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 27, 1999
--------------------------------------------------
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 July 23,
1999 was 28,527,555.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED JUNE 27, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 27, 1999
and December 27, 1998................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks
Ended June 27, 1999 and June 28, 1998................................................ 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 27, 1999......................................................... 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 27, 1999 and June 28, 1998................................................ 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....................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................................... 21
Item 6. Exhibits and Reports on Form 8-K........................................................ 22
Signatures ................................................................................................. 23
Exhibit Index............................................................................................... 24
</TABLE>
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 27, December 27,
1999 1998
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 1,962 $ 1,767
Short-term investments, at market value (amortized cost of $4,432 in 1999
and $4,699 in 1998)......................................................... 4,563 4,879
Receivables (less allowance for bad debts of $1,949 in 1999 and $1,565 in 1998) 17,790 17,159
Inventories.................................................................... 7,169 6,709
Prepaid and other current assets............................................... 4,523 4,395
-------------- -------------
Total current assets........................................................ 36,007 34,909
Property and equipment, net......................................................... 303,910 364,058
Goodwill, net....................................................................... 95,230 99,599
Franchise interest and rights, net.................................................. 3,704 3,959
Other assets........................................................................ 14,960 8,379
-------------- -------------
$ 453,811 $ 510,904
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 2,539 $ 1,666
Accounts payable............................................................... 21,514 17,427
Accrued expenses and other current liabilities................................. 38,867 44,114
Accrued dividends.............................................................. -- 2,659
Accrued income taxes........................................................... 1,908 85
-------------- -------------
Total current liabilities................................................... 64,828 65,951
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion.......................................... 99,765 145,522
Franchise deposits............................................................. 2,035 2,139
Deferred income taxes.......................................................... 969 1,239
-------------- -------------
Total non-current liabilities............................................... 102,769 148,900
-------------- -------------
Total liabilities........................................................... 167,597 214,851
-------------- -------------
Commitments and contingencies (Note 4)
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 32,154,678 shares in 1999 and 32,150,360 shares in 1998.............. 321 321
Additional paid-in capital..................................................... 167,135 163,651
Retained earnings.............................................................. 204,251 182,010
Unrealized gain on short-term investments, net of income taxes................. 83 113
-------------- -------------
371,790 346,095
Treasury stock 3,683,630 shares in 1999 and 2,610,133 shares in 1998, at cost.. (85,576) (50,042)
-------------- -------------
Total stockholders' equity.................................................. 286,214 296,053
-------------- -------------
$ 453,811 $ 510,904
============== =============
</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 27, June 28, June 27, June 28,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 145,832 $ 149,829 $ 307,592 $ 279,587
Franchise income............................ 18,151 16,580 35,691 33,425
----------- ----------- ------------ -----------
Total operating revenues................. 163,983 166,409 343,283 313,012
----------- ----------- ------------ -----------
Cost of Company restaurant sales:
Food and beverage........................... 39,776 40,917 84,541 76,285
Labor....................................... 45,773 47,291 97,559 89,614
Direct and occupancy........................ 36,124 37,191 77,128 70,410
Pre-opening expense......................... 240 527 618 1,008
----------- ----------- ------------ -----------
Total cost of Company restaurant sales... 121,913 125,926 259,846 237,317
----------- ----------- ------------ -----------
General and administrative expenses.............. 14,484 14,564 30,617 29,018
Amortization of intangible assets................ 1,518 1,546 3,051 2,421
Loss on disposition of restaurants and equipment. 215 213 9,503 671
----------- ----------- ------------ -----------
Operating earnings............................... 25,853 24,160 40,266 43,585
----------- ----------- ------------ -----------
Other income (expense):
Investment income........................... 430 394 610 614
Interest expense............................ (2,522) (3,298) (5,577) (4,049)
Other income (expense)...................... (164) 108 4 275
----------- ----------- ------------ -----------
Total other expense...................... (2,256) (2,796) (4,963) (3,160)
----------- ----------- ------------ -----------
Earnings before income taxes and
extraordinary item.......................... 23,597 21,364 35,303 40,425
Income taxes..................................... 8,731 7,947 13,062 15,038
----------- ----------- ------------ -----------
Earnings before extraordinary item............... 14,866 13,417 22,241 25,387
Extraordinary loss from early extinguishment
of debt, net of income taxes................ -- (641) -- (641)
----------- ----------- ------------ -----------
Net earnings..................................... $ 14,866 $ 12,776 $ 22,241 $ 24,746
=========== =========== ============ ===========
Basic earnings per common share:
Basic earnings before extraordinary item.... $ 0.51 $ 0.44 $ 0.76 $ 0.83
Extraordinary item.......................... -- (0.02) -- (0.02)
----------- ----------- ------------ -----------
Basic net earnings per common share.............. $ 0.51 $ 0.42 $ 0.76 $ 0.81
=========== =========== ============ ===========
Diluted earnings per common share:
Diluted earnings before extraordinary item.. $ 0.51 $ 0.44 $ 0.76 $ 0.83
Extraordinary item.......................... -- (0.02) -- (0.02)
----------- ----------- ------------ -----------
Diluted net earnings per common share............ $ 0.51 $ 0.42 $ 0.76 $ 0.81
