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 24, 2000
------------------------------------
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
20, 2000 was 25,234,243.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 24, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 24, 2000
and December 26, 1999................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 24, 2000 and September 26, 1999...................................... 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 24, 2000.................................................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 24, 2000 and September 26, 1999...................................... 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....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
Signatures ................................................................................................. 20
Exhibit Index............................................................................................... 21
</TABLE>
2
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
September 24, December 26,
2000 1999
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 8,120 $ 1,427
Short-term investments, at market value (amortized cost of $1,526 in 2000 and
$2,476 in 1999)............................................................... 1,576 2,555
Receivables (less allowance for bad debts of $2,489 in 2000 and $2,435 in 1999).. 18,414 13,563
Inventories...................................................................... 11,866 11,247
Prepaid and other current assets................................................. 10,263 5,419
-------------- -------------
Total current assets.......................................................... 50,239 34,211
Property and equipment, net........................................................... 308,150 300,140
Goodwill, net......................................................................... 84,692 88,667
Franchise interest and rights, net.................................................... 3,081 3,449
Other assets.......................................................................... 17,921 15,749
-------------- -------------
$ 464,083 $ 442,216
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 5,682 $ 1,807
Accounts payable................................................................ 29,658 16,966
Accrued expenses and other current liabilities.................................. 53,602 54,962
Accrued dividends............................................................... -- 2,660
Accrued income taxes............................................................ 964 1,267
-------------- -------------
Total current liabilities.................................................... 89,906 77,662
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion........................................... 99,887 106,293
Franchise deposits.............................................................. 1,682 1,765
Deferred income taxes........................................................... 4,501 2,623
-------------- -------------
Total non-current liabilities................................................ 106,070 110,681
-------------- -------------
Total liabilities............................................................ 195,976 188,343
-------------- -------------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued............................................................. -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued - 32,150,360 shares................................................... 321 321
Additional paid-in capital...................................................... 171,192 168,584
Retained earnings............................................................... 280,777 233,548
Unrealized gain on short-term investments, net of income taxes.................. 32 50
-------------- -------------
452,322 402,503
Treasury stock - 6,927,444 shares in 2000 and 5,553,213 shares in 1999, at cost. (184,215) (148,630)
-------------- -------------
Total stockholders' equity................................................... 268,107 253,873
-------------- -------------
$ 464,083 $ 442,216
============== =============
</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 24, September 26, September 24, September 26,
2000 1999 2000 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 151,038 $ 145,434 $ 444,398 $ 453,026
Franchise income............................ 21,252 18,259 61,787 53,950
------------- -------------- ------------- -------------
Total operating revenues................. 172,290 163,693 506,185 506,976
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage........................... 41,408 39,633 120,789 124,174
Labor....................................... 47,703 45,753 140,825 143,312
Direct and occupancy........................ 38,005 34,312 109,760 111,440
Pre-opening expense......................... 322 645 831 1,263
------------- -------------- ------------- -------------
Total cost of Company restaurant sales... 127,438 120,343 372,205 380,189
------------- -------------- ------------- -------------
General and administrative expenses.............. 16,224 15,568 48,569 46,185
Amortization of intangible assets................ 1,460 1,490 4,366 4,541
Loss on disposition of restaurants and equipment. 231 213 906 9,716
------------- -------------- ------------- -------------
Operating earnings............................... 26,937 26,079 80,139 66,345
------------- -------------- ------------- -------------
Other income (expense):
Investment income........................... 389 293 1,105 903
Interest expense............................ (2,225) (2,444) (6,856) (8,021)
