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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 26, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-17962
Applebee's International, Inc.
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(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
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(Address of principal executive offices and zip code)
(913) 967-4000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
per share
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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 2000 was $777,280,316 based upon the closing sale
price on March 16, 2000.
The number of shares of the registrant's common stock outstanding as of March
16, 2000 was 26,573,686.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 is incorporated into Part III hereof.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 26, 1999
INDEX
Page
PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 14
Item 3. Legal Proceedings....................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................................... 16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................................... 17
Item 6. Selected Financial Data................................................................. 18
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 19
Item 8. Financial Statements and Supplementary Data............................................. 26
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 26
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 27
Item 11. Executive Compensation.................................................................. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 27
Item 13. Certain Relationships and Related Transactions.......................................... 27
PART IV
Item 14. Exhibits and Reports on Form 8-K........................................................ 28
Signatures.............................................................................................. 29
2
PART I
Item 1. Business
General
Applebee's International, Inc. and its subsidiaries (the "Company") develops,
franchises and operates casual dining restaurants under the name "Applebee's
Neighborhood Grill & Bar." With nearly 1,200 restaurants and $2.35 billion in
annual system sales, Applebee's Neighborhood Grill and Bar is the largest casual
dining concept in America, both in terms of number of restaurants and market
share.
The Company opened its first restaurant in 1986 and initially developed and
operated six restaurants as a franchisee of the Applebee's Neighborhood Grill &
Bar Division (the "Applebee's Division") of an indirect subsidiary of W.R. Grace
& Co. In March 1988, the Company acquired substantially all the assets of its
franchisor. At the time of this acquisition, the Applebee's Division operated 14
restaurants and had ten franchisees, including the Company, operating 41
franchise restaurants.
As of December 26, 1999, there were 1,168 Applebee's restaurants, of which 906
were operated by franchisees and 262 were operated by the Company. The
restaurants were located in 49 states and eight international countries. During
1999, 107 new restaurants were opened, including 80 franchise restaurants and 27
Company restaurants.
The Company acquired the Rio Bravo Cantina chain of Mexican casual dining
restaurants in March 1995. On April 12, 1999, the Company completed the sale of
the concept, which was comprised of 65 restaurants, including 40 Company
restaurants and 25 franchised restaurants. On April 26, 1999, the Company
completed the sale of its four specialty restaurants, which were also acquired
in 1995.
With the divestiture of the Rio Bravo Cantina concept, the Company's strategy is
to focus singularly on the Applebee's concept. During 1998, the Company
introduced a new "small-town" restaurant prototype developed for communities of
less than 25,000 population. The Company expects the long-term potential
development of the small-town prototype to be at least 150 restaurants. Based on
continued successful market penetration of the Applebee's concept as well as the
new potential for small-towns, the Company now expects the ultimate domestic
potential of the Applebee's system to be at least 1,800 restaurants.
3
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.
Fiscal Year Ended
-----------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
----------------- ---------------- -----------------
Number of restaurants:
Applebee's:
Company(1):
Beginning of year............................ 247 190 148
Restaurant openings.......................... 27 32 32
Restaurant closings.......................... -- (2) (1)
Restaurants acquired from (by) franchisees... (12) 27 11
----------------- ---------------- -----------------
End of year.................................. 262 247 190
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 817 770 671
Restaurant openings.......................... 80 84 113
Restaurant closings.......................... (3) (10) (3)
Restaurants acquired by (from) franchisees... 12 (27) (11)
----------------- ---------------- -----------------
End of year.................................. 906 817 770
----------------- ---------------- -----------------
Total Applebee's:
Beginning of year............................ 1,064 960 819
Restaurant openings.......................... 107 116 145
Restaurant closings.......................... (3) (12) (4)
----------------- ---------------- -----------------
End of year.................................. 1,168 1,064 960
================= ================ =================
Rio Bravo Cantinas:
Company:
Beginning of year............................ 40 31 21
Restaurant openings.......................... -- 9 10
Restaurants divested......................... (40) -- --
----------------- ---------------- -----------------
End of year.................................. -- 40 31
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 26 24 9
Restaurant openings.......................... -- 4 16
Restaurant closings.......................... (1) (2) (1)
Restaurants divested......................... (25) -- --
----------------- ---------------- -----------------
End of year.................................. -- 26 24
----------------- ---------------- -----------------
Total Rio Bravo Cantinas:
Beginning of year............................ 66 55 30
Restaurant openings.......................... -- 13 26
Restaurant closings.......................... (1) (2) (1)
Restaurants divested......................... (65) -- --
----------------- ---------------- -----------------
End of year.................................. -- 66 55
================= ================ =================
Specialty Restaurants................................. -- 4 4
================= ================ =================
Total number of restaurants:
Beginning of year............................ 1,134 1,019 853
Restaurant openings.......................... 107 129 171
Restaurant closings.......................... (4) (14) (5)
Restaurants divested......................... (69) -- --
----------------- ---------------- -----------------
End of year.................................. 1,168 1,134 1,019
================= ================ =================
4
Fiscal Year Ended
-----------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
----------------- ---------------- -----------------
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).................................. $ 41,674 $ 40,664 $ 41,176
Franchise................................... $ 40,297 $ 39,077 $ 39,513
Total Applebee's............................ $ 40,619 $ 39,428 $ 39,826
Rio Bravo Cantinas:
Company(2).................................. -- $ 52,789 $ 60,946
Franchise................................... -- $ 41,675 $ 49,288
Total Rio Bravo Cantinas.................... -- $ 47,966 $ 56,206
Change in comparable restaurant sales:(3)
Applebee's:
Company(1).................................. 4.4% (0.4)% 0.1 %
Franchise................................... 2.9% (0.1)% 0.6 %
Total Applebee's............................ 3.2% (0.2)% 0.5 %
Rio Bravo Cantinas (Company).................... -- (6.8)% (1.6)%
Total system sales (in thousands):
Applebee's...................................... $2,347,388 $2,066,273 $1,818,503
Rio Bravo Cantinas.............................. 42,661 150,899 128,196
Specialty restaurants........................... 4,806 14,373 14,435
----------------- ---------------- -----------------
Total system sales.......................... $2,394,855 $2,231,545 $1,961,134
================= ================ =================
- --------
(1) Includes one Texas restaurant operated by the Company under a management
agreement since July 1990.
(2) Excludes one restaurant which is open for dinner only.
(3) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
5
The Applebee's System
Concept. Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately priced, high quality food and
beverage items, table service and a comfortable atmosphere. Applebee's
restaurants appeal to a wide range of customers including families with
children, young adults and senior citizens.
Applebee's restaurants are designed according to Company specifications and are
located in free-standing buildings, end caps of strip shopping centers, and
shopping malls. The Company has four free-standing restaurant prototypes. The
two larger prototypes are approximately 4,700 and 5,000 square feet and seat
approximately 165 and 200 patrons, respectively. There are also two "small-town"
prototypes which are approximately 3,800 and 4,300 square feet and seat
approximately 135 and 145 patrons, respectively.
During 1998, the Company introduced the new small-town restaurant prototype for
communities of less than 25,000 population. There were 19 test units of the new
small-town designs open as of December 26, 1999, nine by the Company and ten by
franchisees, and additional units are in the development pipeline for both the
Company and selected franchisees. The Company expects the long-term potential
development of the small-town prototype to be at least 150 restaurants. Based on
continued successful market penetration of the Applebee's concept as well as the
new potential for small-towns, the Company now expects the ultimate domestic
potential of the Applebee's system to be at least 1,800 restaurants.
Each Applebee's restaurant has a bar and many restaurants offer patio seating.
The decor of each restaurant incorporates artifacts and memorabilia such as old
movie posters, musical instruments and sports equipment along with photographs
and magazine and newspaper articles highlighting local history and
personalities, giving each restaurant an individual, neighborhood identity. Each
Applebee's restaurant is required to be remodeled every six years to embody the
design elements of the current prototype.
Menu. Each Applebee's restaurant offers a diverse menu of high quality,
moderately priced food and beverage items consisting of traditional favorites
and innovative dishes. The restaurants feature a broad selection of entrees,
including beef, chicken, seafood and pasta items prepared in a variety of
cuisines, as well as appetizers, salads, sandwiches, specialty drinks and
desserts. Substantially all restaurants offer beer, wine, liquor and premium
specialty drinks. During 1999, alcoholic beverages accounted for 13.7% of
Company owned Applebee's restaurant sales. The Company continuously develops and
tests new menu items through regional consumer tastings and additional tests in
selected Company and franchise restaurants. Franchisees are required to present
a menu consisting of approximately 65% of selections from the Company approved
list of national core items and approximately 35% of additional items selected
from the Company approved list of optional items.
Restaurant Operations. All restaurants are operated in accordance with uniform
operating standards and specifications relating to the quality and preparation
of menu items, selection of menu items, maintenance and cleanliness of premises,
and employee conduct. All standards and specifications are developed by the
Company, with input from franchisees, and are applied on a system-wide basis.
Training. The Company has an operations training course for general managers,
kitchen managers and other restaurant managers. The course consists of in-store
task-oriented training and formal administrative, customer service, and
financial training which typically lasts from six to ten weeks. A team of
Company employed trainers is provided for new restaurants to conduct hands-on
training for all restaurant employees to ensure compliance with Company
standards. The Company, generally through in-restaurant seminars and video
presentations, provides periodic training for its restaurant employees regarding
topics such as the responsible service of alcohol and food sanitation and
storage.
6
Advertising. The Company has historically concentrated its advertising and
marketing efforts primarily on food-specific promotions, with each promotion
featuring a specific theme or ethnic cuisine. The Company advertises on a
national, regional and local basis, utilizing primarily television, radio and
print media. In 1999, approximately 4.0% of sales for Company Applebee's
restaurants was spent on advertising, including 1.5% contributed to the national
advertising pool which develops and funds the specific national promotions.
Beginning in 2000, the contribution to the national advertising pool will
increase from 1.5% to 2.1% of sales. The remainder of the Company's advertising
expenditures are focused on local advertising in areas with Company owned
restaurants.
Purchasing. Maintaining high food quality and system-wide consistency is a
central focus of the Company's purchasing program. The Company mandates quality
standards for all products used in the restaurants and maintains a limited list
of approved suppliers from which the Company and its franchisees must select.
The Company has negotiated purchasing agreements with most of its approved
suppliers which result in volume discounts for the Company and its franchisees,
and when necessary, purchases and maintains inventories of Riblets, a specialty
item on the Applebee's menu, to assure sufficient supplies for the system.
Company Applebee's Restaurants
Company Restaurant Openings and Acquisitions. The Company's expansion strategy
is to cluster restaurants in targeted markets, thereby increasing consumer
awareness and enabling the Company to take advantage of operational,
distribution, and advertising efficiencies. The Company's experience in
developing markets indicates that the opening of multiple restaurants within a
particular market results in increased market share.
In order to maximize overall system growth, the Company's expansion strategy
through 1992 emphasized franchise arrangements with experienced, successful and
financially capable restaurant operators. Although the Company continues to
expand the Applebee's system across the United States through franchise
operations, commencing in 1992, the system growth strategy also included
increasing the number of Company restaurants through the direct development of
strategic territories and, if available under acceptable financial terms, by
selectively acquiring existing franchise restaurants and terminating related
development rights held by the selling franchisee. In that regard, the Company
has expanded from a total of 31 owned or operated restaurants as of December 27,
1992 to a total of 262 as of December 26, 1999 through the opening of 184 new
restaurants and the acquisition of 81 franchise restaurants over the last seven
years. In addition, as part of its portfolio management strategy, the Company
has sold 26 restaurants to franchisees during this period, including 12
restaurants in the Philadelphia market in December 1999.
The Company opened 27 new Applebee's restaurants in 1999 and anticipates opening
approximately 25 to 27 new Applebee's restaurants in 2000, although it may open
more or less restaurants depending upon the availability of appropriate new
sites. The areas in which the Company's restaurants are located and the areas
where the Company opened new restaurants during 1999 are set forth in the
following table.
