UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No [ ]
The number of shares of the registrant's common stock outstanding as of November
1, 1996 was 31,293,132.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 29, 1996
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 29, 1996
and December 31, 1995...................................... 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 29, 1996 and September 24, 1995............ 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 29, 1996.......................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 29, 1996 and September 24, 1995............ 6
Notes to Consolidated Financial Statements..................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 18
Item 6. Exhibits and Reports on Form 8-K............................... 18
Signatures .............................................................. 19
Exhibit Index............................................................ 20
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 10,245 $ 30,188
Short-term investments, at market value (amortized cost of $45,134 in 1996
and $21,530 in 1995)..................................................... 45,194 21,836
Receivables (less allowance for bad debts of $720 in 1996 and $723 in 1995). 14,332 9,843
Inventories................................................................. 5,300 10,036
Prepaid and other current assets............................................ 3,856 2,654
------------- --------------
Total current assets..................................................... 78,927 74,557
Property and equipment, net...................................................... 193,558 159,832
Goodwill, net.................................................................... 22,968 25,780
Franchise interest and rights, net............................................... 5,378 5,805
Deferred income taxes............................................................ 924 719
Other assets..................................................................... 4,376 3,987
------------- --------------
$ 306,131 $ 270,680
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 958 $ 935
Current portion of obligations under noncompetition
and consulting agreement................................................. 220 220
Accounts payable............................................................ 15,676 11,183
Accrued expenses and other current liabilities.............................. 23,467 22,635
Accrued dividends........................................................... -- 1,861
Accrued income taxes........................................................ 99 1,641
------------- --------------
Total current liabilities................................................ 40,420 38,475
------------- --------------
Non-current liabilities:
Long-term debt - less current portion....................................... 25,025 25,832
Franchise deposits.......................................................... 1,772 1,168
Obligations under noncompetition and consulting agreement
- less current portion................................................... 220 440
------------- --------------
Total non-current liabilities............................................ 27,017 27,440
------------- --------------
Total liabilities........................................................ 67,437 65,915
Minority interest in joint venture............................................... 974 772
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued......................................................... -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued - 31,574,904 shares in 1996 and 31,298,517 shares in 1995......... 316 313
Additional paid-in capital.................................................. 153,024 148,081
Retained earnings........................................................... 85,192 56,258
Unrealized gain on short-term investments, net of income taxes.............. 37 190
------------- --------------
238,569 204,842
Treasury stock - 281,772 shares in 1996 and 1995, at cost................... (849) (849)
------------- --------------
Total stockholders' equity............................................... 237,720 203,993
------------- --------------
$ 306,131 $ 270,680
============= ==============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------------- ---------------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 92,969 $ 76,965 $ 266,725 $ 216,106
Franchise income............................ 14,105 11,116 39,975 31,215
---------------- --------------- ---------------- ----------------
Total operating revenues................. 107,074 88,081 306,700 247,321
---------------- --------------- ---------------- ----------------
Cost of Company restaurant sales:
Food and beverage........................... 26,172 21,375 75,072 61,236
Labor....................................... 29,027 24,284 84,178 68,413
Direct and occupancy........................ 22,049 18,708 65,377 51,893
Pre-opening expense......................... 865 326 2,039 1,382
---------------- --------------- ---------------- ----------------
Total cost of Company restaurant sales... 78,113 64,693 226,666 182,924
---------------- --------------- ---------------- ----------------
General and administrative expenses.............. 11,152 9,292 32,646 27,681
Merger costs..................................... -- -- -- 1,770
Amortization of intangible assets................ 570 588 1,728 1,698
Loss on disposition of property and equipment.... 183 60 722 166
---------------- --------------- ---------------- ----------------
Operating earnings............................... 17,056 13,448 44,938 33,082
---------------- --------------- ---------------- ----------------
Other income (expense):
Investment income........................... 694 563 2,092 1,010
Interest expense............................ (363) (833) (1,243) (2,126)
Other income................................ 205 111 510 264
---------------- --------------- ---------------- ----------------
Total other income (expense)............. 536 (159) 1,359 (852)
---------------- --------------- ---------------- ----------------
Earnings before income taxes..................... 17,592 13,289 46,297 32,230
Income taxes..................................... 6,598 5,050 17,363 12,927
---------------- --------------- ---------------- ----------------
Net earnings..................................... $ 10,994 $ 8,239 $ 28,934 $ 19,303
================ =============== ================ ================
Net earnings per common share.................... $ 0.35 $ 0.28 $ 0.93 $ 0.67
================ =============== ================ ================
Weighted average shares outstanding.............. 31,277 29,821 31,152 28,715
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain
Common Stock Additional (Loss) on Total
------------------------- Paid-In Retained Short-Term Treasury Stockholders'
Shares Amount Capital Earnings Investments Stock Equity
-------------- ---------- ----------- ------------- ------------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 31,298,517 $ 313 $148,081 $56,258 $ 190 $ (849) $203,993
Stock options exercised........ 276,387 3 3,723 -- -- -- 3,726
Income tax benefit upon exercise
of stock options............. -- -- 1,220 -- -- -- 1,220
Change in unrealized gain on
short-term investments, net
of income taxes.............. -- -- -- -- (153) -- (153)
Net earnings................... -- -- -- 28,934 -- -- 28,934
-------------- ---------- ----------- ------------- ------------ --------- ---------------
Balance, September 29, 1996....... 31,574,904 $ 316 $153,024 $85,192 $ 37 $ (849) $237,720
============== ========== =========== ============= ============ ========= ===============
See notes to consolidated financial statements.
