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 June 29, 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 July 25,
1997 was 31,421,688.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED JUNE 29, 1997
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 29, 1997
and December 29, 1996....................................... 3
Consolidated Statements of Earnings for the 13 Weeks and
26 Weeks Ended June 29, 1997 and June 30, 1996.............. 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 29, 1997................................ 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 29, 1997 and June 30, 1996....................... 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 4. Submission of Matters to a Vote of Security Holders........... 19
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures ................................................................. 20
Exhibit Index............................................................... 21
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 29, December 29,
1997 1996
------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 9,427 $ 17,346
Short-term investments, at market value (amortized cost of $7,310 in 1997
and $39,763 in 1996)........................................................... 7,437 40,064
Receivables (less allowance for bad debts of $252 in 1997 and $270 in 1996)....... 15,021 19,245
Inventories....................................................................... 6,020 4,557
Prepaid and other current assets.................................................. 2,445 2,780
------------- --------------
Total current assets........................................................... 40,350 83,992
Property and equipment, net............................................................ 241,095 196,950
Goodwill, net.......................................................................... 49,241 22,607
Franchise interest and rights, net..................................................... 4,952 5,236
Deferred income taxes.................................................................. 785 1,366
Other assets........................................................................... 4,058 3,960
------------- --------------
$ 340,481 $ 314,111
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 5,361 $ 968
Current portion of obligations under noncompetition and consulting agreement...... 220 220
Accounts payable.................................................................. 17,615 11,949
Accrued expenses and other current liabilities.................................... 22,135 26,515
Accrued dividends................................................................. -- 2,191
------------- --------------
Total current liabilities...................................................... 45,331 41,843
------------- --------------
Non-current liabilities:
Long-term debt - less current portion............................................. 23,795 24,435
Franchise deposits................................................................ 1,738 1,793
Obligations under noncompetition and consulting agreement - less current portion.. -- 220
------------- --------------
Total non-current liabilities.................................................. 25,533 26,448
------------- --------------
Total liabilities.............................................................. 70,864 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 - 31,687,246 shares in 1997 and 31,580,955 shares in 1996............... 317 316
Additional paid-in capital........................................................ 154,873 153,028
Retained earnings................................................................. 115,183 92,081
Unrealized gain on short-term investments, net of income taxes.................... 80 188
------------- --------------
270,453 245,613
Treasury stock - 277,485 shares in 1997 and 281,772 shares in 1996, at cost....... (836) (849)
------------- --------------
Total stockholders' equity..................................................... 269,617 244,764
------------- --------------
$ 340,481 $ 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>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
--------------------------- ---------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales..................... $ 114,775 $ 91,116 $ 215,618 $ 173,756
Franchise income............................. 15,917 13,469 31,326 25,870
----------- ----------- ------------ -----------
Total operating revenues.................. 130,692 104,585 246,944 199,626
----------- ----------- ------------ -----------
Cost of Company restaurant sales:
Food and beverage............................ 31,661 25,549 59,382 48,900
Labor........................................ 36,025 28,292 68,126 55,151
Direct and occupancy......................... 28,419 22,865 54,441 43,328
Pre-opening expense.......................... 902 925 1,412 1,174
----------- ----------- ------------ -----------
Total cost of Company restaurant sales.... 97,007 77,631 183,361 148,553
----------- ----------- ------------ -----------
General and administrative expenses............... 13,109 11,109 25,555 21,494
Amortization of intangible assets................. 857 570 1,425 1,158
Loss on disposition of restaurants and equipment.. 251 424 484 539
----------- ----------- ------------ -----------
Operating earnings................................ 19,468 14,851 36,119 27,882
----------- ----------- ------------ -----------
Other income (expense):
Investment income............................ 446 597 1,379 1,398
Interest expense............................. (473) (434) (832) (880)
Other income................................. 90 200 238 305
----------- ----------- ------------ -----------
Total other income........................ 63 363 785 823
----------- ----------- ------------ -----------
Earnings before income taxes...................... 19,531 15,214 36,904 28,705
Income taxes...................................... 7,305 5,639 13,802 10,765
----------- ----------- ------------ -----------