7
Company
Company Restaurants
Restaurants as of
Opened in December 26,
Area 1999 1999
------------------------------------------------------------- ----------------- ------------------
New England (includes Massachusetts, Vermont,
New Hampshire, Rhode Island and Maine).................... 6 41
Detroit/Southern Michigan................................... 6 40
Virginia.................................................... 2 37
Minneapolis/St. Paul, Minnesota............................. 3 35
North/Central Texas......................................... 3 27
Kansas City, Missouri/Kansas................................ 2 24
St. Louis, Missouri/Illinois................................ 3 24
Las Vegas/Reno, Nevada...................................... -- 12
Atlanta, Georgia............................................ 1 9
San Diego/Southern California............................... -- 7
Albuquerque, New Mexico..................................... -- 6
Philadelphia, Pennsylvania.................................. 1 --
----------------- ------------------
27 262
================= ==================
Restaurant Operations. The staff for a typical Applebee's restaurant consists of
one general manager, one kitchen manager, two or three assistant managers and
approximately 60 hourly employees. All managers of Company owned restaurants
receive a salary and performance bonus based on restaurant sales, profits and
adherence to Company standards. As of December 26, 1999, the Company employed
nine Regional Vice Presidents of Operations/Directors of Operations and 43 Area
Directors, whose duties include regular restaurant visits and inspections and
the ongoing maintenance of the Company standards of quality, service,
cleanliness, value, and courtesy. In addition to providing a significant
contribution to revenues and operating earnings, Company restaurants are used
for many purposes which are integral to the development of the entire system,
including testing of new menu items and training of franchise restaurant
managers and operating personnel. In addition, the operation of Company
restaurants enables the Company to develop and refine its operating standards
and specifications further and to understand and better respond to day-to-day
management and operating concerns of franchisees.
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. The Company currently has exclusive
franchise arrangements with approximately 68 franchise groups, including 13
international franchisees. The Company has generally selected franchisees that
are experienced multi-unit restaurant operators who have been involved with
other restaurant concepts. The Company's franchisees operate Applebee's
restaurants in 42 states and eight international countries. Virtually all
territories in the contiguous 48 states have been granted to franchisees or
designated for Company development.
As of December 26, 1999, there were 906 franchise restaurants. Franchisees
opened 113 restaurants in 1997, 84 restaurants in 1998 and 80 restaurants in
1999. The Company anticipates between 90 to 100 franchise restaurant openings in
2000.
Development of Restaurants. The Company makes available to franchisees the
physical specifications for a typical restaurant, retaining the right to
prohibit or modify the use of any plan. Each franchisee, with assistance from
the Company, is responsible for selecting the site for each restaurant within
its territory, subject to Company approval. The Company conducts a physical
inspection, reviews any proposed lease or purchase agreement, and makes
available demographic studies.
8
Domestic Franchise Arrangements. Each Applebee's franchise arrangement consists
of a development agreement and separate franchise agreements. Development
agreements grant the exclusive right to develop a number of restaurants in a
designated geographical area. The term of a domestic development agreement is
generally 20 years. A separate franchise agreement is entered into by the
franchisee relating to the operation of each restaurant which has a term of 20
years and permits renewal for up to an additional 20 years in accordance with
the terms contained in the then current franchise agreement (including the then
current royalty rates and advertising fees) and upon payment of an additional
franchise fee.
For each restaurant developed, a franchisee is currently obligated to pay to the
Company a royalty fee equal to 4% of the restaurant's monthly gross sales. The
franchise agreements for many franchisees allow the Company to increase royalty
fees up to 5% of gross sales; however, the Company has agreed to withhold
consideration of such action until on or after January 1, 2003. The Company's
current form of development agreement requires an initial franchise fee of
$35,000 for each restaurant developed during its term. The terms, royalties and
advertising fees under a limited number of franchise agreements and the
franchise fees under older development agreements vary from the currently
offered arrangements.
Advertising. Through 1999, domestic franchisees were required to spend at least
1.5% of gross sales on local advertising and promotional activities, in addition
to their contribution of 1.5% of gross sales to the national advertising fund.
To fund the Company's brand-building strategy, the required contribution to the
national advertising fund will increase to 2.1% of gross sales in 2000, and may
increase from 2.1% to a maximum of 2.5% of gross sales in 2001. Beginning in
2002, the required contribution will be 2.5% of gross sales. Franchisees also
promote the opening of each restaurant and the Company, subject to certain
conditions, reimburses the franchisee for 50% of the out-of-pocket opening
advertising expenditures, up to a maximum of $2,500. The Company can increase
the combined amount of the advertising fee and the amount required to be spent
on local advertising and promotional activities to a maximum of 5% of gross
sales.
Training and Support. The Company provides ongoing advice and assistance to
franchisees in connection with the operation and management of each restaurant
through training sessions, meetings, seminars, on-premises visits, and by
written or other material. Such advice and assistance relates to revisions to
operating manual policies and procedures, and new developments, techniques, and
improvements in restaurant management, food and beverage preparation, sales
promotion, and service concepts. The Company also has franchise business
managers (12 at December 26, 1999) who are responsible for assisting each
franchisee with business planning, development, technology and human resources
efforts.
Quality Control. The Company continuously monitors franchisee operations and
inspects restaurants, principally through its full-time franchise territory
managers (14 at December 26, 1999). The Company makes both scheduled and
unannounced inspections of restaurants to ensure that only approved products are
in use and that Company prescribed practices and procedures are being followed.
A minimum of three planned visits are made each year, during which a
representative of the Company conducts an inspection and consultation at each
restaurant. The Company has the right to terminate a franchise if a franchisee
does not operate and maintain a restaurant in accordance with the Company's
requirements.
Franchise Business Council. The Company maintains a Franchise Business Council
which provides advice to the Company regarding operations, marketing, product
development and other aspects of restaurant operations for the purpose of
improving the franchise system. As of December 26, 1999, the Franchise Business
Council consisted of seven franchisee representatives, two members of the
Company's senior management, and the Company's Chairman of the Board. One
franchisee representative is a permanent member, one franchisee representative
must be a franchisee with five or less restaurants, and any franchisee who
operates 10% or more of the total number of system restaurants (currently none)
is reserved a seat. In addition, the Company's Chairman is a permanent member of
the Franchise Business Council. The remaining franchisee representatives are
elected by franchisees prior to, and announced at, the annual franchise
convention.
9
International Franchise Agreements. The Company has begun pursuing international
franchising of the Applebee's concept under a long-term strategy of controlled
expansion. This strategy includes seeking qualified franchisees with the
resources to open multiple restaurants in each territory and the familiarity
with the specific local business environment. The Company is currently focusing
on international franchising in major cities in Canada, Mexico, Central America
and the Middle East. In this regard, the Company currently has development
agreements with 13 international franchisees. The Company had 26 international
restaurants in operation as of December 26, 1999. The success of current
international operations and further international expansion will be dependent
upon, among other things, local acceptance of the Applebee's concept, and the
Company's ability to attract qualified franchisees and operating personnel, to
comply with the regulatory requirements of the local jurisdictions, and to
supervise international franchisee operations effectively.
Franchise Financing. Although financing is the sole responsibility of the
franchisee, the Company makes available to franchisees information relating to
financial institutions interested in financing the costs of restaurant
development for qualified franchisees. None of these financial institutions is
an affiliate or agent of the Company, and the Company has no control over the
terms or conditions of any financing arrangement offered by these financial
institutions. Under a previous franchise financing program, the Company provided
a limited guaranty of loans made to certain franchisees.
Competition
Competition in the casual dining segment of the restaurant industry is expected
to remain intense with respect to price, service, location, concept, and the
type and quality of food. There is also intense competition for real estate
sites, qualified management personnel, and hourly restaurant staff. The
Company's competitors include national, regional and local chains, as well as
local owner-operated restaurants. There are a number of well-established
competitors, some of which have been in existence for a longer period than the
Company and may be better established in the markets where the Company's
restaurants are or may be located. The Company has begun to experience increased
competition in attracting and retaining qualified management level operating
personnel.
Service Marks
The Company owns the rights to the "Applebee's Neighborhood Grill & Bar(R)"
service mark and certain variations thereof in the United States and in various
foreign countries. The Company is aware of names and marks similar to the
service marks of the Company used by third parties in certain limited
geographical areas. The Company intends to protect its service marks by
appropriate legal action where and when necessary.
Government Regulation
The Company's restaurants are subject to numerous federal, state, and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant
requires appropriate licenses from regulatory authorities allowing it to sell
liquor, beer, and wine, and each restaurant requires food service licenses from
local health authorities. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to facilitate compliance with all applicable codes and
regulations.
10
The Company's employment practices are governed by various governmental
employment regulations, including minimum wage, overtime, immigration, family
leave and working condition regulations.
The Company is subject to a variety of federal and state laws governing
franchise sales and the franchise relationship. In general, these laws and
regulations impose certain disclosure and registration requirements prior to the
sale and marketing of franchises. Recent decisions of several state and federal
courts and recently enacted or proposed federal and state laws demonstrate a
trend toward increased protection of the rights and interests of franchisees
against franchisors. Such decisions and laws may limit the ability of
franchisors to enforce certain provisions of franchise agreements or to alter or
terminate franchise agreements. Due to the scope of the Company's business and
the complexity of franchise regulations, minor compliance issues may be
encountered from time to time; however, the Company does not believe any such
issues will have a material adverse effect on its business.
Under certain court decisions and statutes, owners of restaurants and bars in
some states in which the Company owns or operates restaurants may be held liable
for serving alcohol to intoxicated customers whose subsequent conduct results in
injury or death to a third party, and no assurance can be given that the Company
will not be subject to such liability. The Company believes its insurance
presently provides adequate coverage for such liability.
Employees
At December 26, 1999, the Company employed approximately 16,700 full and
part-time employees, of whom approximately 380 were corporate personnel, 1,220
were restaurant managers or managers in training and 15,100 were employed in
non-management full and part-time restaurant positions. Of the 380 corporate
employees, 140 were in management positions and 240 were general office
employees, including part-time employees.
The Company considers its employee relations to be good. Most employees, other
than restaurant management and corporate personnel, are paid on an hourly basis.
The Company believes that it provides working conditions and wages that compare
favorably with those of its competition. The Company has never experienced a
work stoppage due to labor difficulty and the Company's employees are not
covered by a collective bargaining agreement.
11
Executive Officers of the Registrant
The executive officers of the Company as of December 26, 1999 are shown below.
Name Age Position
Abe J. Gustin, Jr................ 65 Chairman of the Board of Directors
Lloyd L. Hill.................... 55 Chief Executive Officer, President and Member of the Board of
Directors
Steven K. Lumpkin................ 45 Executive Vice President of Strategic Development
George D. Shadid................. 45 Executive Vice President and Chief Financial Officer,
Treasurer and Member of the Board of Directors
Julia A. Stewart................. 44 President of Applebee's Division
Larry A. Cates................... 51 President of International Division
Karen B. Eadon................... 46 Senior Vice President of Marketing
Louis A. Kaucic.................. 48 Senior Vice President of Human Resources
John F. Koch..................... 40 Senior Vice President of Research and Development
Carin L. Stutz................... 43 Senior Vice President of Company Operations
Abe J. Gustin, Jr. has been a director of the Company since September 1983 when
the Company was formed. He served as Chairman of the Board of Directors of the
Company from September 1983 until January 1988 and was again elected as Chairman
in September 1992. He was Vice President from November 1987 to January 1988, and
from January 1988 until December 1994, he served as President of the Company.
Mr. Gustin served as Chief Executive Officer of the Company through 1996, and
effective January 1, 1997, became Co-Chief Executive Officer along with Lloyd L.
Hill. In January 1998, Mr. Hill assumed the full duties of Chief Executive
Officer while Mr. Gustin retained his position as the Chairman of the Board and
continued as an active executive of the Company through December 1998. In
January 1999, Mr. Gustin retired as an active executive of the Company but
continues as Chairman of the Board and serves as a member of the Company's
Franchise Business Council.
Lloyd L. Hill was elected a director of the Company in August 1989 and was
appointed Executive Vice President and Chief Operating Officer of the Company in
January 1994. In December 1994, he assumed the role of President in addition to
his role as Chief Operating Officer. Effective January 1, 1997, Mr. Hill assumed
the role of Co-Chief Executive Officer along with Mr. Gustin. In January 1998,
Mr. Gustin retained his position as the Chairman of the Board and Mr. Hill
assumed the full duties of Chief Executive Officer. From December 1989 to
December 1993, he served as President of Kimberly Quality Care, a home health
care and nurse personnel staffing company, where he also served as a director
from 1988 to 1993, having joined that organization in 1980.
Steven K. Lumpkin was employed by the Company in May 1995 as Vice President of
Administration. In January 1996, he was promoted to Senior Vice President of
Administration. In November 1997, he assumed the position of Senior Vice
President of Strategic Development and in January 1998 was promoted to Executive
Vice President of Strategic Development. From July 1993 until January 1995, Mr.
Lumpkin was a Senior Vice President with a division of the Olsten Corporation,
Olsten Kimberly Quality Care. From June 1990 until July 1993, Mr. Lumpkin was an
Executive Vice President and a member of the board of directors of Kimberly
Quality Care. From January 1978 until June 1990, Mr. Lumpkin was employed by
Price Waterhouse LLP, where he served as a management consulting partner and
certified public accountant.
