net earnings
per common share....... $ 0.12 $ 0.15 $ 0.20 $ 0.17
======= ======= ======= =======
Weighted average shares
outstanding............ 27,910 27,974 27,988 28,007
</TABLE>
F-24
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993
-------------------------------------------------------
FISCAL QUARTER ENDED
-------------------------------------------------------
MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 26,
1993 1993 1993 1993
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant
sales................ $33,395 $39,589 $43,335 $43,163
Franchise income...... 4,485 4,936 5,685 6,218
------- ------- ------- -------
Total operating rev-
enues.............. 37,880 44,525 49,020 49,381
------- ------- ------- -------
Cost of Company restau-
rant sales:
Food and beverage..... 9,901 11,678 12,490 12,688
Labor................. 10,899 12,560 13,840 13,651
Direct and occupancy.. 7,802 9,135 9,982 10,364
Pre-opening expense... 330 140 285 833
------- ------- ------- -------
Total cost of Com-
pany restaurant
sales.............. 28,932 33,513 36,597 37,536
------- ------- ------- -------
General and administra-
tive expenses.......... 4,821 5,517 6,231 5,957
Amortization of intangi-
ble assets............. 352 516 523 543
Loss on disposition of
restaurants and equip-
ment................... -- 1 64 26
------- ------- ------- -------
Operating earnings...... 3,775 4,978 5,605 5,319
------- ------- ------- -------
Other income (expense):
Investment income..... 398 347 540 390
Interest expense...... (224) (269) (272) (310)
Other income.......... 40 67 67 5
------- ------- ------- -------
Total other income
(expense).......... 214 145 335 85
------- ------- ------- -------
Earnings before income
taxes.................. 3,989 5,123 5,940 5,404
Income taxes............ 1,283 1,836 1,884 1,690
------- ------- ------- -------
Net earnings............ 2,706 3,287 4,056 3,714
Pro forma provision for
income taxes of pooled
companies.............. 272 272 377 291
------- ------- ------- -------
Pro forma net earnings.. $ 2,434 $ 3,015 $ 3,679 $ 3,423
======= ======= ======= =======
Pro forma net earnings
per common share........ $ 0.09 $ 0.11 $ 0.13 $ 0.13
======= ======= ======= =======
Weighted average shares
outstanding............ 26,802 27,745 27,772 27,853
</TABLE>
----------------
F-25
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH DECEMBER 25,
26, 1995 1994
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 12,922 $ 9,634
Short-term investments, at market value (amortized
cost of $8,942 in 1995 and $9,046 in 1994)........... 8,990 8,893
Receivables (less allowance for bad debts of $801 in
1995 and $740 in 1994)............................... 7,096 7,396
Inventories........................................... 6,348 5,159
Prepaid and other current assets...................... 2,055 2,887
-------- --------
Total current assets................................ 37,411 33,969
Property and equipment, net........................... 120,168 114,729
Goodwill, net......................................... 20,811 21,113
Franchise interest and rights, net.................... 6,237 6,401
Other assets.......................................... 3,370 3,802
-------- --------
$187,997 $180,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Demand note and current portion of notes payable...... $ 3,208 $ 3,505
Current portion of obligations under noncompetition
and consulting agreement............................. 220 220
Accounts payable...................................... 12,539 10,750
Accrued expenses and other current liabilities........ 15,053 16,713
Accrued dividends..................................... -- 1,269
Accrued income taxes.................................. 4,163 1,169
-------- --------
Total current liabilities........................... 35,183 33,626
-------- --------
Non-current liabilities:
Notes payable--less current portion................... 34,303 34,312
Franchise deposits.................................... 1,417 1,355
Obligations under noncompetition and consulting
agreement--less current portion...................... 440 660
Deferred income taxes................................. 62 715
-------- --------
Total non-current liabilities....................... 36,222 37,042
-------- --------
Total liabilities................................... 71,405 70,668
Minority interest in joint venture...................... 604 558
Commitments and contingencies (Notes 3 and 4)
Stockholders' equity:
Preferred stock--par value $0.01 per share:
authorized--1,000,000 shares; no shares issued....... -- --
Common stock--par value $0.01 per share: authorized--
125,000,000 shares; issued--28,435,693 shares in 1995
and 28,295,479 shares in 1994........................ 284 283
Additional paid-in capital............................ 81,571 78,675
Retained earnings..................................... 34,952 30,775
Unrealized gain (loss) on short-term investments, net
of income taxes...................................... 30 (96)
-------- --------
116,837 109,637
Treasury stock--281,772 shares in 1995 and 1994, at
cost................................................. (849) (849)
-------- --------
Total stockholders' equity.......................... 115,988 108,788
-------- --------
$187,997 $180,014
======== ========
</TABLE>
See notes to consolidated financial statements.