Net earnings...................................... $ 12,226 $ 9,575 $ 23,102 $ 17,940
=========== =========== ============ ===========
Net earnings per common share..................... $ 0.39 $ 0.31 $ 0.74 $ 0.58
=========== =========== ============ ===========
Weighted average shares outstanding............... 31,370 31,148 31,340 31,090
</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>
<CAPTION>
Unrealized
Gain (Loss)
Common Stock Additional on Total
------------------------- Paid-In Retained Short-Term Treasury Stockholders'
Shares Amount Capital Earnings Investments Stock Equity
-------------- ---------- ----------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 29, 1996......... 31,580,955 $ 316 $153,028 $ 92,081 $ 188 $ (849) $244,764
Stock options exercised........ 106,291 1 1,461 -- -- -- 1,462
Shares sold under employee stock
purchase plan................ -- -- 80 -- -- 13 93
Income tax benefit upon exercise
of stock options............. -- -- 304 -- -- -- 304
Change in unrealized gain on
short-term investments,
net of income taxes.......... -- -- -- -- (108) -- (108)
Net earnings................... -- -- -- 23,102 -- -- 23,102
-------------- ---------- ----------- ------------ ------------ ---------- --------------
Balance, June 29, 1997............ 31,687,246 $ 317 $154,873 $115,183 $ 80 $ (836) $269,617
============== ========== =========== ============ ============ ========== ==============
</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>
<CAPTION>
26 Weeks Ended
-------------------------------
June 29, June 30,
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 23,102 $ 17,940
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization......................... 9,529 7,336
Amortization of intangible assets..................... 1,425 1,158
Deferred income tax provision (benefit)............... 662 (278)
Loss on disposition of restaurants and equipment...... 484 539
Changes in assets and liabilities (exclusive of
effects of acquisitions):
Receivables........................................... 3,844 (1,601)
Inventories........................................... (1,298) 1,721
Prepaid and other current assets...................... 320 (1,398)
Accounts payable...................................... 5,666 (426)
Accrued expenses and other current liabilities........ (4,630) (1,204)
Franchise deposits.................................... (55) 423
Other................................................. (514) (103)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 38,535 24,107
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (10,375) (23,762)
Maturities and sales of short-term investments........... 42,774 17,931
Purchases of property and equipment...................... (43,750) (28,775)
Acquisition of restaurants............................... (33,650) --
Acquisition of minority interest in joint venture........ (1,275) --
Proceeds from sale of restaurants and equipment.......... 979 786
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES................. (45,297) (33,820)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid........................................... (2,191) (1,861)
Issuance of common stock upon exercise of stock options.. 1,462 3,378
Income tax benefit upon exercise of stock options........ 304 1,025
Shares sold under employee stock purchase plan........... 93 --
Payments on long-term debt............................... (674) (646)
Payments under noncompetition and consulting agreement... (220) (220)
Minority interest in net earnings of joint venture....... 69 119
------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES...... (1,157) 1,795
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (7,919) (7,918)
CASH AND CASH EQUIVALENTS, beginning of period................ 17,346 30,188
------------- --------------
CASH AND CASH EQUIVALENTS, end of period...................... $ 9,427 $ 22,270
============= ==============
</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>
<CAPTION>
26 Weeks Ended
-------------------------------
June 29, June 30,
1997 1996
------------- -------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the 26 week period for:
Income taxes.................................................... $ 13,745 $ 11,356
============= ==============
Interest........................................................ $ 1,771 $ 998
============= ==============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases of $4,055,000 were recorded in April 1997 when the Company
acquired the operations and assets of 11 franchise restaurants. In connection
with this acquisition, the Company issued $2,500,000 of promissory notes.
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, of which $1,500,000 is payable in January
1998 and $1,000,000 is payable in December 1998. One of the principals of the
franchisee was related to a former director of the Company. 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 approximately $27,000,000 which is being amortized on a
straight-line basis over 20 years. The results of operations of such restaurants
have been reflected 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 June 29, 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. In November 1992, the lender was
declared insolvent by the FDIC and has since been liquidated. The Company closed
8
<PAGE>
one of the three restaurants in 1994 and one of the two remaining restaurants in
February 1996. 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. In June 1997, the third party filed a lawsuit against the Company
seeking approximately $3,800,000. The Company believes it has meritorious
defenses and will vigorously defend this lawsuit. 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 June 29, 1997, approximately $48,000,000
had been funded through this financing source, of which approximately
$20,000,000 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 June 29, 1997, 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 $4,000,000 if such officers had been terminated as of June 29,
1997.
