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 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 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, 1997 was 31,331,029.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED MARCH 30, 1997
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 30, 1997
and December 29, 1996....................................... 3
Consolidated Statements of Earnings for the 13 Weeks
Ended March 30, 1997 and March 31, 1996..................... 4
Consolidated Statement of Stockholders' Equity for the
13 Weeks Ended March 30, 1997............................... 5
Consolidated Statements of Cash Flows for the 13 Weeks
Ended March 30, 1997 and March 31, 1996..................... 6
Notes to Consolidated Financial Statements.................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................. 15
Item 6. Exhibits and Reports on Form 8-K.............................. 15
Signatures ................................................................. 16
Exhibit Index............................................................... 17
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 30, December 29,
1997 1996
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 18,735 $ 17,346
Short-term investments, at market value (amortized cost of $45,652 in 1997
and $39,763 in 1996)..................................................... 45,679 40,064
Receivables (less allowance for bad debts of $275 in 1997 and $270 in 1996). 14,794 19,245
Inventories................................................................. 5,361 4,557
Prepaid and other current assets............................................ 1,800 2,780
------------- --------------
Total current assets..................................................... 86,369 83,992
Property and equipment, net...................................................... 204,284 196,950
Goodwill, net.................................................................... 22,800 22,607
Franchise interest and rights, net............................................... 5,094 5,236
Deferred income taxes............................................................ 866 1,366
Other assets..................................................................... 4,126 3,960
------------- --------------
$ 323,539 $ 314,111
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 1,002 $ 968
Current portion of obligations under noncompetition and consulting agreement 220 220
Accounts payable............................................................ 14,453 11,949
Accrued expenses and other current liabilities.............................. 22,821 25,597
Accrued dividends........................................................... -- 2,191
Accrued income taxes........................................................ 5,792 918
------------- --------------
Total current liabilities................................................ 44,288 41,843
------------- --------------
Non-current liabilities:
Long-term debt - less current portion....................................... 21,754 24,435
Franchise deposits.......................................................... 1,664 1,793
Obligations under noncompetition and consulting agreement - less current
portion.................................................................. -- 220
------------- --------------
Total non-current liabilities............................................ 23,418 26,448
------------- --------------
Total liabilities........................................................ 67,706 68,291
Minority interest in joint venture............................................... -- 1,056
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 - 31,612,670 shares in 1997 and 31,580,955 shares in 1996......... 316 316
Additional paid-in capital.................................................. 153,393 153,028
Retained earnings........................................................... 102,957 92,081
Unrealized gain on short-term investments, net of income taxes.............. 16 188
------------- --------------
256,682 245,613
Treasury stock - 281,772 shares in 1997 and 1996, at cost................... (849) (849)
------------- --------------
Total stockholders' equity............................................... 255,833 244,764
------------- --------------
$ 323,539 $ 314,111
============= ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
13 Weeks Ended
-------------------------------
March 30, March 31,
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Company restaurant sales................................ $ 100,843 $ 82,640
Franchise income........................................ 15,409 12,401
------------- -------------
Total operating revenues............................. 116,252 95,041
------------- -------------
Cost of Company restaurant sales:
Food and beverage....................................... 27,721 23,351
Labor................................................... 32,101 26,859
Direct and occupancy.................................... 26,022 20,463
Pre-opening expense..................................... 510 249
------------- -------------
Total cost of Company restaurant sales............... 86,354 70,922
------------- -------------
General and administrative expenses.......................... 12,446 10,385
Amortization of intangible assets............................ 568 588
Loss on disposition of restaurants and equipment............. 233 115
------------- -------------
Operating earnings........................................... 16,651 13,031
------------- -------------
Other income (expense):
Investment income....................................... 933 801
Interest expense........................................ (359) (446)
Other income............................................ 148 105
------------- -------------
Total other income................................... 722 460
------------- -------------
Earnings before income taxes................................. 17,373 13,491
Income taxes................................................. 6,497 5,126
------------- -------------
Net earnings................................................. $ 10,876 $ 8,365
============= =============
