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 September 26, 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
---------------------------------------------------
(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
22, 1999 was 27,231,479.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 26, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 26, 1999
and December 27, 1998................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 26, 1999 and September 27, 1998...................................... 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 26, 1999.................................................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 26, 1999 and September 27, 1998...................................... 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
Part II Other Information
Item 1. Legal Proceedings....................................................................... 22
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>
September 26, December 27,
1999 1998
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 2,875 $ 1,767
Short-term investments, at market value (amortized cost of $2,976 in 1999
and $4,699 in 1998).......................................................... 3,090 4,879
Receivables (less allowance for bad debts of $2,242 in 1999 and $1,565 in 1998). 15,706 17,159
Inventories................................................................. ... 8,686 6,709
Prepaid and other current assets................................................ 4,854 4,395
Assets held for sale............................................................ 18,629 --
-------------- -------------
Total current assets....................................................... 53,840 34,909
Property and equipment, net........................................................ 298,106 364,058
Goodwill, net...................................................................... 89,992 99,599
Franchise interest and rights, net................................................. 3,577 3,959
Other assets....................................................................... 15,240 8,379
-------------- -------------
$ 460,755 $ 510,904
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 3,488 $ 1,666
Accounts payable................................................................ 14,964 17,427
Accrued expenses and other current liabilities.................................. 48,329 44,114
Accrued dividends............................................................... -- 2,659
Accrued income taxes............................................................ 1,513 85
-------------- -------------
Total current liabilities.................................................. 68,294 65,951
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion........................................... 129,296 145,522
Franchise deposits.............................................................. 1,947 2,139
Deferred income taxes........................................................... 1,512 1,239
-------------- -------------
Total non-current liabilities.............................................. 132,755 148,900
-------------- -------------
Total liabilities.......................................................... 201,049 214,851
-------------- -------------
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 - 32,153,345 shares in 1999 and 32,150,360 shares in 1998............. 321 321
Additional paid-in capital...................................................... 168,429 163,651
Retained earnings............................................................... 219,433 182,010
Unrealized gain on short-term investments, net of income taxes.................. 72 113
-------------- -------------
388,255 346,095
Treasury stock - 4,938,831 shares in 1999 and 2,610,133 shares in 1998, at cost. (128,549) (50,042)
-------------- -------------
Total stockholders' equity................................................. 259,706 296,053
-------------- -------------
$ 460,755 $ 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 39 Weeks Ended
------------------------------ ------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 145,434 $ 151,648 $ 453,026 $ 431,235
Franchise income............................ 18,259 17,002 53,950 50,427
------------- -------------- ------------- -------------
Total operating revenues................. 163,693 168,650 506,976 481,662
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage........................... 39,633 41,680 124,174 117,965
Labor....................................... 45,753 47,589 143,312 137,203
Direct and occupancy........................ 34,312 38,301 111,440 108,711
Pre-opening expense......................... 645 912 1,263 1,920
------------- -------------- ------------- -------------
Total cost of Company restaurant sales... 120,343 128,482 380,189 365,799
------------- -------------- ------------- -------------
General and administrative expenses.............. 15,568 14,398 46,185 43,416
Amortization of intangible assets................ 1,490 1,546 4,541 3,967
Loss on disposition of restaurants and equipment. 213 187 9,716 858
------------- -------------- ------------- -------------
Operating earnings............................... 26,079 24,037 66,345 67,622
------------- -------------- ------------- -------------
Other income (expense):
Investment income........................... 293 249 903 863
Interest expense............................ (2,444) (2,853) (8,021) (6,902)
Other income................................ 170 135 174 410
------------- -------------- ------------- -------------
Total other expense...................... (1,981) (2,469) (6,944) (5,629)
------------- -------------- ------------- -------------
Earnings before income taxes and
extraordinary item.......................... 24,098 21,568 59,401 61,993
Income taxes..................................... 8,916 8,024 21,978 23,062
------------- -------------- ------------- -------------
Earnings before extraordinary item............... 15,182 13,544 37,423 38,931
Extraordinary loss from early extinguishment
of debt, net of income taxes ............... -- -- -- (641)
------------- -------------- ------------- -------------
Net earnings..................................... $ 15,182 $ 13,544 $ 37,423 $ 38,290
============= ============== ============= =============
Basic earnings per common share:
Basic earnings before extraordinary item.... $ 0.54 $ 0.45 $ 1.30 $ 1.28
Extraordinary item.......................... -- -- -- (0.02)
------------- -------------- ------------- -------------
Basic net earnings per common share.............. $ 0.54 $ 0.45 $ 1.30 $ 1.26
============= ============== ============= =============
Diluted earnings per common share:
Diluted earnings before extraordinary item.. $ 0.53 $ 0.45 $ 1.29 $ 1.28
Extraordinary item.......................... -- -- -- (0.02)
------------- -------------- ------------- -------------
Diluted net earnings per common share............ $ 0.53 $ 0.45 $ 1.29 $ 1.26
============= ============== ============= =============
Basic weighted average shares outstanding........ 28,100 30,184 28,898 30,392
============= ============== ============= =============
Diluted weighted average shares outstanding...... 28,454 30,278 29,083 30,522
============= ============== ============= =============
</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. -- -- -- -- -- (81,883) (81,883)
Stock options exercised..... -- -- 2,607 -- -- 2,387 4,994
Shares sold under employee
stock purchase plan....... -- -- 433 -- -- 253 686
Income tax benefit upon
exercise of stock options. -- -- 808 -- -- -- 808
Shares issued under employee
stock ownership and 401(k)
plans..................... -- -- 532 -- -- 701 1,233
Restricted shares awarded under
equity incentive plan..... 2,985 -- 92 -- -- 35 127
Unearned compensation relating
to restricted shares...... -- -- 306 -- -- -- 306
Change in unrealized gain on
short-term investments,
net of income taxes....... -- -- -- -- (41) -- (41)
Net earnings................ -- -- -- 37,423 -- -- 37,423
------------ --------- ----------- ----------- ----------- ----------- ---------------
Balance, September 26, 1999.... 32,153,345 $ 321 $ 168,429 $ 219,433 $ 72 $(128,549) $ 259,706
============ ========= =========== =========== =========== =========== ===============
</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 26, September 27,
1999 1998
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 37,423 $ 38,290
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................................. 21,708 20,953
Amortization of intangible assets............................. 4,541 3,967
Amortization of deferred financing costs...................... 504 320
Gain on sale of investments................................... -- (13)
Deferred income tax provision (benefit)....................... 273 (160)
Loss on disposition of restaurants and equipment.............. 9,716 858
Changes in assets and liabilities (exclusive of effects of
acquisitions or divestitures):
Receivables................................................... 1,283 (117)
Inventories................................................... (3,223) 285
Prepaid and other current assets.............................. (574) 2,201
Accounts payable.............................................. (2,463) (5,144)
Accrued expenses and other current liabilities................ 3,631 9,000
Accrued income taxes.......................................... 1,428 (4,135)
Franchise deposits............................................ (192) 448
Other......................................................... (2,240) 461
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 71,815 67,214
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............................. -- (30,799)
Maturities and sales of short-term investments................... 1,700 36,842
Purchases of property and equipment.............................. (44,468) (56,234)
Acquisition of restaurants....................................... -- (101,749)
Proceeds from sale of restaurants and equipment.................. 59,021 10,216
--------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.............. 16,253 (141,724)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock...................................... (81,883) (38,904)
Dividends paid................................................... (2,659) (2,518)
Issuance of common stock upon exercise of stock options.......... 4,994 3,842
Income tax benefit upon exercise of stock options................ 808 1,065
Shares sold under employee stock purchase plan................... 686 613
Proceeds from issuance of long-term debt......................... 38,104 162,825
Deferred financing costs relating to issuance of long-term debt.. -- (4,000)
Payments on long-term debt....................................... (47,010) (55,074)
--------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.............. (86,960) 67,849
--------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 1,108 (6,661)
CASH AND CASH EQUIVALENTS, beginning of period........................ 1,767 8,908
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 2,875 $ 2,247
=============== ================
</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 26, September 27,
1999 1998
---------------- -----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the 39 week period for:
Income taxes........................................................ $ 20,311 $ 26,117
================ =================
Interest............................................................ $ 7,975 $ 5,712
================ =================
</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 six Applebee's 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.
8
<PAGE>
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 disposed 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.
In August 1999, the Company entered into an agreement to sell 11 Applebee's
restaurants in the Philadelphia market to an existing franchisee for $22,750,000
in cash, subject to adjustment. In addition, the buyer will reimburse the
Company for development costs related to a restaurant under construction. The
agreement also provides for additional payments if the franchisee achieves
certain future sales levels in the Philadelphia market. The transaction is
expected to close late in the fourth quarter of 1999, subject to third party
approvals. In connection with this transaction, the Company will recognize a
gain upon the disposition of approximately $4,800,000 ($3,000,000 net of income
taxes). Total Company restaurant sales and cost of Company restaurant sales for
these restaurants for the 39 weeks ended September 26, 1999 were $17,472,000 and
$14,275,000, respectively.
