UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 15, 1995
Commission File Number: 000-17962
Applebee's International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 43-1461763
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
(Address of principal executive offices and zip code)
(913) 967-4000
(Registrant's telephone number, including area code)
None
(Former name or former address, if changed since last report)
<PAGE>
Item 5. Other Events
On March 23, 1995, a wholly-owned subsidiary of Applebee's International,
Inc., (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.
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.
Item 7. Financial Statements and Exhibits
(a) and (b) Financial Statements
The financial statements required by Item 7(a) and (b) were
filed as a part of the Registration Statement of Applebee's International, Inc.
on Form S-4, Registration No. 33-87590, filed December 20, 1994.
(c) Exhibits
27 Financial Data Schedule
The following financial statements are filed as a part of this
Form 8-K:
99.1 Applebee's International, Inc. and Subsidiaries
Consolidated Financial Statements for the Fiscal
Years Ended December 25, 1994, December 26, 1993 and
December 27, 1992 as restated for the IRC Merger.
99.2 Innovative Restaurant Concepts, Inc. and
Subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real
Estate, L.P., and CG Restaurant Partners, Ltd.
Combined Financial Statements for the Fiscal Years
Ended December 25, 1994, December 26, 1993 and
December 27, 1992.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: May 17, 1995 By: /s/ George D. Shadid
George D. Shadid
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE
REGISTRATION STATEMENT ON FORM S-3 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-25-1994 DEC-26-1993 DEC-27-1992
<PERIOD-START> DEC-27-1993 DEC-28-1992 DEC-30-1991
<PERIOD-END> DEC-25-1994 DEC-26-1993 DEC-27-1992
<CASH> 9,634 8,054 0
<SECURITIES> 8,893 10,557 0
<RECEIVABLES> 8,136 6,617 0
<ALLOWANCES> 740 322 0
<INVENTORY> 5,159 2,280 0
<CURRENT-ASSETS> 33,969 28,857 0
<PP&E> 142,071 97,006 0
<DEPRECIATION> 27,342 19,746 0
<TOTAL-ASSETS> 180,014 138,680 0
<CURRENT-LIABILITIES> 33,626 26,323 0
<BONDS> 34,312 16,787 0
<COMMON> 283 282 0
0 0 0
0 0 0
<OTHER-SE> 108,505 92,398 0
<TOTAL-LIABILITY-AND-EQUITY> 180,014 138,680 0
<SALES> 231,160 164,666 87,873
<TOTAL-REVENUES> 262,579 185,990 102,192
<CGS> 200,208 141,711 77,330
<TOTAL-COSTS> 229,036 164,188 91,935
<OTHER-EXPENSES> 3,814 2,025 1,031
<LOSS-PROVISION> 418 100 0
<INTEREST-EXPENSE> 2,029 1,075 599
<INCOME-PRETAX> 28,600 20,456 10,283
<INCOME-TAX> 10,777 7,905 3,948
<INCOME-CONTINUING> 17,823 12,551 6,335
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 17,823 12,551 6,335
<EPS-PRIMARY> .64 .46 .26
<EPS-DILUTED> .64 .46 .26
</TABLE>
INDEX TO FINANCIAL STATEMENTS
Page
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS:
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
December 25, 1994, December 26, 1993 and December 27, 1992......... F-9
Notes to Consolidated Financial Statements............................ F-11
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES, COBB/GWINNETT RIO, LTD.,
RIO REAL ESTATE, L.P., AND CG RESTAURANT PARTNERS, LTD.