Other income (expense)...................... (79) 170 342 174
------------- -------------- ------------- -------------
Total other expense...................... (1,915) (1,981) (5,409) (6,944)
------------- -------------- ------------- -------------
Earnings before income taxes..................... 25,022 24,098 74,730 59,401
Income taxes..................................... 9,208 8,916 27,501 21,978
------------- -------------- ------------- -------------
Net earnings..................................... $ 15,814 $ 15,182 $ 47,229 $ 37,423
============= ============== ============= =============
Basic net earnings per common share.............. $ 0.61 $ 0.54 $ 1.78 $ 1.30
============= ============== ============= =============
Diluted net earnings per common share............ $ 0.60 $ 0.53 $ 1.77 $ 1.29
============= ============== ============= =============
Basic weighted average shares outstanding........ 26,098 28,100 26,486 28,898
============= ============== ============= =============
Diluted weighted average shares outstanding...... 26,187 28,454 26,627 29,083
============= ============== ============= =============
</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 26, 1999............ 32,150,360 $ 321 $ 168,584 $ 233,548 $ 50 $(148,630) $ 253,873
Purchases of treasury stock........ -- -- -- -- -- (42,167) (42,167)
Stock options exercised and
related tax benefit.............. -- -- 1,634 -- -- 3,757 5,391
Shares issued under employee
stock and 401(k) plans........... -- -- 730 -- -- 1,851 2,581
Restricted stock and performance
shares awarded under equity
incentive plan, net of
cancellations.................... -- -- 525 -- -- 974 1,499
Unearned compensation relating
to restricted shares............. -- 269 -- -- -- 269
Notes receivable from officers
for stock sales.................. -- -- (550) -- -- -- (550)
Change in unrealized gain on
short-term investments,
net of income taxes.............. -- -- -- -- (18) -- (18)
Net earnings....................... -- -- -- 47,229 -- -- 47,229
-------------- ---------- ------------ ------------ ----------- ------------ ---------------
Balance, September 24, 2000........... 32,150,360 $ 321 $ 171,192 $ 280,777 $ 32 $(184,215) $ 268,107
============== ========== ============ ============ =========== ============ ===============
</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 24, September 26,
2000 1999
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 47,229 $ 37,423
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................................. 21,999 21,708
Amortization of intangible assets............................. 4,366 4,541
Amortization of deferred financing costs...................... 537 504
Deferred income tax provision................................. 1,310 273
Loss on disposition of restaurants and equipment.............. 906 9,716
Changes in assets and liabilities (exclusive of effects
of divestitures):
Receivables................................................... (4,851) 1,283
Inventories................................................... (619) (3,223)
Prepaid and other current assets.............................. (4,266) (574)
Accounts payable.............................................. 12,692 (2,463)
Accrued expenses and other current liabilities................ 1,548 3,631
Accrued income taxes.......................................... (303) 1,428
Franchise deposits............................................ (83) (192)
Other......................................................... (953) (2,240)
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 79,512 71,815
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments.............................. (100) --
Maturities and sales of short-term investments................... 1,050 1,700
Equity investment in unaffiliated company........................ (2,000) --
Purchases of property and equipment.............................. (30,680) (44,468)
Proceeds from sale of restaurants and equipment.................. 11 59,021
--------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.............. (31,719) 16,253
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock...................................... (42,167) (81,883)
Dividends paid................................................... (2,660) (2,659)
Issuance of common stock upon exercise of stock options and
related tax benefit........................................... 5,391 5,802
Shares sold under employee stock purchase plan................... 892 686
Payments on long-term debt....................................... (2,556) (8,906)
--------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES......................... (41,100) (86,960)
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 6,693 1,108
CASH AND CASH EQUIVALENTS, beginning of period........................ 1,427 1,767
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 8,120 $ 2,875
=============== ================
</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 24, September 26,
2000 1999
---------------- -----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the 39 week period for:
Income taxes........................................................ $ 31,272 $ 20,311
================ =================
Interest............................................................ $ 6,083 $ 7,975
================ =================
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
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 2), 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 26, 1999
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 accounting
principles generally accepted in the United States of America 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 26, 1999.