12
George D. Shadid was employed by the Company in August 1992, and served as
Senior Vice President and Chief Financial Officer until January 1994 when he was
promoted to Executive Vice President and Chief Financial Officer. He also became
Treasurer in March 1995. In March 1999, Mr. Shadid was elected a director of the
Company. From 1985 to 1987, he served as Corporate Controller of
Gilbert/Robinson, Inc., at which time he was promoted to Vice President, and in
1988 assumed the position of Vice President and Chief Financial Officer, which
he held until joining the Company. From 1976 until 1985, Mr. Shadid was employed
by Deloitte & Touche LLP.
Julia A. Stewart was employed by the Company in October 1998 as President of its
Applebee's Division. From July 1991 until September 1998, Ms. Stewart held
several key executive positions with Taco Bell Corporation, a division of Tricon
Global Restaurants, Inc. Most recently, she served as National Vice President of
Franchise and License for over 5,200 Taco Bell units, and was previously Taco
Bell's Western Region Vice President of Operations with responsibility for over
1,200 company-owned restaurants. Prior to joining Taco Bell, she held key
marketing positions over a 15-year period, including Vice President of
Marketing, Research and Development with Stuart Anderson's Black Angus/Cattle
Company Restaurants.
Larry A. Cates was employed by the Company in May 1997 as President of its
International Division. Prior to joining the Company, Mr. Cates spent the
previous 17 years with PepsiCo Restaurants developing international markets for
that company's Pizza Hut, Taco Bell and KFC brands. From 1994 to 1997, Mr. Cates
was Vice President of Franchising and Development - Europe/Middle East, and from
1990 to 1994, he was Chief Executive Officer of Pizza Hut UK, Ltd., a joint
venture between PepsiCo Restaurants and Whitbread.
Karen B. Eadon was employed by the Company in March 1999 as Senior Vice
President of Marketing. From April 1995 to March 1999, Ms. Eadon was Vice
President of Retail Marketing Programs with ARCO Products, a leading gasoline
retail and convenience store chain. From April 1993 to November 1994, she was
employed as Vice President of Marketing by Carl Karcher Enterprises, owner and
franchisor of Carl's Jr. restaurants. From 1985 to 1993, Ms. Eadon held several
key marketing positions with Taco Bell Corporation.
Louis A. Kaucic was employed by the Company in October 1997 as Senior Vice
President of Human Resources. From July 1992 until October 1997, Mr. Kaucic was
Vice President of Human Resources and later promoted to Senior Vice President of
Human Resources with Unique Casual Restaurants, Inc., which operates several
restaurant concepts. From 1982 to 1992, he was employed by Pizza Hut in a
variety of positions, including Director of Employee Relations. From 1978 to
1982, Mr. Kaucic was employed by Kellogg's as an Industrial Relations Manager.
Mr. Kaucic is a director of the Women's Food Service Forum.
John F. Koch was employed by the Company in February 1999 as Senior Vice
President of Research and Development. From January 1990 to February 1999, Mr.
Koch held various positions with The Olive Garden, most recently as the Senior
Vice President of Food and Beverage. Mr. Koch has over 20 years experience in
the restaurant industry.
Carin L. Stutz was employed by the Company in November 1999 as Senior Vice
President of Operations. From July 1994 to November 1999, Ms. Stutz was Division
Vice President with Wendy's International. From 1993 to 1994, she was Regional
Operations Vice President for Sodexho, USA. From 1990 to 1993, Ms. Stutz was
employed by Nutri/System, Inc. as a Vice President of Corporate Operations.
Prior to 1990, Ms. Stutz was employed for 12 years with Wendy's International.
13
Item 2. Properties
At December 26, 1999, the Company owned or operated 262 restaurants, of which it
leased the land and building for 59 sites, owned the building and leased the
land for 80 sites, and owned the land and building for 123 sites. In addition,
as of December 26, 1999, the Company owned 8 sites for future development of
restaurants and had entered into 4 lease agreements for restaurant sites the
Company plans to open during 2000. The Company's leases generally have an
initial term of 15 to 20 years, with renewal terms of 5 to 20 years, and provide
for a fixed rental plus, in certain instances, percentage rentals based on gross
sales.
The Company owns an 80,000 square foot office building in which its corporate
offices are headquartered in Overland Park, Kansas, located in the metropolitan
Kansas City area. The Company also leases office space in certain of the regions
in which it operates restaurants.
Under its franchise agreements, the Company has certain rights to gain control
of a restaurant site in the event of default under the lease or the franchise
agreement.
The following table sets forth the 49 states and the eight international
countries in which Applebee's are located and the number of restaurants
operating in each state or country as of December 26, 1999:
14
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
Domestic:
--------
Alabama........................ -- 22 22
Alaska......................... -- 1 1
Arizona........................ -- 18 18
Arkansas....................... -- 6 6
California..................... 7 56 63
Colorado....................... -- 25 25
Connecticut.................... -- 4 4
Delaware....................... -- 4 4
Florida........................ -- 70 70
Georgia........................ 9 48 57
Idaho.......................... -- 6 6
Illinois....................... 6 40 46
Indiana........................ -- 44 44
Iowa........................... -- 19 19
Kansas......................... 10 13 23
Kentucky....................... -- 23 23
Louisiana...................... -- 17 17
Maine.......................... 4 -- 4
Maryland....................... -- 18 18
Massachusetts.................. 19 -- 19
Michigan....................... 40 8 48
Minnesota...................... 35 -- 35
Mississippi.................... -- 12 12
Missouri....................... 32 8 40
Montana........................ -- 6 6
Nebraska....................... -- 10 10
Nevada......................... 12 -- 12
New Hampshire.................. 11 -- 11
New Jersey..................... -- 20 20
New Mexico..................... 6 4 10
New York....................... -- 50 50
North Carolina................. 1 39 40
North Dakota................... -- 6 6
Ohio........................... -- 58 58
Oklahoma....................... -- 13 13
Oregon......................... -- 10 10
Pennsylvania................... -- 35 35
Rhode Island................... 5 -- 5
South Carolina................. -- 36 36
South Dakota................... -- 2 2
Tennessee...................... -- 40 40
Texas.......................... 27 23 50
Utah........................... -- 7 7
Vermont........................ 2 -- 2
Virginia....................... 36 9 45
Washington..................... -- 12 12
West Virginia.................. -- 11 11
Wisconsin...................... -- 24 24
Wyoming........................ -- 3 3
-------------- -------------- --------------
Total Domestic................. 262 880 1,142
-------------- -------------- --------------
15
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
International:
-------------
Canada......................... -- 11 11
Germany........................ -- 2 2
Greece......................... -- 1 1
Honduras....................... -- 1 1
Kuwait......................... -- 1 1
Mexico......................... -- 3 3
Netherlands.................... -- 5 5
Sweden......................... -- 2 2
-------------- -------------- --------------
Total International............ -- 26 26
-------------- -------------- --------------
262 906 1,168
============== ============== ==============
Item 3. Legal Proceedings
As of December 26, 1999, the Company was using assets owned by a former
franchisee in the operation of one restaurant which remains under a purchase
rights agreement that required the Company to make certain payments to the
franchisee's lender. In 1991, a dispute arose between the lender and the Company
over the amount of the payments due the lender under that agreement and as to
whether the Company had agreed to guarantee the franchisee's debt. Based upon a
then-current independent appraisal, the Company offered to settle the dispute
and purchase the assets of the three then-existing restaurants for $1,000,000 in
1991. In November 1992, the lender was declared insolvent by the FDIC and has
since been liquidated. The Company closed one of the three restaurants in 1994
and one of the two remaining restaurants in February 1996. In the fourth quarter
of 1996, the Company received information indicating that the franchisee's
indebtedness to the FDIC had been acquired by a third party. In June 1997, the
third party filed a lawsuit against the Company seeking approximately
$3,800,000. In April 1999, a summary judgment of $3,833,000 was awarded to the
third party. The Company has filed an appeal and believes it has meritorious
defenses. As of December 26, 1999, the Company believes it has recorded adequate
reserves for this matter.
The Company has reached an agreement in principle to settle a dispute with the
Company's franchisee for Germany regarding disclosures allegedly made or omitted
by the Company.
In addition, the Company is involved in various legal actions arising in the
normal course of business. 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
1. The Company's common stock trades on The Nasdaq Stock Market(R)under
the symbol APPB.
The table below sets forth for the fiscal quarters indicated the
reported high and low sale prices of the Company's common stock, as
reported on The Nasdaq Stock Market.
1999 1998
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 28.69 $ 20.00 $ 23.75 $ 16.13
Second Quarter $ 32.75 $ 22.50 $ 26.00 $ 20.00
Third Quarter $ 34.94 $ 29.88 $ 24.63 $ 18.25
Fourth Quarter $ 35.00 $ 23.00 $ 22.13 $ 16.88
2. Number of stockholders of record at December 26, 1999: 1,173
3. An annual dividend of $0.10 per common share was declared on December
16, 1999 for stockholders of record on December 27, 1999, and the
dividend was payable on January 28, 2000. An annual dividend of $0.09
per common share was declared on November 19, 1998 for stockholders of
record on December 16, 1998, and the dividend was payable on January
21, 1999.
The Company presently anticipates continuing the payment of cash
dividends based upon its annual net income. The actual amount of such
dividends will depend upon future earnings, results of operations,
capital requirements, the financial condition of the Company and
certain other factors. There can be no assurance as to the amount of
net income that the Company will generate in 2000 or future years and,
accordingly, there can be no assurance as to the amount that will be
available for the declaration of dividends, if any.
17
Item 6. Selected Financial Data
The following table sets forth for the periods and the dates indicated selected
financial data of the Company. The fiscal year ended December 31, 1995 contained
53 weeks, and all other periods presented contained 52 weeks. The following
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Form 10-K.
Fiscal Year Ended
--------------------------------------------------------------------------------
December 26, December 27, December 28, December 29, December 31,
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ----------------
(in thousands, except per share amounts)
STATEMENT OF
EARNINGS DATA:
Company restaurant sales................. $ 596,754 $ 580,840 $ 452,173 $ 358,990 $ 299,824
Franchise income......................... 72,830 66,722 63,647 54,141 43,739
--------------- --------------- --------------- --------------- ----------------
Total operating revenues............ $ 669,584 $ 647,562 $ 515,820 $ 413,131 $ 343,563
=============== =============== =============== =============== ================
Operating earnings....................... $ 94,910 $ 88,562 $ 71,283 $ 58,833 $ 45,712
Earnings before extraordinary item....... $ 54,198 $ 50,656 $ 45,091 $ 38,014 $ 27,420
Basic earnings per share before
extraordinary item.................... $ 1.91 $ 1.67 $ 1.44 $ 1.22 $ 0.94
Diluted earnings per share before
extraordinary item.................... $ 1.89 $ 1.67 $ 1.43 $ 1.21 $ 0.92
Net earnings............................. $ 54,198 $ 50,015 $ 45,091 $ 38,014 $ 27,420
Basic net earnings per share............. $ 1.91 $ 1.65 $ 1.44 $ 1.22 $ 0.94
Diluted net earnings per share........... $ 1.89 $ 1.65 $ 1.43 $ 1.21 $ 0.92
Dividends per share...................... $ 0.10 $ 0.09 $ 0.08 $ 0.07 $ 0.06
Basic weighted average shares
outstanding........................... 28,403 30,272 31,401 31,188 29,319
Diluted weighted average shares
outstanding........................... 28,601 30,385 31,640 31,533 29,860
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets............................. $ 442,216 $ 510,904 $ 377,474 $ 314,111 $ 270,680
Long-term obligations, including
current portion........................ $ 108,100 $ 147,188 $ 29,105 $ 25,843 $ 27,427
Stockholders' equity..................... $ 253,873 $ 296,053 $ 290,443 $ 244,764 $ 203,993
18
Item 7. 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 years ended December 26, 1999, December 27, 1998
and December 28, 1997 contained 52 weeks and are referred to hereafter as 1999,
1998 and 1997, respectively.
Acquisitions
On April 14, 1997, the Company acquired the operations and assets of 11
franchise restaurants in the St. Louis metropolitan area, referred to herein as
the "St. Louis Acquisition." The St. Louis Acquisition was accounted for as a
purchase and, accordingly, the results of operations of such restaurants have
been reflected in the consolidated financial statements subsequent to the date
of acquisition.
On March 30, 1998, the Company acquired the operations and assets of 33
restaurants in the Virginia markets of Norfolk, Richmond, Roanoke and
Charlottesville, referred to herein as the "Virginia Acquisition." The Virginia
Acquisition was accounted for as a purchase in the second quarter of 1998 and,
accordingly, the results of operations of such restaurants have been reflected
in the consolidated financial statements subsequent to the date of acquisition.