=========== =========== ============ ===========
Basic weighted average shares outstanding........ 29,070 30,381 29,298 30,496
=========== =========== ============ ===========
Diluted weighted average shares outstanding...... 29,245 30,522 29,451 30,630
=========== =========== ============ ===========
</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 27, 1998........ 32,150,360 $ 321 $ 163,651 $ 182,010 $ 113 $(50,042) $ 296,053
Purchases of treasury stock.... -- -- -- -- -- (36,895) (36,895)
Stock options exercised........ -- -- 2,081 -- -- 1,281 3,362
Shares sold under employee
stock purchase plan.......... -- -- 383 -- -- 75 458
Income tax benefit upon
exercise of stock options.... -- -- 673 -- -- -- 673
Shares issued under 401(k)
plan......................... -- -- 31 -- -- 5 36
Restricted shares awarded under
equity incentive plan........ 4,318 -- 63 -- -- -- 63
Unearned compensation relating
to restricted shares......... -- -- 253 -- -- -- 253
Change in unrealized gain on
short-term investments,
net of income taxes.......... -- -- -- -- (30) -- (30)
Net earnings................... -- -- -- 22,241 -- -- 22,241
------------ ---------- ----------- ----------- ------------- ----------- -------------
Balance, June 27, 1999............ 32,154,678 $ 321 $ 167,135 $ 204,251 $ 83 $(85,576) $ 286,214
============ ========== =========== =========== ============= =========== =============
</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>
26 Weeks Ended
--------------------------------
June 27, June 28,
1999 1998
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 22,241 $ 24,746
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.................................. 14,673 13,457
Amortization of intangible assets.............................. 3,051 2,421
Amortization of deferred financing costs....................... 172 162
Gain on sale of investments.................................... -- (24)
Deferred income tax provision (benefit)........................ (270) (651)
Loss on disposition of restaurants and equipment............... 9,503 671
Changes in assets and liabilities (exclusive of effects of
acquisitions or ..............................................
divestitures):
Receivables.................................................... (801) (1,223)
Inventories.................................................... (1,517) 252
Prepaid and other current assets............................... (226) 846
Accounts payable............................................... 4,087 44
Accrued expenses and other current liabilities................. (7,207) 9,665
Accrued income taxes........................................... 1,823 (5,011)
Franchise deposits............................................. (104) 76
Other.......................................................... (243) 377
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 45,182 45,808
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................... -- (22,834)
Maturities and sales of short-term investments.................... 250 27,345
Purchases of property and equipment............................... (29,335) (29,082)
Acquisitions of restaurants, including acquisition costs.......... -- (101,749)
Proceeds from sale of restaurants and equipment................... 59,015 10,212
------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............... 29,930 (116,108)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock....................................... (36,895) (31,589)
Dividends paid.................................................... (2,659) (2,518)
Issuance of common stock upon exercise of stock options........... 3,362 3,234
Income tax benefit upon exercise of stock options................. 673 937
Shares sold under employee stock purchase plan.................... 458 395
Proceeds from issuance of long-term debt.......................... -- 157,825
Deferred financing costs relating to issuance of long-term debt... -- (4,000)
Payments on long-term debt........................................ (39,856) (54,924)
------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES............... (74,917) 69,360
------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 195 (940)
CASH AND CASH EQUIVALENTS, beginning of period......................... 1,767 8,908
------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 1,962 $ 7,968
============= ==============
</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>
26 Weeks Ended
------------------------------------
June 27, June 28,
1999 1998
---------------- ----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the 26 week period for:
Income taxes........................................................ $ 11,274 $ 19,569
================ ================
Interest............................................................ $ 5,875 $ 2,859
================ ================
</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.
The Company received a $6,000,000 subordinated note in connection with the sale
of the Rio Bravo Cantina restaurants in April 1999 (see Note 3) which is due in
April 2009.
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 27, 1998
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 27,
1998.
The Company believes that all adjustments, consisting only of normal recurring
adjustments (except for the loss on disposition discussed in Note 3), 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. Acquisition
On March 30, 1998, the Company acquired the operations and assets of 33
restaurants in the Virginia markets of Norfolk, Richmond, Roanoke and
Charlottesville, from Apple South, Inc. ("Apple South"), now Avado Brands, Inc.,
referred to herein as the "Virginia Acquisition." 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, and the results of operations of such restaurants
have been reflected in the consolidated financial statements subsequent to the
date of acquisition.
3. Divestitures
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.
In February 1999, the Company entered into an agreement to sell its Rio Bravo
Cantina concept, which was comprised of 65 restaurants, including 40 Company
restaurants and 25 franchised restaurants. The sale was completed on April 12,
1999. The Company received $53 million in consideration ($47 million in cash at
closing and a $6 million long-term subordinated note). In February 1999, the
Company also entered into a separate definitive agreement to sell its four
specialty restaurants for $12 million in cash. This sale was completed on April
26, 1999. Total Company restaurant sales, franchise income and cost of Company
restaurant sales for the 1999 period prior to divestiture were $33,444,000,
$26,000 and $30,331,000, respectively, for both the Rio Bravo Cantina and
specialty restaurants.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company recorded a loss on disposition of $9,000,000
($5,670,000 net of income taxes) in the quarter ended March 28, 1999 to reflect
the difference between the carrying value of the net assets to be disposed of
and the estimated proceeds from the sale transactions. Depreciation and
amortization on the long-lived assets to be disposed was discontinued in
February 1999 in anticipation of the sale of these restaurants.