The Company believes that all adjustments, consisting only of normal recurring
adjustments (except for the loss on disposition discussed in Note 2), 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. Divestitures
On April 12, 1999, the Company completed the sale of its Rio Bravo Cantina
concept, which was comprised of 65 restaurants, including 40 Company restaurants
and 25 franchised restaurants. The Company received $53 million in consideration
($47 million in cash at closing and a $6 million 8% subordinated note due in ten
years). On April 26, 1999, the Company also completed the sale of its four
specialty restaurants for $12 million in cash. 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 first quarter of 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.
On December 13, 1999, the Company completed the sale of 12 Applebee's
restaurants in the Philadelphia market for $23,465,000. The operations of the
restaurants and future restaurant development in the market area were assumed by
an existing Applebee's franchisee. The agreement also provides for additional
payments if the franchisee achieves certain future sales levels in the
Philadelphia market. Depreciation and amortization on the long-lived assets to
be disposed was discontinued in August 1999 in anticipation of the sale of these
restaurants. In connection with this transaction, the Company recognized a gain
in the fourth quarter of 1999 of $4,193,000 ($2,650,000 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.
8
<PAGE>
3. Commitments and Contingencies
Litigation, claims and disputes: As of September 24, 2000, 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. In June 2000, the court of appeals
reversed the summary judgment and remanded the case to a lower court for further
action. The third party has appealed the court's decision. As of September 24,
2000, 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. Such matters currently pending involve disputes with
certain international franchisees regarding disclosures allegedly made or
omitted by the Company. The Company has also filed claims against these
franchisees for amounts due. These matters are in the early stages of
assessment; however, the Company believes that it has meritorious defenses to
the allegations of the franchisees 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.
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 $11,000,000 was outstanding at September
24, 2000. This agreement expired on December 31, 1994 and was not renewed.
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 24, 2000, the aggregate amount
of these lease payments totaled approximately $31,000,000. The Company has been
indemnified by the buyers from any losses related to such guaranties.
Philadelphia divestiture: In connection with the sale of the Philadelphia
restaurants, the Company has provided a loan guarantee to a franchise group
totaling $1,250,000 of which $988,000 remains outstanding as of September 24,
2000.
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 24,
2000, the Company would have been required to make payments aggregating
approximately $6,300,000. In addition, the Company has severance and employment
agreements with certain officers which contain severance provisions not related
to a change in control, and such provisions would have required aggregate
payments of approximately $4,400,000 if such officers had been terminated as of
September 24, 2000.
9
<PAGE>
4. 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 options 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 24, September 26, September 24, September 26,
2000 1999 2000 1999
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net earnings...................................... $ 15,814 $ 15,182 $ 47,229 $ 37,423
=============== =============== =============== ================
Basic weighted average shares outstanding......... 26,098 28,100 26,486 28,898
Dilutive effect of stock options.................. 89 354 141 185
--------------- --------------- --------------- ----------------
Diluted weighted average shares outstanding....... 26,187 28,454 26,627 29,083
=============== =============== =============== ================
Basic net earnings per common share............... $ 0.61 $ 0.54 $ 1.78 $ 1.30
=============== =============== =============== ================
Diluted net earnings per common share............. $ 0.60 $ 0.53 $ 1.77 $ 1.29
=============== =============== =============== ================
</TABLE>
5. 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 and SFAS No. 138, 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 Statements 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 September 24, 2000 and September
26, 1999 each contained 13 weeks, and are referred to hereafter as the "2000
quarter" and the "1999 quarter," respectively. The 39 week periods ended
September 24, 2000 and September 26, 1999 are referred to hereafter as the "2000
year-to-date period" and the "1999 year-to-date period," respectively.
On April 12, 1999, the Company completed the sale of its Rio Bravo Cantina
concept, which was comprised of 65 restaurants, including 40 Company restaurants
and 25 franchised restaurants. The Company received $53 million in consideration
($47 million in cash at closing and a $6 million 8% subordinated note due in ten
years). On April 26, 1999, the Company also completed the sale of its four
specialty restaurants for $12 million in cash. 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.
