UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 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 July 21,
2000 was 26,773,249.
1
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED JUNE 25, 2000
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 25, 2000
and December 26, 1999................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks
Ended June 25, 2000 and June 27, 1999................................................ 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 25, 2000......................................................... 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 25, 2000 and June 27, 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 4. Submission of Matters to a Vote of Security Holders..................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
Signatures ................................................................................................. 21
Exhibit Index............................................................................................... 22
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
June 25, December 26,
2000 1999
-------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 7,004 $ 1,427
Short-term investments, at market value (amortized cost of $2,076 in 2000 and
$2,476 in 1999)............................................................... 2,106 2,555
Receivables (less allowance for bad debts of $2,362 in 2000 and $2,435 in 1999) 17,558 13,563
Inventories...................................................................... 13,785 11,247
Prepaid and other current assets................................................. 9,308 5,419
-------------- -------------
Total current assets.......................................................... 49,761 34,211
Property and equipment, net........................................................... 303,137 300,140
Goodwill, net......................................................................... 86,017 88,667
Franchise interest and rights, net.................................................... 3,204 3,449
Other assets.......................................................................... 17,923 15,749
-------------- -------------
$ 460,042 $ 442,216
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 892 $ 1,807
Accounts payable................................................................. 25,972 16,966
Accrued expenses and other current liabilities................................... 49,494 54,962
Accrued dividends................................................................ -- 2,660
Accrued income taxes............................................................. 1,684 1,267
-------------- -------------
Total current liabilities..................................................... 78,042 77,662
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion............................................ 87,882 106,293
Franchise deposits............................................................... 1,547 1,765
Deferred income taxes............................................................ 3,521 2,623
-------------- -------------
Total non-current liabilities................................................. 92,950 110,681
-------------- -------------
Total liabilities............................................................. 170,992 188,343
-------------- -------------
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....................................................... 171,006 168,584
Retained earnings................................................................ 264,963 233,548
Unrealized gain on short-term investments, net of income taxes................... 20 50
-------------- -------------
436,310 402,503
Treasury stock - 5,389,120 shares in 2000 and 5,553,213 shares in 1999, at cost.. (147,260) (148,630)
-------------- -------------
Total stockholders' equity.................................................... 289,050 253,873
-------------- -------------
$ 460,042 $ 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 26 Weeks Ended
--------------------------- ---------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales.................... $ 147,909 $ 145,832 $ 293,360 $ 307,592
Franchise income............................ 20,736 18,151 40,535 35,691
----------- ----------- ------------ -----------
Total operating revenues................. 168,645 163,983 333,895 343,283
----------- ----------- ------------ -----------
Cost of Company restaurant sales:
Food and beverage........................... 39,323 39,776 79,381 84,541
Labor....................................... 46,954 45,773 93,122 97,559
Direct and occupancy........................ 36,095 36,124 71,755 77,128
Pre-opening expense......................... 213 240 509 618
----------- ----------- ------------ -----------
Total cost of Company restaurant sales... 122,585 121,913 244,767 259,846
----------- ----------- ------------ -----------
General and administrative expenses.............. 16,338 14,484 32,345 30,617
Amortization of intangible assets................ 1,455 1,518 2,906 3,051
Loss on disposition of restaurants and equipment. 322 215 675 9,503
----------- ----------- ------------ -----------
Operating earnings............................... 27,945 25,853 53,202 40,266
----------- ----------- ------------ -----------
Other income (expense):
Investment income........................... 367 430 716 610
Interest expense............................ (2,267) (2,522) (4,631) (5,577)
Other income (expense)...................... 303 (164) 421 4
----------- ----------- ------------ -----------
Total other expense...................... (1,597) (2,256) (3,494) (4,963)