F-26
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------
MARCH 26, MARCH 27,
1995 1994
--------- ---------
<S> <C> <C>
Revenues:
Company restaurant sales.................................. $66,021 $49,847
Franchise income.......................................... 9,418 6,658
------- -------
Total operating revenues................................ 75,439 56,505
------- -------
Cost of Company restaurant sales:
Food and beverage......................................... 18,908 14,821
Labor..................................................... 21,068 16,237
Direct and occupancy...................................... 15,378 12,319
Pre-opening expense....................................... 633 136
------- -------
Total cost of Company restaurant sales.................. 55,987 43,513
------- -------
General and administrative expenses......................... 8,909 6,874
Merger costs................................................ 1,770 --
Amortization of intangible assets........................... 515 547
Loss on disposition of equipment............................ 26 50
------- -------
Operating earnings.......................................... 8,232 5,521
------- -------
Other income (expense):
Investment income......................................... 237 306
Interest expense.......................................... (614) (299)
Other income.............................................. 82 60
------- -------
Total other income (expense)............................ (295) 67
------- -------
Earnings before income taxes................................ 7,937 5,588
Income taxes................................................ 3,611 1,904
------- -------
Net earnings................................................ 4,326 3,684
Pro forma provision for income taxes........................ 73 283
------- -------
Pro forma net earnings...................................... $ 4,253 $ 3,401
======= =======
Pro forma net earnings per common share..................... $ 0.15 $ 0.12
======= =======
Weighted average shares outstanding......................... 28,078 27,910
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ADDITIONAL ON TOTAL
----------------- PAID-IN RETAINED SHORT-TERM TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INVESTMENTS STOCK EQUITY
---------- ------ ---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 25,
1994................... 28,295,479 $283 $78,675 $30,775 $(96) $(849) $108,788
Pro forma provision
for income taxes..... -- -- -- 73 -- -- 73
Reclassification of
net income of IRC
partnerships......... -- -- 149 (149) -- -- --
Stock options
exercised:
Company............. 140,214 1 1,085 -- -- -- 1,086
IRC................. -- -- 1,333 -- -- -- 1,333
Income tax benefit
upon exercise of
stock options........ -- -- 329 -- -- -- 329
Unrealized gain on
short-term
investments, net of
income taxes......... -- -- -- -- 126 -- 126
Pro forma net
earnings............. -- -- -- 4,253 -- -- 4,253
---------- ---- ------- ------- ---- ----- --------
Balance, March 26, 1995. 28,435,693 $284 $81,571 $34,952 $ 30 $(849) $115,988
========== ==== ======= ======= ==== ===== ========
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------
MARCH 26, MARCH 27,
1995 1994
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Pro forma net earnings................................... $ 4,253 $ 3,401
Adjustments to reconcile pro forma net earnings to net
cash provided by operating activities:
Depreciation and amortization.......................... 2,580 1,896
Amortization of intangible assets...................... 515 547
(Gain) loss on sale of investments..................... 4 (101)
Deferred income tax benefit............................ (573) (182)
Loss on disposition of equipment....................... 26 50
Pro forma provision for income taxes................... 73 283
Changes in assets and liabilities:
Receivables............................................ 300 17
Inventories............................................ (1,189) (1,075)
Prepaid and other current assets....................... 669 (63)
Accounts payable....................................... 1,789 1,617
Accrued expenses and other current liabilities......... (1,660) (609)
Accrued income taxes................................... 2,994 (190)
Franchise deposits..................................... 62 (8)
Other.................................................. 385 (251)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 10,228 5,332
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities and sales of short-term investments........... 100 1,761
Purchases of property and equipment...................... (8,039) (8,030)
------- -------
NET CASH USED BY INVESTING ACTIVITIES.................. (7,939) (6,269)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................... (1,269) (879)
Cash distributions....................................... -- (684)
Issuance of common stock upon exercise of stock options.. 2,419 118
Income tax benefit upon exercise of stock options........ 329 116
Proceeds from issuance of notes payable.................. 2,816 320
Payments on notes payable................................ (3,122) (1,874)
Payments under noncompetition and consulting agreement... (220) (244)
Minority interest in net earnings of joint venture....... 46 12
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES....... 999 (3,115)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 3,288 (4,052)
CASH AND CASH EQUIVALENTS, beginning of period............. 9,634 8,054
------- -------
CASH AND CASH EQUIVALENTS, end of period................... $12,922 $ 4,002
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the 13 week period for:
Income taxes........................................... $ 885 $ 2,295
======= =======
Interest............................................... $ 563 $ 470
======= =======
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
See notes to consolidated financial statements.