</TABLE>
5
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
September 29, September 24,
1996 1995
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................ $ 28,934 $ 19,303
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization............................ 11,422 8,443
Amortization of intangible assets........................ 1,728 1,698
Loss (gain) on sale of investments....................... 34 (66)
Deferred income tax provision (benefit).................. 27 (673)
Loss on disposition of property and equipment............ 722 166
Pro forma provision for income taxes..................... -- 73
Changes in assets and liabilities (exclusive of
effects of acquisitions):
Receivables.............................................. (2,789) (1,157)
Inventories.............................................. 4,736 (4,166)
Prepaid and other current assets......................... (1,341) (2,978)
Accounts payable......................................... 4,493 (25)
Accrued expenses and other current liabilities........... 861 2,376
Accrued income taxes..................................... (1,542) 1,201
Franchise deposits....................................... 604 (55)
Other.................................................... (551) 583
---------------- ----------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.................................. 47,338 24,723
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments......................... (49,487) --
Maturities and sales of short-term investments.............. 25,849 4,212
Purchases of property and equipment......................... (46,716) (32,145)
Acquisition of restaurants.................................. -- (9,682)
Proceeds from sale of restaurants and equipment............. 802 39
---------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES.................... (69,552) (37,576)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... -- 60,459
Dividends paid.............................................. (1,861) (1,269)
Issuance of common stock upon exercise of stock options..... 3,726 5,596
Income tax benefit upon exercise of stock options........... 1,220 1,938
Proceeds from issuance of notes payable..................... -- 8,087
Payments on notes payable................................... (796) (22,012)
Payments under noncompetition and consulting agreement...... (220) (220)
Minority interest in net earnings of joint venture.......... 202 130
---------------- ----------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES.................................. 2,271 52,709
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS............................................ (19,943) 39,856
CASH AND CASH EQUIVALENTS, beginning of period................... 30,188 9,634
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of period......................... $ 10,245 $ 49,490
================ ================
See notes to consolidated financial statements.
</TABLE>
6
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------------------
September 29, September 24,
1996 1995
---------------- -----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the 39 week period for:
Income taxes........................................................ $ 17,649 $ 10,348
================ =================
Interest............................................................ $ 1,031 $ 2,156
================ =================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases of $2,608,000 were recorded in April 1995 when the Company
acquired the operations and assets of five franchise restaurants. A capitalized
lease of $424,000 was recorded in July 1995 when the Company entered into a
lease for a new restaurant.
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.
7
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements of Applebee's International, Inc. and
subsidiaries (the "Company") included in this Form 10-Q have been prepared
without audit (except that the balance sheet information as of December 31, 1995
has been derived from consolidated financial statements which were audited) in
accordance with the rules and regulations of the Securities and Exchange
Commission. Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, the Company believes that
the disclosures are adequate to make the information presented not misleading.
The accompanying consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
The Company believes that all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of the interim
periods presented have been made. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.