COMBINED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.............................. F-27
Combined Balance Sheets as of December 25, 1994 and
December 26, 1993.................................................. F-28
Combined Statements of Operations for the Years Ended
December 25, 1994, December 26, 1993 and December 27, 1992......... F-29
Combined Statements of Stockholders' Equity and Partners' Capital
for the Years Ended December 25, 1994, December 26, 1993
and December 27, 1992.............................................. F-30
Combined Statements of Cash Flows for the Years Ended
December 25, 1994, December 26, 1993 and December 27, 1992......... F-31
Notes to Combined Financial Statements................................ F-32
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 21%, 23% 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)
<TABLE>
<CAPTION>
December 25, December 26,
1994 1993
<S> <C> <C>
ASSETS
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: authorized - 1,000,000 shares;
no shares issued.......................................................... -- --
Common stock - par value $0.01 per share: authorized - 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.................................. $ 231,160 $ 164,666 $ 87,873
Franchise income.......................................... 31,419 21,324 14,319
Total operating revenues............................... 262,579 185,990 102,192
Cost of Company restaurant sales:
Food and beverage......................................... 67,438 48,336 26,796
Labor..................................................... 72,885 52,252 28,340
Direct and occupancy...................................... 57,792 39,535 21,426
Pre-opening expense....................................... 2,093 1,588 768
Total cost of Company restaurant sales................. 200,208 141,711 77,330
General and administrative expenses.......................... 29,246 22,577 14,605
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
Additional Loss on Total
Common Stock 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 offering.......... 2,085,000 21 29,322 -- -- -- 29,343
Dividends on common stock,
at a rate of $0.03 per share.. -- -- -- (613) -- -- (613)
Stock options exercised......... 110,361 1 1,174 -- -- -- 1,175
Income tax benefit upon exercise
of stock options.............. -- -- 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 exercised......... 276,699 2 1,230 -- -- -- 1,232
Income tax benefit upon exercise
of stock options.............. -- -- 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 exercised......... 109,759 1 661 -- -- -- 662
Income tax benefit upon exercise
of stock options.............. -- -- 215 -- -- -- 215
Unrealized loss on short-term
investments, 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 equipment........... 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 liabilities............. 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 public 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 options............. 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 venture............ 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
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(dollars in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
December 25, December 26, December 27,
1994 1993 1992
<S> <C> <C> <C>
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>
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).
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.
F-11
<PAGE>
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 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:
Years
Buildings............................................... 20
Leasehold improvements.................................. 5-20
Furniture and equipment................................. 3-7
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.
F-12
<PAGE>
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
<TABLE>
<CAPTION>
December 25, 1994 December 26, 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>
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 were 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, AII 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 are Rio
Bravo Cantinas, a Mexican restaurant concept, and four 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 Forma Pro Forma
(including PVNE) IRC Adjustments Combined
<S> <C> <C> <C> <C>
1994:
Net sales.......... $ 177,108 $ 54,052 $ -- $ 231,160
Net earnings....... $ 15,780 $ 2,242 $ (199) $ 17,823
1993:
Net sales.......... $ 122,223 $ 42,443 $ -- $ 164,666
Net earnings....... $ 11,375 $ 1,222 $ (62) $ 12,535
1992:
Net sales.......... $ 58,609 $ 29,264 $ -- $ 87,873
Net earnings....... $ 5,819 $ 612 $ (114) $ 6,317
</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.
F-13
<PAGE>
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.
Minnesota restaurant acquisition: Effective February 26, 1993, the Company
entered into an agreement (the "Acquisition Agreement") to acquire 14 franchise
restaurants and certain restaurant sites under development, 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):
Property and equipment..................................... $ 6,491
Inventories................................................ 243
Deferred income taxes...................................... (1,145)
Goodwill................................................... 17,959
Total...................................................... $ 23,548
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.
F-14
<PAGE>
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
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Company restaurant sales.................... $ 164,666 $ 169,506 $ 87,873 $ 112,411
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 outstanding......... 27,543 27,753 24,755 26,031
</TABLE>
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.
F-15
<PAGE>
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 receivables............. $ 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>
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 progress......................................... 5,763 2,918
142,071 97,006
Less accumulated depreciation and amortization................... 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):
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
F-16
<PAGE>
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 principal 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 interest through January
2000............................................................. 2,662 3,195
Secured bank note; 6.69% interest per annum at December 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
annual installments of principal and interest through February
2000............................................................. 2,180 2,463
Unsecured promissory note to stockholder; 8.00% interest per
annum; due in equal monthly installments of principal and
interest through October 1995.................................... 112 237
Unsecured promissory note to stockholder; 7.00% interest per
annum............................................................ -- 400
Other............................................................ 70 159
Total............................................................ 37,817 18,721
Less demand note and current portion of notes payable............ 3,505 1,934
Non-current portion of notes payable............................. $ 34,312 $ 16,787
</TABLE>
The prime rates at December 25, 1994 and December 26, 1993 were 8.5% and 6.0%,
respectively.
F-17
<PAGE>
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, and
are due in 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 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):
1995 (including demand note of $584)......................... $ 3,505
1996......................................................... 1,973
1997......................................................... 2,775
1998......................................................... 5,210
1999......................................................... 9,652
F-18
<PAGE>
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 the 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.
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.
F-19
<PAGE>
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
</TABLE>
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
<TABLE>
<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>
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):
F-20
<PAGE>
<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.
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 reduces from 10% to 6.7% of the $75,000,000
facility. The Company's recourse obligations reduce 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.
F-21
<PAGE>
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 $170,000.
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 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.
F-22
<PAGE>
Transactions relative to the Plan are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Options outstanding at beginning of period........... 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 period......... 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 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.