On December 13, 1999, the Company completed the sale of 12 Applebee's
restaurants in the Philadelphia market for $23,465,000. The operations of the
restaurants and future restaurant development in the market area were assumed by
an existing Applebee's franchisee. In connection with this transaction, the
Company recognized a gain in the fourth quarter of 1999 of $4,193,000
($2,650,000 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.
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 39 Weeks Ended
----------------------------- -----------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
-------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales........................... 87.7% 88.8% 87.8% 89.4%
Franchise income................................... 12.3 11.2 12.2 10.6
-------------- -------------- ------------- ---------------
Total operating revenues........................ 100.0% 100.0% 100.0% 100.0%
============== ============== ============= ===============
Cost of sales (as a percentage of Company restaurant
sales):
Food and beverage.................................. 27.4% 27.3% 27.2% 27.4%
Labor.............................................. 31.6 31.5 31.7 31.6
Direct and occupancy............................... 25.2 23.6 24.7 24.6
Pre-opening expense................................ 0.2 0.4 0.2 0.3
-------------- -------------- ------------- ---------------
Total cost of sales............................. 84.4% 82.7% 83.8% 83.9%
============== ============== ============= ===============
General and administrative expenses..................... 9.4% 9.5% 9.6% 9.1%
Amortization of intangible assets....................... 0.8 0.9 0.9 0.9
Loss on disposition of restaurants and equipment........ 0.1 0.1 0.2 1.9
-------------- -------------- ------------- ---------------
Operating earnings...................................... 15.6 15.9 15.8 13.1
-------------- -------------- ------------- ---------------
Other income (expense):
Investment income.................................. 0.2 0.2 0.2 0.2
Interest expense................................... (1.3) (1.5) (1.4) (1.6)
Other income (expense)............................. -- 0.1 0.1 --
-------------- -------------- ------------- ---------------
Total other expense............................. (1.1) (1.2) (1.1) (1.4)
-------------- -------------- ------------- ---------------
Earnings before income taxes............................ 14.5 14.7 14.8 11.7
Income taxes............................................ 5.3 5.4 5.4 4.3
-------------- -------------- ------------- ---------------
Net earnings............................................ 9.2% 9.3% 9.3% 7.4%
============== ============== ============= ===============
</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 39 Weeks Ended
------------------------------- -------------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Number of restaurants:
Applebee's:
Company(1):
Beginning of period..................... 268 257 262 247
Restaurant openings..................... 5 12 13 22
Restaurant closings..................... -- -- (2) --
--------------- --------------- --------------- --------------
End of period........................... 273 269 273 269
--------------- --------------- --------------- --------------
Franchise:
Beginning of period..................... 942 849 906 817
Restaurant openings..................... 27 16 67 49
Restaurant closings..................... -- (1) (4) (2)
--------------- --------------- --------------- --------------
End of period........................... 969 864 969 864
--------------- --------------- --------------- --------------
Total Applebee's:
Beginning of period..................... 1,210 1,106 1,168 1,064
Restaurant openings..................... 32 28 80 71
Restaurant closings..................... -- (1) (6) (2)
--------------- --------------- --------------- --------------
End of period........................... 1,242 1,133 1,242 1,133
=============== =============== =============== ==============
Rio Bravo Cantinas:
Company:
Beginning of period..................... -- -- -- 40
Restaurants divested.................... -- -- -- (40)
--------------- --------------- --------------- --------------
End of period........................... -- -- -- --
--------------- --------------- --------------- --------------
Franchise:
Beginning of period..................... -- -- -- 26
Restaurant closings..................... -- -- -- (1)
Restaurants divested.................... -- -- -- (25)
--------------- --------------- --------------- --------------
End of period........................... -- -- -- --
--------------- --------------- --------------- --------------
Total Rio Bravo Cantinas:
Beginning of period..................... -- -- -- 66
Restaurant closings..................... -- -- -- (1)
Restaurants divested.................... -- -- -- (65)
--------------- --------------- --------------- --------------
End of period........................... -- -- -- --
=============== =============== =============== ==============
Specialty Restaurants............................
