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
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
-------------------------------------------------
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
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(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 October
30, 1998 was 30,025,805.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 27, 1998
INDEX
<TABLE>
<CAPTION>
Page
Part I Financial Information
<S> <C> <C>
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 27, 1998
and December 28, 1997................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 27, 1998 and September 28, 1997...................................... 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 27, 1998.................................................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 27, 1998 and September 28, 1997...................................... 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 13
Part II Other Information
Item 1. Legal Proceedings....................................................................... 23
Item 6. Exhibits and Reports on Form 8-K........................................................ 23
Signatures ................................................................................................. 24
Exhibit Index............................................................................................... 25
</TABLE>
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................... $ 2,247 $ 8,908
Short-term investments, at market value (amortized cost of $4,705 in 1998
and $10,754 in 1997)..................................................... 4,888 10,906
Receivables (less allowance for bad debts of $1,166 in 1998 and $837 in 1997) 16,507 16,390
Inventories................................................................. 4,992 4,788
Prepaid and other current assets............................................ 1,894 2,962
-------------- -------------
Total current assets..................................................... 30,528 43,954
Property and equipment, net...................................................... 351,088 276,082
Goodwill, net.................................................................... 100,362 48,065
Franchise interest and rights, net............................................... 4,095 4,667
Other assets..................................................................... 8,103 4,706
-------------- -------------
$ 494,176 $ 377,474
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 2,833 $ 6,526
Accounts payable............................................................ 14,587 19,731
Accrued expenses and other current liabilities.............................. 36,849 28,547
Accrued dividends........................................................... -- 2,518
Accrued income taxes........................................................ 1,031 5,166
-------------- -------------
Total current liabilities................................................ 55,300 62,488
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion....................................... 139,118 22,579
Franchise deposits.......................................................... 1,980 1,532
Deferred income taxes....................................................... 1,356 432
-------------- -------------
Total non-current liabilities............................................ 142,454 24,543
-------------- -------------
Total liabilities........................................................ 197,754 87,031
-------------- -------------
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 - 32,112,538 shares in 1998 and 31,744,009 shares in 1997......... 321 317
Additional paid-in capital.................................................. 162,684 156,165
Retained earnings........................................................... 172,944 134,654
Unrealized gain on short-term investments, net of income taxes.............. 115 95
-------------- -------------
336,064 291,231
Treasury stock - 2,139,255 shares in 1998 and 261,629 shares in 1997, at cost (39,642) (788)
-------------- -------------
Total stockholders' equity............................................... 296,422 290,443
-------------- -------------
$ 494,176 $ 377,474
============== =============
</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 39 Weeks Ended
------------------------------ ------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 151,648 $ 117,607 $ 431,235 $ 333,225
Franchise income............................ 17,002 16,260 50,427 47,586
------------- -------------- ------------- -------------
Total operating revenues................. 168,650 133,867 481,662 380,811
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage........................... 41,680 32,228 117,965 91,610
Labor....................................... 47,589 37,914 137,203 106,040
Direct and occupancy........................ 38,301 28,884 108,711 83,325
Pre-opening expense......................... 912 864 1,920 2,276
------------- -------------- ------------- -------------
Total cost of Company restaurant sales... 128,482 99,890 365,799 283,251
------------- -------------- ------------- -------------
General and administrative expenses.............. 14,398 13,060 43,416 38,615
Amortization of intangible assets................ 1,546 913 3,967 2,338
Loss on disposition of restaurants and equipment. 187 262 858 746
------------- -------------- ------------- -------------
Operating earnings............................... 24,037 19,742 67,622 55,861
------------- -------------- ------------- -------------
Other income (expense):
Investment income........................... 249 180 863 1,559
Interest expense............................ (2,853) (407) (6,902) (1,239)
Other income................................ 135 58 410 296
------------- -------------- ------------- -------------
Total other income (expense)............. (2,469) (169) (5,629) 616
------------- -------------- ------------- -------------
Earnings before income taxes and
extraordinary item.......................... 21,568 19,573 61,993 56,477
Income taxes..................................... 8,024 7,320 23,062 21,122
------------- -------------- ------------- -------------
Earnings before extraordinary item............... 13,544 12,253 38,931 35,355
Extraordinary loss from early extinguishment
of debt, net of income taxes (Note 4)....... -- -- (641) --
------------- -------------- ------------- -------------
Net earnings..................................... $ 13,544 $ 12,253 $ 38,290 $ 35,355
============= ============== ============= =============
Basic earnings per common share:
Basic earnings before extraordinary item.... $ 0.45 $ 0.39 $ 1.28 $ 1.13
Extraordinary item.......................... -- -- (0.02) --
------------- -------------- ------------- -------------
Basic net earnings per common share.............. $ 0.45 $ 0.39 $ 1.26 $ 1.13
============= ============== ============= =============
Diluted earnings per common share:
Diluted earnings before extraordinary item.. $ 0.45 $ 0.39 $ 1.28 $ 1.12
Extraordinary item.......................... -- -- (0.02) --
------------- -------------- ------------- -------------
Diluted net earnings per common share............ $ 0.45 $ 0.39 $ 1.26 $ 1.12
============= ============== ============= =============
Basic weighted average shares outstanding........ 30,184 31,444 30,392 31,375
============= ============== ============= =============
Diluted weighted average shares outstanding...... 30,278 31,692 30,522 31,636