F-23
<PAGE>
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-24
<PAGE>
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....................... $ 51,702 $ 56,995 $ 60,705 $ 61,758
Franchise income............................... 6,658 7,358 8,046 9,357
Total operating revenues.................... 58,360 64,353 68,751 71,115
Cost of Company restaurant sales:
Food and beverage.............................. 15,381 16,699 17,443 17,915
Labor.......................................... 16,727 17,958 19,116 19,084
Direct and occupancy........................... 13,096 14,104 15,110 15,482
Pre-opening expense............................ 136 631 559 767
Total cost of Company restaurant sales...... 45,340 49,392 52,228 53,248
General and administrative expenses............... 6,902 7,049 6,943 8,352
Merger costs...................................... -- -- -- 920
Amortization of intangible assets................. 547 518 517 451
Loss on disposition of restaurants and equipment.. 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-25
<PAGE>
<TABLE>
<CAPTION>
1993
Fiscal Quarter Ended
March 28, June 27, September 26, December 26,
1993 1993 1993 1993
<S> <C> <C> <C> <C>
Revenues:
ompany restaurant sales........................ $ 34,461 $ 40,604 $ 44,839 $ 44,762
Franchise income............................... 4,485 4,936 5,685 6,218
Total operating revenues.................... 38,946 45,540 50,524 50,980
Cost of Company restaurant sales:
Food and beverage.............................. 10,227 11,987 12,946 13,176
Labor.......................................... 11,148 12,827 14,190 14,087
Direct and occupancy........................... 8,277 9,562 10,668 11,028
Pre-opening expense............................ 330 140 285 833
Total cost of Company restaurant sales...... 29,982 34,516 38,089 39,124
General and administrative expenses............... 4,837 5,529 6,243 5,968
Amortization of intangible assets................. 352 516 523 543
Loss on disposition of restaurants and equipment.. -- 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-26
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-27
<PAGE>
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD., RIO REAL ESTATE, L.P.,
AND CG RESTAURANT PARTNERS, LTD.
COMBINED BALANCE SHEETS
DECEMBER 25, 1994 AND DECEMBER 26, 1993
(In Thousands)
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ 840 $ 1,130
Accounts receivable.......................................................... 476 440
Inventories.................................................................. 522 432
Note receivable (Note 8)..................................................... 0 600
Prepaid expenses............................................................. 125 207
Refundable income taxes...................................................... 341 0
Total current assets...................................................... 2,304 2,809
PROPERTY AND EQUIPMENT, at cost:
Land......................................................................... 6,631 5,738
Building and improvements.................................................... 10,016 7,435
Leaseholds and leasehold improvements........................................ 6,842 6,576
Furniture, fixtures, and equipment........................................... 9,425 8,171
32,914 27,920
Less accumulated depreciation and amortization............................... (10,459) (8,590)
Property and equipment, net............................................... 22,455 19,330
OTHER ASSETS:
Goodwill, net of amortization of $206 and $106 in 1994 and 1993, respectively
(Notes 2 and 7)........................................................... 1,796 1,896
Pre-opening costs, net of amortization of $1,800 and $1,436 in 1994 and 1993,
respectively.............................................................. 930 603
Other........................................................................ 833 313
Total other assets........................................................ 3,559 2,812
$ 28,318 $ 24,951
LIABILITIES AND STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable............................................................. $ 1,241 $ 957
Accrued expenses............................................................. 1,136 700
Accrued rent................................................................. 500 489
Accrued salaries and bonuses................................................. 1,093 819
Accrued property and sales taxes............................................. 348 283
Current maturities of long-term debt......................................... 1,145 930
Demand note payable.......................................................... 584 36
Income taxes payable......................................................... 0 166
Deferred income taxes (Note 6)............................................... 206 75
Total current liabilities................................................. 6,253 4,455
LONG-TERM DEBT, less current maturities......................................... 10,638 11,257
DEFERRED INCOME TAXES (Note 6).................................................. 450 212
COMMITMENTS (Notes 4, 8 and 9)
STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL (Notes 5 and 7):
Limited partners' capital.................................................... 1,747 1,604
Innovative Restaurant Concepts, Inc. common stock, $.0333 par value;