Net earnings per common share................................ $ 0.35 $ 0.27
============= =============
Weighted average shares outstanding.......................... 31,310 31,033
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
<TABLE>
Unrealized
Gain (Loss)
Common Stock Additional on Total
------------------------- Paid-In Retained Short-Term Treasury Stockholders'
Shares Amount Capital Earnings Investments Stock Equity
-------------- ---------- ----------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 29, 1996......... 31,580,955 $ 316 $153,028 $ 92,081 $ 188 $ (849) $244,764
Stock options exercised......... 31,715 -- 323 -- -- -- 323
Income tax benefit upon exercise
of stock options.............. -- -- 42 -- -- -- 42
Change in unrealized gain on
short-term investments,
net of income taxes........... -- -- -- -- (172) -- (172)
Net earnings.................... -- -- -- 10,876 -- -- 10,876
-------------- ---------- ----------- ------------ ------------ ---------- --------------
Balance, March 30, 1997........... 31,612,670 $ 316 $153,393 $102,957 $ 16 $ (849) $255,833
============== ========== =========== ============ ============ ========== ==============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
13 Weeks Ended
--------------------------------
March 30, March 31,
1997 1996
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 10,876 $ 8,365
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization......................... 4,748 3,550
Amortization of intangible assets..................... 568 588
Deferred income tax provision......................... 477 233
Loss on disposition of restaurants and equipment...... 233 115
Changes in assets and liabilities:
Receivables........................................... 4,071 (629)
Inventories........................................... (804) (2)
Prepaid and other current assets...................... 1,105 (2,694)
Accounts payable...................................... 2,504 (1,147)
Accrued expenses and other current liabilities........ (2,926) (2,745)
Accrued income taxes.................................. 4,874 (898)
Franchise deposits.................................... (129) 225
Other................................................. (249) 123
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 25,348 5,084
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (6,401) (11,586)
Maturities and sales of short-term investments........... 504 8,362
Purchases of property and equipment...................... (15,195) (10,316)
Acquisition of minority interest in joint venture........ (1,275) --
Proceeds from sale of restaurants and equipment.......... 891 --
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES................. (21,476) (13,540)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................... (2,191) (1,861)
Issuance of common stock upon exercise of stock options.. 323 708
Income tax benefit upon exercise of stock options........ 42 155
Payments on long-term debt............................... (506) (480)
Payments under noncompetition and consulting agreement... (220) (220)
Minority interest in net earnings of joint venture....... 69 57
------------- --------------
NET CASH USED BY FINANCING ACTIVITIES................. (2,483) (1,641)
------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS......................................... 1,389 (10,097)
CASH AND CASH EQUIVALENTS, beginning of period................ 17,346 30,188
------------- --------------
CASH AND CASH EQUIVALENTS, end of period...................... $ 18,735 $ 20,091
============= ==============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(dollars in thousands)
<TABLE>
13 Weeks Ended
-----------------------------------
March 30, March 31,
1997 1996
--------------- ----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the 13 week period for:
Income taxes........................................................ $ 1,085 $ 5,630
=============== ================
Interest............................................................ $ 976 $ 188
=============== ================
</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 29, 1996
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 29,
1996.
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
In February 1997, the Company exercised its option to purchase the remaining 50%
interest in a joint venture arrangement with its franchisee in Nevada for
$1,275,000.
On April 14, 1997, the Company acquired the operations of 11 franchise
Applebee's restaurants located in the St. Louis metropolitan area and the
related furniture and fixtures, certain land and leasehold improvements and
rights to future development of restaurants for a total purchase price of
$36,150,000. The purchase price was paid in a combination of $33,650,000 in cash
and $2,500,000 of promissory notes. The acquisition will be accounted for as a
purchase, and accordingly, the purchase price will be allocated to the fair
value of net assets acquired and the results of operations of such restaurants
will be reflected in the 1997 financial statements subsequent to the date of
acquisition.
3. Commitments and Contingencies
Litigation, claims and disputes: As of March 30, 1997, 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
8
<PAGE>
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 fourth quarter of
1996, the Company received information indicating that the franchisee's
indebtedness to the FDIC had been acquired by a third party. The Company has not
been contacted by the third party. 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 March 30, 1997, approximately
$48,000,000 had been funded through this financing source, of which $23,500,000
was outstanding. 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 30, 1997,
the Company would have been required to make payments aggregating approximately
$4,600,000. In addition, the Company has severance and employment agreements
with certain officers which contain severance provisions not related to a change
in control, and such provisions would have required aggregate payments of
approximately $3,600,000 if such officers had been terminated as of March 30,
1997.