The property and equipment and other assets related to this transaction have
been classified in the September 26, 1999 consolidated balance sheet as assets
held for sale. Depreciation and amortization on the long-lived assets to be
disposed was discontinued in August 1999 in anticipation of the sale of these
restaurants.
4. Commitments and Contingencies
Litigation, claims and disputes: As of September 26, 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 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 September 26, 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. One such matter currently pending involves a dispute
with the Company's franchisee for Germany regarding disclosures allegedly made
or omitted by the Company. This matter is in the very early stages of
assessment; however, the Company believes that it has meritorious defenses to
the allegations of the franchisee and will vigorously defend these claims.
9
<PAGE>
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are 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. Approximately $49,000,000 was funded
through this financing source, of which $12,000,000 was outstanding at September
26, 1999. This agreement expired on December 31, 1994 and was not renewed,
although some loan commitments were 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 September 26, 1999, the aggregate amount
of these contingent lease payments totaled approximately $23,800,000. 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 September 26,
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
September 26, 1999.
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
$500,000 remains outstanding as of September 26, 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. The Company entered into a $3,000,000 unsecured line of credit facility
in the second quarter and a $10,000,000 unsecured line of credit facility in the
third quarter of 1999, of which $5,000,000 may only be used for letters of
credit.
The Company's bank credit agreement requires that the net proceeds from the sale
of the Philadelphia market be used to repay certain existing debt; accordingly,
approximately $21,750,000 of long-term debt will be repaid upon the closing of
this transaction.
10
<PAGE>
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 39 Weeks Ended
------------------------------------------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net earnings................................... $ 15,182 $ 13,544 $ 37,423 $ 38,290
================ =============== ================ ================
Basic weighted average shares outstanding...... 28,100 30,184 28,898 30,392
Dilutive effect of stock options............... 354 94 185 130
---------------- --------------- ---------------- ----------------
Diluted weighted average shares outstanding.... 28,454 30,278 29,083 30,522
================ =============== ================ ================
Basic net earnings per common share............ $ 0.54 $ 0.45 $ 1.30 $ 1.26
================ =============== ================ ================
Diluted net earnings per common share.......... $ 0.53 $ 0.45 $ 1.29 $ 1.26
================ =============== ================ ================
</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, as
amended by SFAS No. 137, 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 beginning in the first quarter of 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.
11
<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 September 26, 1999 and September
27, 1998 each contained 13 weeks, and are referred to hereafter as the "1999
quarter" and the "1998 quarter," respectively. The 39 week periods ended
September 26, 1999 and September 27, 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.
12
<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 26, September 27, September 26, September 27,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales........................... 88.8% 89.9% 89.4% 89.5%
Franchise income................................... 11.2 10.1 10.6 10.5
-------------- -------------- -------------- --------------
Total operating revenues........................ 100.0% 100.0% 100.0% 100.0%
============== ============== ============== ==============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage.................................. 27.3% 27.5% 27.4% 27.4%
Labor.............................................. 31.5 31.4 31.6 31.8
Direct and occupancy............................... 23.6 25.3 24.6 25.2
Pre-opening expense................................ 0.4 0.6 0.3 0.4
-------------- -------------- -------------- --------------
Total cost of sales............................. 82.7% 84.7% 83.9% 84.8%
============== ============== ============== ==============
General and administrative expenses..................... 9.5% 8.5% 9.1% 9.0%
Amortization of intangible assets....................... 0.9 0.9 0.9 0.8
Loss on disposition of restaurants and equipment........ 0.1 0.1 1.9 0.2
-------------- -------------- -------------- --------------
Operating earnings...................................... 15.9 14.3 13.1 14.0
-------------- -------------- -------------- --------------
Other income (expense):
Investment income.................................. 0.2 0.1 0.2 0.2