10,000,000 shares authorized, 3,215,883 and 3,218,943 shares issued
and outstanding in 1994 and 1993, respectively............................ 107 107
Additional paid-in capital................................................... 7,209 7,217
Retained earnings............................................................ 2,380 565
11,443 9,493
Less subscriptions receivable (Note 5)....................................... (466) (466)
Total stockholders' equity and partners' capital.......................... 10,977 9,027
$ 28,318 $ 24,951
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-28
<PAGE>
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD., RIO REAL ESTATE, L.P.,
AND CG RESTAURANT PARTNERS, LTD.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 25, 1994,
DECEMBER 26, 1993, AND DECEMBER 27, 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
REVENUE...................................................... $ 54,052 $ 42,443 $ 29,264
COST OF SALES:
Food and beverage......................................... 16,107 12,674 9,239
Labor..................................................... 16,238 13,094 8,055
Direct and occupancy...................................... 13,221 10,833 8,073
Preopening expenses....................................... 364 273 223
Total cost of sales.................................... 45,930 36,874 25,590
GENERAL AND ADMINISTRATIVE EXPENSES.......................... 3,910 2,905 2,386
AMORTIZATION OF GOODWILL..................................... 100 93 15
OPERATING INCOME............................................. 4,112 2,571 1,273
OTHER INCOME (EXPENSE):
Investment income......................................... 59 22 29
Interest expense.......................................... (802) (607) (309)
Total other expense....................................... (743) (585) (280)
INCOME BEFORE INCOME TAXES................................... 3,369 1,986 993
PROVISION FOR INCOME TAXES (Note 6).......................... 934 590 264
NET INCOME................................................... 2,435 1,396 729
PRO FORMA PROVISION FOR INCOME TAXES OF
PARTNERSHIPS (Notes 1 and 6).............................. 193 174 117
PRO FORMA NET INCOME......................................... $ 2,242 $ 1,222 $ 612
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-29
<PAGE>
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD., RIO REAL ESTATE, L.P.,
AND CG RESTAURANT PARTNERS, LTD.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY AND PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 25, 1994,
DECEMBER 26, 1993, AND DECEMBER 27, 1992
(In Thousands)
<TABLE>
<CAPTION>
Limited Retained
Partners' Common Stock Paid-In (Deficit)
Capital Shares Amount Capital Earnings Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 29, 1991
(Unaudited).......................... $1,559 2,617 $ 87 $5,213 $ (797) $ 6,062
Net income........................... 307 0 0 0 422 729
Partnership distributions............ (207) 0 0 0 0 (207)
Stock options exercised (Note 5)..... 0 56 2 123 0 125
Stock issuance related to
acquisition of business (Note 7)... 0 358 12 1,253 0 1,265
BALANCE, December 27, 1992.............. 1,659 3,031 101 6,589 (375) 7,974
Net income........................... 456 0 0 0 940 1,396
Partnership distributions............ (511) 0 0 0 0 (511)
Stock options exercised (Note 5)..... 0 125 4 410 0 414
Stock issuance related to
acquisition of minority interest
(Note 2)........................... 0 63 2 218 0 220
BALANCE, December 26, 1993.............. 1,604 3,219 107 7,217 565 9,493
Net income........................... 620 0 0 0 1,815 2,435
Partnership distributions............ (477) 0 0 0 0 (477)
Stock repurchase..................... 0 (3) 0 (8) 0 (8)
BALANCE, December 25, 1994.............. $1,747 3,216 $107 $7,209 $ 2,380 $11,443
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-30
<PAGE>
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD., RIO REAL ESTATE, L.P.,
AND CG RESTAURANT PARTNERS, LTD.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 25, 1994,
DECEMBER 26, 1993, AND DECEMBER 27, 1992
(In Thousands)
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................. $ 2,435 $ 1,396 $ 729
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................... 2,362 2,086 1,729
Deferred income taxes................................... 369 (55) 165
Changes in operating assets and liabilities:
Accounts receivable.................................. (36) (61) (211)
Inventories.......................................... (90) (74) (21)
Prepaid expenses..................................... 82 (156) 51
Accounts payable..................................... 284 228 242
Accrued expenses..................................... 786 443 356
Income taxes......................................... (507) 506 (346)
Total adjustments....................................... 3,250 2,917 1,965
Net cash provided by operating activities............... 5,685 4,313 2,694
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (4,994) (11,828) (2,465)
Proceeds from sales of property and equipment.............. 0 3,078 16
Increase in preopening costs............................... (691) (364) (400)
(Increase) decrease in other assets........................ (549) (161) 46
Cash obtained from acquisition of business................. 0 0 164
Net cash used in investing activities................... (6,234) (9,275) (2,639)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under demand note............................... 5,615 36 1,165