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. 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 1999 period prior to
divestiture were $22,759,000 and $18,568,000, respectively.
19
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.
Fiscal Year Ended
------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
-------------- -------------- ----------------
Revenues:
Company restaurant sales......................... 89.1% 89.7% 87.7%
Franchise income................................. 10.9 10.3 12.3
-------------- -------------- ----------------
Total operating revenues...................... 100.0% 100.0% 100.0%
============== ============== ================
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage................................ 27.5% 27.4% 27.5%
Labor............................................ 31.6 31.9 32.1
Direct and occupancy............................. 24.4 25.3 25.3
Pre-opening expense.............................. 0.3 0.5 0.8
-------------- -------------- ----------------
Total cost of sales........................... 83.7% 85.1% 85.7%
============== ============== ================
General and administrative expenses................... 9.5% 9.0% 10.2%
Amortization of intangible assets..................... 0.9 0.9 0.6
Loss on disposition of restaurants and equipment...... 0.8 0.1 0.2
-------------- -------------- ----------------
Operating earnings.................................... 14.2 13.7 13.8
-------------- -------------- ----------------
Other income (expense):
Investment income................................ 0.2 0.2 0.4
Interest expense................................. (1.6) (1.5) (0.3)
Other income..................................... 0.1 0.1 0.1
-------------- -------------- ----------------
Total other income (expense).................. (1.4) (1.3) 0.1
-------------- -------------- ----------------
Earnings before income taxes and extraordinary item... 12.8 12.4 13.9
Income taxes.......................................... 4.7 4.6 5.2
-------------- -------------- ----------------
Earnings before extraordinary item.................... 8.1 7.8 8.7
Extraordinary loss from early extinguishment
of debt, net of income taxes..................... -- (0.1) --
-------------- -------------- ----------------
Net earnings.......................................... 8.1% 7.7% 8.7%
============== ============== ================
20
Fiscal Year Ended December 26, 1999 Compared With Fiscal Year Ended December 27,
1998
Company Restaurant Sales. Total Company restaurant sales increased $15,914,000
(3%) from $580,840,000 in 1998 to $596,754,000 in 1999. Sales for Company
Applebee's restaurants increased $91,730,000 (19%) from $471,580,000 in 1998 to
$563,310,000 in 1999 due primarily to Company restaurant openings, increases in
comparable restaurant sales and incremental sales from the 33 Virginia
restaurants acquired in March 1998. Sales for Company Rio Bravo Cantina
restaurants decreased from $94,887,000 in 1998 to $28,638,000 in 1999, and sales
for the specialty restaurants decreased from $14,373,000 in 1998 to $4,806,000
in 1999 as a result of their divestiture in April 1999.
Comparable restaurant sales at Company Applebee's restaurants increased by 4.4%
in 1999. Weighted average weekly sales at Company Applebee's restaurants
increased 2.5% from $40,664 in 1998 to $41,674 in 1999. These increases were due
to increased customer traffic as a result of the success of the Company's food
promotions, an increase in network television advertising in 1999 and increased
sales of appetizers, drinks and desserts.
Franchise Income. Overall franchise income increased $6,108,000 (9%) from
$66,722,000 in 1998 to $72,830,000 in 1999 due primarily to the increased number
of franchise Applebee's restaurants operating during 1999 as compared to 1998.
Successful system-wide food promotions also contributed to increases of 2.9% and
3.1%, respectively, in comparable restaurant sales and weighted average weekly
sales for franchise Applebee's restaurants in 1999. These increases were
partially offset by a reduction in franchise royalties as a result of the sale
of the Rio Bravo Cantina concept during the second quarter of 1999 and the
waiver of royalties related to these restaurants, as well as the acquisition of
the Virginia restaurants in the second quarter of 1998.
Cost of Company Restaurant Sales. Food and beverage costs increased from 27.4%
in 1998 to 27.5% in 1999. This increase resulted from the Company's strategy of
investing in higher cost food promotional items, which was partially offset by
the impact of the sale of the Rio Bravo restaurants. In addition, beverage
sales, as a percentage of total Company restaurant sales, declined from 16.6% in
1998 to 14.4% in 1999 which had a negative impact on overall food and beverage
costs, as a percentage of Company restaurant sales. This decrease was due, in
part, to the sale of the Rio Bravo restaurants, which had a higher proportion of
beverage sales. Management also believes that the reduction in beverage sales
was due, in part, to the continuation of the overall trend toward increased
awareness of responsible alcohol consumption as well as a higher rate of growth
in food sales resulting from successful food promotions.
Labor costs decreased from 31.9% in 1998 to 31.6% in 1999. The decrease was due
primarily to lower labor costs in the acquired Virginia restaurants and the
impact of the sale of the Rio Bravo restaurants. These decreases were partially
offset by continued pressure on both hourly labor and management costs due to
low unemployment as well as the highly competitive nature of the restaurant
industry.
Direct and occupancy costs decreased from 25.3% in 1998 to 24.4% in 1999. This
decrease was due primarily to the sale of the Rio Bravo restaurants, a decrease
in advertising costs, as a percentage of sales, and leverage resulting from the
sales increases at Applebee's restaurants in 1999.
General and Administrative Expenses. General and administrative expenses
increased from 9.0% in 1998 to 9.5% in 1999 due to the absorption of general and
administrative expenses over a lower revenue base as a result of the divestiture
of the Rio Bravo and specialty restaurants. General and administrative expenses
increased by $5,294,000 during 1999 compared to 1998 due primarily to increased
incentive compensation expense as a result of the Company's performance.
21
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment increased from $952,000 in 1998 to $5,607,000 in 1999
due primarily to the loss on the disposition of the Rio Bravo Cantina and
specialty restaurants of $9,000,000 which was partially offset by the gain on
the sale of the Philadelphia restaurants of $4,193,000.
Interest Expense. Interest expense increased in 1999 compared to 1998 primarily
as a result of interest associated with borrowings under the Company's credit
facilities for stock repurchases.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 36.8% in 1999 compared to 37.0% in 1998. The decrease in the
Company's overall effective tax rate in 1999 was due primarily to an increase in
credits resulting from FICA taxes on tips and Work Opportunity Tax Credits.
Fiscal Year Ended December 27, 1998 Compared With Fiscal Year Ended December 28,
1997
Company Restaurant Sales. Total Company restaurant sales increased $128,667,000
(28%) from $452,173,000 in 1997 to $580,840,000 in 1998. Sales for Company
Applebee's restaurants increased $117,137,000 (33%) from $354,443,000 in 1997 to
$471,580,000 in 1998 due primarily to Company restaurant openings, sales from
the 33 Virginia restaurants acquired in March 1998, and incremental sales from
the 11 St. Louis restaurants acquired in April 1997. Sales for Company Rio Bravo
Cantina restaurants were $83,295,000 and $94,887,000 in 1997 and 1998,
respectively, and sales for the specialty restaurants were $14,435,000 and
$14,373,000 in 1997 and 1998, respectively. The increase in sales for the Rio
Bravo Cantina restaurants resulted from Company restaurant openings.
Comparable restaurant sales at Company Applebee's restaurants decreased by 0.4%
in 1998. Weighted average weekly sales at Company Applebee's restaurants
decreased 1.2% from $41,176 in 1997 to $40,664 in 1998. Comparable restaurant
sales and weighted average weekly sales at Company Applebee's restaurants in
1998 were positively affected by menu price increases implemented during the
fourth quarter of 1997 for certain menu items.
Comparable restaurant sales for Company Rio Bravo Cantina restaurants decreased
by 6.8% in 1998 due primarily to competition in the Atlanta and Florida markets.
Weighted average weekly sales (excluding one restaurant that is open for dinner
only) decreased from $60,946 in 1997 to $52,789 in 1998. Weighted average weekly
sales in 1998 were also impacted by new restaurant openings in new markets.
Franchise Income. Overall franchise income increased $3,075,000 (5%) from
$63,647,000 in 1997 to $66,722,000 in 1998 due primarily to the increased number
of franchise Applebee's and Rio Bravo Cantina restaurants operating during 1998
as compared to 1997. This increase was partially offset by a reduction in
franchise royalties as a result of the acquisition of the Virginia restaurants
in the second quarter of 1998 and the St. Louis restaurants in the second
quarter of 1997, as well as a reduction in franchise fees due to a decline in
franchise openings from 129 restaurants in 1997 to 88 restaurants in 1998. In
addition, comparable restaurant sales and weighted average weekly sales for
franchise Applebee's restaurants decreased by 0.1% and 1.1%, respectively, in
1998.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.5%
in 1997 to 27.4% in 1998 due primarily to operational improvements, purchasing
efficiencies resulting from the Company's growth, and the menu price increase
implemented in the fourth quarter of 1997. Such decreases were partially offset
by an increase in dairy and poultry costs during the latter half of 1998 and
revisions to Rio Bravo Cantina menu items. Beverage sales, as a percentage of
Company restaurant sales, declined from 17.8% in 1997 to 16.6% in 1998 which had
a negative impact on overall food and beverage costs, as a percentage of Company
restaurant sales. Management believes that the reduction in beverage sales is
due in part to the continuation of the overall trend toward increased awareness
of responsible alcohol consumption.
22
Labor costs decreased from 32.1% in 1997 to 31.9% in 1998. The decrease was due
primarily to lower labor costs in the Virginia restaurants and a decrease in
group medical costs due to favorable claims experience. In addition, labor costs
in the latter part of 1997 were adversely impacted by the implementation of the
Company's food and menu enhancement initiative in its Applebee's restaurants.
These decreases were partially offset by continued pressure on both hourly labor
and management costs as a result of increases in the minimum wage, as well as
the highly competitive nature of the restaurant industry, and higher labor costs
experienced at the Rio Bravo Cantina restaurants due to the significant decline
in sales volumes in 1998.
Direct and occupancy costs were 25.3% in both 1997 and 1998. Rent expense, as a
percentage of sales, declined in 1998 due to a higher proportion of owned
properties resulting from the Virginia Acquisition. In addition, plateware costs
decreased in 1998 as a result of the Company's 1997 food and menu enhancement
initiative in its Applebee's restaurants. Such decreases were offset by
increased levels of advertising expenditures and depreciation expense associated
with new restaurants as well as higher costs experienced at the Rio Bravo
Cantina restaurants due to the significant decline in sales volumes in 1998.
General and Administrative Expenses. General and administrative expenses
decreased from 10.2% in 1997 to 9.0% in 1998 due primarily to the absorption of
general and administrative expenses over a larger revenue base as well as the
additional leverage resulting from the Virginia and St. Louis acquisitions.
General and administrative expenses increased by $5,465,000 during 1998 compared
to 1997 due primarily to the costs of additional personnel associated with the
Company's development efforts and system-wide expansion.
Amortization of Intangible Assets. Amortization of intangible assets increased
in 1998 as a result of the amortization of goodwill related to the St. Louis and
Virginia acquisitions.
Investment Income. Investment income decreased in 1998 compared to 1997
primarily as a result of decreases in cash and cash equivalents and short-term
investments due to capital expenditures and acquisitions.
Interest Expense. Interest expense increased in 1998 compared to 1997 primarily
as a result of interest associated with borrowings under the Company's credit
facilities and capitalized leases related to the St. Louis and Virginia
acquisitions.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.0% in 1998 compared to 37.2% in 1997. The decrease in the
Company's overall effective tax rate in 1998 was due primarily to an increase in
credits resulting from FICA taxes on tips.
Extraordinary Item. In connection with the early extinguishment of debt, the
Company paid a prepayment penalty of $930,000 on March 30, 1998. The prepayment
penalty plus the remaining unamortized portion of the related deferred financing
costs of $91,000 is reflected as an extraordinary loss of $641,000, net of
income taxes of $380,000, in the accompanying consolidated statement of earnings
for 1998.
Liquidity and Capital Resources
The Company's need for capital resources historically has resulted from, and for
the foreseeable future is expected to relate primarily to, the construction and
acquisition of restaurants. Such capital has been provided by public stock
offerings, debt financing, and ongoing Company operations, including cash
generated from Company and franchise operations, credit from trade suppliers,
real estate lease financing, and landlord contributions to leasehold
improvements. The Company has also used its common stock as consideration in the
acquisition of restaurants. In addition, the Company assumed debt or issued new
debt in connection with certain mergers and acquisitions.
23
Capital expenditures were $77,665,000 in fiscal year 1998 (excluding
$101,749,000 related to the Virginia Acquisition, including acquisition costs)
and $53,945,000 in 1999. The Company currently expects to open 25 to 27
Applebee's restaurants in 2000. Capital expenditures are expected to be between
$55,000,000 and $60,000,000 in fiscal 2000 primarily for the development of new
restaurants, refurbishments of and capital replacements for existing
restaurants, and enhancements to information systems. The amount of actual
capital expenditures will be dependent upon, among other things, the proportion
of leased versus owned properties as the Company expects to continue to purchase
a portion of its sites. In addition, if the Company opens more restaurants than
it currently anticipates or acquires additional restaurants, its capital
requirements will increase accordingly.