============= ============== ============= =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Gain 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 28, 1997..... 31,744,009 $ 317 $ 156,165 $ 134,654 $ 95 $ (788) $ 290,443
Purchases of treasury stock. -- -- -- -- -- (38,904) (38,904)
Shares sold under employee
stock purchase plan....... -- -- 507 -- -- 106 613
Stock options exercised..... 296,529 3 4,018 -- -- (179) 3,842
Income tax benefit upon
exercise of stock options. -- -- 1,065 -- -- -- 1,065
Shares issued under employee
stock ownership and 401(k)
plans..................... -- -- 784 -- -- 123 907
Restricted shares awarded under
equity incentive plan, net
of cancellations.......... 72,000 1 1,503 -- -- -- 1,504
Unearned compensation relating
to restricted shares...... -- -- (1,358) -- -- -- (1,358)
Change in unrealized gain on
short-term investments,
net of income taxes....... -- -- -- -- 20 -- 20
Net earnings................ -- -- -- 38,290 -- -- 38,290
------------ ----------- ---------- ---------- ------------- ---------- ------------
Balance, September 27, 1998.... 32,112,538 $ 321 $ 162,684 $ 172,944 $ 115 $(39,642) $ 296,422
============ =========== ========== ========== ============= ========== ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
-----------------------------------
September 27, September 28,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 38,290 $ 35,355
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization......................... 20,953 14,936
Amortization of intangible assets..................... 3,967 2,338
Amortization of deferred financing costs.............. 320 38
(Gain) loss on sale of investments.................... (13) 52
Deferred income tax provision (benefit)............... (160) 240
Loss on disposition of restaurants and equipment...... 858 746
Changes in assets and liabilities (exclusive of effects
of acquisitions):
Receivables........................................... (117) 3,661
Inventories........................................... 285 (943)
Prepaid and other current assets...................... 2,201 (11)
Accounts payable...................................... (5,144) 4,606
Accrued expenses and other current liabilities........ 9,000 (3,513)
Accrued income taxes.................................. (4,135) (26)
Franchise deposits.................................... 448 (156)
Other................................................. 461 (963)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 67,214 56,360
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (30,799) (13,609)
Maturities and sales of short-term investments........... 36,842 47,883
Purchases of property and equipment...................... (56,234) (67,604)
Acquisition of restaurants............................... (101,749) (33,650)
Acquisition of minority interest in joint venture........ -- (1,275)
Proceeds from sale of restaurants and equipment.......... 10,216 979
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES................. (141,724) (67,276)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock.............................. (38,904) --
Dividends paid........................................... (2,518) (2,191)
Issuance of common stock upon exercise of stock options.. 3,842 2,122
Income tax benefit upon exercise of stock options........ 1,065 548
Shares sold under employee stock purchase plan........... 613 255
Proceeds from issuance of long-term debt................. 162,825 --
Deferred financing costs relating to issuance of long-term debt (4,000) --
Payments on long-term debt............................... (55,074) (1,044)
Minority interest in net earnings of joint venture....... -- 69
--------------- ---------------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES............................... 67,849 (241)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (6,661) (11,157)
CASH AND CASH EQUIVALENTS, beginning of period................ 8,908 17,346
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period...................... $ 2,247 $ 6,189
=============== ===============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
-------------------------------------
September 27, September 28,
1998 1997
---------------- -----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the 39 week period for:
Income taxes........................................................ $ 26,117 $ 20,175
================ =================
Interest............................................................ $ 5,712 $ 1,803
================ =================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases of $5,052,000 were recorded in April 1998 when the Company
acquired the operations and assets of 33 franchise restaurants.
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 28, 1997
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 28,
1997.
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
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 was paid in January 1998
and $1,000,000 is payable in November 1998. One of the principals of the
franchisee was related to a person who was a director of the Company until May
1997. 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. In conjunction with this
acquisition, the Company also recorded capitalized leases of $4,055,000. 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.
On December 23, 1997, the Company entered into an agreement with Apple South,
Inc. ("Apple South"), now Avado Brands, Inc., its largest franchisee, to acquire
31 Applebee's restaurants plus one restaurant under construction and rights to
future development of restaurants in the Virginia markets of Norfolk, Richmond,
Roanoke and Charlottesville, referred to herein as the "Virginia Acquisition."
The Virginia Acquisition was completed on March 30, 1998, and was effective
immediately after the close of business on March 29, 1998. The total purchase
price was $94,749,000 and was paid in cash on March 30, 1998. The purchase price
reflects $93,400,000 for the 32 restaurants referred to above plus $1,349,000
for one additional restaurant that was opened by Apple South prior to closing,
as well as normal closing adjustments. See Note 3 for additional commitments and
contingencies relating to the agreement with Apple South. The acquisition was
accounted for as a purchase in the second quarter of 1998 and, accordingly, the
purchase price has been allocated to the fair value of net assets acquired and
the results of operations of such restaurants are reflected in the 1998
financial statements subsequent to the date of acquisition.
8
<PAGE>
The Virginia Acquisition purchase price of $94,749,000 plus estimated
acquisition fees of $7,000,000 has been allocated to the fair value of net
assets acquired based upon an independent appraisal. The total of $101,749,000
has been allocated in the financial statements as follows (in thousands):
Property and equipment............................... $ 45,485
Inventories.......................................... 489
Goodwill............................................. 55,772
Petty cash........................................... 48
Prepaid and other current assets..................... 60
Accrued expenses..................................... (105)
---------------
Total........................................... $ 101,749
===============
The following summarized unaudited pro forma results of operations of the
Company (in thousands, except per share amounts) for the 1998 and 1997
year-to-date periods assume the Virginia Acquisition and the Company's new
financing arrangements (see Note 4) occurred as of the beginning of the
respective periods. The pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the Virginia Acquisition been effective
as of the dates indicated, or which may result in the future.