8
<PAGE>
4. Commitments and Contingencies
Litigation, claims and disputes: As of June 27, 1999, 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. In late April 1999, a summary judgment of
$3,833,000 was awarded to the third party. The Company has filed an appeal and
believes it has meritorious defenses. As of June 27, 1999, the Company believes
it has recorded adequate reserves for this matter.
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 June 27, 1999, approximately $49,000,000
had been funded through this financing source, of which $13,000,000 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.
Lease guaranties: In connection with the sale of restaurants to franchisees and
other parties, the Company has, in certain cases, remained contingently liable
for the remaining lease payments. As of June 27, 1999, the aggregate amount of
these contingent lease payments totaled approximately $24,200,000. The Company
has been indemnified by the buyers from any losses related to such guaranties.
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 27, 1999, the
Company would have been required to make payments aggregating approximately
$5,500,000. 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 $3,100,000 if such officers had been terminated as of June 27,
1999.
9
<PAGE>
Apple South divestiture: In May 1999, Apple South completed the divestiture of
all of its restaurants. In connection with the divestiture, the Company has
provided guarantees to two franchise groups totaling $1,500,000 of which
$535,000 remains outstanding as of June 27, 1999. Two principals of one of the
franchise groups are related to a director and officer of the Company.
5. Financing
In connection with the sale of the Rio Bravo Cantina and specialty restaurants,
the Company repaid $31,000,000 of its senior term loan during the second quarter
of 1999. In addition, during the second quarter, the Company entered into a
$3,000,000 unsecured line of credit facility with another bank.
6. 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. 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 26 Weeks Ended
------------------------------- -------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings......................................... $ 14,866 $ 12,776 $ 22,241 $ 24,746
=============== =============== =============== ===============
Basic weighted average shares outstanding............ 29,070 30,381 29,298 30,496
Dilutive effect of stock options..................... 175 141 153 134
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding.......... 29,245 30,522 29,451 30,630
=============== =============== =============== ===============
Basic net earnings per common share.................. $ 0.51 $ 0.42 $ 0.76 $ 0.81
=============== =============== =============== ===============
Diluted net earnings per common share................ $ 0.51 $ 0.42 $ 0.76 $ 0.81
=============== =============== =============== ===============
</TABLE>
7. New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 for each Applebee's restaurant opened). Beverage sales include sales of
alcoholic beverages, while non-alcoholic beverages are included in food sales.
Certain expenses (food and beverage, labor, direct and occupancy costs, and
pre-opening expenses) relate directly to Company restaurants, and other expenses
(general and administrative and amortization expenses) relate to both Company
restaurants and franchise operations.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal quarters ended June 27, 1999 and June 28, 1998
each contained 13 weeks, and are referred to hereafter as the "1999 quarter" and
the "1998 quarter," respectively. The 26 week periods ended June 27, 1999 and
June 28, 1998 are referred to hereafter as the "1999 year-to-date period" and
the "1998 year-to-date period," respectively.
On March 30, 1998, the Company acquired the operations and assets of 33
restaurants in the Virginia markets of Norfolk, Richmond, Roanoke and
Charlottesville, referred to herein as the "Virginia Acquisition." The Virginia
Acquisition was accounted for as a purchase in the second quarter of 1998 and,
accordingly, the results of operations of such restaurants have been reflected
in the consolidated financial statements subsequent to the date of acquisition.
In February 1999, the Company entered into an agreement to sell its Rio Bravo
Cantina concept, which was comprised of 65 restaurants, including 40 Company
restaurants and 25 franchised restaurants. The sale was completed on April 12,
1999. The Company received $53 million in consideration ($47 million in cash at
closing and a $6 million subordinated note). In February 1999, the Company also
entered into a separate definitive agreement to sell its four specialty
restaurants for $12 million in cash. This sale was completed on April 26, 1999.
The two sale transactions and related expenses resulted in a loss on disposition
of $9,000,000 before income taxes ($5,670,000 net of income taxes), which was
recorded in the first quarter of 1999. Total Company restaurant sales, franchise
income and cost of Company restaurant sales for the 1999 period prior to
divestiture were $33,444,000, $26,000 and $30,331,000, respectively, for both
the Rio Bravo Cantina and specialty restaurants.
