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 March 31, 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 April
30, 1996 was 31,071,855.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED MARCH 31, 1996
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995....................................... 3
Consolidated Statements of Earnings for the 13 Weeks
Ended March 31, 1996 and March 26, 1995..................... 4
Consolidated Statement of Stockholders' Equity for the
13 Weeks Ended March 31, 1996............................... 5
Consolidated Statements of Cash Flows for the 13 Weeks
Ended March 31, 1996 and March 26, 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>
March 31, December 31,
1996 1995
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 20,091 $ 30,188
Short-term investments, at market value (amortized cost of $24,754 in 1996
and $21,530 in 1995)..................................................... 24,885 21,836
Receivables (less allowance for bad debts of $717 in 1996 and $723 in 1995). 11,422 9,843
Inventories................................................................. 10,038 10,036
Prepaid and other current assets............................................ 5,674 2,654
------------- --------------
Total current assets..................................................... 72,110 74,557
Property and equipment, net...................................................... 165,622 159,832
Goodwill, net.................................................................... 25,198 25,780
Franchise interest and rights, net............................................... 5,662 5,805
Deferred income taxes............................................................ 200 719
Other assets..................................................................... 3,880 3,987
------------- --------------
$ 272,672 $ 270,680
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 962 $ 935
Current portion of obligations under noncompetition and
consulting agreement..................................................... 220 220
Accounts payable............................................................ 10,036 11,183
Accrued expenses and other current liabilities.............................. 19,786 22,635
Accrued dividends........................................................... -- 1,861
Accrued income taxes........................................................ 743 1,641
------------- --------------
Total current liabilities................................................ 31,747 38,475
------------- --------------
Non-current liabilities:
Long-term debt - less current portion....................................... 25,329 25,832
Franchise deposits.......................................................... 1,393 1,168
Obligations under noncompetition and consulting agreement
- less current portion................................................... 220 440
------------- --------------
Total non-current liabilities............................................ 26,942 27,440
------------- --------------
Total liabilities........................................................ 58,689 65,915
Minority interest in joint venture............................................... 829 772
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 - 31,353,227 shares in 1996 and 31,298,517 shares in 1995......... 313 313
Additional paid-in capital.................................................. 148,944 148,081
Retained earnings........................................................... 64,623 56,258
Unrealized gain on short-term investments, net of income taxes.............. 123 190
------------- --------------
214,003 204,842
Treasury stock - 281,772 shares in 1996 and 1995, at cost................... (849) (849)
------------- --------------
Total stockholders' equity............................................... 213,154 203,993
------------- --------------
$ 272,672 $ 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
--------------------------------
March 31, March 26,
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Company restaurant sales................................ $82,640 $66,021
Franchise income........................................ 12,401 9,418
------------- -------------
Total operating revenues............................. 95,041 75,439
------------- -------------
Cost of Company restaurant sales:
Food and beverage....................................... 23,351 18,908
Labor................................................... 26,859 21,068
Direct and occupancy.................................... 20,463 15,378
Pre-opening expense..................................... 249 633
------------- -------------
Total cost of Company restaurant sales............... 70,922 55,987
------------- -------------
General and administrative expenses........................ 10,385 8,909
Merger costs............................................... -- 1,770
Amortization of intangible assets.......................... 588 515
Loss on disposition of property and equipment.............. 115 26
------------- -------------
Operating earnings......................................... 13,031 8,232
------------- -------------
Other income (expense):
Investment income....................................... 801 237
Interest expense........................................ (446) (614)
Other income............................................ 105 82
------------- -------------
Total other income (expense)......................... 460 (295)
------------- -------------
Earnings before income taxes............................... 13,491 7,937
Income taxes............................................... 5,126 3,684
------------- -------------
Net earnings............................................... $ 8,365 $ 4,253
============= =============
Net earnings per common share.............................. $ 0.27 $ 0.15
============= =============
Weighted average shares outstanding........................ 31,033 28,078
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
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 31, 1995........ 31,298,517 $ 313 $148,081 $ 56,258 $ 190 $ (849) $203,993
Stock options exercised........ 54,710 -- 708 -- -- -- 708
Income tax benefit upon exercise
of stock options............. -- -- 155 -- -- -- 155
Unrealized loss on short-term
investments, net of income
taxes........................ -- -- -- -- (67) -- (67)
Net earnings................... -- -- -- 8,365 -- -- 8,365
------------- ---------- ------------ ------------- ------------- ---------- ---------------
Balance, March 31, 1996........... 31,353,227 $ 313 $148,944 $ 64,623 $ 123 $ (849) $213,154
============= ========== ============ ============= ============= ========== ===============
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>
13 Weeks Ended
--------------------------------
March 31, March 26,
1996 1995
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 8,365 $ 4,253
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization......................... 3,550 2,580
Amortization of intangible assets..................... 588 515
Deferred income tax provision (benefit)............... 233 (573)
Loss on disposition of property and equipment......... 115 26
Pro forma provision for income taxes.................. -- 73
Changes in assets and liabilities:
Receivables........................................... (629) 300
Inventories........................................... (2) (1,189)
Prepaid and other current assets...................... (2,694) 669
Accounts payable...................................... (1,147) 1,789
Accrued expenses and other current liabilities........ (2,745) (1,660)
Accrued income taxes.................................. (898) 2,994
Franchise deposits.................................... 225 62
Other................................................. 123 389
------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES............................... 5,084 10,228
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (11,586) --
Maturities and sales of short-term investments........... 8,362 100
Purchases of property and equipment...................... (10,316) (8,039)
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES................. (13,540) (7,939)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................... (1,861) (1,269)
Issuance of common stock upon exercise of stock options.. 708 2,419
Income tax benefit upon exercise of stock options........ 155 329
Proceeds from issuance of notes payable.................. -- 2,816
Payments on notes payable................................ (480) (3,122)
Payments under noncompetition and consulting agreement... (220) (220)
Minority interest in net earnings of joint venture....... 57 46
------------- --------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES............................... (1,641) 999
------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... (10,097) 3,288
CASH AND CASH EQUIVALENTS, beginning of period.............. 30,188 9,634
------------- --------------
CASH AND CASH EQUIVALENTS, end of period.................... $ 20,091 $ 12,922
============= ==============
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>
13 Weeks Ended
-----------------------------------
March 31, March 26,
1996 1995
--------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the 13 week period for:
Income taxes....................................... $ 5,630 $ 885
=============== ================
Interest........................................... $ 188 $ 563
=============== ================
</TABLE>
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
See notes to consolidated financial statements.