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------------------------------
September 27, 1998 September 28, 1997
------------------------ ------------------------
Actual Pro Forma Actual Pro Forma
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Food and beverage sales.............................. $ 431,235 $ 447,902 $ 333,225 $ 379,349
Franchise income..................................... 50,427 49,700 47,586 45,681
---------- ------------- --------- -------------
Total operating revenues............................. $ 481,662 $ 497,602 $ 380,811 $ 425,030
========== ============= ========= =============
Earnings before extraordinary item................... $ 38,931 $ 38,656 $ 35,355 $ 34,898
Net earnings......................................... $ 38,290 $ 38,015 $ 35,355 $ 34,898
Basic net earnings per common share.................. $ 1.26 $ 1.25 $ 1.13 $ 1.11
Diluted net earnings per common share................ $ 1.26 $ 1.25 $ 1.12 $ 1.10
Basic weighted average shares outstanding............ 30,392 30,392 31,375 31,375
Diluted weighted average shares outstanding.......... 30,522 30,522 31,636 31,636
</TABLE>
3. Commitments and Contingencies
Litigation, claims and disputes: As of September 27, 1998, the Company was using
assets owned by a former franchisee in the operation of one restaurant which
remains under a purchase rights agreement that 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 under
that agreement and as to whether the Company had agreed to guarantee the
franchisee's debt. Based upon a then current independent appraisal, the Company
offered to settle the dispute and purchase the assets of the three then existing
restaurants 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 lawsuit remains in the discovery phase.
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.
9
<PAGE>
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Franchise financing: The Company entered into an agreement in 1992 with a
financing source to provide up to $75,000,000 of financing to Company
franchisees to fund development of new franchise restaurants. The Company
provided a limited guaranty of loans made under the agreement. The Company's
maximum recourse obligation of 10% of the amount funded is reduced beginning in
the second year of each long-term loan and thereafter decreases ratably to zero
after the seventh year of each loan. At September 27, 1998, approximately
$48,000,000 had been funded through this financing source, of which $14,000,000
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 September 27,
1998, the Company would have been required to make payments aggregating
approximately $5,000,000. In addition, the Company has severance and employment
agreements with certain officers which contain severance provisions not related
to a change in control, and such provisions would have required aggregate
payments of approximately $3,900,000 if such officers had been terminated as of
September 27, 1998.
Apple South divestiture plan: As part of the agreement with Apple South relating
to the Virginia Acquisition (see Note 2), Apple South has also agreed to use its
best efforts to sell its other Applebee's restaurants as soon as practical,
resulting in its exit as an Applebee's franchisee. As of September 27, 1998,
Apple South had completed the sale of 190 of its restaurants (68% of its total).
To the extent any restaurants are not divested by Apple South by December 31,
1999, the Company has an option to purchase the remaining restaurants at a
predetermined formula. The Company and Apple South have committed to work
together to identify and approve qualified franchise groups to acquire the
remaining Apple South restaurants and to effect an efficient transition of
ownership. To assist in this transition, the Company has agreed to provide the
availability of guarantees of up to 10% of the borrowings of qualified franchise
groups, up to a maximum of $10,000,000 in the aggregate. To date, the Company
has provided a guarantee to one franchise group totaling $1,000,000. Two
principals of the franchise group are related to a director and officer of the
Company.
10
<PAGE>
4. Financing
On March 30, 1998, the Company entered into a bank credit agreement that
provides for $225,000,000 in senior secured credit facilities, consisting of an
eight-year senior secured term loan of $125,000,000 and a five-year secured
working capital facility of $100,000,000. The Company also entered into a
five-year $5,000,000 letter of credit facility with another bank. On March 30,
1998, $125,000,000 was borrowed under the term loan facility and $15,000,000 was
borrowed under the working capital facility. The total proceeds were utilized to
fund the Virginia Acquisition (see Note 2) including related transaction fees
and expenses; to repay certain existing indebtedness totaling $37,500,000; to
pay deferred financing costs of $4,000,000; and for working capital needs and
general corporate purposes.
In connection with the early extinguishment of debt, the Company paid a
prepayment penalty of $930,000 on March 30, 1998. The prepayment penalty plus
the remaining unamortized portion of the related deferred financing costs of
$91,000 is reflected as an extraordinary loss of $641,000, net of income taxes
of $380,000, in the accompanying consolidated statement of earnings for the 39
weeks ended September 27, 1998.
Long-term debt, including capitalized lease obligations, as of September 27,
1998 is comprised of the following (in thousands):
Term loan facility................................... $ 125,000
Working capital facility............................. 5,000
Capitalized lease obligations........................ 9,674
Other................................................ 2,277
---------------
Total........................................... $ 141,951
===============
As of September 27, 1998, $5,000,000 was outstanding under the $100,000,000
working capital facility, and standby letters of credit totaling $2,727,000 were
outstanding under the $5,000,000 letter of credit facility.
The senior term loan bears interest at either the bank's prime rate plus 1.25%
or LIBOR plus 2.25%, at the Company's option, and requires semi-annual principal
payments aggregating $1,250,000 per year for each of the first seven years, with
the remaining $116,250,000 due during the eighth year. The working capital
facility bears interest at either the bank's prime rate plus 0.375% or LIBOR
plus 1.375%, at the Company's option. A commitment fee of 0.30% is payable on
any unused portion of the working capital facility.