2. Acquisitions
IRC Merger: On March 23, 1995, a wholly-owned subsidiary of the Company merged
with and into Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein
as the "IRC Merger." Immediately prior to the IRC Merger, IRC's affiliated
limited partnerships, Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P. and CG
Restaurant Partners, Ltd., were liquidated, and contemporaneously with the IRC
Merger, the Company acquired the interests of the limited partners in the
distributed assets of these partnerships. As a result of the IRC Merger, IRC
became a wholly-owned subsidiary of the Company. A total of approximately
2,630,000 shares of the Company's newly-issued common stock was issued to the
shareholders and limited partners of IRC, including IRC shares issued in 1995
upon the exercise of IRC stock options prior to the IRC Merger. IRC employees
also exchanged pre-existing stock options for options to purchase approximately
147,000 shares of the Company's common stock. In addition, the Company assumed
approximately $13,700,000 of IRC indebtedness, of which $1,270,000 was repaid at
closing and the remainder was repaid during 1995. At the time of the IRC Merger,
IRC operated 17 restaurants, 13 of which were Rio Bravo Cantinas, a Mexican
restaurant concept, and four were other specialty restaurants.
The IRC Merger was accounted for as a pooling of interests and accordingly, the
accompanying consolidated financial statements include the accounts and
operations of the merged entities for all periods presented. All share amounts
reflect the total number of shares issued in the IRC Merger for all periods
presented. Combined and separate results of the Company and IRC during the
period preceding the IRC Merger were as follows (amounts in thousands):
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Company IRC Adjustments Combined
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
13 Weeks Ended
March 26, 1995:
Net sales.......... $ 52,199 $ 13,822 $ -- $ 66,021
Net earnings....... $ 5,519 $ 577 $ (1,843) $ 4,253
</TABLE>
8
<PAGE>
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 were expensed in the first
quarter of 1995. Merger costs include investment banking fees, legal and
accounting fees, and other merger related expenses. The impact of these costs on
pro forma net earnings per common share was approximately $0.06 in the first
quarter of 1995.
Other restaurant acquisitions: On April 3, 1995, the Company acquired the
operations of five franchise restaurants and the related furniture and fixtures,
certain land and leasehold improvements and rights to future development of
restaurants for a total purchase price of $9,682,000. The acquisition was
accounted for as a purchase, and accordingly, the purchase price has been
allocated to the fair value of net assets acquired and resulted in an allocation
to goodwill of $6,432,000. In connection with this acquisition, the Company also
recorded capitalized leases of $2,608,000. The results of operations of such
restaurants have been included in the consolidated financial statements
subsequent to the date of acquisition. Results of operations of such restaurants
prior to acquisition were not material in relation to the Company's operating
results for the periods shown.
3. Commitments and Contingencies
Litigation, claims and disputes: As of September 29, 1996, the Company was using
assets owned by a former franchisee in the operation of one restaurant under a
purchase rights agreement which required the Company to make certain payments to
the franchisee's lender. In 1991, a dispute arose between the lender and the
Company over the amount of the payments due the lender. Based upon a then
current independent appraisal, the Company offered to settle the dispute and
purchase the assets for $1,000,000 in 1991. The lender rejected the Company's
offer and claimed that the Company had guaranteed the entire $2,400,000 debt of
the franchisee. In November 1992, the lender was declared insolvent by the FDIC
and has since been liquidated. The Company was contacted by the FDIC, and in
1993, the Company offered to settle the issue and purchase the assets at the
three restaurants then being operated for $182,000. The Company closed one of
the three restaurants in 1994 and lowered its offer to $120,000 to settle the
issue and purchase the assets at the two then remaining restaurants. The FDIC
declined the Company's offer, indicating instead its preliminary position that
the Company should pay the entire debt of the franchisee. The Company closed one
of the two remaining restaurants in February 1996, and does not currently intend
to make an additional settlement offer to the FDIC. In the event that the
Company were to pay an amount determined to be in excess of the fair market
value of the assets, the Company will recognize a loss at the time of such
payment.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
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. The Company
provided a limited guaranty of loans made under the agreement. The Company's
maximum recourse obligation of 10% of the amount funded is reduced beginning in
the second year of each long-term loan and thereafter decreases ratably to zero
after the seventh year of each loan. At September 29, 1996, approximately
$47,000,000 had been funded through this financing source. The Company has not
been apprised of any defaults under this agreement by franchisees. This
agreement expired on December 31, 1994 and was not renewed, although some loan
commitments as of the termination date were thereafter funded through December
31, 1995.
9
<PAGE>
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 September 29,
1996, the Company would have been required to make payments aggregating
approximately $5,400,000. 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 $4,400,000 if such officers had been terminated as of
September 29, 1996.