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):
8
<PAGE>
<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>
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 March 31, 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.
9
<PAGE>
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 March 31, 1996, approximately
$46,779,000 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.
Severance agreements: The Company has severance and employment agreements with
certain officers providing for severance payments to be made in the event the
employee resigns or is terminated related to a change in control (as defined in
the agreements). If the severance payments had been due as of March 31, 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 March 31,
1996.
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). 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 March 31, 1996 and March 26, 1995
each contained 13 weeks, and are referred to hereafter as the "1996 quarter" and
the "1995 quarter", 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
---------------------------------
March 31, March 26,
1996 1995
--------------- ---------------
<S> <C> <C>
Revenues:
Company restaurant sales.................................... 87.0% 87.5%
Franchise income............................................ 13.0 12.5
--------------- ---------------
Total operating revenues................................. 100.0% 100.0%
=============== ===============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage........................................... 28.3% 28.6%
Labor....................................................... 32.5 31.9
Direct and occupancy........................................ 24.8 23.3
Pre-opening expense......................................... 0.3 1.0
--------------- ---------------
Total cost of sales...................................... 85.8% 84.8%
=============== ===============
General and administrative expenses............................ 10.9% 11.8%
Merger costs................................................... -- 2.3
Amortization of intangible assets.............................. 0.6 0.7
Loss on disposition of property and equipment.................. 0.1 --
--------------- ---------------
Operating earnings............................................. 13.7 10.9
--------------- ---------------
Other income (expense):
Investment income........................................... 0.8 0.3
Interest expense............................................ (0.5) (0.8)
Other income................................................ 0.1 0.1
--------------- ---------------
Total other income (expense)............................. 0.5 (0.4)
--------------- ---------------
Earnings before income taxes................................... 14.2 10.5
Income taxes................................................... 5.4 4.9
--------------- ---------------
Net earnings................................................... 8.8% 5.6%
=============== ===============
</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
--------------------------
March 31, March 26,
1996 1995
------------ ------------
<S> <C> <C>
Number of restaurant openings:
Applebee's:
Company owned or operated................... 3 8
Franchise................................... 33 22
------------ ------------
Total Applebee's............................ 36 30
Rio Bravo Cantinas............................. -- 1
Restaurants open (end of period):
Applebee's:
Company owned or operated(1)................ 130 105
Franchise................................... 569 430
------------ ------------
Total Applebee's............................ 699 535
Rio Bravo Cantinas............................. 16 13
Specialty restaurants ......................... 4 4
------------ ------------
Total.......................................... 719 552
============ ============
Weighted average weekly sales per restaurant:
Applebee's:
Company owned or operated(1)................ $39,547 $40,290
Franchise................................... $40,016 $41,639
Total Applebee's............................ $39,927 $41,376
Rio Bravo Cantinas(2).......................... $65,724 $64,851
Change in comparable restaurant sales(3):
Applebee's:
Company owned or operated(1)................ (0.4)% 3.7%
Franchise................................... (1.4)% 2.2%
Total Applebee's............................ (1.2)% 2.6%
Rio Bravo Cantinas............................. 2.5 % 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 one at the end of the 1996
quarter).
(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 were as follows (in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
----------------------------------
March 31, March 26, Increase
1996 1995 (Decrease)
---------- ---------- ----------
<S> <C> <C> <C>
Applebee's........................ $ 65,864 $ 52,199 $ 13,665
Rio Bravo Cantinas................ 13,396 10,385 3,011
Specialty restaurants............. 3,380 3,437 (57)
---------- ---------- ----------
Total............................. $ 82,640 $ 66,021 $ 16,619
========== ========== ==========
</TABLE>
Overall Company restaurant sales increased 25% in the 1996 quarter. Sales for
Company owned Applebee's restaurants increased 26% in the 1996 quarter due
primarily to Company restaurant openings and sales from the five Philadelphia
restaurants acquired in April 1995. The increase in sales for the Rio Bravo
Cantina restaurants resulted primarily from Company restaurant openings and an
increase in comparable restaurant sales. The decrease in sales for the specialty
restaurants was due primarily to the remodeling of one restaurant which was
closed for eight days in the 1996 quarter.
Comparable restaurant sales at Company owned or operated Applebee's restaurants,
which were negatively impacted by the extremely harsh winter weather in early
1996, decreased by 0.4% in the 1996 quarter. The Company does not expect
significant comparable restaurant sales increases and may experience comparable
restaurant sales decreases for the remainder of the 1996 fiscal year for Company
owned Applebee's restaurants, as many of its restaurants operate near sales
capacity. In addition, certain markets have experienced increased competition,
and the Company will increase its advertising spending, as a percentage of
sales, in 1996.
Weighted average weekly sales at Company owned or operated Applebee's
restaurants declined from $40,290 in the 1995 quarter to $39,547 in the 1996
quarter. This decrease was due in part to the weather and in part to the
inclusion in the 1995 quarter of the week between Christmas and New Year's Day,
which is historically one of the highest sales volume weeks of the year. The
1996 quarter began on January 1, 1996. 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 $26,400
in the 1995 quarter and $27,600 in the 1996 quarter. 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 the Rio Bravo Cantina restaurants increased by
2.5% in the 1996 quarter, and weighted average weekly sales (excluding one
restaurant that is open for dinner only) increased from $64,851 in the 1995
quarter to $65,724 in the 1996 quarter.