In connection with the senior term loan, the Company has entered into interest
rate swap agreements to manage its exposure to interest rate fluctuations. The
agreements were effective beginning May 1, 1998, and have maturity dates ranging
from four to seven years for an aggregate notional amount of $100,000,000 for
three-month LIBOR rates ranging from 5.91% to 6.05%.
Both the senior term loan and the working capital facility are secured by the
common stock of each of the Company's present and future subsidiaries and all
intercompany debt of the Company and such subsidiaries. In addition, both the
senior term loan and the working capital facility are subject to various
covenants and restrictions which, among other things, require the maintenance of
stipulated fixed charge, interest coverage and leverage ratios, as defined, and
limit additional indebtedness and capital expenditures in excess of specified
amounts. The credit agreement also restricts the amount available for cash
dividends. As long as the working capital facility is in place, cash dividends
are limited to $5,000,000 in any fiscal year. The Company is currently in
compliance with the covenants contained in its credit agreement.
11
<PAGE>
The Company's Board of Directors has approved plans to repurchase up to
$50,000,000 of the Company's common stock, subject to market conditions. The
credit agreement permits up to $50,000,000 to be utilized for such repurchases.
Since December 28, 1997, the Company has repurchased 1,946,000 shares of its
common stock at an aggregate cost of $38,904,000.
5. Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," during 1997. SFAS No.
128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. All prior period weighted average and
per share information has been restated in accordance with SFAS No. 128.
Outstanding stock options issued by the Company represent the only dilutive
effect on weighted average shares. A reconciliation between basic and diluted
weighted average shares outstanding and the related earnings per share
calculation is presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------------- ---------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net earnings................................ $ 13,544 $ 12,253 $ 38,290 $ 35,355
================ =============== ================ ================
Basic weighted average shares outstanding... 30,184 31,444 30,392 31,375
Dilutive effect of stock options............ 94 248 130 261
---------------- --------------- ---------------- ----------------
Diluted weighted average shares outstanding. 30,278 31,692 30,522 31,636
================ =============== ================ ================
Basic net earnings per common share......... $ 0.45 $ 0.39 $ 1.26 $ 1.13
================ =============== ================ ================
Diluted net earnings per common share....... $ 0.45 $ 0.39 $ 1.26 $ 1.12
================ =============== ================ ================
</TABLE>
6. Long Island Sale
In May 1998, the Company completed the sale of its six restaurants located in
the Long Island, New York area for approximately $10,000,000 in cash. The
operations of the restaurants and future restaurant development in the market
area have been assumed by an existing Applebee's franchisee. The sale of these
restaurants did not have a significant effect on the Company's net earnings and
financial position.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 for each Applebee's restaurant opened and $40,000 for each Rio Bravo
Cantina restaurant opened). Beverage sales include sales of alcoholic beverages,
while non-alcoholic beverages are included in food sales. Certain expenses (food
and beverage, labor, direct and occupancy costs, and pre-opening expenses)
relate directly to Company restaurants, and other expenses (general and
administrative and amortization expenses) relate to both Company restaurants and
franchise operations.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal quarters ended September 27, 1998 and September
28, 1997 each contained 13 weeks, and are referred to hereafter as the "1998
quarter" and the "1997 quarter," respectively. The 39 week periods ended
September 27, 1998 and September 28, 1997 are referred to hereafter as the "1998
year-to-date period" and the "1997 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.
On December 23, 1997, the Company entered into an agreement with Apple South,
Inc. ("Apple South"), its largest franchisee, to acquire 31 Applebee's
restaurants plus one restaurant under construction and rights to future
development of restaurants in the Virginia markets of Norfolk, Richmond, Roanoke
and Charlottesville, referred to herein as the "Virginia Acquisition." The
Virginia Acquisition was completed on March 30, 1998, and was effective
immediately after the close of business on March 29, 1998. The total purchase
price was $94,749,000 and was paid in cash on March 30, 1998. The acquisition
was accounted for as a purchase in the second quarter of 1998 and, accordingly,
the purchase price has been allocated to the fair value of net assets acquired
and the results of operations of such restaurants have been reflected in the
1998 financial statements subsequent to the date of acquisition.
13
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of earnings expressed as a percentage
of total operating revenues, except where otherwise noted.