4. Subsequent Events
In October 1996, the Company completed the sale of six of its eight Company
owned Applebee's restaurants located in the San Bernardino and Riverside
counties of southern California. The operations of the six restaurants and
future restaurant development in the market area were assumed by an existing
Applebee's franchisee. The sales price was $8,500,000 of which $3,500,000 was
received in cash at closing and $5,000,000 was received as a promissory note
(due in two equal annual installments). A loss on the disposition of the
properties of $75,000 was recorded in the third quarter of 1996. The Company
will continue to operate the two remaining restaurants in the territory while it
considers possible alternatives for those locations. Depending upon the ultimate
course of action relating to these restaurants, the Company may incur a loss on
their disposition in the future.
The Company is also currently assessing its strategic direction with respect to
the operations of its remaining southern California presence, comprised of six
Company owned Applebee's restaurants in the San Diego market area, and future
restaurant development in this territory. The Company's alternatives for the San
Diego market may include continued operation of the restaurants and development
of new restaurants, a franchisee alliance for future development of the
remainder of the market, or the possible sale of the existing restaurants to a
franchisee.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 for each Applebee's restaurant opened and $40,000 for each Rio Bravo
Cantina restaurant opened). Beverage sales include sales of alcoholic beverages,
while non-alcoholic beverages are included in food sales. Certain expenses (food
and beverage, labor, direct and occupancy costs, and pre-opening expenses)
relate directly to Company restaurants, and other expenses (general and
administrative and amortization expenses) relate to both Company restaurants and
franchise operations.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal quarters ended September 29, 1996 and September
24, 1995 each contained 13 weeks, and are referred to hereafter as the "1996
quarter" and the "1995 quarter," respectively. The 39 week periods ended
September 29, 1996 and September 24, 1995 are referred to hereafter as the "1996
year-to-date period" and the "1995 year-to-date period," respectively.
On March 23, 1995, a wholly-owned subsidiary of the Company merged with and into
Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein as the "IRC
Merger." As a result of the IRC Merger, IRC became a wholly-owned subsidiary of
the Company. The IRC Merger was accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements include the
accounts and operations of the merged entities for all periods presented. At the
time of the IRC Merger, IRC operated 17 restaurants, including 13 Rio Bravo
Cantina restaurants, and four other specialty restaurants, comprised of Ray's on
the River, two Green Hills Grille restaurants, and the Rio Bravo Grill.
On April 3, 1995, the Company acquired the operations and assets of five
franchise restaurants in the Philadelphia metropolitan area, referred to herein
as the "Philadelphia Acquisition." The Philadelphia Acquisition was accounted
for as a purchase and, accordingly, the results of operations of such
restaurants have been reflected in the consolidated financial statements
subsequent to the date of acquisition.
11
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of earnings expressed as a percentage
of total operating revenues, except where otherwise noted.
Percentages may not add due to rounding.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales........................... 86.8% 87.4% 87.0% 87.4%
Franchise income................................... 13.2 12.6 13.0 12.6
-------------- -------------- ------------- ---------------
Total operating revenues........................ 100.0% 100.0% 100.0% 100.0%
============== ============== ============= ===============
Cost of Company restaurant sales (as a percentage of
Company restaurant sales):
Food and beverage.................................. 28.2% 27.8% 28.1% 28.3%
Labor.............................................. 31.2 31.6 31.6 31.7
Direct and occupancy............................... 23.7 24.3 24.5 24.0
Pre-opening expense................................ 0.9 0.4 0.8 0.6
-------------- -------------- ------------- ---------------
Total cost of Company restaurant sales.......... 84.0% 84.1% 85.0% 84.6%
============== ============== ============= ===============
General and administrative expenses..................... 10.4% 10.5% 10.6% 11.2%
Merger costs............................................ -- -- -- 0.7
Amortization of intangible assets....................... 0.5 0.7 0.6 0.7
Loss on disposition of property and equipment........... 0.2 0.1 0.2 0.1
-------------- -------------- ------------- ---------------
Operating earnings...................................... 15.9 15.3 14.7 13.4
-------------- -------------- ------------- ---------------
Other income (expense):
Investment income.................................. 0.6 0.6 0.7 0.4
Interest expense................................... (0.3) (0.9) (0.4) (0.9)
Other income....................................... 0.2 0.1 0.2 0.1
-------------- -------------- ------------- ---------------