F-29
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements of Applebee's International, Inc. and
subsidiaries (the "Company") for the 13 weeks ended March 26, 1995 and March
27, 1994 have been prepared without audit (except that the balance sheet
information as of December 25, 1994 has been derived from consolidated
financial statements which were audited) in accordance with the rules and
regulations of the Securities and Exchange Commission. Although certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted, the Company believes that the disclosures are adequate to
make the information presented not misleading. The accompanying consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the fiscal year ended December 25, 1994
included herein.
The Company believes that all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of the
interim periods presented have been made. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
Beginning in fiscal 1995, the cost of meals provided to employees and other
complimentary meals have been classified as labor costs and direct and
occupancy costs, respectively. Previously, the retail price of such meals was
reflected in Company restaurant sales with corresponding amounts reflected as
labor costs or direct and occupancy costs. The consolidated financial
statements for the 13 weeks ended March 27, 1994 have been reclassified to
conform to the presentation for the 13 weeks ended March 26, 1995, the effects
of which were not material.
2. ACQUISITIONS
IRC Merger: On March 23, 1995, the Company acquired Innovative Restaurant
Concepts, Inc. and its affiliates ("IRC"), referred to herein as the "IRC
Merger". As a result of the IRC Merger, IRC became a wholly-owned subsidiary of
the Company. A total of approximately 2,630,000 shares of the Company's newly-
issued common stock was issued to the shareholders and limited partners of IRC,
including IRC shares issued in 1995 upon the exercise of IRC stock options
prior to the IRC Merger. IRC employees exchanged pre-existing stock options for
options to purchase approximately 147,000 shares of the Company's common stock.
Of such shares and options, 7.5% were placed in escrow to address potential
adjustments during the escrow period that will end December 23, 1995. In
addition, the Company assumed approximately $13,700,000 of IRC indebtedness, of
which $1,270,000 was repaid at closing. At the time of the IRC Merger, IRC
operated 17 restaurants, 13 of which were Rio Bravo Cantinas, a Mexican
restaurant concept, and four were other specialty restaurants.
The IRC Merger was accounted for as a pooling of interests and accordingly,
the accompanying consolidated financial statements have been restated to
include the accounts and operations of the merged entities for all periods
presented. All share amounts have been restated to reflect the total number of
shares issued to IRC for all periods presented. Separate results of the two
entities were as follows (amounts in thousands):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY IRC ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
13 Weeks Ended March 26, 1995
Net sales....................... $52,199 $13,822 $ -- $66,021
Net earnings.................... $ 5,519 $ 577 $(1,843) $ 4,253
13 Weeks Ended March 27, 1994
Net sales....................... $37,640 $12,207 $ -- $49,847
Net earnings.................... $ 2,916 $ 580 $ (95) $ 3,401
</TABLE>
F-30
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Adjustments have been made to eliminate the impact of intercompany balances
and to record provisions for pro forma income taxes for certain affiliates of
IRC. Merger costs of $1,770,000 relating to the IRC merger have been expensed
in the first quarter of 1995. Merger costs include investment banking fees,
legal and accounting fees, and other merger related expenses. The impact of
these costs on pro forma net earnings per common share was approximately $0.06
in the first quarter of 1995.