Repayments of demand note.................................. (5,067) 0 (1,560)
Borrowings of long-term debt............................... 1,122 9,527 4,981
Repayments of long-term debt............................... (1,526) (4,295) (3,456)
Decrease in minority interest.............................. 0 (47) (49)
Collections of notes receivable............................ 600 0 76
Partnership distributions.................................. (477) (511) (207)
Proceeds from issuance of stock............................ 0 44 125
Repurchases of stock....................................... (8) 0 0
Net cash provided by financing activities............... 259 4,754 1,075
NET (DECREASE) INCREASE IN CASH............................... (290) (208) 1,130
CASH, beginning of year....................................... 1,130 1,338 208
CASH, end of year............................................. $ 840 $ 1,130 $ 1,338
CASH PAYMENTS FOR INTEREST.................................... $ 733 $ 590 $ 309
CASH PAYMENTS FOR INCOME TAXES................................ $ 1,044 $ 204 $ 487
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-31
<PAGE>
INNOVATIVE RESTAURANT CONCEPTS, INC. AND SUBSIDIARIES,
COBB/GWINNETT RIO, LTD., RIO REAL ESTATE, L.P.,
AND CG RESTAURANT PARTNERS, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 25, 1994 AND DECEMBER 26, 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Combination
The combined financial statements include the consolidated accounts of
Innovative Restaurant Concepts, Inc. ("IRC") and its majority-owned
subsidiaries and the accounts of Cobb/ Gwinnett Rio, Ltd. ("CGR"), Rio
Real Estate, L.P. ("RRE"), and CG Restaurant Partners, Ltd. ("CG, Ltd."),
collectively referred to as the "Companies." The Companies are related
entities through common management and ownership (Note 2). All significant
intercompany accounts and transactions, including IRC's capital investment
in CGR, RRE, and CG, Ltd., have been eliminated in consolidation and
combination.
General
As of December 25, 1994, the Companies own and operate 16 restaurants
which operate under four separate concepts: Rio Bravo Cantina, Rio Bravo
Grill, Ray's on the River, and Green Hills Grille. In addition, as of
December 25, 1994, IRC also owns two nonoperating restaurant properties
which are in the process of conversion to Rio Bravo Cantina restaurants.
The Companies' fiscal year ends on the last Sunday in December.
Inventories
Inventories, consisting principally of food, beverages, and supplies, are
priced at the lower of cost (first-in, first-out method) or market
(replacement cost).
Property and Equipment
Property and equipment are stated at cost. Maintenance and repair costs
are charged to expense as incurred, and major renewals and betterments are
capitalized. When property is retired or otherwise disposed of, the
related costs and accumulated depreciation are removed from the accounts
and any resulting gain or loss is reflected in the statements of
operations.
For financial reporting purposes, depreciation is computed using both
straight-line and accelerated methods over the following estimated useful
lives of the assets:
Buildings and improvements 20 to 31.5 years
Furniture, fixtures, and equipment 3 to 7 years
Leaseholds and leasehold improvements Term of lease
F-32
<PAGE>
Goodwill
The Companies amortize costs in excess of fair value of net assets
acquired, consisting primarily of goodwill acquired in the acquisition of
Summit Restaurants, Inc. (Note 7), a wholly owned subsidiary of IRC, on a
straight-line basis over 20 years. The Companies periodically evaluate the
existence of goodwill impairment on the basis of whether the goodwill is
fully recoverable from projected, undiscounted cash flows of the related
business unit.
Preopening Costs
The Companies amortize preopening costs, consisting primarily of salaries,
wages, and other direct costs incurred prior to the opening of a new
restaurant, on a straight-line basis over a three-year period, commencing
with the opening of the related restaurant.
Income Taxes
During 1992, IRC adopted Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes," and has applied the
provisions of SFAS No. 109 retroactively to December 31, 1990. SFAS No.
109 requires the determination of deferred income taxes using the asset
and liability method, under which deferred tax assets and liabilities are
determined based on the differences between the financial accounting and
tax bases of assets and liabilities. There was no material cumulative
effect of this change in accounting on the Company's results of
operations.
The limited partnerships, CGR, RRE, and CG, Ltd. (the "Partnerships"), are
not considered taxable entities for federal and state income tax purposes.
All taxable income or loss is included in the separate tax returns of the
partners, including IRC, in accordance with the terms of each partnership
agreement. The accompanying statements of operations include pro forma
adjustments to provide for income taxes as if the Partnerships were
taxable entities for each of the years presented.
2. ORGANIZATION
CG, Ltd.
IRC is the sole general partner of CG, Ltd., with approximately 92%
ownership. CG, Ltd. is the general partner of CGR, with approximately 50%
ownership of CGR. CGR was formed to own and operate two Rio Bravo Cantina
restaurants.