----------- ----------- ------------ -----------
Earnings before income taxes..................... 26,348 23,597 49,708 35,303
Income taxes..................................... 9,696 8,731 18,293 13,062
----------- ----------- ------------ -----------
Net earnings..................................... $ 16,652 $ 14,866 $ 31,415 $ 22,241
=========== =========== ============ ===========
Basic net earnings per common share.............. $ 0.62 $ 0.51 $ 1.18 $ 0.76
=========== =========== ============ ===========
Diluted net earnings per common share............ $ 0.62 $ 0.51 $ 1.17 $ 0.76
=========== =========== ============ ===========
Basic weighted average shares outstanding........ 26,690 29,070 26,680 29,298
=========== =========== ============ ===========
Diluted weighted average shares outstanding...... 27,033 29,245 26,894 29,451
=========== =========== ============ ===========
</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....... -- -- -- -- -- (4,995) (4,995)
Stock options exercised and
related tax benefit............. -- -- 1,632 -- -- 3,709 5,341
Shares issued under employee
stock and 401(k) plans.......... -- -- 654 -- -- 1,675 2,329
Restricted stock and performance
shares awarded under equity
incentive plan, net of
cancellations................... -- -- 493 -- -- 981 1,474
Unearned compensation relating
to restricted shares............ -- -- 179 -- -- -- 179
Notes receivable from officers
for stock sales................. -- -- (536) -- -- -- (536)
Change in unrealized gain on
short-term investments,
net of income taxes............. -- -- -- -- (30) -- (30)
Net earnings...................... -- -- -- 31,415 -- -- 31,415
-------------- ---------- ------------ ------------ ------------ ---------- -------------
Balance, June 25, 2000............... 32,150,360 $ 321 $ 171,006 $ 264,963 $ 20 $(147,260) $ 289,050
============== ========== ============ ============ ============ ========== =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
--------------------------------
June 25, June 27,
2000 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 31,415 $ 22,241
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.................................. 14,589 14,673
Amortization of intangible assets.............................. 2,906 3,051
Amortization of deferred financing costs....................... 355 172
Deferred income tax provision (benefit)........................ 614 (270)
Loss on disposition of restaurants and equipment............... 675 9,503
Changes in assets and liabilities (exclusive of effects
of divestitures):
Receivables.................................................... (3,995) (801)
Inventories.................................................... (2,538) (1,517)
Prepaid and other current assets............................... (3,587) (226)
Accounts payable............................................... 9,006 4,087
Accrued expenses and other current liabilities................. (2,560) (7,207)
Accrued income taxes........................................... 417 1,823
Franchise deposits............................................. (218) (104)
Other.......................................................... (896) (243)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 46,183 45,182
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................... (100) --
Maturities and sales of short-term investments.................... 500 250
Equity investment in unaffiliated company......................... (2,000) --
Purchases of property and equipment............................... (17,993) (29,335)
Proceeds from sale of restaurants and equipment................... 9 59,015
------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES............... (19,584) 29,930
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock....................................... (4,995) (36,895)
Dividends paid.................................................... (2,660) (2,659)
Issuance of common stock upon exercise of stock options and
related tax benefit............................................ 5,341 4,035
Shares sold under employee stock purchase plan.................... 638 458
Payments on long-term debt........................................ (19,346) (39,856)
------------- --------------
NET CASH USED BY FINANCING ACTIVITIES.......................... (21,022) (74,917)
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................. 5,577 195
CASH AND CASH EQUIVALENTS, beginning of period......................... 1,427 1,767
------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 7,004 $ 1,962
============= ==============
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
26 Weeks Ended
------------------------------------
June 25, June 27,
2000 1999
---------------- ----------------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the 26 week period for:
Income taxes........................................................ $ 21,040 $ 11,274
================ ================
Interest............................................................ $ 4,162 $ 5,875
================ ================
</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 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 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 26 weeks ended June 27, 1999 were $11,427,000 and
$9,467,000, respectively.
8
<PAGE>
3. Commitments and Contingencies
Litigation, claims and disputes: As of June 25, 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 June 25, 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. One such matter currently pending involves a dispute
with the Company's franchisee for the Netherlands 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.