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 27, June 28, June 27, June 28,
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales................................ 88.9% 90.0% 89.6% 89.3%
Franchise income........................................ 11.1 10.0 10.4 10.7
------------ ------------ ------------ -------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============ =============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage....................................... 27.3% 27.3% 27.5% 27.3%
Labor................................................... 31.4 31.6 31.7 32.1
Direct and occupancy.................................... 24.8 24.8 25.1 25.2
Pre-opening expense..................................... 0.2 0.4 0.2 0.4
------------ ------------ ------------ -------------
Total cost of sales.................................. 83.6% 84.0% 84.5% 84.9%
============ ============ ============ =============
General and administrative expenses.......................... 8.8% 8.8% 8.9% 9.3%
Amortization of intangible assets............................ 0.9 0.9 0.9 0.8
Loss on disposition of restaurants and equipment............. 0.1 0.1 2.8 0.2
------------ ------------ ------------ -------------
Operating earnings........................................... 15.8 14.5 11.7 13.9
------------ ------------ ------------ -------------
Other income (expense):
Investment income....................................... 0.3 0.2 0.2 0.2
Interest expense........................................ (1.5) (2.0) (1.6) (1.3)
Other income (expense).................................. (0.1) 0.1 -- 0.1
------------ ------------ ------------ -------------
Total other expense.................................. (1.4) (1.7) (1.4) (1.0)
------------ ------------ ------------ -------------
Earnings before income taxes and
extraordinary item...................................... 14.4 12.8 10.3 12.9
Income taxes................................................. 5.3 4.8 3.8 4.8
------------ ------------ ------------ -------------
Earnings before extraordinary item........................... 9.1 8.1 6.5 8.1
Extraordinary loss from early extinguishment of
debt, net of income taxes............................... -- (0.4) -- (0.2)
------------ ------------ ------------ -------------
Net earnings................................................. 9.1% 7.7% 6.5% 7.9%
============ ============ ============ =============
</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 27, June 28, June 27, June 28,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Number of restaurants:
Applebee's:
Company(1):
Beginning of period........................... 254 195 247 190
Restaurant openings........................... 3 3 10 8
Restaurants acquired from franchisees......... -- 33 -- 33
Restaurants acquired by franchisees........... -- (6) -- (6)
Restaurant closings........................... -- (1) -- (1)
------------- ------------- -------------- -------------
End of period................................. 257 224 257 224
------------- ------------- -------------- -------------
Franchise:
Beginning of period........................... 837 784 817 770
Restaurant openings........................... 13 25 33 40
Restaurants acquired from franchisees......... -- (33) -- (33)
Restaurants acquired by franchisees........... -- 6 -- 6
Restaurant closings........................... (1) (2) (1) (3)
------------- ------------- -------------- -------------
End of period................................. 849 780 849 780
------------- ------------- -------------- -------------
Total Applebee's:
Beginning of period........................... 1,091 979 1,064 960
Restaurant openings........................... 16 28 43 48
Restaurant closings........................... (1) (3) (1) (4)
------------- ------------- -------------- -------------
End of period................................. 1,106 1,004 1,106 1,004
============= ============= ============== =============
Rio Bravo Cantinas:
Company:
Beginning of period........................... 40 32 40 31
Restaurant openings........................... -- 3 -- 4
Restaurants divested.......................... (40) -- (40) --
------------- ------------- -------------- -------------
End of period................................. -- 35 -- 35
------------- ------------- -------------- -------------
Franchise:
Beginning of period........................... 25 26 26 24
Restaurant openings........................... -- -- -- 2
Restaurant closings........................... -- -- (1) --
Restaurants divested.......................... (25) -- (25) --
------------- ------------- -------------- -------------
End of period................................. -- 26 -- 26
------------- ------------- -------------- -------------
Total Rio Bravo Cantinas:
Beginning of period........................... 65 58 66 55
Restaurant openings........................... -- 3 -- 6
Restaurant closings........................... -- -- (1) --
Restaurants divested.......................... (65) -- (65) --
------------- ------------- -------------- -------------
End of period................................. -- 61 -- 61
============= ============= ============== =============
Specialty Restaurants.................................. -- 4 -- 4
============= ============= ============== =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
------------------------------ -------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Total number of restaurants:
Beginning of period.......................... 1,160 1,041 1,134 1,019
Restaurant openings.......................... 16 31 43 54
Restaurant closings.......................... (1) (3) (2) (4)
Restaurants divested......................... (69) -- (69) --
-------------- -------------- --------------- --------------
End of period................................ 1,106 1,069 1,106 1,069
============== ============== =============== ==============
Weighted average weekly sales per restaurant:
Applebee's:
Company(1)................................... $ 42,375 $ 41,670 $ 41,639 $ 41,507
Franchise.................................... $ 41,226 $ 40,132 $ 40,577 $ 39,973
Total Applebee's............................. $ 41,493 $ 40,480 $ 40,824 $ 40,299
Change in comparable restaurant sales:(2)
Applebee's:
Company(1)................................... 3.6% (1.3)% 2.5% (1.0)%
Franchise.................................... 2.3% (1.2)% 1.3% (0.7)%
Total Applebee's............................. 2.6% (1.2)% 1.6% (0.8)%
Total system sales (in thousands):
Applebee's....................................... $ 593,143 $ 520,896 $ 1,155,893 $ 1,025,577
Rio Bravo Cantinas............................... 5,890 39,819 42,661 76,457
Specialty restaurants............................ 1,140 3,723 4,806 7,360
-------------- -------------- --------------- --------------
Total system sales........................... $ 600,173 $ 564,438 $ 1,203,360 $ 1,109,394
============== ============== =============== ==============
</TABLE>
- --------
(1) Includes one Texas restaurant operated by the Company under a management
agreement since July 1990.
(2) When computing comparable restaurant sales,restaurants open for at least
18 months are compared from period to period.