Percentages may not add due to rounding.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
----------------------------- -----------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales........................... 89.9 % 87.9 % 89.5 % 87.5 %
Franchise income................................... 10.1 12.1 10.5 12.5
-------------- -------------- -------------- --------------
Total operating revenues........................ 100.0 % 100.0 % 100.0 % 100.0 %
============== ============== ============== ==============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage.................................. 27.5 % 27.4 % 27.4 % 27.5 %
Labor.............................................. 31.4 32.2 31.8 31.8
Direct and occupancy............................... 25.3 24.6 25.2 25.0
Pre-opening expense................................ 0.6 0.7 0.4 0.7
-------------- -------------- -------------- --------------
Total cost of sales............................. 84.7 % 84.9 % 84.8 % 85.0 %
============== ============== ============== ==============
General and administrative expenses..................... 8.5 % 9.8 % 9.0 % 10.1 %
Amortization of intangible assets....................... 0.9 0.7 0.8 0.6
Loss on disposition of restaurants and equipment........ 0.1 0.2 0.2 0.2
-------------- -------------- -------------- --------------
Operating earnings...................................... 14.3 14.7 14.0 14.7
-------------- -------------- -------------- --------------
Other income (expense):
Investment income.................................. 0.1 0.1 0.2 0.4
Interest expense................................... (1.7) (0.3) (1.4) (0.3)
Other income....................................... 0.1 0.1 0.1 0.1
-------------- -------------- -------------- --------------
Total other income (expense).................... (1.5) (0.1) (1.2) 0.2
-------------- -------------- -------------- --------------
Earnings before income taxes and extraordinary item..... 12.8 14.6 12.9 14.8
Income taxes............................................ 4.8 5.5 4.8 5.5
-------------- -------------- -------------- --------------
Earnings before extraordinary item...................... 8.0 9.2 8.1 9.3
Extraordinary loss from early extinguishment of
debt, net of income taxes.......................... -- -- (0.1) --
-------------- -------------- -------------- --------------
Net earnings............................................ 8.0 % 9.2 % 7.9 % 9.3 %
============== ============== ============== ==============
</TABLE>
14
<PAGE>
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Number of restaurants:
Applebee's:
Company(1):
Beginning of period........................... 224 166 190 148
Restaurant openings........................... 12 7 20 15
Restaurants acquired from franchisees......... -- -- 33 11
Restaurants acquired by franchisees........... -- -- (6) --
Restaurant closings........................... -- -- (1) (1)
--------------- --------------- --------------- ---------------
End of period................................. 236 173 236 173
--------------- --------------- --------------- ---------------
Franchise:
Beginning of period........................... 780 706 770 671
Restaurant openings........................... 20 30 60 77
Restaurants acquired from franchisees......... -- -- (33) (11)
Restaurants acquired by franchisees........... -- -- 6 --
Restaurant closings........................... (3) (1) (6) (2)
--------------- --------------- --------------- ---------------
End of period................................. 797 735 797 735
--------------- --------------- --------------- ---------------
Total Applebee's:
Beginning of period........................... 1,004 872 960 819
Restaurant openings........................... 32 37 80 92
Restaurant closings........................... (3) (1) (7) (3)
--------------- --------------- --------------- ---------------
End of period................................. 1,033 908 1,033 908
=============== =============== =============== ===============
Rio Bravo Cantinas:
Company:
Beginning of period........................... 35 27 31 21
Restaurant openings........................... 2 2 6 8
--------------- --------------- --------------- ---------------
End of period................................. 37 29 37 29
--------------- --------------- --------------- ---------------
Franchise:
Beginning of period........................... 26 18 24 9
Restaurant openings........................... 1 5 3 14
Restaurant closings........................... (2) -- (2) --
--------------- --------------- --------------- ---------------
End of period................................. 25 23 25 23
--------------- --------------- --------------- ---------------
Total Rio Bravo Cantinas:
Beginning of period........................... 61 45 55 30
Restaurant openings........................... 3 7 9 22
Restaurant closings........................... (2) -- (2) --
--------------- --------------- --------------- ---------------
End of period................................. 62 52 62 52
=============== =============== =============== ===============
Specialty Restaurants.................................. 4 4 4 4
=============== =============== =============== ===============
Total number of restaurants:
Beginning of period........................... 1,069 921 1,019 853
Restaurant openings........................... 35 44 89 114
Restaurant closings........................... (5) (1) (9) (3)
--------------- --------------- --------------- ---------------
End of period................................. 1,099 964 1,099 964
=============== =============== =============== ===============
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Weighted average weekly sales per restaurant:
Applebee's:
Company(1)................................... $ 41,088 $ 41,476 $ 41,357 $ 41,705
Franchise.................................... $ 39,148 $ 39,428 $ 39,693 $ 40,294
Total Applebee's............................. $ 39,588 $ 39,818 $ 40,055 $ 40,556
Rio Bravo Cantinas:
Company(2)................................... $ 52,834 $ 62,123 $ 55,581 $ 64,241
Franchise.................................... $ 42,780 $ 51,269 $ 43,353 $ 52,685
Total Rio Bravo Cantinas..................... $ 48,489 $ 57,494 $ 50,135 $ 59,744
Change in comparable restaurant sales:(3)
Applebee's:
Company(1)................................... 0.4 % (0.8)% (0.5)% 0.2 %
Franchise.................................... 0.1 % (0.6)% (0.4)% 1.0 %
Total Applebee's............................. 0.2 % (0.7)% (0.5)% 0.9 %
Rio Bravo Cantinas (Company)..................... (8.8)% (3.0)% (6.1)% (1.0)%
Total system sales (in thousands):
Applebee's....................................... $ 525,883 $ 460,734 $1,551,459 $1,359,815
Rio Bravo Cantinas............................... 39,169 36,127 115,626 94,473
Specialty restaurants............................ 3,561 3,603 10,921 10,834
------------- --------------- ---------------- ---------------
Total system sales........................... $ 568,613 $ 500,464 $1,678,006 $1,465,122
============= =============== ================ ===============
</TABLE>
- --------
(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.