Franchise Income. Franchise income increased $2,983,000 (32%), from $9,418,000
in the 1995 quarter to $12,401,000 in the 1996 quarter. This increase was due
primarily to the increased number of franchise restaurants operating during the
1996 quarter as compared to the 1995 quarter. The remaining increase in
franchise income was due to an increase in franchise fees of $420,000 resulting
from an increase in the number of franchise restaurant openings from 22 in the
1995 quarter to 33 in the 1996 quarter. Such increases were partially offset by
decreases in franchise restaurant weighted average weekly sales of 3.9%, and
comparable franchise restaurant sales of 1.4% in the 1996 quarter due primarily
to the factors discussed above for Company owned Applebee's restaurants.
14
<PAGE>
Cost of Company Restaurant Sales. Food and beverage costs decreased from 28.6%
in the 1995 quarter to 28.3% in the 1996 quarter primarily as a result of
operational improvements, purchasing efficiencies resulting from the Company's
rapid growth and early payment discounts. Beverage sales, as a percentage of
Company restaurant sales, declined to 18.7% in the 1996 quarter from 19.5% in
the 1995 quarter 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 increased from 31.9% in the 1995 quarter to 32.5% in the 1996
quarter due primarily to higher management costs. The increase in management
costs as well as a slight increase in hourly labor costs were due in part to the
lower sales resulting from the harsh weather experienced during the 1996
quarter. Such increases were partially offset by an overall reduction in
workers' compensation costs due to favorable historical claims experience.
Overall labor costs continue to be adversely affected by the lower sales volumes
in the southern California market.
Direct and occupancy costs increased from 23.3% in the 1995 quarter to 24.8% in
the 1996 quarter due primarily to higher levels of planned advertising
expenditures and an increase in depreciation 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.
General and Administrative Expenses. General and administrative expenses
decreased in the 1996 quarter to 10.9% from 11.8% in the 1995 quarter, due
primarily to the absorption of general and administrative expenses over a larger
revenue base. General and administrative expenses increased by $1,476,000 during
the 1996 quarter compared to the 1995 quarter 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
development of the Rio Bravo Cantina concept.
Merger Costs. The Company incurred merger costs of $1,770,000 in the 1995
quarter relating to the IRC Merger. The impact of these costs on net earnings
per common share was approximately $0.06 in the 1995 quarter.
Investment Income. Investment income increased in the 1996 quarter compared to
the 1995 quarter 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 compared to the
1995 quarter primarily as a result of a decrease in interest related to the
revolving credit facility incurred in the 1995 quarter 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 38.0% in the 1996 quarter compared to 46.4% in the 1995
quarter. Such rates reflect the pro forma provision for income taxes at
statutory rates for certain affiliates of IRC in the 1995 quarter. 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 is due to the non-deductibility of the
merger costs incurred relating to IRC in the 1995 quarter. Excluding such merger
costs, the effective income tax rate was also 38.0% in the 1995 quarter.
15
<PAGE>
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
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). The Company presently
anticipates capital expenditures of between $75,000,000 and $80,000,000 in 1996
primarily for the development of new restaurants, refurbishments of and capital
replacements for existing restaurants, and enhancements to information systems
for the Company's restaurants and corporate office. The Company currently
expects to open approximately 30 Applebee's restaurants and five Rio Bravo
Cantina restaurants in 1996. In addition, during 1996 the Company will increase
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 March 31, 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 March 31, 1996,
the Company held liquid assets totaling $44,976,000, consisting of cash and cash
equivalents ($20,091,000) and short-term investments ($24,885,000). No amounts
were outstanding under the revolving credit facility; however, standby letters
of credit issued under the facility totaling $387,000 were outstanding as of
March 31, 1996.
16
<PAGE>
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 been recently proposed 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 March 31, 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 March 31, 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: May 6, 1996 By: /s/ Abe J. Gustin, Jr.
----------------------- --------------------------
Abe J. Gustin, Jr.
Chairman, President and
Chief Executive Officer
Date: May 6, 1996 By: /s/ George D. Shadid
----------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: May 6, 1996 By: /s/ David R. Smith
----------------------- ----------------------
David R. Smith
Vice President and Controller
(principal accounting officer)
19
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -------- -----------------------------------------------------------------------
10.1 Employment Agreement with Abe J. Gustin, Jr., dated January 1, 1996.
10.2 Amended Consulting Agreement with Kenneth D. Hill dated March 1, 1996.
27 Financial Data Schedule.
20
ABE J. GUSTIN, JR.
EMPLOYMENT AGREEMENT
This Employment Agreement is made as of January 1, 1996, by and between
Applebee's International, Inc., a Delaware corporation (the "Company") and Abe
J. Gustin, Jr. (the "Executive").
WHEREAS, the Company believes it to be in its best interest to provide for
continuity of management and to provide protection for its valuable trade
secrets and confidential information; and
WHEREAS, the Company desires to employ the Executive and the Executive is
willing to render his services to the Company on the terms and conditions with
respect to such employment hereinafter set forth.
NOW, THEREFORE, in consideration of premises and the mutual terms and
conditions hereof, the Company and the Executive hereby agree as follows:
1. Employment. The Company hereby employs the Executive and the Executive
hereby accepts employment with the Company upon the terms and conditions
hereinafter set forth.
2. Exclusive Services. The Executive shall devote all necessary working
time, ability and attention to the business of the Company during the term of
this Agreement and shall not, directly or indirectly, render any material
services to any business, corporation, or organization whether for compensation
or otherwise, without the prior knowledge of the Board of Directors of the
Company (hereinafter referred to as the "Board").
3. Duties. The Executive is hereby employed as Chairman of the Board and
Chief Executive Officer of the Company and shall render his services at the
principal business offices of the Company, as such may be located from time to
time, unless otherwise agreed between the Board and the Executive. The Executive
shall have authority and shall perform such duties as are specified by the
bylaws of the Company for the office of Chairman; subject, however, to such
limitations, instructions, directions, and control as the Board may specify from
time to time in its sole discretion.