On March 30, 1998, the Company entered into a bank credit agreement that
provided for $225,000,000 in senior secured credit facilities, consisting of an
eight-year senior secured term loan of $125,000,000 and a five-year secured
working capital facility of $100,000,000. The Company also entered into a
five-year $5,000,000 letter of credit facility with another bank. In the third
quarter of 1999, the Company entered into a one-year renewable $10,000,000
unsecured line of credit facility, of which $5,000,000 may only be used for
letters of credit. In the fourth quarter of 1999, the Company's working capital
facility was reduced from $100,000,000 to $86,500,000 as a result of the sale of
the Philadelphia restaurants. Both the senior term loan and the working capital
facility are secured by the common stock of each of the Company's present and
future subsidiaries and all intercompany debt of the Company and such
subsidiaries. In addition, both the senior term loan and the working capital
facility are subject to various covenants and restrictions which, among other
things, require the maintenance of stipulated fixed charge, interest coverage
and leverage ratios, as defined, and limit additional indebtedness and capital
expenditures in excess of specified amounts. Cash dividends were limited to
$5,000,000 through fiscal year 1999. The credit agreement originally permitted
up to $50,000,000 to be utilized for repurchases of the Company's common stock.
In February 1999, the credit agreement was amended to permit additional
repurchases of common stock of up to $100,000,000 and to allow annual cash
dividends of the greater of $5,000,000 or 50% of consolidated net income
beginning in fiscal year 2000. The Company is currently in compliance with the
covenants contained in its credit agreement.
During 1998, the Company's Board of Directors approved plans to repurchase up to
$50,000,000 of the Company's common stock, subject to market conditions. During
1998, the Company repurchased 2,431,000 shares of its common stock at an
aggregate cost of $49,332,000. In February 1999, the Company's Board of
Directors approved plans to repurchase up to an additional $100,000,000 of the
Company's common stock over a two-year period, subject to market conditions. In
December 1999, the Company's Board of Directors authorized an additional program
to repurchase 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. During 1999, the Company repurchased 3,332,000
shares of its common stock at an aggregate cost of $102,959,000.
As of December 26, 1999, the Company held liquid assets totaling $3,982,000,
consisting of cash and cash equivalents of $1,427,000 and short-term investments
of $2,555,000. The working capital deficit increased from $34,576,000 at
December 27, 1998 to $43,451,000 at December 26, 1999. This increase was due
primarily to increased gift certificate sales in December 1999 and an increase
in accrued incentive compensation expense as a result of the Company's 1999
performance. As of December 26, 1999, $18,500,000 was outstanding under the
Company's working capital and line of credit facilities, and standby letters of
credit totaling $3,530,000 were outstanding under its letter of credit
facilities.
24
The Company believes that its liquid assets and cash generated from operations,
combined with borrowings available under its credit facilities, will provide
sufficient funds for its operating, capital and other requirements for the
foreseeable future.
Inflation
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
A majority of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. An increase in the minimum wage has been recently proposed by the Federal
government and is also being discussed by various state governments. Although
the Company has been able to and will continue to attempt to pass along
increases in costs through food and beverage price increases, there can be no
assurance that all such increases can be reflected in its prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at its restaurants.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended by SFAS No. 137, establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This statement
is effective for the Company beginning in the first quarter of fiscal year 2001.
The Company believes that the adoption of the provisions of SFAS No. 133 will
not have a material effect on its financial statements, based on current
activities.
Impact of the Year 2000
As of the filing date of this report, the impact of the Year 2000 has not had a
material adverse impact on the Company's business or results of operations. The
total cost of the Company's Year 2000 efforts was approximately $1,300,000.
These amounts included the costs of external consultants, the purchase of
software and hardware, and the compensation of internal employees working on
Year 2000 projects. All costs were funded from cash flows from operations.
25
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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
On March 30, 1998, the Company entered into a bank credit agreement that
provided for $225,000,000 in senior secured credit facilities, consisting of an
eight-year senior secured term loan of $125,000,000 and a five-year secured
working capital facility of $100,000,000. In the fourth quarter of 1999, the
Company's working capital facility was reduced from $100,000,000 to $86,500,000
as a result of the sale of the Philadelphia restaurants. The senior term loan
bears interest at either the bank's prime rate plus 1.25% or LIBOR plus 2.25%,
at the Company's option. The working capital facility bears interest at either
the bank's prime rate plus 0.125% or LIBOR plus 1.125%, at the Company's option.
The interest rate on the working capital facility is subject to change based
upon the Company's leverage ratio.
In connection with the bank credit agreement, the Company entered into interest
rate swap agreements to manage its exposure to interest rate fluctuations. The
agreements were effective beginning May 1, 1998, and have maturity dates ranging
from four to seven years and were for an aggregate notional amount of
$100,000,000. The Company terminated $25,000,000 of the swap agreements in 1999.
The termination of the swap agreements did not have a material impact on the
Company's results of operations. 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 December 26, 1999, the total amount of debt subject to interest rate
fluctuations was $28,161,000 ($9,661,000 under the term loan and $18,500,000
under revolving credit and unsecured line of credit facilities). A 1% change in
interest rates would result in an increase or decrease in interest expense of
$282,000 per year.
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Company, see
"Executive Officers of the Registrant" in Part I of this report. For information
with respect to the Directors of the Company, see the Proxy Statement for the
Annual Meeting of Stockholders to be held on or about May 4, 2000, which is
incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the
Proxy Statement for the Annual Meeting of Stockholders to be held on or about
May 4, 2000, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Officers,
Directors and Certain Beneficial Owners" in the Proxy Statement for the Annual
Meeting of Stockholders to be held on or about May 4, 2000, is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in the Proxy
Statement for the Annual Meeting of Stockholders to be held on or about May 4,
2000, is incorporated herein by reference.
27
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) List of documents filed as part of this report:
1. Financial Statements:
The financial statements are listed in the accompanying "Index
to Financial Statements" on Page F-1.
2. Exhibits:
The exhibits filed with or incorporated by reference in this
report are listed on the Exhibit Index beginning on page E-1.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on September 29, 1999,
announcing strong third quarter sales trends and increased network
television advertising in 2000.
28
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.
Date: March 23, 2000 By: /s/ Lloyd L. Hill
------------------ ------------------------------
Lloyd L. Hill
Chief Executive Officer
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lloyd L. Hill and Robert T. Steinkamp, and each
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any amendments to this Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Lloyd L. Hill Date: March 23, 2000
------------------------- -------------------------
Lloyd L. Hill
Director and Chief Executive Officer
(principal executive officer)
By: /s/ George D. Shadid Date: March 23, 2000
------------------------- -------------------------
George D. Shadid
Director, Executive Vice President
and Chief Financial Officer
(principal financial officer)
By: /s/ Mark A. Peterson Date: March 23, 2000
------------------------- -------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
By: /s/ Abe J. Gustin, Jr. Date: March 23, 2000
------------------------- -------------------------
Abe J. Gustin, Jr.
Director, Chairman of the Board
29
By: /s/ Erline Belton Date: March 23, 2000
------------------------- -------------------------
Erline Belton
Director
By: /s/ Douglas R. Conant Date: March 23, 2000
------------------------- -------------------------
Douglas R. Conant
Director
By: /s/ D. Patrick Curran Date: March 23, 2000
------------------------- -------------------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 23, 2000
------------------------- -------------------------
Eric L. Hansen
Director
By: /s/ Mark S. Hansen Date: March 23, 2000
------------------------- -------------------------
Mark S. Hansen
Director
By: /s/ Jack P. Helms Date: March 23, 2000
------------------------- -------------------------
Jack P. Helms
Director
By: /s/ Burton M. Sack Date: March 23, 2000
------------------------- -------------------------
Burton M. Sack
Director
30
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
Index to consolidated Financial Statements
Page
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of December 26, 1999 and
December 27, 1998 .................................................................................. F-3
Consolidated Statements of Earnings for the fiscal years ended
December 26, 1999, December 27, 1998 and December 28, 1997........................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal Years
Ended December 26, 1999, December 27, 1998 and December 28, 1997..................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 26, 1999, December 27, 1998 and December 28, 1997........................................... F-6
Notes to Consolidated Financial Statements............................................................... F-8
F-1
Independent Auditors' Report
Applebee's International, Inc.:
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 26, 1999 and
December 27, 1998 and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 26, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Applebee's International, Inc. and subsidiaries at December 26, 1999 and
December 27, 1998, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended December 26, 1999
in conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Kansas City, Missouri
February 18, 2000
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 26, December 27,
1999 1998
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 1,427 $ 1,767
Short-term investments, at market value...................................... 2,555 4,879
Receivables, net of allowance................................................ 13,563 13,625
Inventories.................................................................. 11,247 6,709
Prepaid and other current assets............................................. 5,419 4,395
-------------- -------------
Total current assets...................................................... 34,211 31,375
Property and equipment, net....................................................... 300,140 364,058
Goodwill, net..................................................................... 88,667 99,599
Franchise interest and rights, net................................................ 3,449 3,959
Other assets...................................................................... 15,749 11,913
-------------- -------------
$ 442,216 $ 510,904
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 1,807 $ 1,666
Accounts payable............................................................. 16,966 17,427
Accrued expenses and other current liabilities............................... 54,962 44,114
Accrued dividends............................................................ 2,660 2,659
Accrued income taxes......................................................... 1,267 85
-------------- -------------
Total current liabilities................................................. 77,662 65,951
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion........................................ 106,293 145,522
Franchise deposits........................................................... 1,765 2,139
Deferred income taxes........................................................ 2,623 1,239
-------------- -------------
Total non-current liabilities............................................. 110,681 148,900
-------------- -------------
Total liabilities......................................................... 188,343 214,851
-------------- -------------
Commitments and contingencies (Notes 7, 8 and 11)
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 in 1999 and 32,150,360 shares in 1998.......... 321 321
Additional paid-in capital................................................... 168,584 163,651
Retained earnings............................................................ 233,548 182,010
Unrealized gain on short-term investments, net of income taxes............... 50 113
-------------- -------------
402,503 346,095
Treasury stock-5,553,213 shares in 1999 and 2,610,133 shares in 1998,at cost. (148,630) (50,042)
-------------- -------------
Total stockholders' equity................................................ 253,873 296,053
-------------- -------------
$ 442,216 $ 510,904
============== =============
See notes to consolidated financial statements.
F-3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Fiscal Year Ended
--------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
-------------- ------------- -------------
Revenues:
Company restaurant sales................................ $ 596,754 $ 580,840 $ 452,173
Franchise income........................................ 72,830 66,722 63,647
-------------- ------------- -------------
Total operating revenues............................. 669,584 647,562 515,820
-------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage....................................... 163,865 159,420 124,469
Labor................................................... 188,538 185,260 145,165
Direct and occupancy.................................... 145,747 146,693 114,196
Pre-opening expense..................................... 1,582 3,093 3,661
-------------- ------------- -------------
Total cost of Company restaurant sales............... 499,732 494,466 387,491
-------------- ------------- -------------
General and administrative expenses.......................... 63,338 58,044 52,579
Amortization of intangible assets............................ 5,997 5,538 3,258
Loss on disposition of restaurants and equipment............. 5,607 952 1,209
-------------- ------------- -------------
Operating earnings........................................... 94,910 88,562 71,283
-------------- ------------- -------------
Other income (expense):
Investment income....................................... 1,195 1,131 1,834
Interest expense........................................ (10,814) (9,922) (1,705)
Other income............................................ 444 638 389
-------------- ------------- -------------
Total other income (expense)......................... (9,175) (8,153) 518
-------------- ------------- -------------
Earnings before income taxes and extraordinary item.......... 85,735 80,409 71,801
Income taxes................................................. 31,537 29,753 26,710
-------------- ------------- -------------
Earnings before extraordinary item........................... 54,198 50,656 45,091
Extraordinary loss from early extinguishment
of debt, net of income taxes (Note 8)................... -- (641) --
-------------- ------------- -------------
Net earnings................................................. $ 54,198 $ 50,015 $ 45,091
============== ============= =============
Basic earnings per common share:
Basic earnings before extraordinary item................ $ 1.91 $ 1.67 $ 1.44
Extraordinary item...................................... -- (0.02) --
-------------- ------------- -------------
Basic net earnings per common share.......................... $ 1.91 $ 1.65 $ 1.44
============== ============= =============
Diluted earnings per common share:
Diluted earnings before extraordinary item.............. $ 1.89 $ 1.67 $ 1.43
Extraordinary item...................................... -- (0.02) --
-------------- ------------- -------------
Diluted net earnings per common share........................ $ 1.89 $ 1.65 $ 1.43
============== ============= =============
Basic weighted average shares outstanding.................... 28,403 30,272 31,401
============== ============= =============
Diluted weighted average shares outstanding.................. 28,601 30,385 31,640
============== ============= =============
See notes to consolidated financial statements.