4. New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS 128
establishes Standards for computing and presenting earnings per share and
applies to entities with publicly held common stock. This statement is effective
for fiscal periods ending after December 15, 1997, and early adoption is not
permitted. The Company will adopt the provisions of SFAS 128 for its fiscal year
ending December 28, 1997. In addition to the Company's current presentation of
net earnings per share, this statement will require the Company to present
diluted net earnings per share, which includes the dilutive effect of stock
options. However, the Company does not believe the additional disclosure of
diluted net earnings per share will materially impact the financial statements.
9
<PAGE>
5. Employee Benefit Plans
During 1996, the Company established an employee stock purchase plan in
accordance with Section 423 of the Internal Revenue Code. This plan was approved
at the 1997 Annual Meeting of Stockholders. The plan allows employees to
purchase shares of the Company's common stock at a 10% discount through payroll
deductions. The number of common shares authorized pursuant to the plan is
200,000.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 for each Applebee's restaurant opened and $40,000 for each Rio Bravo
Cantina restaurant opened). Beverage sales include sales of alcoholic beverages,
while non-alcoholic beverages are included in food sales. Certain expenses (food
and beverage, labor, direct and occupancy costs, and pre-opening expenses)
relate directly to Company restaurants, and other expenses (general and
administrative and amortization expenses) relate to both Company restaurants and
franchise operations.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal quarters ended June 29, 1997 and June 30, 1996
each contained 13 weeks, and are referred to hereafter as the "1997 quarter" and
the "1996 quarter," respectively. The 26 week periods ended June 29, 1997 and
June 30, 1996 are referred to hereafter as the "1997 year-to-date period" and
the "1996 year-to-date period," respectively.
On April 14, 1997, the Company acquired the operations and assets of 11
franchise restaurants in the St. Louis metropolitan area, referred to herein as
the "St. Louis Acquisition." The St. Louis 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 26 Weeks Ended
--------------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales................................ 87.8% 87.1% 87.3% 87.0%
Franchise income........................................ 12.2 12.9 12.7 13.0
------------ ------------ ------------- ------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============= ============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage....................................... 27.6% 28.0% 27.5% 28.1%
Labor................................................... 31.4 31.1 31.6 31.7
Direct and occupancy.................................... 24.8 25.1 25.2 24.9
Pre-opening expense..................................... 0.8 1.0 0.7 0.7
------------ ------------ ------------- ------------
Total cost of sales.................................. 84.5% 85.2% 85.0% 85.5%
============ ============ ============= ============
General and administrative expenses.......................... 10.0% 10.6% 10.3% 10.8%
Amortization of intangible assets............................ 0.7 0.5 0.6 0.6
Loss on disposition of restaurants and equipment............. 0.2 0.4 0.2 0.3
------------ ------------ ------------- ------------
Operating earnings........................................... 14.9 14.2 14.6 14.0
------------ ------------ ------------- ------------
Other income (expense):
Investment income....................................... 0.3 0.6 0.6 0.7
Interest expense........................................ (0.4) (0.4) (0.3) (0.4)
Other income............................................ 0.1 0.2 0.1 0.1
------------ ------------ ------------- ------------
Total other income................................... 0.0 0.4 0.3 0.4
------------ ------------ ------------- ------------
Earnings before income taxes................................. 14.9 14.6 14.9 14.4
Income taxes................................................. 5.6 5.4 5.6 5.4
------------ ------------ ------------- ------------
Net earnings................................................. 9.4% 9.2% 9.4% 9.0%
============ ============ ============= ============
</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 26 Weeks Ended
--------------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Number of restaurant openings:
Applebee's:
Company....................................... 6 8 8 11
Franchise..................................... 23 34 47 67
------------ ------------ ------------- ------------
Total Applebee's.............................. 29 42 55 78
------------ ------------ ------------- ------------
Rio Bravo Cantinas:
Company....................................... 3 1 6 1