9
<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 March 30, 1997 and March 31, 1996
each contained 13 weeks, and are referred to hereafter as the "1997 quarter" and
the "1996 quarter," respectively.
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>
13 Weeks Ended
---------------------------------
March 30, March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Revenues:
Company restaurant sales.................................... 86.7% 87.0%
Franchise income............................................ 13.3 13.0
--------------- ---------------
Total operating revenues................................. 100.0% 100.0%
=============== ===============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage........................................... 27.5% 28.3%
Labor....................................................... 31.8 32.5
Direct and occupancy........................................ 25.8 24.8
Pre-opening expense......................................... 0.5 0.3
--------------- ---------------
Total cost of sales...................................... 85.6% 85.8%
=============== ===============
General and administrative expenses.............................. 10.7% 10.9%
Amortization of intangible assets................................ 0.5 0.6
Loss on disposition of restaurants and equipment................. 0.2 0.1
--------------- ---------------
Operating earnings............................................... 14.3 13.7
--------------- ---------------
Other income (expense):
Investment income........................................... 0.8 0.8
Interest expense............................................ (0.3) (0.5)
Other income................................................ 0.1 0.1
--------------- ---------------
Total other income....................................... 0.6 0.5
--------------- ---------------
Earnings before income taxes..................................... 14.9 14.2
Income taxes..................................................... 5.6 5.4
--------------- ---------------
Net earnings..................................................... 9.4% 8.8%
=============== ===============
</TABLE>
10
<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>
13 Weeks Ended
----------------------------------
March 30, March 31,
1997 1996
--------------- ---------------
<S> <C> <C>
Number of restaurant openings:
Applebee's:
Company..................................... 2 3
Franchise................................... 24 33
--------------- ---------------
Total Applebee's............................ 26 36
--------------- ---------------
Rio Bravo Cantinas:
Company..................................... 3 -
Franchise................................... 5 -
--------------- ---------------
Total Rio Bravo Cantinas.................... 8 -
--------------- ---------------
Restaurants open (end of period):
Applebee's:
Company(1).................................. 149 130
Franchise................................... 695 569
--------------- ---------------
Total Applebee's............................ 844 699
Rio Bravo Cantinas:
Company..................................... 24 16
Franchise................................... 14 -
--------------- ---------------
Total Rio Bravo Cantinas.................... 38 16
Specialty restaurants .......................... 4 4
--------------- ---------------
Total........................................... 886 719
=============== ===============
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).................................. $40,888 $39,547
Franchise................................... $40,506 $40,016
Total Applebee's............................ $40,574 $39,927
Rio Bravo Cantinas (Company)(2)................. $62,912 $65,724
Change in comparable restaurant sales(3):
Applebee's:
Company(1).................................. 2.1 % (0.4)%
Franchise................................... 2.7 % (1.4)%
Total Applebee's............................ 2.6 % (1.2)%
Rio Bravo Cantinas (Company).................... 2.2 % 2.5 %
Total system sales (in thousands):
Applebee's...................................... $439,095 $355,308
<FN>
- --------
(1) Includes one Texas restaurant operated by the Company under a management
agreement since July 1990.
(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>
11
<PAGE>
Company Restaurant Sales. Company restaurant sales for the 1997 and 1996
quarters were as follows (in thousands):
<TABLE>
13 Weeks Ended
----------------------------------------------
March 30, March 31,
1997 1996 Increase
-------------- -------------- --------------
<S> <C> <C> <C>
Applebee's........................ $ 79,200 $65,864 $13,336
Rio Bravo Cantinas................ 18,083 13,396 4,687
Specialty restaurants............. 3,560 3,380 180
-------------- -------------- --------------
Total........................ $100,843 $82,640 $18,203
============== ============== ==============
</TABLE>
Overall Company restaurant sales increased 22% in the 1997 quarter. Sales in the
1997 quarter increased 20% for Applebee's restaurants and 35% for Rio Bravo
Cantina restaurants due primarily to Company restaurant openings and increases
in comparable restaurant sales.