16
<PAGE>
Company Restaurant Sales. Company restaurant sales for the 1998 and 1997
quarters and the 1998 and 1997 year-to-date periods were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------
September 27, September 28, Increase
1998 1997 (Decrease)
----------------- ----------------- --------------
<S> <C> <C> <C>
Applebee's........................ $ 123,634 $ 91,413 $ 32,221
Rio Bravo Cantinas................ 24,453 22,591 1,862
Specialty restaurants............. 3,561 3,603 (42)
----------------- ----------------- --------------
Total........................ $ 151,648 $ 117,607 $ 34,041
================= ================= ==============
39 Weeks Ended
--------------------------------------------------
September 27, September 28, Increase
1998 1997 (Decrease)
----------------- ----------------- --------------
Applebee's........................ $ 348,519 $ 259,740 $ 88,779
Rio Bravo Cantinas................ 71,795 62,651 9,144
Specialty restaurants............. 10,921 10,834 87
----------------- ----------------- --------------
Total........................ $ 431,235 $ 333,225 $ 98,010
================= ================= ==============
</TABLE>
Total Company restaurant sales increased 29% in both the 1998 quarter and the
1998 year-to-date period. Sales increased 35% and 34% for Applebee's restaurants
in the 1998 quarter and the 1998 year-to-date period, respectively, due
primarily to Company restaurant openings and sales from the 33 Virginia
restaurants acquired in March of 1998. Sales in the 1998 year-to-date period
also increased as a result of the April 1997 acquisition of 11 St. Louis
restaurants. Sales increased 8% and 15% for Rio Bravo Cantina restaurants in the
1998 quarter and the 1998 year-to-date period, respectively, due to Company
restaurant openings.
Comparable restaurant sales at Company Applebee's restaurants increased by 0.4%
and decreased by 0.5% in the 1998 quarter and the 1998 year-to-date period,
respectively. Weighted average weekly sales at Company Applebee's restaurants
decreased 0.9% from $41,476 in the 1997 quarter to $41,088 in the 1998 quarter
and decreased 0.8% from $41,705 in the 1997 year-to-date period to $41,357 in
the 1998 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 1998 fiscal year for Company Applebee's restaurants. 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 and average weekly sales volumes of new
restaurants may result.
Comparable restaurant sales for Company Rio Bravo Cantina restaurants decreased
by 8.8% in the 1998 quarter and 6.1% in the 1998 year-to-date period due
primarily to competition in the Atlanta and Florida markets. Weighted average
weekly sales (excluding one restaurant that is open for dinner only) decreased
from $62,123 in the 1997 quarter to $52,834 in the 1998 quarter and from $64,241
in the 1997 year-to-date period to $55,581 in the 1998 year-to-date period.
Weighted average weekly sales in the 1998 quarter and the 1998 year-to-date
period continue to be impacted by new restaurant openings in new markets, as
well as the addition of a new smaller prototype restaurant during 1997. 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.
17
<PAGE>
Franchise Income. Overall franchise income increased $742,000 (5%) from
$16,260,000 in the 1997 quarter to $17,002,000 in the 1998 quarter and increased
$2,841,000 (6%) from $47,586,000 in the 1997 year-to-date period to $50,427,000
in the 1998 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 1998 quarter and 1998 year-to-date period as compared to
the 1997 quarter and 1997 year-to-date period. Franchise income in both the 1998
quarter and the 1998 year-to-date period was impacted by the acquisition of the
Virginia restaurants in the second quarter of 1998 and the St. Louis restaurants
in the second quarter of 1997.
Cost of Company Restaurant Sales. Food and beverage costs increased slightly
from 27.4% in the 1997 quarter to 27.5% in the 1998 quarter and decreased
slightly from 27.5% in the 1997 year-to-date period to 27.4% in the 1998
year-to-date period. These fluctuations are due to higher dairy costs during the
1998 quarter and changes in Rio Bravo Cantina menu items which were offset by
operational improvements, purchasing efficiencies resulting from the Company's
growth, and the menu price increase implemented in the fourth quarter of 1997.
Beverage sales, as a percentage of Company restaurant sales, declined from 17.4%
and 17.9% in 1997 quarter and the 1997 year-to-date period, respectively to
16.1% and 16.7% in the 1998 quarter and the 1998 year-to-date period,
respectively, which had a negative impact on overall food and beverage costs.
Management believes that the reduction in beverage sales is due in part to the
continuation of the overall trend toward increased awareness of responsible
alcohol consumption.
Labor costs decreased from 32.2% in the 1997 quarter to 31.4% in the 1998
quarter and were 31.8% in both the 1997 year-to-date period and the 1998
year-to-date period. The decrease in the 1998 quarter is due to lower labor
costs in the Virginia restaurants and a decrease in group medical insurance
costs due to favorable claims experience. In addition, labor costs in the 1997
quarter and the 1997 year-to-date period were adversely impacted by the
implementation of the Company's food and menu enhancement initiative in its
Applebee's restaurants during the latter half of 1997. These decreases were
partially offset by continued pressure on both hourly labor and management costs
as a result of increases in the minimum wage, as well as the highly competitive
nature of the restaurant industry.
Direct and occupancy costs increased from 24.6% and 25.0% in the 1997 quarter
and 1997 year-to-date period, respectively, to 25.3% and 25.2% in the 1998
quarter and 1998 year-to-date period, respectively. Such increases were due to
higher levels of advertising expenditures and depreciation expense associated
with new restaurants. These increases were offset, in part, by a decrease in
rent expense, as a percentage of sales, due to a higher proportion of owned
properties in Virginia, as well as a reduction in plateware costs relating to
the Company's 1997 food and menu enhancement initiative in its Applebee's
restaurants.
General and Administrative Expenses. General and administrative expenses
decreased from 9.8% and 10.1% in the 1997 quarter and 1997 year-to-date period,
respectively, to 8.5% and 9.0% in the 1998 quarter and 1998 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 Virginia and St. Louis acquisitions. General and administrative
expenses increased by $1,338,000 (10%) and $4,801,000 (12%) during the 1998
quarter and 1998 year-to-date period, respectively, compared to the 1997 quarter
and 1997 year-to-date period, respectively, due primarily to the costs of
additional personnel associated with the Company's development efforts and
system-wide expansion.