Franchise..................................... 4 1 9 1
------------ ------------ ------------- ------------
Total Rio Bravo Cantinas...................... 7 2 15 2
------------ ------------ ------------- ------------
Restaurants open (end of period):
Applebee's:
Company (1)................................... 166 138 166 138
Franchise..................................... 706 602 706 602
------------ ------------ ------------- ------------
Total Applebee's.............................. 872 740 872 740
Rio Bravo Cantinas:
Company....................................... 27 17 27 17
Franchise..................................... 18 1 18 1
------------ ------------ ------------- ------------
Total Rio Bravo Cantinas...................... 45 18 45 18
Specialty restaurants............................. 4 4 4 4
------------ ------------ ------------- ------------
Total............................................. 921 762 921 762
============ ============ ============= ============
Weighted average weekly sales per restaurant:
Applebee's:
Company (1)................................... $ 42,706 $ 41,591 $ 41,831 $ 40,586
Franchise..................................... $ 40,984 $ 41,226 $ 40,747 $ 40,637
Total Applebee's.............................. $ 41,306 $ 41,294 $ 40,946 $ 40,627
Rio Bravo Cantinas:
Company (2)................................... $ 67,802 $ 74,571 $ 65,509 $ 70,214
Change in comparable restaurant sales:(3)
Applebee's:
Company(1).................................... (0.3)% 3.4 % 0.8 % 1.6 %
Franchise..................................... 1.2 % (1.3)% 1.9 % (1.4)%
Total Applebee's.............................. 0.9 % (0.4)% 1.7 % (0.8)%
Rio Bravo Cantinas (Company)...................... (1.8)% 4.1 % 0.0 % 3.4 %
Total system sales (in thousands):
Applebee's........................................ $ 459,986 $ 385,772 $ 899,081 $741,079
<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>
13
<PAGE>
Company Restaurant Sales. Company restaurant sales for the 1997 and 1996
quarters and the 1997 and 1996 year-to-date periods were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------------------
June 29, June 30, Increase
1997 1996 (Decrease)
---------- ----------- -----------
<S> <C> <C> <C>
Applebee's........................ $ 89,127 $ 71,766 $ 17,361
Rio Bravo Cantinas................ 21,977 15,592 6,385
Specialty restaurants............. 3,671 3,758 (87)
---------- ----------- ------------
Total............................. $ 114,775 $ 91,116 $ 23,659
========== =========== ============
26 Weeks Ended
-----------------------------------
June 29, June 30,
1997 1996 Increase
---------- ----------- -----------
Applebee's........................ $ 168,327 $ 137,630 $ 30,697
Rio Bravo Cantinas................ 40,060 28,988 11,072
Specialty restaurants............. 7,231 7,138 93
---------- ----------- -----------
Total........................ $ 215,618 $ 173,756 $ 41,862
========== =========== ===========
</TABLE>
Total Company restaurant sales increased 26% and 24% in the 1997 quarter and the
1997 year-to-date period, respectively. Sales increased 24% and 22% for
Applebee's restaurants in the 1997 quarter and the 1997 year-to-date period,
respectively, due primarily to Company restaurant openings and sales from the 11
St. Louis restaurants acquired in April 1997. Sales increased 41% and 38% for
Rio Bravo Cantina restaurants in the 1997 quarter and the 1997 year-to-date
period, respectively, due primarily to Company restaurant openings.
Comparable restaurant sales at Company Applebee's restaurants decreased by 0.3%
in the 1997 quarter as compared to the 1996 quarter, during which a 3.4%
increase in comparable restaurant sales resulted, in part, from an increase in
advertising spending during the Company's 1996 "Pasta Americana" campaign.
Comparable restaurant sales at Company Applebee's restaurants increased by 0.8%
in the 1997 year-to-date period due partially to lower sales in early 1996,
which were negatively impacted by extremely harsh winter weather. Weighted
average weekly sales at Company Applebee's restaurants increased 2.7% from
$41,591 in the 1996 quarter to $42,706 in the 1997 quarter and increased 3.1%
from $40,586 in the 1996 year-to-date period to $41,831 in the 1997 year-to-date
period. Comparable restaurant sales and weighted average weekly sales at Company
Applebee's restaurants in both the 1997 quarter and the 1997 year-to-date period
were positively affected by a menu price increase that was implemented during
the fourth quarter of 1996 for certain menu items. In addition, weighted average
weekly sales in the 1997 quarter and the 1997 year-to-date period increased as a
result of the sale of six lower than average volume restaurants in southern
California in October 1996 and the purchase of 11 higher than average volume
restaurants in St. Louis in April 1997. Excluding these restaurants, weighted
average weekly sales decreased 0.3% in the 1997 quarter and increased 0.9% in
the 1997 year-to-date period.