Beginning of period..................... -- -- -- 4
Restaurants divested.................... -- -- -- (4)
--------------- --------------- --------------- --------------
End of period........................... -- -- -- --
=============== =============== =============== ==============
Total number of restaurants:
Beginning of period..................... 1,210 1,106 1,168 1,134
Restaurant openings..................... 32 28 80 71
Restaurant closings..................... -- (1) (6) (3)
Restaurants divested.................... -- -- -- (69)
--------------- --------------- --------------- --------------
End of period........................... 1,242 1,133 1,242 1,133
=============== =============== =============== ==============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).............................. $ 42,799 $ 42,549 $ 42,591 $ 41,950
Franchise............................... $ 41,536 $ 40,689 $ 41,660 $ 40,615
Total Applebee's........................ $ 41,815 $ 41,126 $ 41,868 $ 40,927
Change in comparable restaurant sales:(2)
Applebee's:
Company(1).............................. 1.1 % 5.4 % 2.5 % 3.5 %
Franchise............................... 1.6 % 3.3 % 2.2 % 2.0 %
Total Applebee's........................ 1.5 % 3.8 % 2.2 % 2.4 %
Total system sales (in thousands):
Applebee's.................................. $ 667,494 $ 598,675 $1,959,837 $1,754,568
Rio Bravo Cantinas.......................... -- -- -- 42,661
Specialty restaurants....................... -- -- -- 4,806
--------------- -------------- --------------- ---------------
Total system sales...................... $ 667,494 $ 598,675 $1,959,837 $1,802,035
=============== ============== =============== ===============
</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 2000 and 1999
quarters and the 2000 and 1999 year-to-date periods were as follows (in
thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------------------------------------
September 24, September 26,
2000 1999 Increase
----------------- ----------------- ------------------
<S> <C> <C> <C>
Applebee's........................ $ 151,038 $ 145,434 $ 5,604
Rio Bravo Cantinas................ -- -- --
Specialty restaurants............. -- -- --
----------------- ----------------- ------------------
Total........................ $ 151,038 $ 145,434 $ 5,604
================= ================= ==================
39 Weeks Ended
--------------------------------------------------------
September 24, September 26, Increase
2000 1999 (Decrease)
----------------- ----------------- ------------------
Applebee's........................ $ 444,398 $ 419,582 $ 24,816
Rio Bravo Cantinas................ -- 28,638 (28,638)
Specialty restaurants............. -- 4,806 (4,806)
----------------- ----------------- ------------------
Total........................ $ 444,398 $ 453,026 $ (8,628)
================= ================= ==================
</TABLE>
Sales increased 4% and 6% for Applebee's restaurants in the 2000 quarter and the
2000 year-to-date period, respectively, due to Company restaurant openings,
which were partially offset by the sale of the Philadelphia restaurants in
December 1999, and increases in comparable restaurant sales. The remaining
change in total Company restaurant sales for the 2000 year-to-date period
resulted from the sale of the Rio Bravo Cantina and specialty restaurants in
April 1999.
Comparable restaurant sales at Company Applebee's restaurants increased by 1.1%
and 2.5% in the 2000 quarter and the 2000 year-to-date period, respectively.
Weighted average weekly sales at Company Applebee's restaurants increased 0.6%
from $42,549 in the 1999 quarter to $42,799 in the 2000 quarter and increased
1.5% from $41,950 in the 1999 year-to-date period to $42,591 in the 2000
year-to-date period. These increases were due primarily to an increase in the
average guest check resulting from the Company's food promotions and increased
sales of appetizers, drinks and desserts.
Franchise Income. Overall franchise income increased $2,993,000 (16%) from
$18,259,000 in the 1999 quarter to $21,252,000 in the 2000 quarter and increased
$7,837,000 (15%) from $53,950,000 in the 1999 year-to-date period to $61,787,000
in the 2000 year-to-date period. Such increases were due primarily to the
increased number of franchise Applebee's restaurants operating during the 2000
quarter and 2000 year-to-date period. Weighted average weekly sales at franchise
restaurants increased 2.1% and 2.6% and franchise comparable restaurant sales
increased 1.6% and 2.2% in the 2000 quarter and 2000 year-to-date period,
respectively.