Comparable restaurant sales at Company Applebee's restaurants increased by 2.1%
in the 1997 quarter. Weighted average weekly sales at Company Applebee's
restaurants increased 3.4% from $39,547 in the 1996 quarter to $40,888 in the
1997 quarter. The Company believes these increases were due primarily to lower
sales in the 1996 quarter, which were negatively impacted by extremely harsh
winter weather, and a menu price increase which was implemented during the
fourth quarter of 1996 for certain menu items. In addition, weighted average
weekly sales in the 1997 quarter improved as a result of the sale of six
restaurants in southern California in October 1996. Excluding these restaurants
from the 1996 quarter, weighted average weekly sales increased 2.3% in the 1997
quarter.
The Company does not expect significant comparable restaurant sales increases
and may experience comparable restaurant sales decreases for the remainder of
the 1997 fiscal year for Company Applebee's restaurants, as many of its
restaurants operate near sales capacity and various markets continue to
experience competitive pressures. Although the Company's experience in
developing markets indicates that the opening of multiple restaurants within a
particular market results in increased market share, decreases in comparable
restaurant sales may result.
Comparable restaurant sales for Company Rio Bravo Cantina restaurants increased
by 2.2% in the 1997 quarter. Weighted average weekly sales (excluding one
restaurant that is open for dinner only) decreased from $65,724 in the 1996
quarter to $62,912 in the 1997 quarter. When entering new markets where the
Company has not yet established a market presence, sales levels are expected to
be lower than in the Georgia and Florida markets where the Company has a
concentration of restaurants and high customer awareness. Weighted average
weekly sales in the 1997 quarter were impacted by the eight new Company
restaurants which have opened since the end of the 1996 quarter. Seven of these
restaurants were in new markets, including five which were opened in Michigan
and Minnesota during the fall and winter months when sales at Rio Bravo Cantina
restaurants are typically lower than in the spring or summer months.
Franchise Income. Overall franchise income increased $3,008,000 (24%) from
$12,401,000 in the 1996 quarter to $15,409,000 in the 1997 quarter. This
increase was due primarily to the increased number of franchise Applebee's
restaurants operating during the 1997 quarter as compared to the 1996 quarter as
well as to the 14 franchise Rio Bravo Cantina restaurants which have opened
since the end of the 1996 quarter. In addition, comparable sales and weighted
average weekly sales for franchise Applebee's restaurants increased by 2.7% and
1.2%, respectively, in the 1997 quarter.
12
<PAGE>
Cost of Company Restaurant Sales. Food and beverage costs decreased from 28.3%
in the 1996 quarter to 27.5% in the 1997 quarter, due primarily to operational
improvements, purchasing efficiencies resulting from the Company's rapid growth,
and the menu price increase implemented in the fourth quarter of 1996. Beverage
sales, as a percentage of Company restaurant sales, declined from 18.7% in the
1996 quarter to 18.1% in the 1997 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 decreased from 32.5% in the 1996 quarter to 31.8% in the 1997
quarter. This decrease was due primarily to higher hourly labor and management
costs resulting from lower sales in the 1996 quarter which were negatively
impacted by extremely harsh winter weather.
Direct and occupancy costs increased from 24.8% in the 1996 quarter to 25.8% in
the 1997 quarter due primarily to higher levels of planned advertising
expenditures and an increase in depreciation expense.
Pre-opening expense increased from $249,000 in the 1996 quarter to $510,000 in
the 1997 quarter due primarily to the opening of five restaurants in the 1997
quarter (two Applebee's and three Rio Bravo Cantinas) as compared to three
Applebee's restaurants in the 1996 quarter.
General and Administrative Expenses. General and administrative expenses
decreased in the 1997 quarter to 10.7% from 10.9% in the 1996 quarter, due
primarily to the absorption of general and administrative expenses over a larger
revenue base. General and administrative expenses increased by $2,061,000 during
the 1997 quarter compared to the 1996 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 expansion
of the Rio Bravo Cantina concept.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.4% in the 1997 quarter compared to 38.0% in the 1996
quarter. The decrease in the Company's effective tax rate in the 1997 quarter
was due primarily 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
acquisition of restaurants. In addition, the Company assumed debt or issued new
debt in connection with certain mergers and acquisitions.