14
<PAGE>
Company Restaurant Sales. Company restaurant sales for the 1999 and 1998
quarters and the 1999 and 1998 year-to-date periods were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
------------------------------------------------
June 27, June 28, Increase
1999 1998 (Decrease)
-------------- -------------- ----------------
<S> <C> <C> <C>
Applebee's........................ $ 140,728 $ 121,384 $ 19,344
Rio Bravo Cantinas................ 3,964 24,722 (20,758)
Specialty restaurants............. 1,140 3,723 (2,583)
-------------- -------------- ----------------
Total........................ $ 145,832 $ 149,829 $ (3,997)
============== ============== ================
26 Weeks Ended
------------------------------------------------
June 27, June 28, Increase
1999 1998 (Decrease)
-------------- -------------- ----------------
Applebee's........................ $ 274,148 $ 224,885 $ 49,263
Rio Bravo Cantinas................ 28,638 47,342 (18,704)
Specialty restaurants............. 4,806 7,360 (2,554)
-------------- -------------- ----------------
Total........................ $ 307,592 $ 279,587 $ 28,005
============== ============== ================
</TABLE>
Total Company restaurant sales decreased 3% in the 1999 quarter due to the sale
of the Rio Bravo Cantina and specialty restaurants in April 1999. Total Company
restaurant sales increased 10% in the 1999 year-to-date period. Sales increased
16% and 22% for Applebee's restaurants in the 1999 quarter and the 1999
year-to-date period, respectively, due to Company restaurant openings and
increases in comparable restaurant sales. Sales in the 1999 year-to-date period
also increased as a result of the March 1998 acquisition of 33 Applebee's
restaurants in Virginia, offset by the decrease in sales resulting from the
divestiture of the Rio Bravo Cantina and specialty restaurants.
Comparable restaurant sales at Company Applebee's restaurants increased by 3.6%
and 2.5% in the 1999 quarter and the 1999 year-to-date period, respectively.
Weighted average weekly sales at Company Applebee's restaurants increased 1.7%
from $41,670 in the 1998 quarter to $42,375 in the 1999 quarter and increased
0.3% from $41,507 in the 1998 year-to-date period to $41,639 in the 1999
year-to-date period. These increases were due primarily to increased customer
traffic as a result of the success of the Company's food promotions.
Franchise Income. Overall franchise income increased $1,571,000 (9%) from
$16,580,000 in the 1998 quarter to $18,151,000 in the 1999 quarter and increased
$2,266,000 (7%) from $33,425,000 in the 1998 year-to-date period to $35,691,000
in the 1999 year-to-date period. Such increases were due primarily to the
increased number of franchise Applebee's restaurants operating during the 1999
quarter and 1999 year-to-date period. Successful system-wide food promotions
also contributed to increases of 2.7% and 1.5% in weighted average weekly sales
and 2.3% and 1.3% in comparable franchise restaurant sales in the 1999 quarter
and 1999 year-to-date period, respectively. Franchise income in the 1999
year-to-date period was affected by a decrease in royalties as a result of the
Virginia Acquisition in March 1998. In addition, the waiver of royalties related
to the Rio Bravo Cantina restaurants and the sale of the concept during the 1999
quarter reduced franchise income in both the 1999 quarter and the 1999
year-to-date period.
15
<PAGE>
Cost of Company Restaurant Sales. Food and beverage costs were 27.3% in both the
1998 quarter and the 1999 quarter and increased from 27.3% in the 1998
year-to-date period to 27.5% in the 1999 quarter and year-to-date period due
primarily to the higher usage of beef relating to Applebee's menu promotions
during the 1999 year-to-date period. In addition, beverage sales, as a
percentage of Company restaurant sales, declined from 16.8% and 17.0% in the
1998 quarter and the 1998 year-to-date period, respectively to 13.8% and 15.0%
in the 1999 quarter and the 1999 year-to-date period, respectively, which had a
negative impact on overall food and beverage costs. The decrease in beverage
sales was due, in part to the sale of the Rio Bravo restaurants, which had a
higher proportion of beverage sales. In addition, beverage sales at both
Applebee's and Rio Bravo restaurants continued to decline. Management believes
that the reduction in beverage sales is due in part to the continuation of the
overall trend toward increased awareness of responsible alcohol consumption.
Labor costs decreased from 31.6% in the 1998 quarter to 31.4% in the 1999
quarter and decreased from 32.1% in the 1998 year-to-date period to 31.7% in the
1999 year-to-date period. The decrease in the 1999 year-to-date period was due
primarily to lower labor costs in the Virginia restaurants. In addition, labor
costs in the 1999 quarter and the 1999 year-to-date period decreased due to a
decrease in management costs as a percentage of sales due to increased sales
volumes in Applebee's restaurants. 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, and higher labor costs experienced at the Rio Bravo Cantina
restaurants due to the significant decline in sales volumes in the 1999 period
prior to the divestiture.
Direct and occupancy costs were 24.8% in both the 1998 quarter and the 1999
quarter and decreased slightly from 25.2% in the 1998 year-to-date period to
25.1% in the 1999 year-to-date period. Rent expense, as a percentage of sales,
declined in both the 1999 quarter and 1999 year-to-date period due to a higher
proportion of owned properties resulting from the Virginia Acquisition. In
addition, depreciation expense, as a percentage of sales, decreased as the
Company discontinued depreciation of the Rio Bravo Cantina and specialty
restaurants at the time the agreement to sell the restaurants was reached in
February 1999. These decreases were offset by an increase in depreciation
expense associated with new restaurants in the 1999 quarter and the 1999 year-to
date period.
General and Administrative Expenses. General and administrative expenses were
8.8% in both the 1998 quarter and 1999 quarter and decreased from 9.3% in the
1998 year-to-date period to 8.9% in the 1999 year-to-date period. The decrease
in the 1999 year-to-date period was 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 Acquisition. The Company expects
general and administrative expenses, as a percentage of total revenues, to
increase slightly in the future due to the lower revenue base resulting from the
divestiture of the Rio Bravo Cantina and specialty restaurants.
Amortization of Intangible Assets. Amortization of intangible assets increased
in the 1999 year-to-date period as a result of the amortization of goodwill
related to the Virginia Acquisition.