Total other income (expense).................... 0.5 (0.2) 0.5 (0.4)
-------------- -------------- ------------- ---------------
Earnings before income taxes............................ 16.4 15.1 15.1 13.0
Income taxes............................................ 6.2 5.7 5.7 5.2
-------------- -------------- ------------- ---------------
Net earnings............................................ 10.3% 9.4% 9.4% 7.8%
============== ============== ============= ===============
</TABLE>
12
<PAGE>
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Number of restaurant openings:
Applebee's:
Company owned or operated..................... 7 3 18 16
Franchise..................................... 35 33 102 91
-------------- -------------- ------------- ---------------
Total Applebee's.............................. 42 36 120 107
Rio Bravo Cantinas:
Company owned or operated..................... 2 1 3 3
Franchise..................................... 2 -- 3 --
-------------- -------------- ------------- ---------------
Total Rio Bravo Cantinas...................... 4 1 6 3
Restaurants open (end of period):
Applebee's:
Company owned or operated(1).................. 144 118 144 118
Franchise..................................... 637 494 637 494
Total Applebee's.............................. 781 612 781 612
Rio Bravo Cantinas:
Company owned or operated..................... 19 15 19 15
Franchise..................................... 3 -- 3 --
-------------- -------------- ------------- ---------------
Total Rio Bravo Cantinas...................... 22 15 22 15
Specialty restaurants............................. 4 4 4 4
-------------- -------------- ------------- ---------------
Total............................................. 807 631 807 631
============== ============== ============= ===============
Weighted average weekly sales per restaurant:
Applebee's:
Company owned or operated(1).................. $ 40,870 $ 40,663 $ 40,684 $ 40,404
Franchise..................................... $ 40,322 $ 41,445 $ 40,526 $ 41,717
Total Applebee's.............................. $ 40,423 $ 41,292 $ 40,556 $ 41,458
Rio Bravo Cantinas (Company owned)(2)............. $ 69,511 $ 68,567 $ 69,968 $ 68,575
Change in comparable restaurant sales(3):
Applebee's:
Company owned or operated(1).................. 0.8 % 0.9% 1.3 % 1.5%
Franchise..................................... (1.3)% 1.0% (1.3)% 1.8%
Total Applebee's.............................. (0.9)% 0.9% (0.8)% 1.7%
Rio Bravo Cantinas (Company owned)................ 5.8 % 1.3% 4.2 % 1.1%
<FN>
- --------
(1) Company owned or operated data includes certain Texas restaurants operated
by the Company under a management agreement since July 1990 (two at the end
of the 1995 quarter and 1995 year-to-date period and one at the end of the
1996 quarter and 1996 year-to-date period).
(2) Excludes one restaurant which is open for dinner only.
(3) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
</FN>
</TABLE>
13
<PAGE>
Company Restaurant Sales. Company restaurant sales for the 1996 and 1995
quarters and the 1996 and 1995 year-to-date periods were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------------------------------------
September 29, September 24, Amount of Percentage
1996 1995 Increase Increase
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Applebee's............................. $ 73,760 $ 60,810 $ 12,950 21%
Rio Bravo Cantinas..................... 15,396 12,654 2,742 22%
Specialty restaurants.................. 3,813 3,501 312 9%
------------- ------------- ------------- -------------
Total.................................. $ 92,969 $ 76,965 $ 16,004 21%
============= ============= ============= =============
39 Weeks Ended
-------------------------------------------------------
September 29, September 24, Amount of Percentage
1996 1995 Increase Increase
------------- ------------- ------------- -------------
Applebee's............................. $211,390 $170,583 $ 40,807 24%
Rio Bravo Cantinas..................... 44,384 34,964 9,420 27%
Specialty restaurants.................. 10,951 10,559 392 4%
------------- ------------- ------------- -------------
Total.................................. $266,725 $216,106 $ 50,619 23%
============= ============= ============= =============
</TABLE>
The above increases in sales were due primarily to Company restaurant openings
and increases in comparable restaurant sales. Sales in the 1996 year-to-date
period also increased as a result of the five Philadelphia Applebee's
restaurants acquired in April 1995.
Comparable restaurant sales at Company owned or operated Applebee's restaurants
increased by 0.8% and 1.3% in the 1996 quarter and the 1996 year-to-date period,
respectively. Weighted average weekly sales at Company owned or operated
Applebee's restaurants increased from $40,663 in the 1995 quarter to $40,870 in
the 1996 quarter and from $40,404 in the 1995 year-to-date period to $40,684 in
the 1996 year-to-date period. The Company believes these increases were due, in
part, to successful food-specific promotions backed by an increase in
advertising spending, as a percentage of sales, in the 1996 year-to-date period.
Comparable restaurant sales and weighted average weekly sales in certain markets
were negatively impacted by the Olympics in the 1996 quarter, and in the 1996
year-to-date period, by the extremely harsh winter weather in early 1996.