4. Term. This Agreement shall have a term of two (2) years commencing as of
January 1, 1996 and is subject to earlier termination as hereinafter provided.
<PAGE>
5. Compensation. As compensation for his services rendered under this
Agreement, the Executive shall be entitled to receive the following:
a. Base Salary. The executive shall initially be paid a base salary of
$465,000.00 per year, payable in equal bi-weekly installments on the 15th
and the final days of each month during the term of this Agreement,
prorated for any partial employment month. Such salary ("Base Salary") may
be increased by the Board in its sole discretion.
b. Additional Compensation. The Executive shall be paid such
additional compensation and bonuses, as may be determined and authorized in
the sole discretion of the Board.
6. Benefits. In addition to the compensation to be paid to the Executive
pursuant to Paragraph 5 hereof, the Executive shall further be entitled to
receive the following:
a. Participation in Employee Plans. The Executive shall be entitled to
participate in any health, disability, group term life insurance plan, any
pension, retirement or profit sharing plan, any executive bonus plan, or
any other fringe benefits which may be extended generally from time to time
to employees of the Company at the level of Executive Vice President or
above.
b. Disability Salary Continuation. If the Executive becomes disabled
during the term of this Agreement, the Company shall continue to pay the
Executive his Base Salary during the first ninety (90) day period of such
disability and shall continue to pay the Executive, but at the rate of
fifty percent (50%) of his Base Salary, for nine (9) months of such
disability. "Disability" as used herein shall mean any physical, emotional
or mental, injury illness or incapacity, other than death, which renders
the Executive unable to perform the duties required of him under this
Agreement. The existence of any disability shall be determined to exist in
the sole discretion of the Board which shall not be unreasonably exercised.
All payments under this Paragraph shall cease upon the expiration or other
termination of this Agreement or of the Executive's employment.
c. Vacation. The Executive shall be entitled to five (5) weeks
vacation with full salary and benefits each year. No cash or other payment
will be due, however, for unused vacation and vacation may not be carried
over from any year to the next.
d. Stock Options. Executive shall be entitled to all stock options as
approved by the Board of Directors and, for all such options granted after
the date hereof, Executive shall have a minimum of one year from the date
of termination of employment to exercise said options. All options granted
after the date hereof shall fully vest one (1) year after Executive's
employment is terminated pursuant to Paragraph 13(b).
2
<PAGE>
7. Reimbursement of Expenses. Subject to such rules and procedures as from
time to time are specified by the Company, the Company shall reimburse the
Executive on a monthly basis for reasonable business expenses necessarily
incurred in the performance of his duties under this Agreement.
8. Confidentiality/Trade Secrets. The Executive acknowledges that his
position with the Company is one of the highest trust and confidence both by
reason of his position and by reason of his access to and contact with the trade
secrets and confidential and proprietary business information of the Company.
Both during the term of this Agreement and thereafter, the Executive covenants
and agrees as follows:
a. he shall use his best efforts and exercise utmost diligence to
protect and safeguard the trade secrets and confidential and proprietary
information of the Company, including but not limited to the identity of
its customers and suppliers, its arrangements with customers and suppliers,
and its technical and financial data, records, compilations of information,
processes, recipes and specifications relating to its customers, suppliers,
products and services;
b. he shall not disclose any of such trade secrets and confidential
and proprietary information, except as may be required in the course of his
employment with the Company or by law; and
c. he shall not use, directly or indirectly, for his own benefit or
for the benefit of another, any of such trade secrets and confidential and
proprietary information.
All files, records, documents, drawings, specifications, memoranda, notes,
or other documents relating to the business of the Company, whether prepared by
the Executive or otherwise coming into his possession, shall be the exclusive
property of the Company and shall be delivered to the Company and not retained
by the Executive upon termination of his employment for any reason whatsoever or
at any other time upon request of the Board.
9. Discoveries. The Executive covenants and agrees that he will fully
inform the Company of and disclose to the Company all inventions, designs,
improvements, discoveries and processes ("Discoveries") which he has now or may
hereafter have during his employment with the Company and which pertain or
relate to the business of the Company or to any experimental work, products,
services or processes of the Company in progress or planned for the future,
whether conceived by the Executive alone or with others, and whether or not
conceived during regular working hours or in conjunction with the use of any
Company assets. All such Discoveries shall be the exclusive property of the
Company whether or not patent or trademark applications are filed thereon. The
Executive shall assist the Company, at any time during or after his employment,
in obtaining patents on all such Discoveries deemed patentable by the Company
and shall execute all documents and do all things necessary to obtain letters
patent, vest the Company with full and exclusive title thereto, and protect the
same against infringement by others. If such assistance takes place after his
employment is terminated the Executive shall be paid by the Company at a rate
equal to fifty percent (50%) of his existing salary at the date of termination
for any time actually spent in rendering such assistance at the request of the
Company.
3
<PAGE>
10. Non-Competition. The Executive covenants and agrees that, during the
period of his employment, he shall not, without the prior written consent of the
Board, directly or indirectly, as an employee, employer, consultant, agent,
principal, partner, shareholder, corporate officer, director, or through any
other kind of ownership (other than ownership of securities of publicly held
corporations of which the Executive owns less than five percent 5% of any class
of outstanding securities) or in any other representative or individual
capacity, engage in or render any services to any business engaged in the casual
dining restaurant industry, or in any other segment of the restaurant industry
in which the Company or any subsidiary of the Company may become involved after
the date hereof and prior to the date of termination of Executive's employment.