18
<PAGE>
Amortization of Intangible Assets. Amortization of intangible assets increased
in both the 1998 quarter and the 1998 year-to-date period as a result of the
amortization of goodwill related to the St. Louis and Virginia acquisitions.
Investment Income. Investment income in the 1998 year-to-date period decreased
primarily as a result of decreases in cash and cash equivalents and short-term
investments due to capital expenditures and acquisitions.
Interest Expense. Interest expense increased in both the 1998 quarter and the
1998 year-to-date period as a result of interest associated with borrowings
under the Company's $225,000,000 credit facilities and capitalized leases
related to the St. Louis and Virginia acquisitions.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.2% in both the 1998 quarter and 1998 year-to-date period,
compared to 37.4% in the 1997 quarter and 1997 year-to-date period,
respectively. The decrease in the Company's effective tax rate in both the 1998
quarter and the 1998 year-to-date period was due primarily to a reduction in
state income taxes and an increase in credits resulting from FICA taxes on tips.
Extraordinary Item. In connection with the early extinguishment of debt, the
Company paid a prepayment penalty of $930,000 on March 30, 1998. The prepayment
penalty plus the remaining unamortized portion of the related deferred financing
costs of $91,000 is reflected as an extraordinary loss of $641,000, net of
income taxes of $380,000, in the accompanying consolidated statement of earnings
for the 39 weeks ended September 27, 1998.
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 $90,480,000 in fiscal year 1997 (excluding $33,650,000
related to the St. Louis Acquisition and $1,525,000 related to the purchase of
the remaining 50% interest in a joint venture arrangement with the Company's
franchisee in Nevada) and $56,234,000 (excluding $101,749,000 related to the
Virginia Acquisition, including acquisition costs) in the 1998 year-to-date
period. The Company currently expects to open 32 Applebee's restaurants in 1998
(excluding the 33 Applebee's restaurants acquired as part of the Virginia
Acquisition on March 30, 1998) and 30 to 32 Applebee's restaurants in 1999. The
Company also expects to open 9 Rio Bravo Cantina restaurants in 1998 and has not
yet finalized development plans for 1999. In addition to the $101,749,000
relating to the Virginia Acquisition, capital expenditures are expected to be
between $80,000,000 and $85,000,000 in fiscal 1998 and between $75,000,000 and
$80,000,000 in fiscal 1999 primarily for the development of new restaurants,
refurbishments of and capital replacements for existing restaurants, and
enhancements to information systems. 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.
19
<PAGE>
On March 30, 1998, the Company entered into a bank credit agreement that
provides for $225,000,000 in senior secured credit facilities, consisting of an
eight-year senior secured term loan of $125,000,000 and a five-year secured
working capital facility of $100,000,000. The Company also entered into a
five-year $5,000,000 letter of credit facility with another bank. On March 30,
1998, $125,000,000 was borrowed under the term loan facility and $15,000,000 was
borrowed under the working capital facility. The total proceeds were utilized to
fund the Virginia Acquisition (see Note 2) including related transaction fees
and expenses; to repay certain existing indebtedness totaling $37,500,000; to
pay deferred financing costs of $4,000,000; and for working capital needs and
general corporate purposes.
Both the senior term loan and the working capital facility are secured by the
common stock of each of the Company's present and future subsidiaries and all
intercompany debt of the Company and such subsidiaries. In addition, both the
senior term loan and the working capital facility are subject to various
covenants and restrictions which, among other things, require the maintenance of
stipulated fixed charge, interest coverage and leverage ratios, as defined, and
limit additional indebtedness and capital expenditures in excess of specified
amounts. The credit agreement also restricts the amount available for cash
dividends. As long as the working capital facility is in place, cash dividends
are limited to $5,000,000 in any fiscal year. The Company is currently in
compliance with the covenants contained in its credit agreement.
The Company's Board of Directors has approved plans to repurchase up to
$50,000,000 of the Company's common stock, subject to market conditions. The
credit agreement permits up to $50,000,000 to be utilized for such repurchases.
Since December 28, 1997, the Company has repurchased 1,946,000 shares of its
common stock at an aggregate value of $38,904,000.
As of September 27, 1998, the Company held liquid assets totaling $7,135,000,
consisting of cash and cash equivalents of $2,247,000 and short-term investments
of $4,888,000. The working capital deficit increased from $18,534,000 at
December 28, 1997 to $24,772,000 at September 27, 1998 due primarily to the use
of cash and short-term investments for capital expenditures and stock
repurchases. As of September 27, 1998, $5,000,000 was outstanding under the
$100,000,000 working capital facility, and standby letters of credit totaling
$2,727,000 were outstanding under the $5,000,000 letter of credit facility.
The Company believes that its liquid assets and cash generated from operations,
combined with borrowings available under its $225,000,000 senior secured credit
facilities, will provide sufficient funds for its capital requirements for the
foreseeable future.
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.
20
<PAGE>
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 became effective on 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.
Impact of the Year 2000
The Year 2000 will have a broad impact on the business environment in which the
Company operates due to the possibility that many computer systems across all
industries will be unable to process information containing dates beginning in
the Year 2000.