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment increased from $671,000 in the 1998 year-to-date
period to $9,503,000 in the 1999 year-to-date period due primarily to the loss
on the disposition of the Rio Bravo Cantina and specialty restaurants of
$9,000,000 which was recorded in the first quarter of 1999.
Interest Expense. Interest expense decreased in the 1999 quarter primarily as a
result of a $31,000,000 senior term loan payment related to the sale of the Rio
Bravo Cantina and specialty restaurants. Interest expense increased in the 1999
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
Virginia Acquisition.
16
<PAGE>
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.0% in both the 1999 quarter and 1999 year-to-date period,
compared to 37.2% in both the 1998 quarter and 1998 year-to-date period. The
decrease in the Company's effective tax rate in both the 1999 quarter and the
1999 year-to-date period was due primarily to an increase in credits resulting
from FICA taxes on tips.
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 $77,665,000 in fiscal year 1998 (excluding
$101,749,000 related to the Virginia Acquisition, including acquisition costs)
and $29,335,000 in the 1999 year-to-date period. The Company currently expects
to open 28 Applebee's restaurants in 1999. Capital expenditures are expected to
total between $60,000,000 and $65,000,000 for fiscal 1999 primarily for the
development of new restaurants, refurbishments of and capital replacements for
existing restaurants, and enhancements to information systems. The decrease in
capital expenditures in fiscal 1999 is a result of a reduction in the number of
Company Applebee's restaurants to be opened in 1999 and the divestiture of the
Rio Bravo Cantina restaurants. 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.
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 has entered into a
five-year $5,000,000 letter of credit facility and a $3,000,000 unsecured line
of credit facility with another bank. 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. Cash dividends are limited
to $5,000,000 through fiscal year 1999. The credit agreement originally
permitted up to $50,000,000 to be utilized for repurchases of the Company's
common stock. In February 1999, the credit agreement was amended to permit
additional repurchases of common stock of up to $100,000,000 and to allow annual
cash dividends of the greater of $5,000,000 or 50% of consolidated net income
beginning in fiscal year 2000. The Company is currently in compliance with the
covenants contained in its credit agreement.
In February 1999, the Company's Board of Directors approved plans to repurchase
up to an additional $100,000,000 of the Company's common stock over a two-year
period, subject to market conditions. During the 1999 year-to-date period, the
Company repurchased 1,292,500 shares of its common stock at an aggregate cost of
$36,895,000.
As of June 27, 1999, the Company held liquid assets totaling $6,525,000,
consisting of cash and cash equivalents of $1,962,000 and short-term investments
of $4,563,000. The working capital deficit decreased from $31,042,000 at
December 27, 1998 to a deficit of $28,821,000 at June 27, 1999 due primarily to
the elimination of the working capital deficit attributable to the Rio Bravo and
specialty restaurants. As of June 27, 1999, $3,000,000 was outstanding under the
$100,000,000 working capital facility, $1,100,000 was outstanding under the
$3,000,000 line of credit with another bank and standby letters of credit
totaling $3,417,000 were outstanding under the $5,000,000 letter of credit
facility.
17
<PAGE>
The Company believes that its liquid assets and cash generated from operations,
combined with borrowings available under its credit facilities, will provide
sufficient funds for its operating, capital and other 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.
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. 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 June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for the Company for
periods beginning in fiscal year 2001. The Company believes that the adoption of
the provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
18
<PAGE>
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 for 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 75% of
the systems already compliant. The Company expects to be fully compliant by the
end of the third quarter of 1999. Inventories and assessments of non-information
technology ("non-IT") systems were completed during 1998. Remediation of
substantially all non-IT systems began in the fourth quarter of 1998 with a
mid-year 1999 target completion date. Progress toward 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 third quarter 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.
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
outside 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.
19
<PAGE>
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. The estimated total cost of
the Company's Year 2000 efforts is approximately $1,300,000. The total amount
expended through fiscal year 1998 was approximately $200,000, and the estimated
costs to be incurred in fiscal year 1999 are approximately $1,100,000. These
amounts include the costs of external consultants, the purchase of software and
hardware, and the compensation of internal employees working on Year 2000
projects. All estimated costs have been budgeted and are expected to be funded
by cash flows from operations.
Forward-Looking Statements
The statements contained herein regarding 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 23, 1999.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 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. The working capital facility bears interest at either the bank's prime
rate plus 0.125% or LIBOR plus 1.125%, at the Company's option. The interest
rate on the working capital facility is subject to change based upon the
Company's leverage ratio.
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 $85,000,000 for
three-month LIBOR rates ranging from 5.91% to 6.05%.
As of June 27, 1999, the total amount of debt subject to interest rate
fluctuations was $11,904,000 ($7,750,000 under the term loan, $3,000,000 under
the revolving credit facility and $1,154,000 under the line of credit facility
with another bank). A 1% change in interest rates would result in an increase or
decrease in interest expense of $119,000 per year.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 27, 1999, 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. In late
April 1999, a summary judgment of $3,833,000 was awarded to the third party. The
Company has filed an appeal and believes it has meritorious defenses. As of June
27, 1999, the Company believes it has recorded adequate reserves for this
matter.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 13, 1999. The
following matters were submitted to a vote of the Stockholders:
Proposal I. It was proposed that Erline Belton, Eric L.
Hansen and Mark S. Hansen be elected as directors
to serve a three-year term expiring in 2002 and
that the appointment of George D. Shadid as a
director be ratified with a term expiring in 2000.