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 June 25,
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 June 25, 2000, the aggregate amount of
these lease payments totaled approximately $31,600,000. 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 $1,074,000 remains outstanding as of June 25, 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 June 25, 2000, the
Company would have been required to make payments aggregating approximately
$6,100,000. 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 June 25,
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 26 Weeks Ended
------------------------------- -------------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net earnings......................................... $ 16,652 $ 14,866 $ 31,415 $ 22,241
=============== =============== =============== ===============
Basic weighted average shares outstanding............ 26,690 29,070 26,680 29,298
Dilutive effect of stock options..................... 343 175 214 153
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding.......... 27,033 29,245 26,894 29,451
=============== =============== =============== ===============
Basic net earnings per common share.................. $ 0.62 $ 0.51 $ 1.18 $ 0.76
=============== =============== =============== ===============
Diluted net earnings per common share................ $ 0.62 $ 0.51 $ 1.17 $ 0.76
=============== =============== =============== ===============
</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 June 25, 2000 and June 27, 1999
each contained 13 weeks, and are referred to hereafter as the "2000 quarter" and
the "1999 quarter," respectively. The 26 week periods ended June 25, 2000 and
June 27, 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 26 weeks ended June 27,
1999 were $11,427,000 and $9,467,000, 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 26 Weeks Ended
-------------------------- --------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Company restaurant sales................................ 87.7% 88.9% 87.9% 89.6%
Franchise income........................................ 12.3 11.1 12.1 10.4
------------ ------------ ------------- ------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============= ============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage....................................... 26.6% 27.3% 27.1% 27.5%
Labor................................................... 31.7 31.4 31.7 31.7
Direct and occupancy.................................... 24.4 24.8 24.5 25.1
Pre-opening expense..................................... 0.1 0.2 0.2 0.2
------------ ------------ ------------- ------------
Total cost of sales.................................. 82.9% 83.6% 83.4% 84.5%
============ ============ ============= ============
General and administrative expenses.......................... 9.7% 8.8% 9.7% 8.9%
Amortization of intangible assets............................ 0.9 0.9 0.9 0.9
Loss on disposition of restaurants and equipment............. 0.2 0.1 0.2 2.8
------------ ------------ ------------- ------------
Operating earnings........................................... 16.6 15.8 15.9 11.7
------------ ------------ ------------- ------------
Other income (expense):
Investment income....................................... 0.2 0.3 0.2 0.2
Interest expense........................................ (1.3) (1.5) (1.4) (1.6)
Other income (expense).................................. 0.2 (0.1) 0.1 --
------------ ------------ ------------- ------------
Total other expense.................................. (0.9) (1.4) (1.0) (1.4)
------------ ------------ ------------- ------------
Earnings before income taxes................................. 15.6 14.4 14.9 10.3
Income taxes................................................. 5.7 5.3 5.5 3.8
------------ ------------ ------------- ------------
Net earnings................................................. 9.9% 9.1% 9.4% 6.5%
============ ============ ============= ============
</TABLE>
12
<PAGE>
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees.
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------------- -----------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Number of restaurants:
Applebee's:
Company(1):
Beginning of period........................... 266 254 262 247
Restaurant openings........................... 3 3 8 10
Restaurant closings........................... (1) -- (2) --
------------- ------------- -------------- -------------
End of period................................. 268 257 268 257
------------- ------------- -------------- -------------
Franchise:
Beginning of period........................... 919 837 906 817
Restaurant openings........................... 26 13 40 33
Restaurant closings........................... (3) (1) (4) (1)
------------- ------------- -------------- -------------
End of period................................. 942 849 942 849
------------- ------------- -------------- -------------
Total Applebee's:
Beginning of period........................... 1,185 1,091 1,168 1,064
Restaurant openings........................... 29 16 48 43
Restaurant closings........................... (4) (1) (6) (1)
------------- ------------- -------------- -------------
End of period................................. 1,210 1,106 1,210 1,106
============= ============= ============== =============
Rio Bravo Cantinas:
Company:
Beginning of period........................... -- 40 -- 40
Restaurants divested.......................... -- (40) -- (40)
------------- ------------- -------------- -------------
End of period................................. -- -- -- --
------------- ------------- -------------- -------------
Franchise:
Beginning of period........................... -- 25 -- 26