Interest expense................................... (1.5) (1.7) (1.6) (1.4)
Other income....................................... 0.1 0.1 0.0 0.1
-------------- -------------- -------------- --------------
Total other expense............................. (1.2) (1.5) (1.4) (1.2)
-------------- -------------- -------------- --------------
Earnings before income taxes and extraordinary item..... 14.7 12.8 11.7 12.9
Income taxes............................................ 5.4 4.8 4.3 4.8
-------------- -------------- -------------- --------------
Earnings before extraordinary item...................... 9.3 8.0 7.4 8.1
Extraordinary loss from early extinguishment of
debt, net of income taxes.......................... -- -- -- (0.1)
-------------- -------------- -------------- --------------
Net earnings............................................ 9.3% 8.0% 7.4% 7.9%
============== ============== ============== ==============
</TABLE>
13
<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 26, September 27, September 26, September 27,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Number of restaurants:
Applebee's:
Company(1):
Beginning of period..................... 257 224 247 190
Restaurant openings..................... 12 12 22 20
Restaurants acquired from franchisees... -- -- -- 33
Restaurants acquired by franchisees..... -- -- -- (6)
Restaurant closings..................... -- -- -- (1)
--------------- --------------- --------------- --------------
End of period........................... 269 236 269 236
--------------- --------------- --------------- --------------
Franchise:
Beginning of period..................... 849 780 817 770
Restaurant openings..................... 16 20 49 60
Restaurants acquired from franchisees... -- -- -- (33)
Restaurants acquired by franchisees..... -- -- -- 6
Restaurant closings..................... (1) (3) (2) (6)
--------------- --------------- --------------- --------------
End of period........................... 864 797 864 797
--------------- --------------- --------------- --------------
Total Applebee's:
Beginning of period..................... 1,106 1,004 1,064 960
Restaurant openings..................... 28 32 71 80
Restaurant closings..................... (1) (3) (2) (7)
--------------- --------------- --------------- --------------
End of period........................... 1,133 1,033 1,133 1,033
=============== =============== =============== ==============
Rio Bravo Cantinas:
Company:
Beginning of period..................... -- 35 40 31
Restaurant openings..................... -- 2 -- 6
Restaurants divested.................... -- -- (40) --
--------------- --------------- --------------- --------------
End of period........................... -- 37 -- 37
--------------- --------------- --------------- --------------
Franchise:
Beginning of period..................... -- 26 26 24
Restaurant openings..................... -- 1 -- 3
Restaurant closings..................... -- (2) (1) (2)
Restaurants divested.................... -- -- (25) --
--------------- --------------- --------------- --------------
End of period........................... -- 25 -- 25
--------------- --------------- --------------- --------------
Total Rio Bravo Cantinas:
Beginning of period..................... -- 61 66 55
Restaurant openings..................... -- 3 -- 9
Restaurant closings..................... -- (2) (1) (2)
Restaurants divested.................... -- -- (65) --
--------------- --------------- --------------- --------------
End of period........................... -- 62 -- 62
=============== =============== =============== ==============
Specialty Restaurants............................ -- 4 -- 4
=============== =============== =============== ==============
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Total number of restaurants:
Beginning of period..................... 1,106 1,069 1,134 1,019
Restaurant openings..................... 28 35 71 89
Restaurant closings..................... (1) (5) (3) (9)
Restaurants divested.................... -- -- (69) --
--------------- --------------- --------------- --------------
End of period........................... 1,133 1,099 1,133 1,099
=============== =============== =============== ==============
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).............................. $ 42,549 $ 41,088 $ 41,950 $ 41,357
Franchise............................... $ 40,689 $ 39,148 $ 40,615 $ 39,693
Total Applebee's........................ $ 41,126 $ 39,588 $ 40,927 $ 40,055
Change in comparable restaurant sales:(2)
Applebee's:
Company(1).............................. 5.4 % 0.4 % 3.5 % (0.5)%
Franchise............................... 3.3 % 0.1 % 2.0 % (0.4)%
Total Applebee's........................ 3.8 % 0.2 % 2.4 % (0.5)%
Total system sales (in thousands):
Applebee's.................................. $ 598,675 $ 525,883 $1,754,568 $1,551,459
Rio Bravo Cantinas.......................... -- 39,169 42,661 115,626
Specialty restaurants....................... -- 3,561 4,806 10,921
--------------- -------------- --------------- ---------------
Total system sales...................... $ 598,675 $ 568,613 $1,802,035 $1,678,006
=============== ============== =============== ===============
</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.