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
14
<PAGE>
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 decreased
by 1.8% in the 1997 quarter and were flat in the 1997 year-to-date period due
primarily to increased competition in the Atlanta market. In addition, sales in
the Atlanta market were negatively impacted in the latter part of the second
quarter by unseasonably wet and cold weather. Weighted average weekly sales
(excluding one restaurant that is open for dinner only) decreased from $74,571
in the 1996 quarter to $67,802 in the 1997 quarter and from $70,214 in the 1996
year-to-date period to $65,509 in the 1997 year-to-date period. Weighted average
weekly sales in the 1997 quarter and the 1997 year-to-date period were impacted
by the ten new Company restaurants which have opened since the end of the 1996
quarter; seven of these restaurants were in new markets. 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.
Franchise Income. Overall franchise income increased $2,448,000 (18%) from
$13,469,000 in the 1996 quarter to $15,917,000 in the 1997 quarter and increased
$5,456,000 (21%) from $25,870,000 in the 1996 year-to-date period to $31,326,000
in the 1997 year-to-date period. Such increases were due primarily to the
increased number of franchise Applebee's and Rio Bravo Cantina restaurants
operating during the 1997 quarter and 1997 year-to-date period as compared to
the 1996 quarter and 1996 year-to-date period. In addition, comparable sales
increased by 1.2% while weighted average weekly sales decreased 0.6% for
franchise Applebee's restaurants in the 1997 quarter. Comparable sales and
weighted average weekly sales for franchise Applebee's restaurants increased by
1.9% and 0.3%, respectively, in the 1997 year-to-date period.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 28.0%
and 28.1% in the 1996 quarter and the 1996 year-to-date period, respectively, to
27.6% and 27.5% in the 1997 quarter and the 1997 year-to-date period,
respectively, 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 18.6% and 18.7% in the 1996 quarter and
the 1996 year-to-date period, respectively, to 18.1% in both the 1997 quarter
and the 1997 year-to-date period, 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 31.1% in the 1996 quarter to 31.4% in the 1997
quarter and decreased from 31.7% in the 1996 year-to-date period to 31.6% in the
1997 year-to-date period. The increase in the 1997 quarter was due primarily to
an increase in group medical insurance costs. The decrease in the 1997
year-to-date period was due primarily to higher hourly labor and management
costs in early 1996 that resulted from lower sales during periods of extremely
harsh winter weather. This decrease was partially offset by the increase in the
1997 quarter in group medical insurance costs. An increase in the Federal
minimum wage went into effect on October 1, 1996 and a second increase will
become effective September 1, 1997. Increases in the minimum wage as well as the
highly competitive nature of the restaurant industry continue to exert pressure
on both hourly labor and management costs. The Company evaluates its
compensation programs on an ongoing basis in order to attract and retain quality
employees.
15
<PAGE>
Direct and occupancy costs decreased from 25.1% in the 1996 quarter to 24.8% in
the 1997 quarter and increased from 24.9% in the 1996 year-to-date period to
25.2% in the 1997 year-to-date period. The decrease in the 1997 quarter was due
primarily to lower advertising expense in comparison to the 1996 quarter when
the Company increased its advertising spending for Applebee's restaurants during
its "Pasta Americana" campaign. The increase in the 1997 year-to-date period was
due primarily to higher levels of planned advertising expenditures and an
increase in depreciation expense. The Company expects direct and occupancy
costs, as a percentage of sales, to be temporarily impacted during the remainder
of the 1997 fiscal year as a result of the one-time implementation costs of its
menu and food enhancement initiative.
General and Administrative Expenses. General and administrative expenses
decreased from 10.6% and 10.8% in the 1996 quarter and 1996 year-to-date period,
respectively, to 10.0% and 10.3% in the 1997 quarter and 1997 year-to-date
period, respectively, due primarily to the absorption of general and
administrative expenses over a larger revenue base as well as the additional
leverage resulting from the St. Louis Acquisition. General and administrative
expenses increased by $2,000,000 and $4,061,000 during the 1997 quarter and 1997
year-to-date period, respectively, compared to the 1996 quarter and 1996
year-to-date period, respectively, due primarily to the costs of additional
personnel associated with the Company's development efforts and system-wide
expansion, including costs related to the franchising and expansion of the Rio
Bravo Cantina concept.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.4% in both the 1997 quarter and 1997 year-to-date period,
compared to 37.1% and 37.5% in the 1996 quarter and the 1996 year-to-date
period, respectively. In the 1996 year-to-date period, the Company lowered its
effective income tax rate, as a percentage of earnings before income taxes, from
38.0% to 37.5% due primarily to a reduction in state income taxes, which
resulted in an effective income tax rate of 37.1% in the 1996 quarter.