For purposes of this Agreement "casual dining restaurant industry" consists of
"sit down" restaurants serving alcoholic beverages, with a per guest average
guest check of under $15.00 (adjusted upward each year to recognize Company menu
price increases). The Executive agrees that such covenant against competition
shall continue for a period of twelve (12) months from the end of the month in
which the Executive's employment is terminated under Paragraphs 13(a) or (c) and
the Company shall pay to the Executive each month during such twelve (12) month
period an amount equal to one-twelfth (1/12) of the base salary of the Executive
in effect at the time of such termination. In addition, the Executive agrees
that the Company shall have the right to extend the covenant against competition
for up to an additional twelve (12) months if the Company continues to make such
monthly payments. In the event the Executive's employment is terminated under
Paragraph 13(b) the noncompetition covenant shall last for twenty-six (26)
months without any payment by the Company other than that required by Paragraph
13(b).
11. Nonsolicitation. The Executive agrees that during the period of his
employment, and for so long thereafter as the noncompetition covenant in
Paragraph 10 remains in effect, he will not, either directly or indirectly, for
himself or for any third party, solicit, induce, recruit, or cause another
person in the employ of the Company to terminate his/her employment for the
purpose of joining, associating or becoming employed with any business or
activity which is engaged in the casual dining restaurant industry or any other
segment of the restaurant industry in which the Company may become involved
after the date hereof and prior to the date of any termination of employment.
The Company and the Executive specifically acknowledge and agree that the
foregoing covenants of the Executive in Sections 10 and 11 are reasonable in
content and scope and are given by the Executive for adequate consideration.
4
<PAGE>
12. Remedies for Breach of Covenants of the Executive. The covenants set
forth in Paragraphs 8, 9, 10, and 11 of this Agreement shall continue to be
binding upon the Executive, notwithstanding the termination of his employment
upon with the Company for any reason whatsoever. Such covenants shall be deemed
and construed as separate agreements independent of any other provisions of this
Agreement and any other agreement between the Company and the Executive. The
existence of any claim or cause of action by the Executive against the Company,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by the Company of any or all such covenants. It is
expressly agreed that the remedy at law for the breach of any such covenant is
inadequate and injunctive relief shall be available to prevent the breach or any
threatened breach thereof.
13. Termination. This Agreement (other than Paragraphs 8, 10, and 11 hereof
which, except as provided in Paragraph 14, shall survive any termination hereof)
may be terminated as follows:
a. By the Executive. The Executive may terminate this Agreement at any
time during the term of this Agreement by giving six (6) months prior
notice of termination to the Board.
b. By the Company Without Cause. The Board, without cause, may
terminate this Agreement at any time during the term of this Agreement upon
thirty (30) days prior written notice to the Executive. In the case of a
termination under this subparagraph, this Company shall pay to the
Executive each month for a period of twenty-six (26) months beginning with
the month immediately after the effective date of the termination an amount
equal to one-twelfth (1/12) of his total cash compensation (salary and
bonus) attributable to the fiscal year immediately preceding the year in
which the termination becomes effective.
c. By the Company With Cause. The Board may, upon written notice
effective immediately, terminate this Agreement at any time during the term
of this Agreement if any one or more of the following conditions exist and
thereafter the Company shall have no obligation to make any payments
hereunder other than salary and accrued bonuses for services rendered
through the effective date of such termination;
(1) If the Executive becomes disabled as defined in Paragraph
6(c) of this Agreement for a period of more than three hundred
sixty-five (365) consecutive days;
(2) If the Executive for reasons other than illness or injury
absents himself from his duties without the consent of the Board for
more than thirty (30) consecutive days, other than for approved
vacation or leave of absence;
(3) If the Executive should die (effective on the date of death);
(4) If the Executive should be convicted of a crime punishable by
imprisonment; and
(5) If the Executive should willfully breach or habitually
neglect his duties which he is required to perform under this
Agreement or otherwise fail to comply with the terms and conditions of
this Agreement specifically including, but not limited to, the
covenants set forth in Paragraphs 8, 9, 10 and 11 hereof, and fails to
cure any such breach or failure within ten (10) days after written
notice thereof given b the Company to the Executive.
5
<PAGE>
14. Termination After Change in Control. In the event of a Change in
Control, as defined below, any termination of Executive's employment with the
Company within the twelve (12) month period following such Change in Control,
whether by Executive or by the Company and whether with or without cause, the
following shall occur:
a. The provisions of Paragraph 10 and 11 shall not apply and
shall be void;
b. On the tenth business day following the effective date of such
termination, the Executive shall receive (i) a lump sum payment equal
to two and one-sixth (2 1/6) times his total cash compensation (salary
and bonus) attributable to the fiscal year immediately preceding the
year in which the termination becomes effective, and (ii) a lump sum
payment equal to all bonus amounts calculated under the Executive
Bonus Plan for each prior fiscal quarter in the fiscal year in which
the termination becomes effective, including the fiscal quarter in
which the termination becomes effective (so long as the termination
becomes effective after the ninth week of such fiscal quarter); and
c. The Executive shall be entitled to continuation of coverage
for twenty-six (26) months (beginning with the month subsequent to the
effective date of such termination) under all Company paid or
partially paid health, disability, or group life insurance plans or
any retirement, pension, or profit sharing plans, in each case at such
level as had been available to the Executive immediately prior to the
Change in Control; and
d. Any unvested portion of all stock options held by the
Executive as of the day immediately preceding the effective date of
such termination shall immediately vest and become exercisable and,
for purposes of such options, such termination shall be deemed to be a
termination by the Company not for cause.