Restaurant closings........................... -- -- -- (1)
Restaurants divested.......................... -- (25) -- (25)
------------- ------------- -------------- -------------
End of period................................. -- -- -- --
------------- ------------- -------------- -------------
Total Rio Bravo Cantinas:
Beginning of period........................... -- 65 -- 66
Restaurant closings........................... -- -- -- (1)
Restaurants divested.......................... -- (65) -- (65)
------------- ------------- -------------- -------------
End of period................................. -- -- -- --
============= ============= ============== =============
Specialty Restaurants:
Beginning of period........................... -- 4 -- 4
Restaurants divested.......................... -- (4) -- (4)
------------- ------------- -------------- -------------
End of period................................. -- -- -- --
============= ============= ============== =============
Total number of restaurants:
Beginning of period.......................... 1,185 1,160 1,168 1,134
Restaurant openings.......................... 29 16 48 43
Restaurant closings.......................... (4) (1) (6) (2)
Restaurants divested......................... -- (69) -- (69)
------------- ------------- -------------- -------------
End of period................................ 1,210 1,106 1,210 1,106
============= ============= ============== =============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
13 Weeks Ended 26 Weeks Ended
---------------------------- -------------------------------
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
Weighted average weekly sales per restaurant:
Applebee's:
Company(1)................................... $ 42,600 $ 42,375 $ 42,485 $ 41,639
Franchise.................................... $ 41,969 $ 41,226 $ 41,725 $ 40,577
Total Applebee's............................. $ 42,110 $ 41,493 $ 41,895 $ 40,824
Change in comparable restaurant sales:(2)
Applebee's:
Company(1)................................... 1.6% 3.6% 3.2% 2.5%
Franchise.................................... 1.2% 2.3% 2.5% 1.3%
Total Applebee's............................. 1.3% 2.6% 2.6% 1.6%
Total system sales (in thousands):
Applebee's....................................... $ 655,123 $ 593,143 $1,292,343 $1,155,893
Rio Bravo Cantinas............................... -- 5,890 -- 42,661
Specialty restaurants............................ -- 1,140 -- 4,806
------------- ------------- --------------- --------------
Total system sales........................... $ 655,123 $ 600,173 $1,292,343 $1,203,360
============= ============= =============== ==============
</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
-----------------------------------------------
June 25, June 27, Increase
2000 1999 (Decrease)
-------------- -------------- ---------------
<S> <C> <C> <C>
Applebee's........................ $ 147,909 $ 140,728 $ 7,181
Rio Bravo Cantinas................ -- 3,964 (3,964)
Specialty restaurants............. -- 1,140 (1,140)
-------------- -------------- ---------------
Total........................ $ 147,909 $ 145,832 $ 2,077
============== ============== ===============
26 Weeks Ended
-----------------------------------------------
June 25, June 27, Increase
2000 1999 (Decrease)
-------------- -------------- ---------------
Applebee's........................ $ 293,360 $ 274,148 $ 19,212
Rio Bravo Cantinas................ -- 28,638 (28,638)
Specialty restaurants............. -- 4,806 (4,806)
-------------- -------------- ---------------
Total........................ $ 293,360 $ 307,592 $ (14,232)
============== ============== ===============
</TABLE>
Sales increased 5% and 7% for Applebee's restaurants in the 2000 quarter and the
2000 year-to-date period, respectively, due to Company restaurant openings and
increases in comparable restaurant sales which were partially offset by the sale
of the Philadelphia restaurants in December 1999. The remaining change in total
Company restaurant sales for both the 2000 quarter and 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 1.6%
and 3.2% in the 2000 quarter and the 2000 year-to-date period, respectively.
Weighted average weekly sales at Company Applebee's restaurants increased 0.5%
from $42,375 in the 1999 quarter to $42,600 in the 2000 quarter and increased
2.0% from $41,639 in the 1999 year-to-date period to $42,485 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 $2,585,000 (14%) from
$18,151,000 in the 1999 quarter to $20,736,000 in the 2000 quarter and increased
$4,844,000 (14%) from $35,691,000 in the 1999 year-to-date period to $40,535,000
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 1.8% and 2.8% and franchise comparable restaurant sales
increased 1.2% and 2.5% in the 2000 quarter and 2000 year-to-date period,
respectively.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.3%
in the 1999 quarter to 26.6% in the 2000 quarter and from 27.5% in the 1999
year-to-date period to 27.1% in the 2000 year-to-date period due primarily to
operational improvements including the implementation of a new theoretical food
cost system in 2000. Food and beverage costs in the 2000 year-to-date period
were also positively impacted by the sale of the Rio Bravo restaurants. Beverage
sales, as a percentage of Company restaurant sales, declined from 13.8% and
15.0% in the 1999 quarter and the 1999 year-to-date period, respectively, to
13.5% and 13.7% in the 2000 quarter and the 2000 year-to-date period,
respectively, which had a negative impact on overall food and beverage costs.
These decreases were due primarily to the sale of the Rio Bravo restaurants,
which had a higher proportion of beverage sales.