A menu price increase will be implemented during the fourth quarter of 1996 in
selected markets for certain menu items. The Company does not expect significant
comparable restaurant sales increases and may experience comparable restaurant
sales decreases for the remainder of 1996 and for 1997 for Company owned
Applebee's restaurants, as many of its restaurants operate near sales capacity
and various markets continue to experience competitive pressures.
Weighted average weekly sales at Company owned Applebee's restaurants continue
to be adversely affected by the southern California market where weighted
average weekly sales were approximately $27,000 and $26,800 in the 1995 quarter
and the 1995 year-to-date period, respectively, and $26,900 and $27,600 in the
1996 quarter and the 1996 year-to-date period, respectively. When entering
highly competitive new markets, or territories where the Company has not yet
established a market presence, sales levels and profit margins are expected to
be lower than in markets where the Company has a concentration of restaurants or
has established customer awareness.
Comparable restaurant sales for Company owned Rio Bravo Cantina restaurants
increased by 5.8% in the 1996 quarter and 4.2% in the 1996 year-to-date period.
Weighted average weekly sales (excluding one restaurant that is open for dinner
only) increased from $68,567 in the 1995 quarter to $69,511 in the 1996 quarter
14
<PAGE>
and from $68,575 in the 1995 year-to-date period to $69,968 in the 1996
year-to-date period.
Franchise Income. Overall franchise income increased $2,989,000 (27%) from
$11,116,000 in the 1995 quarter to $14,105,000 in the 1996 quarter and increased
$8,760,000 (28%) from $31,215,000 in the 1995 year-to-date period to $39,975,000
in the 1996 year-to-date period. Such increases were due primarily to the
increased number of franchise Applebee's restaurants operating during the 1996
quarter and year-to-date period as compared to the 1995 quarter and year-to-date
period. The remaining increase in franchise income in the 1996 year-to-date
period was due to an increase in franchise fees of $588,000 resulting from an
increase in the number of franchise Applebee's restaurant openings from 91 in
the 1995 year-to-date period to 102 in the 1996 year-to-date period and the
opening of three franchise Rio Bravo Cantina restaurants during the 1996
year-to-date period. Such increases were partially offset by decreases in
franchise restaurant weighted average weekly sales and comparable restaurant
sales for Applebee's restaurants.
Cost of Company Restaurant Sales. Food and beverage costs increased from 27.8%
in the 1995 quarter to 28.2% in the 1996 quarter due primarily to an increase in
dairy and poultry costs. Food and beverage costs decreased slightly from 28.3%
in the 1995 year-to-date period to 28.1% in the 1996 year-to-date period due
primarily to operational improvements, purchasing efficiencies resulting from
the Company's rapid growth and early payment discounts. In addition, the Company
experienced an increase in food costs in the second quarter of 1995 as a result
of winter flooding in California which caused shortages of certain produce items
and a significant increase in related costs. Beverage sales, as a percentage of
Company restaurant sales, declined from 18.1% and 19.0% in the 1995 quarter and
1995 year-to-date period, respectively, to 17.8% and 18.4% in the 1996 quarter
and 1996 year-to-date period, respectively, which had a negative impact on
overall food and beverage costs. Management believes that the reduction in
beverage sales is due in part to the continuation of the overall trend toward
increased awareness of responsible alcohol consumption.
Labor costs decreased from 31.6% and 31.7% in the 1995 quarter and 1995
year-to-date period, respectively, to 31.2% and 31.6% in the 1996 quarter and
1996 year-to-date period, respectively. Labor costs in both the 1996 quarter and
the 1996 year-to-date period were positively affected by an overall reduction in
workers' compensation costs due to favorable historical claims experience and
improved hourly labor efficiency. Such decreases were partially offset in the
1996 year-to-date period by higher management and hourly labor costs due in part
to the lower sales resulting from the harsh weather experienced in the first
quarter of 1996. Overall labor costs continue to be adversely affected by the
lower sales volumes in the southern California market. The Company does not
expect a significant increase in labor costs resulting from the minimum wage
increase which was effective October 1, 1996.
Direct and occupancy costs decreased from 24.3% in the 1995 quarter to 23.7% in
the 1996 quarter due primarily to lower advertising expense and rent expense as
a percentage of sales which were partially offset by an increase in depreciation
expense. Direct and occupancy costs increased from 24.0% in the 1995
year-to-date period to 24.5% in the 1996 year-to-date period due primarily to
higher advertising expense and depreciation expense which were partially offset
by lower rent expense. The southern California market continues to have a
negative impact on overall direct and occupancy costs due to the absorption of
such expenses, which are primarily fixed in nature, over a lower average weekly
sales base in that market.