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 $81,175,000 in the
1997 year-to-date period (which includes $36,150,000 related to the St. Louis
Acquisition and $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 32 Applebee's restaurants and
ten 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, 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
16
<PAGE>
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 June 29, 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 June 29, 1997, the Company held liquid assets totaling
$16,864,000, consisting of cash and cash equivalents $9,427,000 and short-term
investments $7,437,000. No amounts were outstanding under the revolving credit
facility; however, standby letters of credit issued under the facility totaling
$2,146,000 were outstanding as of June 29, 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.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share." SFAS 128
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock. This statement is effective
for fiscal periods ending after December 15, 1997 and early adoption is not
permitted. The Company will adopt the provisions of SFAS 128 for its fiscal year
ending December 28, 1997. In addition to the Company's current presentation of
net earnings per share, this statement will require the Company to present
diluted net earnings per share, which includes the dilutive effect of stock
options. However, the Company does not believe the additional disclosure of
diluted net earnings per share will materially impact the financial statements.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 29, 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. In November 1992, the lender was declared insolvent by the FDIC and has
since been liquidated. The Company closed one of the three restaurants in 1994
and one of the two remaining restaurants in February 1996. 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. In June 1997, the
third party filed a lawsuit against the Company seeking approximately
$3,800,000. The Company believes it has meritorious defenses and will vigorously
defend this lawsuit. 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.
18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on May 14, 1997. The
following matters were submitted to a vote of the Stockholders:
Proposal I. It was proposed that Abe J. Gustin, Jr., D. Patrick
Curran and Robert A. Martin be elected as directors to serve
a three-year term expiring in 2000.
Proposal II. It was proposed that the Company's 1995 Equity Incentive
Plan be amended to increase the number of shares of Common
Stock available for Awards thereunder by 300,000 shares.
Proposal III. It was proposed that the Company adopt an Employee Stock
Purchase Plan.
Proposal IV. Ratification of Deloitte & Touche LLP as independent
auditors for the Company for the 1997 fiscal year.
The results of the voting on the foregoing matters were as follows:
Affirmative Broker Non-
Proposal Votes Negative Votes Abstentions Votes
- --------------- --------------- ------------------ -------------- -----------
I (Gustin) 28,947,404 350,094 -- --
I (Curran) 28,947,404 350,094 -- --
I (Martin) 28,947,404 350,094 -- --
II 23,128,863 6,022,232 64,047 82,356
III 28,627,175 531,362 56,606 82,355
IV 29,255,320 14,953 27,225 --
Since each Proposal required the affirmative votes of 14,648,750 shares to be
adopted, each Proposal was affirmatively adopted by the Stockholders.
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 June 29, 1997.
19
<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: July 30, 1997 By: /s/ Abe J. Gustin, Jr.
----------------------- --------------------------
Abe J. Gustin, Jr.
Chairman and Co-Chief Executive Officer
Date: July 30, 1997 By: /s/ Lloyd L. Hill
----------------------- ---------------------
Lloyd L. Hill
Co-Chief Executive Officer, President
and Chief Operating Officer
Date: July 30, 1997 By: /s/ George D. Shadid
----------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: July 30, 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
- ------------- ------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED JUNE 29, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> JUN-29-1997
<CASH> 9,427
<SECURITIES> 7,437
<RECEIVABLES> 15,273
<ALLOWANCES> 252
<INVENTORY> 6,020
<CURRENT-ASSETS> 40,350
<PP&E> 297,746
<DEPRECIATION> 56,651
<TOTAL-ASSETS> 340,481
<CURRENT-LIABILITIES> 45,331
<BONDS> 23,795
0
0
<COMMON> 317
<OTHER-SE> 269,300
<TOTAL-LIABILITY-AND-EQUITY> 340,481
<SALES> 215,618
<TOTAL-REVENUES> 246,944
<CGS> 183,361
<TOTAL-COSTS> 208,916
<OTHER-EXPENSES> 1,909
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 832
<INCOME-PRETAX> 36,904
<INCOME-TAX> 13,802
<INCOME-CONTINUING> 23,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,102
<EPS-PRIMARY> .74
<EPS-DILUTED> .74
</TABLE>