Cost of Company Restaurant Sales. Food and beverage costs increased from 27.3%
in the 1999 quarter to 27.4% in the 2000 quarter and decreased from 27.4% in the
1999 year-to-date period to 27.2% in the 2000 year-to-date period. The increase
in the 2000 quarter was due primarily to the implementation of a new menu in
September 2000. Food and beverage costs in both the 2000 quarter and the 2000
year-to-date period were positively impacted by operational improvements
including the implementation of a new theoretical food cost system in 2000. The
decrease in the 2000 year-to-date period was also due, in part, to the sale of
the Rio Bravo restaurants.
15
<PAGE>
Labor costs increased from 31.5% and 31.6% in the 1999 quarter and 1999
year-to-date period, respectively, to 31.6% and 31.7% in the 2000 quarter and
2000 year-to-date period, respectively. Labor costs for Company Applebee's
restaurants increased in both the 2000 quarter and the 2000 year-to-date period
due to training related to the implementation of a new menu in the 2000 quarter
and continued pressure on both hourly labor and management costs due to low
unemployment and the highly competitive nature of the restaurant industry. These
increases were partially offset by lower management incentive compensation in
the 2000 quarter and the impact of the sale of the Rio Bravo restaurants in the
2000 year-to-date period.
Direct and occupancy costs increased from 23.6% in the 1999 quarter to 25.2% in
the 2000 quarter and from 24.6% in the 1999 year-to-date period to 24.7% in the
2000 year-to-date period. The increase in the 2000 quarter resulted primarily
from an increase in advertising costs, as a percentage of sales, due to the
timing of food promotions and an increase in utilities expense. The increase in
the 2000 year-to-date period was due primarily to lower depreciation expense in
the 1999 year-to-date period 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.
General and Administrative Expenses. General and administrative expenses
decreased from 9.5% in the 1999 quarter to 9.4% in the 2000 quarter and
increased from 9.1% in the 1999 year-to-date period to 9.6% in the 2000
year-to-date period. The decrease in the 2000 quarter was due primarily to lower
incentive compensation expense. The increase in the 2000 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, specialty
and Philadelphia restaurants.
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment decreased from $9,716,000 in the 1999 year-to-date
period to $906,000 in the 2000 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 both the 2000 quarter and 2000
year-to-date period as a result of the reduction in debt resulting from the sale
of the Rio Bravo Cantina, specialty and Philadelphia restaurants in 1999.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 36.8% in both the 2000 quarter and 2000 year-to-date period,
compared to 37.0% in both the 1999 quarter and 1999 year-to-date period. The
decrease in the Company's effective tax rate in both the 2000 quarter and the
2000 year-to-date period was due primarily to an increase in credits resulting
from FICA taxes on tips and Work Opportunity Tax Credits.
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.
16
<PAGE>
Capital expenditures were $53,945,000 in fiscal year 1999 and $30,680,000 in the
2000 year-to-date period. Capital expenditures are expected to be between
$48,000,000 and $53,000,000 in fiscal 2000 and between $55,000,000 and
$60,000,000 in 2001, primarily for the development of new restaurants,
refurbishments of and capital replacements for existing restaurants, and
enhancements to information systems. The Company currently expects to open 25 to
26 Applebee's restaurants in 2000 and 25 to 27 Applebee's restaurants in 2001.
The amount of actual capital expenditures will be dependent upon, among other
things, the proportion of leased versus owned properties as the Company expects
to continue to purchase a portion of its sites. In addition, if the Company
opens more restaurants than it currently anticipates or acquires additional
restaurants, its capital requirements will increase accordingly.