The partnership agreement for CGR generally provides that net income and
cash from operations, as defined, will be periodically distributed at the
sole discretion of the general partner as follows: first, 100% to the
limited partners (allocated according to their respective partnership
interests) until they have received a 5% noncumulative preferential return
on their respective net cash capital contributions; second, 100% to CG,
Ltd. until it has received a 5% noncumulative preferential return on its
net cash capital contribution; third, 66 2/3% to the limited partners and
33 1/3% to CG, Ltd. until all limited partners have received cumulative
distributions (excluding any preferential return) equal to 100% of their
respective cash capital contributions; and fourth, thereafter, split
equally between the limited partners and CG, Ltd. Net losses, as defined,
are allocated in proportion to the respective partnership interests.
F-33
<PAGE>
IRC manages the operations of CGR under the terms of a management
agreement which provides for a monthly management fee of 7% of adjusted
gross sales, as defined. In addition, the management agreement also
provides that CGR reimburse IRC for direct expenses incurred on its behalf
and for an allocable share of operational costs associated with services
provided by IRC.
RRE
On December 13, 1990, IRC contributed capital to RRE totaling $582,000 in
exchange for a limited partnership interest of $495,000 and a general
partnership interest of $87,000. Additional amounts totaling $935,000 were
contributed to RRE by private investors for the remaining limited
partnership interest. IRC is the sole general partner of RRE with
approximately 38% ownership. RRE owns land, property rights, and leasehold
improvements for two Rio Bravo Cantina restaurants which are leased to
IRC.
General Manager Limited Partnerships
During 1991 and 1990, IRC established limited partnerships with the
general managers (the "GMs") of four of its restaurants: Ray's on the
River, Rio Bravo Buckhead, Rio Bravo Nashville, and Rio Bravo Tampa. In
the formation of each limited partnership, IRC contributed the net
operating assets of each restaurant in exchange for a 92.5% general
partnership interest. Each GM, in turn, signed a promissory note payable
to IRC to purchase the remaining 7.5% (the minority interests) of each
limited partnership.
Effective January 1, 1993, IRC repurchased each GM's interest in the
limited partnerships at estimated fair value, as defined in each
partnership agreement. The aggregate purchase price of approximately
$417,000 consisted of a combination of cash, the issuance of common stock,
and cancellation of notes receivable from the GMs. In connection with this
acquisition, IRC recorded goodwill of approximately $203,000, which is
being amortized over 20 years.
F-34
<PAGE>
3. DEMAND NOTE PAYABLE AND LONG-TERM DEBT
Demand note payable and long-term debt at December 25, 1994 and December
26, 1993 consisted of the following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Demand note payable $ 584,000 $ 36,000
Long-term debt:
Note payable to bank bearing interest at the prime rate, due in equal
monthly installments of $14,333 plus interest with a final principal
payment of approximately $216,000 due May 1, 1998; collateralized by
certain land of one of IRC's restaurant locations and is guaranteed
by the major stockholder 789,000 961,000
Note payable to bank bearing interest at the prime rate, due in equal
monthly installments of $44,373 plus interest through January 31,
2000; collateralized by common stock and all personal property and
fixtures and guaranteed by the major stockholder 2,662,000 3,195,000
Note payable to a related party bearing interest at 8%, due in
monthly installments of $11,639, including interest through
October 31, 1995 112,000 237,000
Note payable to bank bearing interest at the prime rate plus .75%,
payable in various monthly installments with a final principal
payment of approximately $5,581,000, due December 1, 1999;
collateralized by real estate, furniture, fixtures, equipment, and
other personal property of certain of IRC's restaurant locations and
is guaranteed by the major stockholder 6,940,000 6,434,000
Note payable to bank bearing interest at the prime rate plus .5%,
payable in various monthly installments with a final principal
payment of approximately $778,000, due July 10, 1997; collateralized
by real estate and other personal property of one of RRE's restaurant
locations and is guaranteed by IRC 917,000 964,000
Note payable to bank bearing interest at the prime rate, payable in
equal monthly installments of $2,750 plus interest with a final
principal payment of approximately $264,000, due December 31, 1997;
collateralized by real estate and other personal property of RRE 363,000 396,000
11,783,000 12,187,000
Less current maturities 1,145,000 930,000
Long-term debt, less current maturities $10,638,000 $11,257,000
</TABLE>
F-35
<PAGE>
The prime rates at December 25, 1994 and December 26, 1993 were 8.5% and
6%, respectively. In March 1993, the Company entered into an interest rate
swap agreement with a bank which converted $2,000,000 of floating rate
debt to 7.13% fixed rate debt. Subsequent to year-end, the Company sold
the rights available under this agreement and realized a gain on the sale
of approximately $60,000.