F-4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Unrealized
Gain(Loss)
Common Stock Additional on Total
------------------------ Paid-In Retained Short-Term Treasury Stockholders'
Shares Amount Capital Earnings Investments Stock Equity
------------ ----------- ------------ ---------- ------------- ---------- ---------------
Balance, December 29, 1996.......... 31,580,955 $ 316 $ 153,028 $ 92,081 $ 188 $ (849) $ 244,764
Dividends on common stock,
$0.08 per share................ -- -- -- (2,518) -- -- (2,518)
Stock options exercised and related
tax benefit.................... 163,054 1 2,741 -- -- -- 2,742
Shares sold under employee
stock purchase plan............ -- -- 396 -- -- 61 457
Change in unrealized gain on
short-term investments, net of
income taxes................... -- -- -- -- (93) -- (93)
Net earnings..................... -- -- -- 45,091 -- -- 45,091
------------ ----------- ------------ ---------- ------------- ---------- ----------------
Balance, December 28, 1997.......... 31,744,009 317 156,165 134,654 95 (788) 290,443
Purchases of treasury stock...... -- -- -- -- -- (49,332) (49,332)
Dividends on common stock,
$0.09 per share................ -- -- -- (2,659) -- -- (2,659)
Stock options exercised and related
tax benefit.................... 336,351 3 5,741 -- -- (184) 5,560
Shares issued under employee stock
purchase, stock ownership and
401(k) plans................... -- -- 1,465 -- -- 262 1,727
Restricted shares awarded under
equity incentive plan, net of
cancellations.................. 70,000 1 1,514 -- -- -- 1,515
Unearned compensation relating
to restricted shares........... -- -- (1,234) -- -- -- (1,234)
Change in unrealized gain on
short-term investments, net of
income taxes................... -- -- -- -- 18 -- 18
Net earnings..................... -- -- -- 50,015 -- -- 50,015
------------ ----------- ------------ ---------- ------------- ---------- ----------------
Balance, December 27, 1998.......... 32,150,360 321 163,651 182,010 113 (50,042) 296,053
Purchases of treasury stock...... -- -- -- -- -- (102,959) (102,959)
Dividends on common stock,
$0.10 per share................ -- -- -- (2,660) -- -- (2,660)
Stock options exercised and related
tax benefit.................... -- -- 3,773 -- -- 3,252 7,025
Shares issued under employee stock
purchase, stock ownership and
401(k) plans................... -- -- 1,063 -- -- 1,113 2,176
Restricted shares awarded under
equity incentive plan, net of
cancellations.................. -- -- 121 -- -- 6 127
Unearned compensation relating
to restricted shares........... -- -- 431 -- -- -- 431
Notes receivable from officers for
stock sales.................... -- -- (455) -- -- -- (455)
Change in unrealized gain on
short-term investments, net of
income taxes................... -- -- -- -- (63) -- (63)
Net earnings..................... -- -- -- 54,198 -- -- 54,198
------------ ----------- ------------ ---------- ------------- ---------- ----------------
Balance, December 26, 1999.......... 32,150,360 $ 321 $ 168,584 $233,548 $ 50 $(148,630) $ 253,873
============ =========== ============ ========== ============= ========== ================
See notes to consolidated financial statements.
F-5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
----------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................. $ 54,198 $ 50,015 $ 45,091
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.............................. 28,930 29,135 20,877
Amortization of intangible assets.......................... 5,997 5,538 3,258
Amortization of deferred financing costs................... 678 477 50
(Gain) loss on sale of investments......................... -- (13) 20
Deferred income tax provision (benefit).................... (244) (492) 1,001
Loss on disposition of restaurants and equipment........... 5,607 952 1,209
Changes in assets and liabilities (exclusive of effects of
acquisitions):
Receivables................................................ (108) 2,229 2,451
Inventories................................................ (5,781) (1,432) (66)
Prepaid and other current assets........................... 508 (84) 671
Accounts payable........................................... (461) (2,304) 7,782
Accrued expenses and other current liabilities............. 9,937 16,317 2,400
Accrued income taxes....................................... 1,182 (5,081) 4,248
Franchise deposits......................................... (374) 607 (261)
Other...................................................... 700 (3,356) (1,352)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 100,769 92,508 87,379
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (53,945) (77,665) (90,480)
Proceeds from sale of restaurants and equipment............... 81,884 10,216 988
Purchases of short-term investments........................... -- (30,799) (19,150)
Maturities and sales of short-term investments................ 2,200 36,842 48,117
Acquisitions of restaurants................................... -- (101,749) (33,650)
Acquisition of minority interest in joint venture............. -- -- (1,525)
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES........... 30,139 (163,155) (95,700)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock................................... (102,959) (49,332) --
Dividends paid................................................ (2,659) (2,518) (2,191)
Issuance of common stock upon exercise of stock options and
related tax benefit........................................ 7,025 5,560 2,742
Shares sold under employee stock purchase plan................ 944 820 457
Proceeds from issuance of long-term debt...................... 44,604 175,825 --
Deferred financing costs relating to issuance of long-term debt -- (4,000) --
Payments on long-term debt.................................... (78,203) (62,849) (1,194)
Minority interest in net earnings of joint venture............ -- -- 69
-------------- -------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........... (131,248) 63,506 (117)
-------------- -------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................... (340) (7,141) (8,438)
CASH AND CASH EQUIVALENTS, beginning of period..................... 1,767 8,908 17,346
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 1,427 $ 1,767 $ 8,908
============== ============== ==============
See notes to consolidated financial statements.
F-6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Fiscal Year Ended
------------------------------------------------------
December 26, December 27, December 28,
1999 1998 1997
----------------- ----------------- -----------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes.................................... $ 29,629 $ 33,935 $ 20,613
================= ================= =================
Interest........................................ $ 10,651 $ 8,809 $ 2,573
================= ================= =================
Supplemental disclosures of noncash investing and financing activities:
Capitalized leases of $4,055,000 were recorded in April 1997 when the Company
acquired the operations and assets of 11 franchise restaurants. In connection
with this acquisition, the Company issued $2,500,000 of promissory notes (see
Note 3).
Capitalized leases of $5,052,000 were recorded in April 1998 when the Company
acquired the operations and assets of 33 franchise restaurants (see Note 3).
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 4), 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.
F-7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Applebee's International, Inc. and its subsidiaries (the "Company") develops,
franchises and operates casual dining restaurants under the name "Applebee's
Neighborhood Grill & Bar". As of December 26, 1999, there were 1,168 Applebee's
restaurants, of which 906 were operated by franchisees and 262 were operated by
the Company. Such restaurants were located in 49 states and eight international
countries.
2. Summary of Significant Accounting Policies
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated.
Fiscal year: The Company's fiscal year ends on the last Sunday of the calendar
year. The fiscal years ended December 26, 1999, December 27, 1998 and December
28, 1997 each contained 52 weeks, and are referred to hereafter as 1999, 1998
and 1997, respectively.
Short-term investments: Short-term investments are comprised of certificates of
deposit, state and municipal bonds, and preferred stocks. Gains and losses from
sales are determined using the specific identification method. As of December
26, 1999, all short-term investments have been classified as available-for-sale.
Financial instruments: The Company's financial instruments at December 26, 1999
and December 27, 1998 consist of cash equivalents, short-term investments,
long-term debt, excluding capitalized lease obligations, and interest rate swaps
(see Note 8). Except for interest rate swaps, which are not reflected in the
consolidated financial statements at fair value, the fair value of these
financial instruments approximates the carrying amounts reported in the
consolidated balance sheets. The carrying amount of cash equivalents
approximates fair value because of the short maturity of those instruments. The
carrying amount of short-term investments is based on quoted market prices. The
fair value of the Company's long-term debt, excluding capitalized lease
obligations, is based on quotations made on similar issues.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Pre-opening expense: The Company expenses direct training and other costs
related to opening new or relocated restaurants in the month of opening.
Property and equipment: Property and equipment are stated at cost. Depreciation
is provided primarily on a straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the lesser of the lease
term, including renewal options, or the estimated useful life of the related
asset. The general ranges of original depreciable lives are as follows:
Years
Buildings........................................... 20
Leasehold improvements.............................. 15-20
Furniture and equipment............................. 3-7
Interest has been capitalized in connection with the development of new
restaurants and is amortized over the estimated useful life of the related
asset. Interest costs of $407,000, $859,000 and $755,000 were capitalized during
1999, 1998 and 1997, respectively.
Goodwill: Goodwill represents the excess of cost over fair market value of net
assets acquired by the Company. Goodwill is being amortized over periods ranging
from 15 to 20 years on a straight-line basis. Accumulated amortization at
December 26, 1999 and December 27, 1998 was $16,161,000 and $12,551,000,
respectively.
F-8
Impairment of long-lived assets: Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. The Company analyzes potential impairments of assets on
a restaurant-by-restaurant basis.
Franchise interest and rights: Franchise interest and rights represent
allocations of purchase price to either the purchased restaurants or franchise
operations acquired. The allocated costs are amortized over the estimated life
of the restaurants or the franchise agreements on a straight-line basis ranging
from 7 to 20 years. Accumulated amortization at December 26, 1999 and December
27, 1998 was $7,057,000 and $6,546,000, respectively.
Franchise revenues: Franchise revenues are deferred until substantial
performance of franchisor obligations is complete. Initial franchise fees,
included in franchise income in the consolidated statements of earnings, totaled
$2,897,000, $3,099,000 and $4,263,000 for 1999, 1998 and 1997, respectively.
Advertising costs: The Company expenses advertising costs for Company-owned
restaurants as incurred except for production costs of advertising which are
expensed the first time the advertising takes place. Advertising expense related
to Company restaurants was $28,340,000, $29,097,000 and $20,752,000 for 1999,
1998 and 1997, respectively.
Interest rate swap agreements: The Company has entered into interest rate swap
agreements to manage its exposure to interest rate fluctuations. The
differential to be paid or received is recognized over the term of the swap
agreements as a component of interest expense. Although the swap agreements
expose the Company to interest rate risk, fluctuations in the value of the swaps
are mitigated by expected offsetting fluctuations in the variable debt.
Stock-based compensation: The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." The Statement encourages rather than requires
companies to adopt a method that accounts for stock compensation awards based on
their estimated fair value at the date they are granted. Companies are
permitted, however, to account for stock compensation awards under Accounting
Principles Board ("APB") Opinion No. 25 which requires compensation cost to be
recognized based on the excess, if any, between the quoted market price of the
stock at the date of grant and the amount an employee must pay to acquire the
stock. The Company has elected to continue to apply APB Opinion No. 25 and has
disclosed the pro forma net earnings and earnings per share, determined as if
the fair value method had been applied, in Note 13.
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 and accrued performance shares 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):
1999 1998 1997
--------------- ---------------- ----------------
Net earnings....................................... $ 54,198 $ 50,015 $ 45,091
============ ============ ============
Basic weighted average shares outstanding.......... 28,403 30,272 31,401
Dilutive effect of stock options................... 198 113 239
------------ ------------ ------------
Diluted weighted average shares outstanding........ 28,601 30,385 31,640
============ ============ ============
Basic net earnings per common share................ $ 1.91 $ 1.65 $ 1.44
============ ============ ============
Diluted net earnings per common share.............. $ 1.89 $ 1.65 $ 1.43
============ ============ =============
F-9
Stock options with exercise prices greater than the average market price of the
Company's common stock for the applicable periods are excluded from the
computation of diluted weighted average shares outstanding. Such options totaled
approximately 8,000, 1,604,000 and 1,625,000 for 1999, 1998 and 1997,
respectively.
Pervasiveness of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New accounting pronouncement: In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133, as amended by SFAS No. 137, establishes accounting
and reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement is effective for the Company beginning in the
first quarter of fiscal year 2001. The Company believes that the adoption of the
provisions of SFAS No. 133 will not have a material effect on its financial
statements, based on current activities.
Reclassifications: Certain prior year amounts have been reclassified to conform
with the 1999 presentation.