6
<PAGE>
15. Definitions Related to Change of Control.
a. "Change of Control" means any one of the following: (i) Continuing
Directors no longer constitute at least 2/3 of the Board of Directors; (ii)
any person or group of persons (as defined in Rule 13d-5 under the
Securities Exchange Act of 1934 (the "Exchange Act")), together with its
affiliates, become the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of thirty percent (30%) or more of
the Company's then outstanding Common Stock or thirty percent (30%) or more
of the combined voting power of the Company's then outstanding securities
(calculated in accordance with Section 13(d)(3) or 14(d) of the Exchange
Act) entitled generally to vote for the election of the Company's
Directors; (iii) the approval by the Company's stockholders of the merger
or consolidation of the Company with any other corporation, the sale of
substantially all of the assets of the Company or the liquidation or
dissolution of the Company, unless, in the case of a merger or
consolidation, the then Continuing Directors in office immediately prior to
such merger or consolidation will constitute at least 2/3 of the Board of
Directors of the surviving corporation of such merger or consolidation and
any parent (as such term is defined in Rule 12b-2 under the Exchange Act of
such corporation; or (iv) at least 2/3 of the then Continuing Directors in
office immediately prior to any other action proposed to be taken by the
Company's stockholders or by the Company's Board of Directors determine
that such proposed action, if taken, would constitute a change of control
of the Company and such action is taken.
b. "Continuing Director" means any individual who either (i) was a
member of the Company's Board of Directors on the date hereof, or (ii) was
designated (before initial election as a Director) as a Continuing Director
by a majority of the then Continuing Directors.
7
<PAGE>
16. Arbitration of Disputes. Any dispute or claim arising out of or
relating to this Agreement or any termination of the Executive's employment
shall be submitted for arbitration in the greater Kansas City metropolitan area
in accordance with the then current Commercial Arbitration rules of the American
Arbitration Association. The judgment and any award rendered therein may be
appealed to a Court having proper jurisdiction if either party is not satisfied
with the decision. The Company shall bear the full cost of any arbitration,
including up to $25,000 of the expenses and attorneys' fees incurred by the
Executive related thereto or to any actions taken by the Executive to appeal or
enforce judgment rendered therein, regardless of the outcome of such
arbitration, and the Company shall not be entitled to use any lawyer who is a
Company employee to represent it in any dispute or arbitration related hereto.
17. Mitigation. The Executive shall have no duty to attempt to mitigate the
level of benefits payable by the Company to him hereunder and the Company shall
not be entitled to set off against the amounts payable hereunder any amounts
received by the Executive from any other source, including any subsequent
employer, except any amounts received by the Executive in violation of Paragraph
10, above.
18. Notices. Any notices to be given hereunder by either party to the other
may be effected either by personal delivery in writing or by mail, registered or
certified, postage prepaid, with return receipt requested. Mailed notices shall
be addressed as follows:
a. If to the Company:
Applebee's International, Inc.
4551 West 107th Street, Suite 100
Overland Park, Kansas 66207
Attn: General Counsel
b. If to the Executive:
Abe J. Gustin, Jr.
12218 Washington Court
Kansas City, Missouri 64145
Either party may change its address for notice by giving notice in accordance
with the terms of this Paragraph 18.
8
<PAGE>
19. General Provisions.
a. Law Governing. This Agreement shall be governed by and construed in
accordance with the laws of the State of Kansas.
b. Invalid Provisions. If any provision of this Agreement is held to
be illegal, invalid, or unenforceable, such provision shall be fully
severable and this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision had never comprised a part
hereof; and the remaining provisions hereof shall remain in full force and
effect and shall not be affected by the illegal, invalid, or unenforceable
provision or by its severance herefrom. Furthermore, in lieu of such
illegal, invalid, or unenforceable provision there shall be added
automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and
still be legal, valid or enforceable.
c. Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject matter
hereof. The parties recognize, however, that the Indemnification Agreement
between the Company and the Executive dated ____________, and any Stock
Option Agreements, to the extent not lapsed or fully exercised, continue to
be in effect. No terms, conditions, warranties, other than those contained
herein, and no amendments or modifications hereto shall be binding unless
made in writing and signed by the parties hereto.
d. Binding Effect. This Agreement shall extend to and be binding upon
and inure to the benefit to the parties hereto, their respective heirs,
representatives, successors and assigns. This Agreement may not be assigned
by the Executive.
e. Waiver. The waiver by either party hereto of a breach of any term
or provision of this Agreement shall not operate or be construed as a
waiver of a subsequent breach of the same provision by any party or of the
breach of any other term or provision of this Agreement.
f. Titles. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any
work, clause, paragraph, or provision of this Agreement.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Agreement as of the date and year first above written.
THIS AGREEMENT CONTAINS AN ARBITRATION CLAUSE.
EXECUTIVE: APPLEBEE'S INTERNATIONAL, INC.
By:
Abe J. Gustin, Jr. Printed Name:
Title:
9
KENNETH D. HILL
AMENDED CONSULTING AGREEMENT
This Agreement is made as of March 1, 1996 by and between APPLEBEE'S
INTERNATIONAL, INC., a Delaware corporation (the "Company") and KENNETH D. HILL
(the "Consultant").
WHEREAS, Consultant is knowledgeable in the industry of casual dining
restaurants, and Company wishes to contract with Consultant for the performance
of services on its behalf subject to the terms of this Agreement;
WHEREAS, Consultant is willing to render his services to the Company on
the terms and conditions hereinafter set forth.
WHEREAS, the parties are parties to a Consulting Agreement dated March
1, 1995 which they wish to amend and replace with this Agreement.
NOW, THEREFORE, in consideration of the mutual terms and conditions
hereof, the Company and the Consultant hereby agree as follows:
1. Scope of Work. The Company hereby retains Consultant and the
Consultant hereby agrees to perform services for the Company upon the terms and
conditions of this Agreement.
2. Services.
a. The Consultant shall act as liaison for the Company with
governmental and regulatory entities and other entities involved in the
restaurant industry, with the title "Consultant for Governmental Affairs
and Industry Relations" in lieu of a corporate officer title.
b. In addition to the foregoing duties, the Consultant agrees to
remain a member of Company's Board of Directors, if elected, (i) until
termination or expiration of this Agreement or (ii) until he is informed in
writing that a replacement director has been identified by the Company,
whichever occurs first. Consultant hereby resigns from the Company's Board
of Directors effective upon the occurrence of either of those two events.