Proposal II. Amendment of the Company's 1995 Equity Incentive
Plan to increase the number of shares available
for awards by 1,300,000 and to change the
formula by which stock options are granted annually
to non-employee directors.
Proposal III. Approval of the Company's 1999 Management and
Executive Incentive Plan.
Proposal IV. Ratification of Deloitte & Touche LLP as
independent auditors for the Company for the 1999
fiscal year.
21
<PAGE>
<TABLE>
<CAPTION>
The results of the voting on the foregoing matters were as follows:
Broker Non-
Proposal Affirmative Votes Negative Votes Abstentions Votes
- --------------------- ------------------ -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
I (Belton) 22,831,387 547,339 -- 44
I (E. Hansen) 22,831,912 546,814 -- 44
I (M. Hansen) 22,832,092 546,634 -- 44
I (Shadid) 22,832,112 546,614 -- 44
II 18,082,149 4,789,568 195,639 311,414
III 19,449,887 3,854,224 74,551 108
IV 23,291,056 48,160 39,451 103
</TABLE>
Since each Proposal required the affirmative votes of 11,689,386 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 filed a report on Form 8-K on April 27, 1999
announcing the completion of the sale of the Rio Bravo Cantina
and specialty restaurants.
22
<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 28, 1999 By: /s/ Lloyd L. Hill
--------------------- ------------------------
Lloyd L. Hill
Chief Executive Officer, President and
Chief Operating Officer
Date: July 28, 1999 By: /s/ George D. Shadid
--------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: July 28, 1999 By: /s/ Mark A. Peterson
--------------------- ----------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
23
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- ------------------------------------------------------------------
4.1 Amendment dated May 13, 1999 to Shareholder Rights Plan contained
in Rights Agreement dated as of September 7, 1994, between
Applebee's International, Inc. and Chemical Bank, as Rights Agent.
10.1 Amendments to 1995 Equity Incentive Plan.
27 Financial Data Schedule.
24
FIRST AMENDMENT TO RIGHTS AGREEMENT
This First Amendment to Rights Agreement (the "Amendment"), dated as of
May 13, 1999, is entered into by and between Applebee's International, Inc., a
Delaware corporation (the "Company") and The Chase Manhatten Bank (formerly
known as Chemical Bank) as successor Rights Agent (the "Rights Agent").
WHEREAS, the Company and the Rights Agent are parties to that certain
Rights Agreement dated as of September 7, 1994 (the "Rights Agreement");
WHEREAS, the Rights Agreement contains terms restricting the ability of
the Company's Board of Directors to amend the Rights Agreement or redeem the
Rights issued thereunder under certain circumstances;
WHEREAS, the Board of Directors of the Company has determined that it
is in the best interests of the Company and its stockholders to amend the Rights
Agreement to remove such terms as set forth herein and the Rights Agent has
agreed to the Amendment of the Rights Agreement as set forth herein;
WHEREAS, pursuant to Section 26 of the Rights Agreement, the Rights
Agreement may be amended as set forth herein without the approval of the holders
of the Rights;
WHEREAS, unless otherwise defined in this Amendment, capitalized terms
used herein shall have the meanings given to them in the Rights Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements herein set forth, the Company and the Rights Agent agree as follows:
1. Amendment of Rights Agreement. Effective as of the date hereof,
(a) Section 1 is amended so that the last sentence of the definition of
"Acquiring Person" shall read as follows:
"For purposes of this definition, the determination
whether any Person acted in `good faith' shall be
conclusively determined by the Board of Directors of
the Company."
(b) Section 3(d) is amended by deleting the phrase "Chemical Bank" and
substituting the following phrase therefor "The Chase Manhatten Bank (formerly
known as Chemical Bank)."
(c) The proviso at the end of Section 24(a) is deleted such that
Section 24(a) shall read in its entirety as follows:
1
<PAGE>
SECTION 24. Redemption and Termination. (a) The Board
of Directors of the Company may, at its option, at
any time prior to the earlier of (i) such time as a
Person becomes an Acquiring Person and (ii) the
Expiration Date, order the redemption of all, but not
fewer than all, the then outstanding Rights at the
Redemption Price (the date of such redemption being
the "Redemption Date"), and the Company, at its
option, may pay the Redemption Price either in cash
or Common Shares or other securities of the Company
deemed by the Board of Directors of the Company, in
the exercise of its sole discretion, to be at least
equivalent in value to the Redemption Price, subject
to any limitations contained herein on the right to
redeem outstanding Rights (including the occurrence
of any event or the expiration of any period after
which the Rights may no longer be redeemed).
(d) Section 25 is amended by deleting the phrase "Chemical Bank" and
substituting the following phrase therefor "The Chase Manhatten Bank."
(e) Section 26 is amended as follows:
(i) The second to last sentence of Section 26 is deleted.
(ii) The last sentence of Section 26 is deleted and replaced with
the following:
"Notwithstanding anything to the contrary
contained in this Rights Agreement, no
supplement or amendment to this Rights
Agreement shall be made which (a) reduces
the Redemption Price (except as required by
Section 12(a)) or (b) provides for an
earlier Expiration Date."
2. Rights Agreement in Full Force and Effect. Except as amended hereby,
the Rights Agreement shall remain in full force and effect.
3. Governing Law. This Amendment shall be deemed to be a contract made
under the laws of the State of Delaware and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State.