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, are due
on demand, and are collateralized by IRC stock and a major stockholder
guarantee. Available borrowings under the line-of-credit agreement totaled
approximately $116,000 and $664,000 at December 25, 1994 and December 26,
1993, respectively.
The note payable to the bank of $6,940,000 as of December 25, 1994
contains certain restrictive covenants on the part of IRC, including, but
not limited to, the following:
o IRC's total liabilities to net worth ratio shall not exceed
3.25 to 1.
o IRC's minimum cash flow to current maturities of long-term
debt shall be at least 1.5 to 1.
o IRC must maintain a minimum net worth of $6,300,000 at
December 25, 1994, increasing by a minimum of $300,000 each
year.
As of December 25, 1994, IRC was in compliance with these covenants.
Scheduled principal maturities of long-term debt as of December 25, 1994
were as follows:
1995 $ 1,145,000
1996 1,043,000
1997 1,818,000
1998 1,368,000
1999 6,409,000
$11,783,000
F-36
<PAGE>
4. LEASES AND RELATED-PARTY TRANSACTIONS
During 1994, 1993, and 1992, IRC, CGR, and RRE leased land and restaurant
facilities under operating lease agreements. In addition, IRC leased its
office space under an operating lease with an outside party related
through common ownership. These agreements expire at varying dates through
2012. The leases generally provide for payment by IRC, CGR, and RRE of
real estate taxes and maintenance expenses and, in some instances,
increased rental amounts based on a percentage of sales in excess of
stipulated amounts. Renewal options, generally for periods of five years
and under terms similar to the initial lease, are also available. Rental
expenses and contingent rentals which are payable based on a percentage of
sales in excess of stipulated amounts are as follows:
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1994 1993 1992
<S> <C> <C> <C>
Rental expense $1,068,000 $ 937,000 $ 992,000
Contingent rental expense 409,000 363,000 264,000
Total rental expense $1,477,000 $1,300,000 $1,256,000
</TABLE>
Aggregate future minimum lease payments under noncancelable operating
lease agreements are as follows at December 25, 1994:
1995 $ 1,112,000
1996 1,107,000
1997 977,000
1998 816,000
1999 758,000
Thereafter 7,809,000
12,579,000
Less minimum amounts receivable under
noncancelable sublease (487,000)
$12,092,000
F-37
<PAGE>
5. STOCKHOLDERS' EQUITY
Incentive Stock Options
During 1987, IRC's board of directors approved an incentive stock option
plan for key employees. The board of directors is authorized to issue
options to acquire up to 900,000 shares of common stock at an option price
equal to the estimated fair value of the common stock on the option grant
date as determined by the board of directors. The options granted in 1987
vested ratably to the employee through 1992 and may be exercised until the
earlier of termination of employment or December 27, 1997. For options
granted subsequent to 1987, the employee has a vested right to exercise
the options at any time until the earlier of termination of employment or
expiration of the agreement (ten years from grant date). In the event of
termination of employment, IRC has the right of first refusal to
repurchase stock issued to employees under this plan. A summary of stock
option activity is as follows:
<TABLE>
<CAPTION>
Price
Shares Range
<S> <C> <C>
Outstanding at December 29, 1991 392,601 2.12-3.53
Granted 290,750 3.53
Canceled (71,010) 2.12-3.53
Exercised (56,274) 2.12-3.53
Outstanding at December 27, 1992 556,067 2.12-3.53
Granted 60,700 3.53
Canceled (6,822) 3.53
Exercised (19,803) 2.12-3.53
Outstanding at December 26, 1993 590,142 2.12-3.53
Granted 76,500 5.01
Canceled (9,253) 3.53-5.01
Outstanding at December 25, 1994 657,389 2.12-5.01
</TABLE>
During 1992, 45,000 options were exercised with proceeds of a subscription
receivable.
F-38
<PAGE>
Nonqualified Stock Options
On December 31, 1990, IRC granted 22,500 nonqualified stock options to
certain directors. The options were granted at an option price of $3.53
(the estimated fair value at date of grant), became vested upon the date
of grant, and expire December 31, 2000. Additionally, during 1991, certain
directors were issued 4,500 shares of common stock as compensation
pursuant to provisions within the private placement memorandum. On March
1, 1992, IRC granted 90,000 nonqualified stock options to certain
directors at an exercise price of $3.53 per share. These options vested
upon the date of grant and expire March 1, 2002. During 1993, 105,000
options were exercised by certain directors with proceeds of a
subscription receivable, and at December 25, 1994, 7,500 options remained
unexercised.