Capital expenditures were $65,672,000 in fiscal year 1996 and $16,470,000 in the
1997 quarter (which includes $1,275,000 related to the purchase of the remaining
50% interest in a joint venture arrangement with the Company's franchisee in
Nevada). The Company currently expects to open approximately 35 Applebee's
restaurants (including at least two new restaurants in the St. Louis area) and
nine Rio Bravo Cantina restaurants in 1997. Capital expenditures in fiscal 1997
are expected to be between $120,000,000 and $125,000,000 primarily for the
development of new restaurants, acquisitions of restaurants (including
13
<PAGE>
$36,150,000 relating to the St. Louis acquisition which was completed in April
1997), refurbishments of and capital replacements for existing restaurants, and
enhancements to information systems for the Company's restaurants and corporate
office. The amount of actual capital expenditures will be dependent upon, among
other things, the proportion of leased versus owned properties as the Company
expects to continue to purchase a 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 30, 1997, retained earnings were not
restricted for the payment of cash dividends. The Company is currently in
compliance with the covenants of all of its debt agreements.
The Company believes that its 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 30, 1997, the Company held liquid assets
totaling $64,414,000, consisting of cash and cash equivalents ($18,735,000) and
short-term investments ($45,679,000), of which $33,650,000 was utilized to fund
the St. Louis acquisition in April 1997. No amounts were outstanding under the
revolving credit facility; however, standby letters of credit issued under the
facility totaling $1,140,000 were outstanding as of March 30, 1997.
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 Federal minimum wage went into effect on October 1,
1996 and a second increase will become effective September 1, 1997. In addition,
increases in the minimum wage are 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.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of March 30, 1997, 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 fourth quarter of 1996, the
Company received information indicating that the franchisee's indebtedness to
the FDIC had been acquired by a third party. The Company has not been contacted
by the third party. 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 filed a report on Form 8-K on February 10, 1997,
announcing that it had entered into a definitive agreement to
acquire 11 Applebee's restaurants in the St. Louis, Mo. market
area from its franchisee, Apple Partners Limited Partnership.
15
<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, 1997 By: /s/ Abe J. Gustin, Jr.
----------------------- --------------------------
Abe J. Gustin, Jr.
Chairman and Co-Chief Executive Officer
Date: May 6, 1997 By: /s/ Lloyd L. Hill
----------------------- ---------------------
Lloyd L. Hill
Co-Chief Executive Officer, President
and Chief Operating Officer
Date: May 6, 1997 By: /s/ George D. Shadid
----------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: May 6, 1997 By: /s/ Mark A. Peterson
----------------------- ------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
16
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- ------------------------------------------------------------------
10.1 Amendment No. 1 to Employment Agreement with Philip J. Hickey,
Jr., dated January 1, 1997.
10.2 Amendment No. 2 to Consulting Agreement with Kenneth D. Hill,
dated March 1, 1997.
27 Financial Data Schedule.
17
<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 30, 1997 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-28-1997
<PERIOD-END> MAR-30-1997
<CASH> 18,735
<SECURITIES> 45,679
<RECEIVABLES> 15,069
<ALLOWANCES> 275
<INVENTORY> 5,361
<CURRENT-ASSETS> 86,369
<PP&E> 257,178
<DEPRECIATION> 52,894
<TOTAL-ASSETS> 323,539
<CURRENT-LIABILITIES> 44,288
<BONDS> 21,754
0
0
<COMMON> 316
<OTHER-SE> 255,517
<TOTAL-LIABILITY-AND-EQUITY> 323,539
<SALES> 100,843
<TOTAL-REVENUES> 116,252
<CGS> 86,354
<TOTAL-COSTS> 98,800
<OTHER-EXPENSES> 801
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 359
<INCOME-PRETAX> 17,373
<INCOME-TAX> 6,497
<INCOME-CONTINUING> 10,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,876
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
</TABLE>
AMENDMENT NO. 1
EMPLOYMENT AGREEMENT
APPLEBEE'S INTERNATIONAL, INC.
PHILIP J. HICKEY, JR.
THIS AGREEMENT, made and entered effective this 1st day of January,
1997, by and between Philip J. Hickey, Jr. ("Executive") and Applebee's
International, Inc. ("Company");
W I T N E S S E T H:
Whereas, Company and Executive entered an Employment Agreement
("Agreement") effective March 23, 1995, which provided for a term through
January 1, 1997, and
Whereas, the parties desire to extend the term of said Employment
Agreement and provide for certain modifications thereof,
NOW THEREFORE, for and in consideration of the mutual covenants and
promises herein contained, the parties hereto agree as follows:
1. The term of the Employment Agreement is hereby extended to and
including December 31, 1997, upon the same terms and conditions set forth in
said Employment Agreement, except as hereinafter amended.