15
<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
--------------------------------------------------------
September 26, September 27, Increase
1999 1998 (Decrease)
----------------- ----------------- ------------------
<S> <C> <C> <C>
Applebee's........................ $ 145,434 $ 123,634 $ 21,800
Rio Bravo Cantinas................ -- 24,453 (24,453)
Specialty restaurants............. -- 3,561 (3,561)
----------------- ----------------- ------------------
Total........................ $ 145,434 $ 151,648 $ (6,214)
================= ================= ==================
39 Weeks Ended
--------------------------------------------------------
September 26, September 27, Increase
1999 1998 (Decrease)
----------------- ----------------- ------------------
Applebee's........................ $ 419,582 $ 348,519 $ 71,063
Rio Bravo Cantinas................ 28,638 71,795 (43,157)
Specialty restaurants............. 4,806 10,921 (6,115)
----------------- ----------------- ------------------
Total........................ $ 453,026 $ 431,235 $ 21,791
================= ================= ==================
</TABLE>
Total Company restaurant sales decreased 4% in the 1999 quarter due to the sale
of the Rio Bravo Cantina and specialty restaurants in April 1999. Total Company
restaurant sales increased 5% in the 1999 year-to-date period. Sales increased
18% and 20% 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 5.4%
and 3.5% in the 1999 quarter and the 1999 year-to-date period, respectively.
Weighted average weekly sales at Company Applebee's restaurants increased 3.6%
from $41,088 in the 1998 quarter to $42,549 in the 1999 quarter and increased
1.4% from $41,357 in the 1998 year-to-date period to $41,950 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 and an
increase in network television advertising in 1999.
Franchise Income. Overall franchise income increased $1,257,000 (7%) from
$17,002,000 in the 1998 quarter to $18,259,000 in the 1999 quarter and increased
$3,523,000 (7%) from $50,427,000 in the 1998 year-to-date period to $53,950,000
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 3.9% and 2.3% in weighted average weekly sales
and 3.3% and 2.0% 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
second quarter of 1999 reduced franchise income in both the 1999 quarter and the
1999 year-to-date period.
16
<PAGE>
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.5%
in the 1998 quarter to 27.3% in the 1999 quarter and were 27.4% in both the 1998
year-to-date period and the 1999 year-to-date period. The decrease in the 1999
quarter was due, in part, to the sale of the Rio Bravo restaurants and was
partially offset by higher costs relating to an all-you-can-eat Riblets
promotion during the quarter. In addition, beverage sales, as a percentage of
Company restaurant sales, declined from 16.1% and 16.7% in the 1998 quarter and
the 1998 year-to-date period, respectively, to 13.3% and 14.4% 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, as a percentage of
total sales, at Applebee's 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 as
well as a higher rate of growth in food sales resulting from successful food
promotions.
Labor costs increased from 31.4% in the 1998 quarter to 31.5% in the 1999
quarter due to continued pressure on both hourly labor and management costs due
to low unemployment and the highly competitive nature of the restaurant
industry. In addition, labor costs increased due to higher management incentive
compensation expense, as well as increased training during the 1999 quarter.
These increases were partially offset by the impact of the sale of the Rio Bravo
restaurants. Labor costs decreased from 31.8% in the 1998 year-to-date period to
31.6% in the 1999 year-to-date period due primarily to the lower labor costs in
the acquired Virginia restaurants.
Direct and occupancy costs decreased from 25.3% in the 1998 quarter to 23.6% in
the 1999 quarter and from 25.2% in the 1998 year-to-date period to 24.6% in the
1999 year-to-date period. The decreases in both periods were due primarily to
the sale of the Rio Bravo restaurants, as well as leverage resulting from the
sales increases at Applebee's restaurants in 1999, and a decrease in advertising
costs, as a percentage of sales. In addition, depreciation expense, as a
percentage of sales, decreased as the Company discontinued depreciation of the
Rio Bravo Cantina, specialty and Philadelphia Applebee's restaurants at the time
the agreements to sell the restaurants were reached.
General and Administrative Expenses. General and administrative expenses
increased from 8.5% and 9.0% in the 1998 quarter and the 1998 year-to-date
period, respectively, to 9.5% and 9.1% in the 1999 quarter and 1999 year-to-date
period, respectively. The increase in the 1999 quarter and the 1999 year-to-date
period was due primarily to the absorption of general and administrative
expenses over a lower revenue base due to the divestiture of the Rio Bravo
Cantina and specialty restaurants. In addition, incentive compensation expense
increased as a result of the Company's performance.
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment increased from $858,000 in the 1998 year-to-date
period to $9,716,000 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. This decrease was partially offset by
an increase in interest resulting from borrowings under the revolving credit
facility for stock repurchases. 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 related to the Virginia Acquisition.