Consultant shall carry out those duties traditionally performed by a member
of the board of directors of a public company. These duties include the
duty of care and the duty of loyalty.
3. Term. Subject to earlier termination as provided in Paragraph 11,
below, this Agreement shall terminate March 1, 1998, subject to renewal in one
year increments on an annual basis thereafter by mutual agreement of the
parties.
<PAGE>
4. Fee. As payment for his services rendered under this Agreement, the
Consultant shall receive the following:
a. The Consultant shall be paid an annual fee of $150,000 beginning
March 1, 1996 and $75,000 beginning March 1, 1997 payable in equal monthly
installments during the term of this Agreement, prorated for any partial
month. Consultant understands that he is not eligible for any benefits from
the Company other than his consulting fee and that he is responsible for
all tax payments related thereto.
b. So long as the Consultant retains his membership on the Company's
Board of Directors, any stock options which have previously been granted to
him shall remain valid and outstanding and, with respect to options granted
to Consultant in consideration of his employment with the Company, shall
vest, if not already vested, as if Consultant remained an employee of the
Company during the full term of his service on the Board of Directors.
During the term of this Consulting Agreement, Consultant shall be treated
as an inside director with respect to the grant and vesting of options.
5. Reimbursement of Expenses. Subject to such rules and procedures as
from time to time are specified by the Company, the Company shall reimburse the
Consultant for travel expenses preapproved by the Chief Operating or Chief
Financial Officer of the Company, necessarily incurred in the performance of his
duties on specific projects. Consultant will not be entitled to a separate
automobile allowance and the Company will not furnish the Consultant with an
automobile for his use.
6. Confidentiality/Trade Secrets. The Consultant acknowledges that his
position with the Company is one of the highest trust and confidence by reason
of his access to and contact with the trade secrets and confidential and
proprietary business information of the Company. Both during the term of this
Agreement and thereafter, the Consultant covenants and agrees as follows:
a. he shall use his best efforts and exercise utmost diligence to
protect and safeguard the trade secrets and confidential and proprietary
information of the Company including but not limited to the identity of its
customers and suppliers, its arrangements with customers and suppliers, and
its technical and financial data, records, compilations of information,
processes, recipes and specifications relating to its customers, suppliers,
products and services;
b. he shall not disclose any of such trade secrets and confidential
and proprietary information, except as may be required in the course of
performing services for the Company under this Agreement or by law; and
c. he shall not knowingly use, directly or indirectly, for his own
benefit or for the benefit of another, any of such trade secrets and
confidential and proprietary information.
2
<PAGE>
All files, records, documents, drawings, specifications, memoranda,
notes, or other documents relating to the business of the Company, whether
prepared by the Consultant or otherwise coming into his possession, shall be the
exclusive property of the Company and shall be delivered to the Company and not
retained by the Consultant upon termination of this Agreement for any reason
whatsoever or any other time upon request of the Company.
Notwithstanding anything to the contrary in this Agreement, this
Section 6 shall not apply to information which (a) is or has become known
generally or is or has become part of the public domain other than through
disclosure by Consultant, or (b) is disclosed to Consultant by a third party
whom Consultant does not know has any obligation of secrecy regarding such
information.
7. Discoveries. The Consultant covenants and agrees that he will fully
inform the Company of and disclose to the Company all inventions, concepts,
designs, improvements, discoveries and processes ("Discoveries") which he may
have during the term of this Agreement and which pertain or relate to the casual
dining business of the Company or to any experimental work, products, services
or processes of the Company in progress or planned for the future, whether
conceived by the Consultant alone or with others, and whether or not conceived
in conjunction with the use of any Company assets. All such Discoveries shall be
the exclusive property of the Company whether or not patent or trademark
applications are filed thereon. The Consultant shall assist the Company, at any
time during or after the term of this Agreement, in obtaining patents on all
such Discoveries deemed patentable by the Company and shall execute all
documents and do all things necessary to obtain letters patent, vest the Company
with full and exclusive title thereto, and protect the same against infringement
by others.
8. Noncompetition. Taking into consideration the nature, scope and
volume of the Company's operations, the Consultant agrees that during the term
of this Agreement and for a period of one (1) year immediately following any
termination of this Agreement (other than a termination by Consultant for a
material breach hereof by Company, or by Company without cause in a situation
where Company does not pay to Consultant the amounts due under Section 4 and 11
hereof), he will not, within the United States or any other country in which the
Company, directly or indirectly, owns, operates or franchises restaurants,
directly or indirectly, own, manage, operate, control, or be employed by,
participate in, or be connected in any matter with the ownership (other than
ownership of securities of other publicly held corporations of which Consultant
owns less than 2% of any class of outstanding securities), management,
operation, or control of any business engaged in the casual dining restaurant
industry, or in any other segment of the restaurant industry in which the
Company may become involved after the date hereof and prior to the date of any
termination of this Agreement. During the term hereof, Consultant may engage in
outside business interests outside the casual dining industry if such interests
do not materially interfere with his consulting duties for the Company; provided
that Consultant shall generally make himself available for services to the
Company during normal business hours during the term of this Agreement as long
as Company seeks to utilize his services in accordance with this Agreement; and,
further provided that the extent to which Company utilizes the services of
Consultant during the term of this Agreement shall remain with Company as long
as fees are paid in accordance with paragraph 4(a). For purposes of this
Agreement, "casual dining restaurant industry" consists of casual dining/full
service restaurants serving alcoholic beverages with a per guest average guest
check of under $15.00.
3
<PAGE>
9. Nonsolicitation. The Consultant agrees that during the term of this
Agreement and for a period of one (1) year immediately following the termination
of this Agreement, he will not, either directly or indirectly, for himself or
for any third party, solicit, induce, recruit, or cause another person in the
employ of the Company at a level of restaurant manager or higher to terminate
his/her employment for the purpose of joining, associating or becoming employed
with any business or activity which is engaged in the casual dining restaurant
industry or any other segment of the restaurant industry in which the Company
may become involved after the date hereof and prior to the date of any
termination of this Agreement or removal or resignation of Consultant from the
Board. The Company and the Consultant specifically acknowledge and agree that
the foregoing covenants of the Consultant in Paragraphs 8 and 9 are reasonable
in content and scope and are given by the Consultant for adequate consideration.