The Company's senior term loan and working capital facilities are subject to
various covenants and restrictions which, among other things, require the
maintenance of stipulated fixed charge, interest coverage and leverage ratios,
as defined, and limit additional indebtedness and capital expenditures in excess
of specified amounts. The credit agreement permits annual cash dividends of the
greater of $5,000,000 or 50% of consolidated net income. In addition, in April
2000, the credit agreement was amended to permit additional repurchases of
common stock of up to $50,000,000 through December 31, 2001. The Company is
currently in compliance with the covenants contained in its credit agreement.
In December 1999, the Company's Board of Directors authorized the repurchase of
up to $32,500,000 of its common stock through the year 2000, subject to market
conditions and pursuant to applicable restrictions under the Company's credit
agreement. In August 2000, the Company's Board of Directors authorized an
additional repurchase of up to $25,000,000 of its common stock, subject to
market conditions. The Company repurchased 1,735,000 shares of its common stock
at an aggregate cost of $42,167,000 in the 2000 year-to-date period, and has
repurchased a total of 1,823,000 shares at an aggregate cost of $44,459,000
under these two authorizations.
As of September 24, 2000, the Company held liquid assets totaling $9,696,000,
consisting of cash and cash equivalents of $8,120,000 and short-term investments
of $1,576,000. The working capital deficit decreased from $43,451,000 at
December 26, 1999 to $39,667,000 at September 24, 2000. This decrease was due
primarily to the redemption of gift certificates sold in 1999 and the payment of
the Company's annual dividend in January 2000. As of September 24, 2000, the
Company had standby letters of credit totaling $5,280,000 outstanding under its
$10,000,000 letter of credit facilities, $12,000,000 outstanding under its
$86,500,000 working capital facility and $4,790,000 outstanding on its
$5,000,000 line of credit facility.
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.
17
<PAGE>
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 and SFAS No. 138, 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 Statements will
not have a material effect on its financial statements, based on current
activities.
Forward-Looking Statements
The statements contained herein regarding restaurant development and capital
expenditures 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, including but not limited to the ability of the
company and its franchisees to open and operate additional restaurants
profitably, the continued growth of its franchisees and its ability to attract
and retain qualified franchisees, the impact of intense competition in the
casual dining segment of the restaurant industry and its ability to control
restaurant operating costs which are impacted by market changes, minimum wage
and other employment laws, food costs and inflation. For a discussion of the
principal factors that could cause actual results to be materially different,
refer to the Company's current report on Form 8-K filed with the Securities and
Exchange Commission on February 9, 2000. The Company disclaims any obligation to
update forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company's 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 Company's 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.
The Company has interest rate swap agreements in place to manage its exposure to
interest rate fluctuations. The swap agreements effectively fix the underlying
three-month LIBOR interest rate on $75,000,000 of the senior credit facilities
to rates ranging from 5.91% to 6.05%.
As of September 24, 2000, the total amount of debt subject to interest rate
fluctuations was $26,022,000 ($9,232,000 under the term loan, $12,000,000 under
the working capital facility and $4,790,000 under the line of credit facility).
A 1% change in interest rates would result in an increase or decrease in
interest expense of $260,000 per year.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 24, 2000, 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. In June 2000, the court of appeals reversed the summary judgment
and remanded the case to a lower court for further action. The third party has
appealed the court's decision. As of September 24, 2000, 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. Such matters currently pending involve disputes with
certain international franchisees regarding disclosures allegedly made or
omitted by the Company. The Company has also filed claims against these
franchisees for amounts due. These matters are in the early stages of
assessment; however, the Company believes that it has meritorious defenses to
the allegations of the franchisees 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 filed a report on Form 8-K on July 27, 2000
announcing second quarter earnings per share of 62 cents.
(c) The Company filed a report on Form 8-K on August 8, 2000
announcing an additional $25 million stock repurchase program.
19
<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 25, 2000 By: /s/ Lloyd L. Hill
------------------------- ---------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: October 25, 2000 By: /s/ George D. Shadid
------------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: October 25, 2000 By: /s/ Mark A. Peterson
------------------------- ------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
20
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
27 Financial Data Schedule.
21