17
<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 $44,468,000 in the 1999 year-to-date period. The Company currently expects
to open 27 Applebee's restaurants in 1999 and 25 to 27 Applebee's restaurants in
2000. Capital expenditures are expected to total between $60,000,000 and
$62,000,000 for fiscal 1999 and between $55,000,000 and $60,000,000 in 2000,
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.
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. In addition, the Company entered into
a $3,000,000 unsecured line of credit facility in the second quarter of 1999 and
a $10,000,000 unsecured line of credit facility in the third quarter of 1999, of
which $5,000,000 may only be used for letters of credit. The Company also has a
five-year $5,000,000 letter of credit facility. 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.
18
<PAGE>
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 2,662,000 shares of its common stock at an aggregate cost of
$81,883,000.
As of September 26, 1999, the Company held liquid assets totaling $5,965,000,
consisting of cash and cash equivalents of $2,875,000 and short-term investments
of $3,090,000. The working capital deficit decreased from $31,042,000 at
December 27, 1998 to $14,454,000 at September 26, 1999. This decrease was due
primarily to the reclassification of the property and equipment relating to the
Philadelphia restaurants as "assets held for sale," a current asset. The
Company's bank credit agreement requires that the net proceeds from the sale of
assets be used to repay debt. As of September 26, 1999, $35,104,000 was
outstanding under the Company's working capital and line of credit facilities
and standby letters of credit totaling $3,541,000 were outstanding under its
letter of credit facilities.
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. An increase in the minimum wage has been recently proposed by the Federal
government and is also being discussed by various state governments. Although
the Company has been able to and will continue to attempt to pass along
increases in costs through food and beverage price increases, there can be no
assurance that all such increases can be reflected in its prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at its restaurants.
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, as
amended by SFAS No. 137, 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 beginning in the first quarter of 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.
19
<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 98% of
the systems already compliant. The Company expects to be fully compliant by
November 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 and was completed in the
third quarter of 1999. 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, were
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 have been developed and include, but are not
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 were 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.
20
<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 September 26, 1999, the total amount of debt subject to interest rate
fluctuations was $42,854,000 ($7,750,000 under the term loan and $35,104,000
under revolving credit and line of credit facilities). A 1% change in interest
rates would result in an increase or decrease in interest expense of $429,000
per year.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 26, 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 September 26, 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. One such matter currently pending involves a dispute
with the Company's franchisee for Germany regarding disclosures allegedly made
or omitted by the Company. This matter is in the very early stages of
assessment; however, the Company believes that it has meritorious defenses to
the allegations of the franchisee and will vigorously defend these claims.
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are 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 26, 1999.
22
<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: October 27, 1999 By: /s/ Lloyd L. Hill
------------------- -----------------------------
Lloyd L. Hill
Chief Executive Officer, President and
Chief Operating Officer
Date: October 27, 1999 By: /s/ George D. Shadid
------------------- -----------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: October 27, 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
- ------------- ------------------------------------------------------------------
27 Financial Data Schedule.
24
<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 26, 1999 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-26-1999 DEC-27-1998
<PERIOD-END> SEP-26-1999 SEP-27-1998
<CASH> 2,875 2,247
<SECURITIES> 3,090 4,888
<RECEIVABLES> 17,948 17,673
<ALLOWANCES> 2,242 1,166
<INVENTORY> 8,686 4,992
<CURRENT-ASSETS> 53,840 30,528
<PP&E> 384,522 436,649
<DEPRECIATION> 86,416 85,561
<TOTAL-ASSETS> 460,755 494,176
<CURRENT-LIABILITIES> 68,294 55,300
<BONDS> 129,296 139,118
0 0
0 0
<COMMON> 321 321
<OTHER-SE> 259,706 296,422
<TOTAL-LIABILITY-AND-EQUITY> 460,755 494,176
<SALES> 453,026 431,235
<TOTAL-REVENUES> 506,976 481,662
<CGS> 380,189 365,799
<TOTAL-COSTS> 426,374 409,215
<OTHER-EXPENSES> 14,257 4,825
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,021 6,902
<INCOME-PRETAX> 59,401 61,993
<INCOME-TAX> 21,978 23,062
<INCOME-CONTINUING> 37,423 38,931
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (641)
<CHANGES> 0 0
<NET-INCOME> 37,423 38,290
<EPS-BASIC> 1.30 1.26
<EPS-DILUTED> 1.29 1.26
</TABLE>