4. Counterparts. This Amendment may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
APPLEBEE'S INTERNATIONAL, INC.
By: /s/ Lloyd L. Hill
-------------------
Title: President/CEO
THE CHASE MANHATTEN BANK (formerly known as CHEMICAL BANK),
as successor Rights Agent
By: /s/ Eric R. Leason
------------------
Title: Vice President
3
Amendments to
1995 Equity Incentive Plan
Section 4.1 of the Plan shall be amended so that the number of shares
authorized under the Plan is increased to 3,600,000 shares.
Note: The following amendments will be effective for options granted in
1999, so that the first Measurement Year will be 1998 and the first base year
will be 1997.
Section 9 of the Plan shall be amended as follows:
SECTION 9
DIRECTOR OPTIONS
The provisions of this Section 9 are applicable only to Options granted
to Nonemployee Directors. The provisions of Section 5 are applicable to Options
granted to Employees and Consultants (and to the extent provided in Section
9.2.6, to Director Options).
9.1 Granting of Options.
9.1.1 Nonemployee Director Grants. Each Nonemployee Director
shall receive an annual grant of Director Options to purchase 5,000
shares of Stock. Such amount would automatically increase if Earnings
Per Share for the Fiscal Year immediately preceding the year in which
the director option is granted (the "Measurement Year") exceeded the
Earnings Per Share for the Fiscal Year immediately preceding the
Measurement Year by more than 15%. The Board of Directors will
determine the formula by which the base grant would increase each year.
In no event shall the number of Director Options granted to each
Nonemployee Director in any Fiscal Year exceed 9,000 shares.
9.1.2 Employee Director Grants. Employee Directors shall only
receive Options in their capacity as Employees and not in their
capacity as Directors.
9.1.3 Date of Grant. All Director Options shall be granted at
the annual meeting of the Board.
9.2 Terms of Options.
9.2.1 Option Agreement. Each Option granted pursuant to this
Section 9 shall be evidenced by a written stock option agreement which
shall be executed by the Optionee and the Company.
1
<PAGE>
9.2.2 Exercise Price. The Exercise Price for the Shares
subject to each Option granted pursuant to this Section 9 shall be 100%
of the Fair Market Value of such Shares on the Grant Date.
9.2.3 Exercisability. Each Option granted pursuant to Section
9.1.1 shall become immediately exercisable on the first anniversary of
the Grant Date. Notwithstanding the preceding, once an optionee ceases
to be a Director, his or her Options which are not exercisable shall
not become exercisable thereafter.
9.2.4 Expiration of Options. Each Option shall terminate upon
the first to occur of the following events:
(a) The expiration of ten (10) years from the Grant Date;
or
(b) The expiration of one (1) year from the date of the
Optionee's termination of service as a Director for any reason.
9.2.5 Not Incentive Stock Options. Options granted pursuant to
this Section 9 shall not be designated as Incentive Stock Options.
9.2.6 Other Terms. All provisions of this Plan not
inconsistent with this Section 9 shall apply to Options granted to
Nonemployee Directors; provided, however, that Section 5.2 (relating to
the Committee's discretion to set the terms and conditions of Options)
shall be inapplicable with respect to Nonemployee Directors.
* * * * *
The definition of "Earnings Per Share" under the Plan shall be amended
to read as follows:
"Earnings Per Share" means as to any Fiscal Year, the Company's Net
Income or a business unit's Pro Forma Net Income, divided by the weighted
average number of Shares outstanding for such Fiscal Year (basic Earnings Per
Share as opposed to diluted Earnings Per Share), rounded to the nearest cent
($0.01). The weighted average number of shares outstanding for any Fiscal Year
will be determined by disregarding any stock repurchases by the Company and the
Net Income or Pro Forma Net Income will be adjusted to reflect the net impact of
any debt service attributable to funds borrowed to effect any stock repurchases.
For these purposes, all funds used to effect stock repurchases will be deemed to
have been borrowed, and at an interest rate equal to the lowest cost of the
Company's then existing borrowed funds."
2
<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 27, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-26-1999 DEC-27-1998
<PERIOD-END> JUN-27-1999 JUN-28-1998
<CASH> 1,962 7,968
<SECURITIES> 4,563 6,403
<RECEIVABLES> 19,739 18,533
<ALLOWANCES> 1,949 920
<INVENTORY> 7,169 5,025
<CURRENT-ASSETS> 36,007 39,879
<PP&E> 387,398 410,157
<DEPRECIATION> 83,488 78,555
<TOTAL-ASSETS> 453,811 485,705
<CURRENT-LIABILITIES> 64,828 60,408
<BONDS> 99,765 134,103
0 0
0 0
<COMMON> 321 321
<OTHER-SE> 286,214 289,105
<TOTAL-LIABILITY-AND-EQUITY> 453,811 485,705
<SALES> 307,592 279,587
<TOTAL-REVENUES> 343,283 313,012
<CGS> 259,846 237,317
<TOTAL-COSTS> 290,463 266,335
<OTHER-EXPENSES> 12,554 3,092
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,577 4,049
<INCOME-PRETAX> 35,303 40,425
<INCOME-TAX> 13,062 15,038
<INCOME-CONTINUING> 22,241 25,387
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (641)
<CHANGES> 0 0
<NET-INCOME> 22,241 24,746
<EPS-BASIC> 0.76 0.81
<EPS-DILUTED> 0.76 0.81
</TABLE>