Stock Split
Effective November 15, 1992, IRC amended its articles of incorporation to
provide for a three-for-one split of its common stock. As a result, the
par value of the stock became $.0333 per share, which is reflected in the
accompanying balance sheets. All amounts in the accompanying financial
statements have been adjusted to reflect this split.
Authorized Shares
Effective October 15, 1992, IRC amended its articles of incorporation to
increase the number of authorized shares of common stock to 10,000,000.
6. INCOME TAXES
The following tables set forth the provision (benefit) for income taxes of
IRC:
<TABLE>
<CAPTION>
December 25, December 26, December 27,
1994 1993 1992
<S> <C> <C> <C>
Current provision for income taxes:
Federal $ 495,000 $ 546,000 $ 54,000
State 70,000 99,000 45,000
565,000 645,000 99,000
Deferred provision (benefit) for income
taxes 369,000 (55,000) 165,000
$ 934,000 $ 590,000 $ 264,000
</TABLE>
The principal differences between the federal statutory income tax rate
and the provision for income taxes of IRC as set forth in the accompanying
statements of operations are as follows:
F-39
<PAGE>
<TABLE>
<CAPTION>
Rate
December 25, December 26, December 27,
1994 1993 1992
<S> <C> <C> <C>
Federal statutory tax rate 34.00% 34.00% 34.00%
State taxes, net of federal tax
benefit 4.12 4.27 4.33
Other (4.14) 0.29 0.15
Effective tax rates 33.98% 38.56% 38.48%
</TABLE>
The components of the deferred tax liability of IRC as of December 25,
1994 and December 26, 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax assets:
Accrued compensation and miscellaneous
reserves $ 11,000 $ 25,000
Deferred tax liability:
Property and equipment (322,000) (106,000)
Preopening costs (345,000) (206,000)
(667,000) (312,000)
Valuation allowance 0 0
$ (656,000) $(287,000)
</TABLE>
The pro forma provision for income taxes of the Partnerships has been
computed using the federal statutory income tax rate and the state income
tax rate, net of the federal income tax benefit. The combined income of
CGR, RRE, and CG, Ltd. which is not included in the taxable income of IRC
was approximately $620,000, $456,000, and $307,000 for the years ended
December 25, 1994, December 26, 1993, and December 27, 1992, respectively.
Components of deferred tax assets and liabilities of the Partnerships are
not material to the combined financial position of the Companies.
7. ACQUISITION OF RESTAURANT COMPANY
During 1992, IRC issued 358,419 shares of 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, which are not material to the
accompanying financial statements, are included in the statements of
operations beginning on the date of acquisition.
In connection with this acquisition, IRC issued options to purchase
261,750 shares of common stock to certain key employees of the acquired
company under IRC's incentive stock option plan (Note 5).
F-40
<PAGE>
8. ACQUISITION OF RESTAURANT PROPERTIES
During 1993 under a plan to obtain additional Rio Bravo Cantina Restaurant
locations, IRC acquired nine restaurant properties from an unrelated party
in two separate transactions. The total purchase price of the properties
of approximately $9,938,000 was financed with the proceeds of a bank note
(Note 3). IRC subsequently sold in 1993 three of the properties purchased
in two unrelated transactions for a total of approximately $3,694,000,
which consisted of cash and a promissory note receivable of $600,000. The
proceeds from these two sales were used to pay down IRC's outstanding
debt. The promissory note was collected during the year ended December 25,
1994. Of the remaining six restaurant properties, five have been converted
and now operate as Rio Bravo Cantina restaurants and one is currently in
the process of conversion to a Rio Bravo Cantina restaurant.
During the year ended December 25, 1994, IRC purchased a restaurant site
in Jacksonville, Florida, for approximately $1,225,000. At December 25,
1994, the site was in the process of being converted into a Rio Bravo
Cantina restaurant, and this store opened as a Rio Bravo Cantina
restaurant during January 1995.
9. MERGER AGREEMENT
On October 14, 1994, the stockholders of IRC and the partners of CGR, RRE,
and CG, Ltd. entered into an agreement with Applebee's International, Inc.
("Applebee's"), a publicly held company, to exchange 100% of the
outstanding common stock of IRC and 100% of the outstanding partners'
capital for registered shares of Applebee's common stock. Completion of
this transaction is anticipated to occur in late March 1995.
10. SUBSEQUENT EVENT
On March 3, 1995, IRC purchased a restaurant site in Atlanta, Georgia, for
approximately $800,000. IRC intends to construct a Rio Bravo Cantina
restaurant on this site. In connection with this purchase and restaurant
construction, 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 and is guaranteed by the majority stockholder.
F-41