3. Acquisitions
On April 14, 1997, the Company acquired the operations of 11 franchise
Applebee's restaurants located in the St. Louis metropolitan area and the
related furniture and fixtures, certain land and leasehold improvements, and
rights to future development of restaurants for a total purchase price of
$36,150,000. The purchase price was paid in a combination of $33,650,000 in cash
and $2,500,000 of promissory notes, which were paid in 1998. One of the
principals of the franchisee was related to a person who was a director of the
Company until May 1997. The acquisition was accounted for as a purchase, and
accordingly, the purchase price has been allocated to the fair value of net
assets acquired and resulted in an allocation to goodwill of approximately
$27,000,000 which is being amortized on a straight-line basis over 20 years. In
conjunction with this acquisition, the Company also recorded capitalized leases
of $4,055,000. The results of operations of such restaurants have been reflected
in the consolidated financial statements subsequent to the date of acquisition.
Results of operations of such restaurants prior to acquisition were not material
in relation to the Company's operating results for the periods shown.
In 1997, the Company exercised its option to purchase the remaining 50% interest
in a joint venture arrangement with its franchisee in Nevada for $1,525,000.
On March 30, 1998, the Company acquired the operations and assets of 33
restaurants in the Virginia markets of Norfolk, Richmond, Roanoke and
Charlottesville, from Apple South, Inc. ("Apple South"), now Avado Brands, Inc.,
referred to herein as the "Virginia Acquisition." The total purchase price was
$94,749,000 and was paid in cash on March 30, 1998. The acquisition was
accounted for as a purchase, and the results of operations of such restaurants
are reflected in the consolidated financial statements subsequent to the date of
acquisition.
The following summarized unaudited pro forma results of operations of the
Company (in thousands, except per share amounts) for 1998 and 1997 assume the
Virginia Acquisition and the Company's financing arrangements (see Note 8)
occurred as of the beginning of the earliest period presented. The pro forma
results have been prepared for comparative purposes only and do not purport to
be indicative of the results of operations which actually would have resulted
had the Virginia Acquisition been effective as of the dates indicated, or which
may result in the future.
F-10
Fiscal Year Ended
------------------------------------------------------
December 27, 1998 December 28, 1997
-------------------------- ---------------------------
Actual Pro Forma Actual Pro Forma
---------- --------------- ------------- -------------
Food and beverage sales.............................. $ 580,840 $ 597,507 $ 452,173 $ 513,456
Franchise income..................................... 66,722 65,995 63,647 61,106
---------- --------------- ------------- -------------
Total operating revenues............................. $ 647,562 $ 663,502 $ 515,820 $ 574,562
========== =============== ============= ==============
Earnings before extraordinary item................... $ 50,656 $ 50,381 $ 45,091 $ 44,432
Net earnings......................................... $ 50,015 $ 49,740 $ 45,091 $ 44,432
Basic net earnings per common share.................. $ 1.65 $ 1.64 $ 1.44 $ 1.41
Diluted net earnings per common share................ $ 1.65 $ 1.64 $ 1.43 $ 1.40
Basic weighted average shares outstanding............ 30,272 30,272 31,401 31,401
Diluted weighted average shares outstanding.......... 30,385 30,385 31,640 31,640
4. 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 1999 period prior to divestiture were $22,759,000 and
$18,568,000, respectively.
F-11
5. Receivables
Receivables are comprised of the following (in thousands):
December 26, December 27,
1999 1998
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 12,935 $ 11,507
Credit card receivables.......................................... 2,473 2,587
Franchise fee receivables........................................ 431 498
Interest and dividends receivable................................ 39 105
Other............................................................ 120 493
----------------- -----------------
15,998 15,190
Less allowance for bad debts..................................... 2,435 1,565
----------------- -----------------
$ 13,563 $ 13,625
================= =================
The provision for bad debts totaled $981,000, $1,000,000 and $635,000 for 1999,
1998 and 1997, respectively. Write-offs against the allowance for bad debts
totaled $111,000, $272,000 and $68,000 during 1999, 1998 and 1997, respectively.
6. Other Assets
Other assets are comprised of the following (in thousands):
December 26, December 27,
1999 1998
----------------- -----------------
Notes receivable................................................. $ 8,654 $ 3,534
Deferred financing costs, net.................................... 3,211 3,535
Liquor licenses.................................................. 2,800 3,824
Other............................................................ 1,084 1,020
----------------- -----------------
$ 15,749 $ 11,913
================= =================
7. Property and Equipment
Property and equipment, net is comprised of the following (in thousands):
December 26, December 27,
1999 1998
----------------- ------------------
Land............................................................. $ 63,922 $ 77,121
Buildings and leasehold improvements............................. 205,625 239,047
Furniture and equipment.......................................... 118,795 134,810
Construction in progress......................................... 4,786 6,351
----------------- ------------------
393,128 457,329
Less accumulated depreciation and capitalized
lease amortization............................................ 92,988 93,271
----------------- ------------------
$ 300,140 $ 364,058
================= ==================
Property under capitalized leases in the amount of $4,055,000 and $9,592,000 at
December 26, 1999 and December 27, 1998, respectively, is included in buildings
and leasehold improvements. Accumulated amortization of such property amounted
to $647,000 and $711,000 at December 26, 1999 and December 27, 1998,
respectively. Capitalized leases relate to the buildings on certain restaurant
properties. The land portions of the restaurant property leases are accounted
for as operating leases.
Depreciation and capitalized lease amortization expense relating to property and
equipment totaled $28,930,000, $29,135,000 and $20,877,000 for 1999, 1998 and
1997, respectively. Of these amounts, $300,000, $476,000 and $210,000 related to
capitalized lease amortization during 1999, 1998 and 1997, respectively.
F-12
The Company leases certain of its restaurants. The leases generally provide for
payment of minimum annual rent, real estate taxes, insurance and maintenance
and, in some cases, contingent rent (calculated as a percentage of sales) in
excess of minimum rent. Total rental expense for all operating leases is
comprised of the following (in thousands):
1999 1998 1997
------------------ ------------------ -----------------
Minimum rent................................. $ 11,780 $ 12,432 $ 10,452
Contingent rent.............................. 1,070 1,294 1,298
------------------ ------------------ -----------------
$ 12,850 $ 13,726 $ 11,750
================== ================== =================
The present value of capitalized lease payments and the future minimum lease
payments under noncancelable operating leases (including leases executed for
sites to be developed in 2000) as of December 26, 1999 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ -----------------
2000............................................................. $ 644 $ 10,962
2001............................................................. 667 10,912
2002............................................................. 691 10,829
2003............................................................. 716 10,409
2004............................................................. 741 9,520
Thereafter....................................................... 9,097 80,040
------------------ ------------------
Total minimum lease payments..................................... 12,556 $ 132,672
==================
Less amounts representing interest............................... 8,359
------------------
Present value of minimum lease payments.......................... $ 4,197
==================
8. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 26, December 27,
1999 1998
---------------- ----------------
Unsecured senior term loan; interest at LIBOR plus 2.25% or
prime rate plus 1.25%, with semi-annual principal payments;
due March 2006................................................. $ 84,661 $ 124,375
Unsecured revolving credit facility; interest at LIBOR plus
1.125% or prime rate plus 0.125%; due March 2003............... 18,000 12,000
Unsecured line of credit facility; interest at federal funds
rate; due September 17, 2000................................... 500 --
Unsecured promissory notes issued in connection with the
acquisition of restaurants; 8.00% interest per annum; due
in annual installments of principal and interest through
February 2000.................................................. 417 802
Capitalized lease obligations...................................... 4,197 9,686
Other.............................................................. 325 325
---------------- ----------------
Total long-term debt............................................. 108,100 147,188
Less current portion of long-term debt........................... 1,807 1,666
---------------- ----------------
Long-term debt - less current portion............................ $ 106,293 $ 145,522
================ ================
F-13
On March 30, 1998, the Company entered into a bank credit agreement that
provided for $225,000,000 in senior secured credit facilities, consisting of an
eight-year senior secured term loan of $125,000,000 and a five-year secured
working capital facility of $100,000,000. The Company also entered into a
five-year $5,000,000 letter of credit facility with another bank. In the third
quarter of 1999, the Company entered into a one-year renewable $10,000,000
unsecured line of credit facility, of which $5,000,000 may only be used for
letters of credit.
In connection with the sale of the Rio Bravo Cantina and specialty restaurants,
the Company repaid $31,000,000 of the senior term loan during the second quarter
of 1999. In the fourth quarter of 1999, the Company also repaid $7,600,000 of
the senior term loan and $13,500,000 of borrowings under the working capital
facility in connection with the sale of the Philadelphia market. The Company's
working capital facility was reduced from $100,000,000 to $86,500,000 as a
result of this transaction.
In connection with the early extinguishment of debt in 1998, the Company paid a
prepayment penalty of $930,000. The prepayment penalty plus the remaining
unamortized portion of the related deferred financing costs of $91,000 is
reflected as an extraordinary loss of $641,000, net of income taxes of $380,000,
in the accompanying consolidated statement of earnings for 1998.
In February 1999, the Company purchased the buildings and related land and
equipment underlying three capital leases for a total of $4,725,000 from Apple
South. As a result, $5,052,000 of the capitalized lease obligations were retired
in 1999. In addition, as a result of the sale of the Philadelphia market in
December 1999, capitalized lease obligations decreased by $480,000.
As of December 26, 1999, $18,000,000 was outstanding under the $86,500,000
working capital facility, $500,000 was outstanding under the $10,000,000
unsecured line of credit facility, and standby letters of credit totaling
$3,530,000 were outstanding under the letter of credit facilities.
The senior term loan bears interest at either the bank's prime rate plus 1.25%
or LIBOR plus 2.25%, at the Company's option, and requires semi-annual principal
payments aggregating $860,000 per year for each year through March 31, 2005,
with the remaining $79,934,000 due in two equal amounts through March 31, 2006.
The working capital facility bears interest at either the bank's prime rate plus
0.125% or LIBOR plus 1.125%, at the Company's option. A commitment fee of 0.25%
is payable on any unused portion of the working capital facility. The interest
rate on the working capital facility and the commitment fee are subject to
change based upon the Company's leverage ratio.
In connection with the bank credit agreement, the Company has entered into
interest rate swap agreements to manage its exposure to interest rate
fluctuations. The agreements were effective beginning May 1, 1998, and have
maturity dates ranging from four to seven years and were for an aggregate
notional amount of $100,000,000. The Company terminated $25,000,000 of the swap
agreements in 1999. The termination of the swap agreements did not have a
material impact on the Company's results of operations. 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
December 26, 1999, the fair value of these swaps was a net receivable of
$2,076,000. The fair value represents the estimated amount that the Company
would receive or pay to terminate the agreements taking into account current
interest rates.
Both the senior term loan and the working capital facility are secured by the
common stock of each of the Company's present and future subsidiaries and all
intercompany debt of the Company and such subsidiaries. In addition, both the
senior term loan and the working capital facility are subject to various
covenants and restrictions which, among other things, require the maintenance of
stipulated fixed charge, interest coverage and leverage ratios, as defined, and
limit additional indebtedness and capital expenditures in excess of specified
amounts. Cash dividends were limited to $5,000,000 through fiscal year 1999. The
credit agreement originally permitted up to $50,000,000 to be utilized for
repurchases of the Company's common stock. In February 1999, the credit
agreement was amended to permit additional repurchases of common stock of up to
$100,000,000 and to allow annual cash dividends of the greater of $5,000,000 or
50% of consolidated net income beginning in fiscal year 2000. The Company is
currently in compliance with the covenants contained in its credit agreement.