10. Remedies for Breach of Covenants of the Consultant. The covenants
set forth in Paragraphs 6, 7, 8, and 9 of this Agreement shall continue to be
binding upon the Consultant, notwithstanding the termination of this Agreement
by Consultant without cause or by Company with cause, for the term set forth in
each such paragraph. Such covenants shall be deemed and construed as separate
agreements independent of any other provisions of this Agreement and any other
agreement between the Company and the Consultant. It is expressly agreed that
the remedy at law for the breach of any such covenant is inadequate and
injunctive relief shall be available to prevent the breach or any threatened
breach thereof.
11. Termination.
a. Consultant may terminate this Agreement (a "Termination") at any
time, with or without cause or reason. The Company may terminate this
Agreement at any time after March 1, 1996 upon notice to the Consultant,
but only for cause. In the event of any Termination, the Consultant shall
receive his fee only through the date of the Termination.
b. "Cause" shall be limited to gross misconduct by Consultant in
performing the services hereunder, material breach of any covenant
hereunder by the Consultant, Consultant being convicted of the commission
of a criminal offense constituting a felony or the Consultant's death or
permanent disability.
In the event of termination by Company for cause or by Consultant
without cause, Consultant shall receive his fee only through the date of the
termination. In the event of termination by Company without cause or by
Consultant for a material breach hereof by Company, Consultant shall receive the
fee to which he would have been entitled through March 1, 1997 (if such
termination takes place on or prior thereto) or until the March 1 first
following such termination (if such termination takes place on or after March 1,
1997).
4
<PAGE>
12. Arbitration of Disputes. Any dispute or claim arising out of or
relating to this Agreement shall be settled by arbitration in the greater Kansas
City metropolitan area in accordance with the then current rules of the American
Arbitration Association, and judgment upon any award rendered therein may be
entered in any court having proper jurisdiction. The party which is not the
prevailing party as determined by the Arbitrator, shall bear its and the
prevailing party's reasonable cost of any arbitration, including the expenses
and attorneys' fees incurred by it related thereto and including any actions
taken by it to appeal or enforce the judgment rendered therein, regardless of
the outcome of such arbitration.
13. Notices. Any notices to be given hereunder by either party to the
other may be effected either by personal delivery in writing or by mail,
registered or certified, postage prepaid, with return receipt requested. Mailed
notices shall be addressed as follows:
a. If to the Company:
Applebee's International, Inc.
4551 West 107th
Suite 100
Overland Park, Kansas 66207
Attn: General Counsel
b. If to the Consultant:
Kenneth D. Hill
12601 Briar
Leawood, Kansas 66209
Either party may change its address for notice by giving notice in accordance
with the terms of this Paragraph 13.
14. General Provisions.
a. Independent Contractor. Consultant shall be an independent
contractor with respect to services performed under this Agreement and
shall not be deemed to be an agent, employee or partner of Company.
b. Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of Kansas.
c. Invalid Provisions. If any provision of this Agreement is held
to be illegal, invalid, or unenforceable, such provision shall be
fully severable and this Agreement shall be construed and enforced as
if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall
remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provision there shall be added automatically as a part
of this Agreement a provision as similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and still be
legal, valid or enforceable.
5
<PAGE>
d. Entire Agreement. This Agreement sets forth the entire
understanding of the parties and supersedes all prior agreements or
understandings, whether written or oral, with respect to the subject
matter hereof, except for any agreements related to the stock options
referred to in Section 4(b) above. No terms, conditions, warranties,
other than those contained herein, and no amendments or modifications
hereto shall be binding unless made in writing and signed by the
parties hereto. The Consulting Agreement between the parties dated
March 1, 1995 is hereby terminated by mutual agreement of the parties
and all rights and obligations of either party thereunder are waived
and deemed satisfied.
e. Binding Effect. This Agreement shall extend to and be binding
upon and inure to the benefit of the parties hereto, their respective
heirs, representatives, successors and assigns. This Agreement may not
be assigned by the Consultant or by Company unless such assignment is
accomplished by adequate assurance of financial responsibilities of
the assignee.
f. Waiver. The waiver by either party hereto of a breach of any
term or provision of this Agreement shall not operate or be construed
as a waiver of a subsequent breach of the same provision by any party
or of the breach of any other term or provision of this Agreement.
g. Titles. Titles of the paragraphs herein are used solely for
convenience and shall not be used for interpretation or construing any
word, clause, paragraph, or provision of this Agreement.
h. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and the Consultant have executed this
Agreement as of the date and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION THAT MAY BE
ENFORCED BY THE PARTIES.
CONSULTANT: APPLEBEE'S INTERNATIONAL, INC.
By:
Kenneth D. Hill Name:
Title:
6
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,091
<SECURITIES> 24,885
<RECEIVABLES> 12,139
<ALLOWANCES> 717
<INVENTORY> 10,038
<CURRENT-ASSETS> 72,110
<PP&E> 206,262
<DEPRECIATION> 40,640
<TOTAL-ASSETS> 272,672
<CURRENT-LIABILITIES> 31,747
<BONDS> 25,329
0
0
<COMMON> 313
<OTHER-SE> 212,841
<TOTAL-LIABILITY-AND-EQUITY> 272,672
<SALES> 82,640
<TOTAL-REVENUES> 95,041
<CGS> 70,922
<TOTAL-COSTS> 81,307
<OTHER-EXPENSES> 703
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 446
<INCOME-PRETAX> 13,491
<INCOME-TAX> 5,126
<INCOME-CONTINUING> 8,365
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,365
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
</TABLE>