Other restaurant acquisitions: On April 3, 1995, the Company acquired the
operations of five franchise restaurants and the related furniture and
fixtures, certain land and leasehold improvements. The total purchase price was
approximately $9,500,000, of which $9,250,000 was paid in cash at the time of
closing and the remaining $250,000 was placed in escrow to address potential
adjustments. The acquisition will be accounted for as a purchase, and
accordingly, the purchase price will be allocated to the fair value of net
assets acquired and the results of operations of such restaurants will be
reflected in the 1995 financial statements subsequent to the date of
acquisition. Based on preliminary information, it is anticipated that
approximately $6,500,000 of the purchase price will be allocated to goodwill.
3. COMMITMENTS AND CONTINGENCIES
Litigation: The Company is involved in various legal actions arising in the
normal course of business. After taking into consideration legal counsel's
evaluation of such actions, management is of the opinion that the outcome of
these actions will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
Franchise financing: The Company entered into an agreement in 1992 with a
financing source to provide up to $75,000,000 of financing to Company
franchisees to fund development of new franchise restaurants. Up to $25,000,000
of the $75,000,000 available under the agreement can be used by franchisees for
short-term construction financing. The Company has provided a limited guaranty
of loans made under the agreement. The Company's recourse obligation of the
construction financing portion of the facility is capped at $2,500,000. When
the short-term construction loans are converted to long-term loans, the
Company's maximum recourse obligation is reduced from 10% to 6.7% of the
$75,000,000 facility. The Company's recourse obligations are reduced beginning
in the second year of each long-term loan and thereafter decrease ratably to
zero after the seventh year of each loan. At March 26, 1995, approximately
$41,433,000 had been funded through this financing source and various loans
were in process. The Company has not been apprised of any defaults by
franchisees. This agreement expired on December 31, 1994 and was not renewed,
although some loan commitments as of the termination date may thereafter be
funded.
Severance agreements: The Company has severance and employment agreements
with certain officers providing for severance payments to be made in the event
the employee resigns or is terminated related to a change in control (as
defined in the agreements). If the severance payments had been due as of March
26, 1995, the Company would have been required to make payments aggregating
approximately $4,800,000. In addition, the Company has severance and employment
agreements with certain officers which contain severance provisions not related
to a change in control, and such provisions would have required aggregate
payments of approximately $3,100,000 if such officers had been terminated as of
March 26, 1995.
4. FINANCING
In February 1995, the Company obtained a $20,000,000 unsecured bank revolving
credit facility which expires on December 31, 1997. The revolving credit
facility bears interest at LIBOR plus 0.60% or the prime rate, at the Company's
option, and requires the Company to pay a commitment fee of 0.15% on any unused
F-31
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
portion of the facility. As of March 26, 1995, no amounts were outstanding
under the facility. The revolving credit facility contains various covenants
and restrictions which, among other things, require the maintenance of a
stipulated fixed charge coverage ratio and minimum consolidated net worth, as
defined, and also limit additional indebtedness in excess of specified amounts.
The revolving credit facility also restricts the amount of retained earnings
available for the payment of cash dividends. The Company is currently in
compliance with such covenants.
F-32
<PAGE>
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH ANY OFFERING MADE HEREBY OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES COVERED BY THIS PROSPECTUS IN ANY JURISDICTION IN WHICH, OR TO ANY
PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 9
Dividend Policy........................................................... 9
Price Range of Common Stock............................................... 9
Capitalization............................................................ 10
Selected Consolidated Financial Data...................................... 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 12
Business.................................................................. 24
Management................................................................ 33
Principal and Selling Stockholders........................................ 36
Underwriting.............................................................. 38
Experts................................................................... 39
Legal Opinion............................................................. 39
Available Information..................................................... 39
Incorporation by Reference................................................ 40
Index to Financial Statements............................................. F-1
</TABLE>
2,400,000 SHARES
LOGO
APPLEBEE'S
INTERNATIONAL,
INC.
COMMON STOCK
--------------
PROSPECTUS
--------------
PIPER JAFFRAY INC.
DILLON, READ & CO. INC.
MONTGOMERY SECURITIES
July 28, 1995