Pre-opening expense increased from $326,000 and $1,382,000 in the 1995 quarter
and 1995 year-to-date period, respectively, to $865,000 and $2,039,000 in the
1996 quarter and 1996 year-to-date period, respectively. The increase in the
1996 quarter was due primarily to the opening of four additional Applebee's
15
<PAGE>
restaurants and one additional Rio Bravo Cantina restaurant as compared to the
1995 quarter. The increase in the 1996 year-to-date period was due primarily to
the opening of two additional Applebee's restaurants, costs incurred relating to
the reopening of one Applebee's restaurant after being rebuilt, and higher
pre-opening costs relating to the three Rio Bravo Cantina restaurants that were
opened in the 1996 year-to-date period.
General and Administrative Expenses. General and administrative expenses
decreased from 10.5% and 11.2% in the 1995 quarter and 1995 year-to-date period,
respectively, to 10.4% and 10.6% in the 1996 quarter and 1996 year-to-date
period, respectively, due primarily to the absorption of general and
administrative expenses over a larger revenue base. General and administrative
expenses increased by $1,860,000 and $4,965,000 during the 1996 quarter and 1996
year-to-date period, respectively, compared to the 1995 quarter and 1995
year-to-date period, respectively, due primarily to the costs of additional
personnel associated with the Company's development efforts and system-wide
expansion, including costs related to the franchising and expansion of the Rio
Bravo Cantina concept.
Merger Costs. The Company incurred merger costs of $1,770,000 in the first
quarter of 1995 relating to the IRC Merger. The impact of these costs on net
earnings per common share was approximately $0.06 in the first quarter of 1995
and the 1995 year-to-date period.
Investment Income. Investment income increased in the 1996 quarter and 1996
year-to-date period primarily as a result of increases in cash and cash
equivalents and short-term investments resulting from the proceeds of the
Company's stock offering in July 1995.
Interest Expense. Interest expense decreased in the 1996 quarter and 1996
year-to-date period compared to the 1995 quarter and 1995 year-to-date period
primarily as a result of a decrease in interest related to the revolving credit
facility incurred in the both the 1995 quarter and the 1995 year-to-date period
and a decrease in long-term debt resulting from the payoff in August 1995 of the
debt assumed in connection with the IRC Merger.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.5% in both the 1996 quarter and the 1996 year-to-date
period, as compared to 38.0% and 40.1% in the 1995 quarter and the 1995
year-to-date period, respectively. Such rates reflect the pro forma provision
for income taxes at statutory rates for certain affiliates of IRC in the first
quarter of 1995. The combined earnings of IRC included earnings of limited
partnerships which were not taxable entities for federal and state income tax
purposes. The decrease in the Company's overall effective tax rate in the 1996
year-to-date period is due primarily to the non-deductibility of the merger
costs incurred relating to IRC in the first quarter of 1995. Excluding such
merger costs, the effective income tax rate was 38.0% in the 1995 year-to-date
period. The decrease in the Company's overall effective tax rate in the 1996
quarter and the remaining decrease in the 1996 year-to-date period is due to a
reduction in state income taxes.
Liquidity and Capital Resources
The Company's need for capital resources historically has resulted from, and for
the foreseeable future is expected to relate primarily to, the construction and
acquisition of restaurants. Such capital has been provided by public stock
offerings, debt financing, and ongoing Company operations, including cash
generated from Company and franchise operations, credit from trade suppliers,
real estate lease financing, and landlord contributions to leasehold
improvements. The Company has also used its common stock as consideration in the
16
<PAGE>
acquisition of restaurants. In addition, the Company assumed debt or issued new
debt in connection with certain mergers and acquisitions.
Capital expenditures were $61,581,000 in fiscal year 1995 (which includes
$9,682,000 related to the Philadelphia Acquisition) and $46,716,000 in the 1996
year-to-date period. The Company presently anticipates capital expenditures of
between $75,000,000 and $80,000,000 in 1996 and between $85,000,000 and
$90,000,000 in 1997 primarily for the development of new restaurants,
refurbishments of and capital replacements for existing restaurants, and
enhancements to information systems for the Company's restaurants and corporate
office. The Company currently expects to open approximately 30 Applebee's
restaurants and six Rio Bravo Cantina restaurants in 1996 and between 30 and 35
Applebee's restaurants and at least eight Rio Bravo Cantina restaurants in 1997.