15
<PAGE>
Labor costs increased from 31.4% in the 1999 quarter to 31.7% in the 2000
quarter and were 31.7% in both the 1999 year-to-date period and the 2000
year-to-date period. Labor costs for Company Applebee's restaurants increased in
both the 2000 quarter and the 2000 year-to-date period due to continued pressure
on both hourly labor and management costs due to low unemployment and the highly
competitive nature of the restaurant industry as well as higher management
incentive compensation expense. The increase in the 2000 year-to-date period was
offset by the impact of the sale of the Rio Bravo restaurants.
Direct and occupancy costs decreased from 24.8% in the 1999 quarter to 24.4% in
the 2000 quarter and from 25.1% in the 1999 year-to-date period to 24.5% in the
2000 year-to-date period. The decreases in both periods were due primarily to a
decrease in advertising costs, as a percentage of sales, due to the timing of
food promotions. The decrease in the 2000 year-to-date period was also due to
the sale of the Rio Bravo restaurants.
General and Administrative Expenses. General and administrative expenses
increased from 8.8% and 8.9% in the 1999 quarter and 1999 year-to-date period,
respectively, to 9.7% in both the 2000 quarter and the 2000 year-to-date period.
The increase in the 2000 quarter and the 2000 year-to-date period was due
primarily to the absorption of general and administrative expenses over a lower
revenue base as a result of the divestiture of the Rio Bravo, specialty and
Philadelphia restaurants.
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment decreased from $9,503,000 in the 1999 year-to-date
period to $675,000 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 the
2000 year-to-date period as a result of a reduction in debt related to 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 $17,993,000 in the
2000 year-to-date period. Capital expenditures are expected to be between
$52,000,000 and $57,000,000 in fiscal 2000 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 27 Applebee's restaurants in 2000. 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. The Company repurchased 185,000 shares of its common stock at an
aggregate cost of $4,995,000 in the 2000 year-to-date period.
As of June 25, 2000, the Company held liquid assets totaling $9,110,000,
consisting of cash and cash equivalents of $7,004,000 and short-term investments
of $2,106,000. The working capital deficit decreased from $43,451,000 at
December 26, 1999 to $28,281,000 at June 25, 2000. This decrease was due
primarily to the redemption of gift certificates sold in 1999, the payment of
accrued bonuses, the payment of the Company's annual dividend in January 2000,
and an increase in inventories. As of June 25, 2000, the Company had standby
letters of credit totaling $4,406,000 outstanding under its $10,000,000 letter
of credit facilities, and no borrowings outstanding under its $86,500,000
working capital facility or 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. 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 entered into interest rate swap agreements 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 June 25, 2000, the total amount of debt subject to interest rate
fluctuations was $9,232,000 ($9,232,000 under the term loan). A 1% change in
interest rates would result in an increase or decrease in interest expense of
$92,000 per year.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of June 25, 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 June 25, 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. One such matter currently pending involves a dispute
with the Company's franchisee for the Netherlands 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.
19
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 4, 2000. The
following matters were submitted to a vote of the Stockholders:
Proposal I. It was proposed that Douglas R. Conant, D.
Patrick Curran and George D. Shadid be elected as
directors to serve a three-year term expiring in
2003.
Proposal II. Amendment of the Company's 1995 Equity Incentive
Plan to change the manner in which stock
options are granted annually to non-employee
directors and to amend the definition of
Performance Goals.
Proposal III. Ratification of Deloitte & Touche LLP as
independent auditors for the Company for the 2000
fiscal year.
The results of the voting on the foregoing matters were as follows:
<TABLE>
<CAPTION>
Affirmative Negative Broker
Proposal Votes Votes Abstentions Non-Votes
--------------------- ------------------ -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
I (Conant) 24,648,910 30,460 -- --
I (Curran) 24,648,155 31,215 -- --
I (Shadid) 23,676,760 1,002,610 -- --
II 15,914,202 8,449,458 315,708 2
III 24,629,424 34,446 15,500 --
</TABLE>
Each Proposal received the required affirmative votes and was affirmatively
adopted by the Stockholders.
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) The Company filed a report on Form 8-K on May 25, 2000
announcing its new e-business strategic initiative and that it
had entered into a service agreement and made a $2 million
equity investment in Instill Corporation.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: July 26, 2000 By: /s/ Lloyd L. Hill
------------------------- ---------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: July 26, 2000 By: /s/ George D. Shadid
------------------------- ------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: July 26, 2000 By: /s/ Mark A. Peterson
------------------------- ------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
21
<PAGE>
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
10.1 Amendment to 1995 Equity Incentive Plan.
27 Financial Data Schedule.
22