2. Section 1 of the Agreement is modified to provide that Executive
shall be employed by and as President of Rio Bravo Services, Inc., a subsidiary
of the Company, and shall also serve as the President of Rio Bravo
International, Inc. and its operating subsidiary.
3. Section 2 of the Agreement is modified so that the party from who
consent is required in said Section 2 shall be "President or Chief Executive
Officer."
4. Section 3 is hereby amended by deleting the same in its entirety and
inserting in its place the following:
"3. Duties. The Executive is hereby employed by the Company and
during the term hereof, Executive shall render his services at the offices of
the Company in the Atlanta, Georgia metropolitan area unless otherwise agreed to
by the Executive. The Executive shall have such authority and shall perform such
duties as are assigned by the President or Chief Executive Officer of the
Company."
5. Section 4 of the Agreement is modified as hereinbefore provided.
6. Section 5 of the Agreement is modified as follows:
(a) Section 5(a) shall reflect a base salary of $185,000.
<PAGE>
(b) The bonus plan described in Section 5(b) shall terminate and
during the extended term hereof, Executive shall participate, to the extent
determined by the Company, in the bonus plan established from time to time for
the management of the Company. A copy of the approved 1997 Management Incentive
Plan is attached hereto. However, notwithstanding the terms of said Plan in the
event that the Executive remains employed under this Agreement through the last
day of 1997, any bonuses earned for any periods in 1997, pursuance to the terms
of said Plan will be paid to the Executive regardless of whether the Executive
remains employed by the Company thereafter. Such payment will be made at the
time that the Company makes bonus payments for the 1997 year to employees
generally.
7. Section 6.d. is hereby deleted in its entirety.
8. Section 14 is hereby amended by the addition of the following
provision;
"e. Notwithstanding any other provision of this Agreement, the
Company shall not be required to make any payment to the Executive for which a
Federal income tax deduction would be disallowed under section 280G of the
Internal Revenue Code of 1986 (without regard to section 280G(b)(4)) or any
corresponding provision of any future Federal income tax law."
9. The last paragraph of Section 8 is modified to provide that the
request referenced therein may be made by the President or the Chief Executive
Officer of the Company.
10. In all other respects, said Employment Agreement as amended shall
remain in full force and effect, without modification or change by this
amendment.
IN WITNESS WHEREOF, the parties hereto have cause this instrument to be
executed effective the day and year first above written.
APPLEBEE'S INTERNATIONAL, INC.
BY: /s/ Lloyd L. Hill
--------------------------
Lloyd L. Hill, President
/s/ Philip J. Hickey, Jr.
--------------------------
Philip J. Hickey, Jr.
AMENDMENT NO. 2
CONSULTING AGREEMENT
APPLEBEE'S INTERNATIONAL, INC.
KENNETH D. HILL
THIS AGREEMENT, made and entered effective this 1st day of March, 1997,
by and between Kenneth D. Hill ("Consultant") and Applebee's International, Inc.
("Company");
W I T N E S S E T H:
Whereas, Company and Consultant entered a Consulting Agreement dated
March 1, 1995, which was later amended as of March 1, 1996 (collectively, the
"Agreement"), and
Whereas, the parties desire to amend the terms of said Agreement and
provide for certain modifications thereof,
NOW THEREFORE, for and in consideration of the mutual covenants and
promises herein contained, the parties hereto agree as follows:
1. The $75,000.00 fee referenced in Section 4a. of the March 1, 1996
amendment to the Agreement is hereby amended and increased to $79,000.00.
2. In all other respects, said Agreement as amended shall remain in
full force and effect, without modification or change by this amendment.
IN WITNESS WHEREOF, the parties hereto have cause this instrument to be
executed effective the day and year first above written.
APPLEBEE'S INTERNATIONAL, INC.
BY: /s/ Lloyd L. Hill
--------------------------
Lloyd L. Hill, President
/s/ Kenneth D. Hill
--------------------------
Kenneth D. Hill