In addition, during 1996 the Company has increased capital spending for
refurbishing and remodeling of certain restaurants and for further enhancements
to the Company's information systems and related technology. The amount of
actual capital expenditures will be dependent upon, among other things, the
proportion of leased versus owned properties as the Company expects to continue
to purchase a significant portion of its sites. In addition, if the Company
opens more restaurants than it currently anticipates or acquires additional
restaurants, its capital requirements will increase accordingly.
The Company has certain debt agreements containing various covenants and
restrictions which, among other things, require the maintenance of a stipulated
fixed charge coverage ratio and minimum consolidated net worth, as defined, and
also limit additional indebtedness in excess of specified amounts. The debt
agreements also restrict the amount of retained earnings available for the
payment of cash dividends. At September 29, 1996, retained earnings were not
restricted for the payment of cash dividends. The Company has been and is
currently in compliance with the covenants of all of its debt agreements.
The Company believes that the proceeds of its 1995 stock offering, liquid
assets, and cash generated from operations, combined with borrowings available
under its $20,000,000 revolving credit facility, will provide sufficient funds
for its capital requirements for the foreseeable future. As of September 29,
1996, the Company held liquid assets totaling $55,439,000, consisting of cash
and cash equivalents ($10,245,000) and short-term investments ($45,194,000). No
amounts were outstanding under the revolving credit facility; however, standby
letters of credit issued under the facility totaling $1,149,000 were outstanding
as of September 29, 1996.
Inflation
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
A majority of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. An increase in the minimum wage has recently been passed by the Federal
government and is also being discussed by various state governments. Although
the Company has been able to and will continue to attempt to pass along
increases in costs through food and beverage price increases, there can be no
assurance that all such increases can be reflected in its prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at its restaurants.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 29, 1996, the Company was using assets owned by a former
franchisee in the operation of two restaurants under a purchase rights agreement
which required the Company to make certain payments to the franchisee's lender.
In 1991, a dispute arose between the lender and the Company over the amount of
the payments due the lender. Based upon a then current independent appraisal,
the Company offered to settle the dispute and purchase the assets for $1,000,000
in 1991. The lender rejected the Company's offer and claimed that the Company
had guaranteed the entire $2,400,000 debt of the franchisee. In November 1992,
the lender was declared insolvent by the FDIC and has since been liquidated. The
Company was contacted by the FDIC, and in 1993, the Company offered to settle
the issue and purchase the assets at the three restaurants then being operated
for $182,000. The Company closed one of the three restaurants in 1994 and
lowered its offer to $120,000 to settle the issue and purchase the assets at the
two then remaining restaurants. The FDIC declined the Company's offer,
indicating instead its preliminary position that the Company should pay the
entire debt of the franchisee. The Company closed one of the two remaining
restaurants in February 1996, and does not currently intend to make an
additional settlement offer to the FDIC. In the event that the Company were to
pay an amount determined to be in excess of the fair market value of the assets,
the Company will recognize a loss at the time of such payment.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are filed as part of
this report.
(b) The Company did not file any reports on Form 8-K during the quarter ended
September 29, 1996.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: November 4, 1996 By: /s/ Abe J. Gustin, Jr.
---------------- --------------------------
Abe J. Gustin, Jr.
Chairman and Chief Executive Officer
Date: November 4, 1996 By: /s/ George D. Shadid
---------------- --------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: November 4, 1996 By: /s/ Mark A. Peterson
---------------- --------------------------
Vice President and Controller
(principal accounting officer)
19
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- ------------------------------------------------------------------
27 Financial Data Schedule.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 10,245
<SECURITIES> 45,194
<RECEIVABLES> 15,052
<ALLOWANCES> 720
<INVENTORY> 5,300
<CURRENT-ASSETS> 78,927
<PP&E> 240,380
<DEPRECIATION> 46,822
<TOTAL-ASSETS> 306,131
<CURRENT-LIABILITIES> 40,420
<BONDS> 25,025
0
0
<COMMON> 316
<OTHER-SE> 237,404
<TOTAL-LIABILITY-AND-EQUITY> 306,131
<SALES> 266,725
<TOTAL-REVENUES> 306,700
<CGS> 226,666
<TOTAL-COSTS> 259,312
<OTHER-EXPENSES> 2,450
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,243
<INCOME-PRETAX> 46,297
<INCOME-TAX> 17,363
<INCOME-CONTINUING> 28,934
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,934
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
</TABLE>