The Company has established a team to assess risk, identify and correct
exposures when possible, and develop contingency plans for Year 2000 compliance
issues. This team has conducted a detailed assessment of its accounting,
finance, operational and other systems in order to identify and address
potential issues relating to the Year 2000. Systems that are not compliant will
be modified or replaced with systems that are Year 2000 compliant. The team is
also responsible for identifying and investigating the Year 2000 readiness of
critical suppliers, franchisees and other third parties and with developing
contingency plans where necessary.
Key systems have been inventoried and assessed for compliance, and detailed
plans are in place for required system modifications or replacements.
Remediation and testing activities are well underway with approximately 70% of
the systems already compliant. The Company expects to be fully compliant by the
third quarter of 1999. Inventories and assessments of non-information technology
("non-IT") systems are in progress and expected to be complete by the end of the
1998 fiscal year. Remediation of substantially all non-IT systems has begun in
the fourth quarter with a mid-year 1999 target completion date. Progress toward
our remediation programs is also monitored by senior management, and
periodically reported to the Company's Board of Directors.
Questionnaires have been sent to substantially all of the Company's suppliers to
obtain reasonable assurance that plans are being developed to address the Year
2000 issue. Risk assessments and contingency plans, where necessary, will be
finalized in the first half of 1999. To the extent that vendors do not provide
the Company with satisfactory evidence of their readiness to handle Year 2000
issues, contingency plans will be developed to obtain qualified replacement
vendors. Information has also been provided to all franchisees regarding the
potential risks associated with Year 2000 compliance.
21
<PAGE>
Contingency plans for Year 2000-related interruptions that are critical to the
ongoing operation of the business are being developed and will include, but not
be limited to, the development of emergency backup and recovery procedures,
remediation of existing systems parallel with installation of new systems,
replacement of electronic applications with manual processes, and identification
of alternate suppliers. All contingency plans are expected to be completed by
the end of the third quarter of 1999. However, no contingency plans are being
developed for the availability of key public services and utilities.
The Company's Year 2000 efforts are ongoing and its overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While the Company anticipates no major interruption of its
business activities, that will be dependent in part, upon the ability of third
parties, particularly franchisees, to be Year 2000 compliant. Although the
Company has implemented the actions described above to address third party
issues, it has no direct ability to influence the compliance actions by such
parties. Accordingly, while the Company believes its actions in this regard
should have the effect of minimizing Year 2000 risks, it is unable to eliminate
them or to estimate the ultimate effect Year 2000 risks will have on the
Company's operating results.
The Company believes that its significant systems are generally Year 2000
compliant, and the costs associated with such compliance have not had, and will
not have, a material impact on the Company's results of operations. This assumes
that the Company will not incur significant Year 2000 related costs on behalf of
its suppliers, franchisees or other third parties.
Forward-Looking Statements
The statements contained herein regarding future sales, operating costs,
restaurant development, capital expenditures and the impact of the Year 2000 are
forward-looking and based on current expectations. There are several risks and
uncertainties that could cause actual results to differ materially from those
described. For a discussion of the principal factors that could cause actual
results to be materially different, refer to the Company's current report on
Form 8-K filed with the Securities and Exchange Commission on February 9, 1998.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 27, 1998, the Company was using assets owned by a former
franchisee in the operation of one restaurant which remains under a purchase
rights agreement that 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 under that agreement and as to
whether the Company had agreed to guarantee the franchisee's debt. Based upon a
then current independent appraisal, the Company offered to settle the dispute
and purchase the assets of the three then existing restaurants 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 lawsuit remains in the discovery phase. 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 such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are filed
as part of this report.
(b) The Company did not file any reports on Form 8-K during the
quarter ended September 27, 1998.
23
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: November 3, 1998 By:/s/ Lloyd L. Hill
---------------------------- ----------------------------------
Lloyd L. Hill
Chief Executive Officer, President
and Chief Operating Officer
Date: November 3, 1998 By:/s/ George D. Shadid
---------------------------- ----------------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: November 3, 1998 By:/s/ Mark A. Peterson
---------------------------- ----------------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
24
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- ------------------------------------------------------------------
27 Financial Data Schedule.
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-27-1998 DEC-28-1997
<PERIOD-END> SEP-27-1998 SEP-28-1997
<CASH> 2,247 6,189
<SECURITIES> 4,888 5,575
<RECEIVABLES> 17,673 15,457
<ALLOWANCES> 1,166 277
<INVENTORY> 4,992 5,665
<CURRENT-ASSETS> 30,528 35,591
<PP&E> 436,649 320,924
<DEPRECIATION> 85,561 61,604
<TOTAL-ASSETS> 494,176 353,612
<CURRENT-LIABILITIES> 55,300 45,362
<BONDS> 139,118 23,660
0 0
0 0
<COMMON> 321 317
<OTHER-SE> 296,422 282,953
<TOTAL-LIABILITY-AND-EQUITY> 494,176 353,612
<SALES> 431,235 333,225
<TOTAL-REVENUES> 481,662 380,811
<CGS> 365,799 283,251
<TOTAL-COSTS> 409,215 321,866
<OTHER-EXPENSES> 4,825 3,084
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 6,902 1,239
<INCOME-PRETAX> 61,993 56,477
<INCOME-TAX> 23,062 21,122
<INCOME-CONTINUING> 38,931 35,355
<DISCONTINUED> 0 0
<EXTRAORDINARY> (641) 0
<CHANGES> 0 0
<NET-INCOME> 38,290 35,355
<EPS-PRIMARY> 1.26 1.13
<EPS-DILUTED> 1.26 1.12
</TABLE>