F-14
Maturities of long-term debt, including capitalized lease obligations, for each
of the five fiscal years subsequent to December 26, 1999, ending during the
years indicated, are as follows (in thousands):
2000.................................................... $ 1,807
2001.................................................... 893
2002.................................................... 902
2003.................................................... 19,237
2004.................................................... 929
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 26, December 27,
1999 1998
------------------ -----------------
Compensation and related taxes.................................... $ 16,647 $ 12,551
Gift certificates................................................. 12,714 7,803
Sales and use taxes............................................... 3,109 3,571
Insurance......................................................... 7,675 6,816
Rent.............................................................. 3,019 3,559
Other............................................................. 11,798 9,814
------------------ -----------------
$ 54,962 $ 44,114
================== =================
10. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
The income tax provision consists of the following (in thousands):
1999 1998 1997
--------------- --------------- ----------------
Current provision:
Federal............................................ $ 27,019 $ 25,803 $ 22,016
State.............................................. 4,762 4,442 3,693
Deferred provision (benefit)........................... (244) (492) 1,001
--------------- --------------- ----------------
Income taxes........................................... $ 31,537 $ 29,753 $ 26,710
=============== =============== ================
The deferred income tax provision is comprised of the following (in thousands):
1999 1998 1997
--------------- --------------- ----------------
Depreciation........................................... $ 1,635 $ 793 $ 2,270
Other.................................................. (1,879) (1,285) (1,269)
--------------- --------------- ----------------
Deferred income tax provision (benefit)................ (244) (492) 1,001
Deferred income taxes related to change in
unrealized gain (loss) on investments.............. (38) 10 57
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ (282) $ (482) $ 1,058
=============== =============== ================
F-15
A reconciliation between the income tax provision and the expected tax
determined by applying the statutory federal income tax rates to earnings before
income taxes follows (in thousands):
1999 1998 1997
--------------- --------------- ----------------
Federal income tax at statutory rates.................. $ 30,007 $ 28,143 $ 25,130
Increase (decrease) to income tax expense:
State income taxes, net of federal benefit......... 3,043 2,951 2,625
FICA tip tax credit................................ (2,195) (2,124) (1,598)
Other.............................................. 682 783 553
--------------- --------------- ----------------
Income taxes........................................... $ 31,537 $ 29,753 $ 26,710
=============== =============== ================
The net current deferred income tax asset amounts are included in "prepaid and
other current assets" in the accompanying consolidated balance sheets. The
significant components of deferred income tax assets and liabilities and the
related balance sheet classifications are as follows (in thousands):
December 26, December 27,
1999 1998
----------------- ------------------
Classified as current:
Allowance for bad debts..................................... $ 896 $ 546
Accrued expenses............................................ 1,171 1,003
Other, net.................................................. 1,393 245
----------------- ------------------
Net deferred income tax asset............................... $ 3,460 $ 1,794
================= ==================
Classified as non-current:
Depreciation................................................ $ (4,214) $ (2,579)
Franchise deposits.......................................... 649 753
Other, net.................................................. 942 587
----------------- ------------------
Net deferred income tax liability........................... $ (2,623) $ (1,239)
================= ==================
11. Commitments and Contingencies
Litigation, claims and disputes: As of December 26, 1999, the Company was using
assets owned by a former franchisee in the operation of one restaurant which
remains under a purchase rights agreement that required the Company to make
certain payments to the franchisee's lender. In 1991, a dispute arose between
the lender and the Company over the amount of the payments due the lender under
that agreement and as to whether the Company had agreed to guarantee the
franchisee's debt. Based upon a then-current independent appraisal, the Company
offered to settle the dispute and purchase the assets of the three then-existing
restaurants for $1,000,000 in 1991. In November 1992, the lender was declared
insolvent by the FDIC and has since been liquidated. The Company closed one of
the three restaurants in 1994 and one of the two remaining restaurants in
February 1996. In the fourth quarter of 1996, the Company received information
indicating that the franchisee's indebtedness to the FDIC had been acquired by a
third party. In June 1997, the third party filed a lawsuit against the Company
seeking approximately $3,800,000. In April 1999, a summary judgment of
$3,833,000 was awarded to the third party. The Company has filed an appeal and
believes it has meritorious defenses. As of December 26, 1999, the Company
believes it has recorded adequate reserves for this matter.
The Company has reached an agreement in principle to settle a dispute with the
Company's franchisee for Germany regarding disclosures allegedly made or omitted
by the Company.
In addition, the Company is involved in various legal actions arising in the
normal course of business. 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.
F-16
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 December
26, 1999. This agreement expired on December 31, 1994 and was not renewed,
although some loan commitments as of the termination date were thereafter funded
through December 31, 1995.
Lease guaranties: In connection with the sale of restaurants to franchisees and
other parties, the Company has, in certain cases, remained contingently liable
for the remaining lease payments. As of December 26, 1999, the aggregate amount
of these lease payments totaled approximately $32,900,000. 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 guarantee to a franchise group totaling
$1,250,000.
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 December 26, 1999,
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 $4,200,000 if such officers had been terminated as of December 26,
1999.
12. Stockholders' Equity
On September 7, 1994, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") and declared a dividend, issued on September 19,
1994, of one Right for each outstanding share of Common Stock of the Company
(the "Common Shares"). The Rights become exercisable if a person or group
acquires more than 15% of the outstanding Common Shares, other than pursuant to
a Qualifying Offer (as defined) or makes a tender offer for more than 15% of the
outstanding Common Shares, other than pursuant to a Qualifying Offer. Upon the
occurrence of such an event, each Right entitles the holder (other than the
acquiror) to purchase for $75 the economic equivalent of Common Shares, or in
certain circumstances, stock of the acquiring entity, worth twice as much. The
Rights will expire on September 7, 2004 unless earlier redeemed by the Company,
and are redeemable prior to becoming exercisable at $0.01 per Right.
During 1998, the Company's Board of Directors approved plans to repurchase up to
$50,000,000 of the Company's common stock, subject to market conditions. During
1998, the Company repurchased 2,431,000 shares of its common stock at an
aggregate cost of $49,332,000. In February 1999, the Company's Board of
Directors approved plans to repurchase up to an additional $100,000,000 of the
Company's common stock over a two-year period, subject to market conditions. In
December 1999, the Company's Board of Directors authorized an additional program
to repurchase 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. During 1999, the Company repurchased 3,332,000
shares of its common stock at an aggregate cost of $102,959,000.
13. Employee Benefit Plans
Employee stock option plans: During 1989, the Company's board of directors
approved the 1989 Employee Stock Option Plan (the "1989 Plan") which provided
for the grant of both qualified and nonqualified options as determined by a
committee appointed by the board of directors. At the 1995 Annual Meeting of
Stockholders, the 1989 Employee Stock Option Plan was terminated, and the 1995
Equity Incentive Plan (the "1995 Plan") was approved. Stock options outstanding
under the existing 1989 Stock Option Plan were not affected by the termination
of that plan.
F-17
Options under the 1989 Plan were granted for a term of three to ten years and
were generally exercisable one year from date of grant. The 1995 Plan allows the
granting of stock options, stock appreciation rights, restricted stock awards,
performance unit awards and performance share awards (collectively, "Awards") to
eligible participants. The number of shares authorized to be issued pursuant to
the 1995 Plan is 3,600,000. Options granted under the 1995 Plan during 1995 have
a term of five to ten years and are generally exercisable three years from date
of grant. Options granted under the 1995 Plan during years subsequent to 1995
have a term of ten years and are generally 50% exercisable three years from date
of grant, 25% exercisable four years from date of grant, and 25% exercisable
five years from date of grant. Subject to the terms of the 1995 Plan, the
Committee has the sole discretion to determine the employees who shall be
granted Awards, the size and types of such Awards, and the terms and conditions
of such Awards.
During 1999, the Company's Board of Directors approved the 1999 Employee
Incentive Plan (the "1999 Plan") which provides for the granting of nonqualified
stock options, stock appreciation rights, restricted stock, performance units
and performance shares to eligible participants. The number of shares authorized
to be issued pursuant to the 1999 Plan is 333,000. Options granted under the
1999 Plan have a term of ten years and are generally exercisable three years
from the date of grant. Under all three plans, the option price for both
qualified and nonqualified options as of the date granted cannot be less than
the fair market value of the Company's common stock.
All three plans permit the granting of performance shares, representing rights
to receive the Company's common stock based upon certain performance criteria.
Performance shares were granted in 1999 which have a one-year and a three-year
performance period. Compensation expense of $2,048,000 related to these grants
was recorded in 1999 and was based on the market price of the Company's common
stock at the end of the fiscal year.
The Company accounts for all three plans in accordance with APB Opinion No. 25
which requires compensation cost to be recognized based on the excess, if any,
between the quoted market price of the stock at the date of grant and the amount
an employee must pay to acquire the stock. Under this method, no compensation
cost has been recognized for stock option awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value as prescribed by SFAS No. 123 (see Note 2),
the Company's net earnings and net earnings per common share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
1999 1998 1997
--------------- --------------- --------------
Net earnings, as reported................................ $ 54,198 $ 50,015 $ 45,091
Net earnings, pro forma.................................. $ 50,880 $ 48,205 $ 41,119
Basic net earnings per common share, as reported......... $ 1.91 $ 1.65 $ 1.44
Basic net earnings per common share, pro forma........... $ 1.79 $ 1.59 $ 1.31
Diluted net earnings per common share, as reported....... $ 1.89 $ 1.65 $ 1.43
Diluted net earnings per common share, pro forma......... $ 1.78 $ 1.59 $ 1.30
The weighted average fair value at date of grant for options granted during
1999, 1998 and 1997 was $13.69, $10.68 and $12.76 per share, respectively,
which, for the purposes of this disclosure, is assumed to be amortized over the
respective vesting period of the grants. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1999, 1998 and
1997: dividend yield of 0.3% for all years; expected volatility of 48.4%, 51.7%
and 56.0%, respectively; risk-free interest rate of 6.4%, 4.7% and 5.7%,
respectively; and expected lives of 4.9, 5.5 and 4.6 years, respectively.
F-18
Transactions relative to all three plans are as follows:
1999 Plan 1995 Plan 1989 Plan
----------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
-------------- -------------- -------------- -------------- ------------- -------------
Options outstanding at
December 29, 1996............ -- -- 1,829,343 $ 27.97 811,703 $14.09
Granted................... -- -- 142,825 $ 24.98 -- --
Exercised................. -- -- (2,167) $ 25.88 (160,887) $13.29
Canceled.................. -- -- (228,902) $ 28.03 (10,804) $20.52
-------------- -------------- -------------
Options outstanding at
December 28, 1997............ -- -- 1,741,099 $ 27.72 640,012 $14.17
Granted................... -- -- 466,498 $ 21.38 -- --
Exercised................. -- -- -- -- (340,351) $13.94
Canceled.................. -- -- (382,999) $ 27.45 (15,249) $20.53
-------------- -------------- -------------
Options outstanding at
December 27, 1998............ -- -- 1,824,598 $ 26.15 284,412 $14.11
Granted................... 83,000 $28.85 379,400 $ 28.24 -- --
Exercised................. -- -- (154,639) $ 26.14 (150,685) $13.15
Canceled.................. -- -- (31,142) $ 24.71 (227) $ 7.48
-------------- -------------- -------------
Options outstanding at
December 26, 1999............ 83,000 $28.85 2,018,217 $ 26.58 133,500 $15.20
============== ============== =============
Options exercisable at
December 26, 1999............ -- -- 937,435 $ 27.65 133,500 $15.20
============= ============== =============
Options available for grant at
December 26, 1999............ 250,000 1,379,355 --
The following table summarizes information relating to fixed-priced stock
options outstanding for all three plans at December 26, 1999:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Range of Exercise Prices Number Contractual Exercise Number Average
Outstanding Life Price Exercisable Exercise Price
--------------------------- --------------- --------------- -------------- --------------- ---------------
1989 Plan:
$ 3.02 to $ 3.03 2,500 1.6 years $ 3.02 2,500 $ 3.02
$ 13.82 to $ 14.38 98,000 4.3 years $ 13.88 98,000 $ 13.88
$ 19.25 to $ 21.88 33,000 1.8 years $ 20.05 33,000 $ 20.05
--------------- ---------------
$ 3.02 to $ 21.88 133,500 3.6 years $ 15.20 133,500 $ 15.20
=============== ===============
1995 Plan:
$ 18.81 to $ 22.75 324,000 8.5 years $ 20.62 5,000 $ 22.75
$ 24.00 to $ 26.69 298,360 5.8 years $ 25.12 165,450 $ 25.05
$ 28.00 to $ 33.00 1,395,857 6.9 years $ 28.27 766,985 $ 28.24
--------------- ---------------
$ 18.81 to $ 33.00 2,018,217 7.0 years $ 26.58 937,435 $ 27.65
=============== ===============
1999 Plan:
$ 28.50 to $ 33.00 83,000 9.4 years $ 28.85 -- --
=============== ===============
F-19
Restricted stock awards: During 1998 and 1999, restricted stock awards were
granted to certain officers and key employees of the Company. These awards vest
evenly over a three-year period. Unearned compensation was recorded for the
market value of the stock at the date of grant and is shown as a reduction to
stockholders' equity in the accompanying consolidated balance sheet. Unearned
compensation is being amortized ratably to expense over the vesting period and
accordingly, the Company recognized compensation expense of $281,000 in 1998 and
$388,000 in 1999.
Employee retirement plans: During 1992, the Company established a profit sharing
plan and trust in accordance with Section 401(k) of the Internal Revenue Code.
Prior to 1997, the Company matched 25% of employee contributions, not to exceed
2% of the employee's total annual compensation, with the Company contributions
vesting at the rate of 20% each year beginning after the employee's second year
of service. The Company adopted amendments to the 401(k) plan which were
effective beginning in 1997. The Company's matching contributions were increased
to 35% and 50% of employee contributions in 1997 and subsequent years,
respectively, not to exceed 2.8% and 4.0%, respectively, of the employee's total
annual compensation, and were made in shares of the Company's common stock. The
Company's contributions vest at the rate of 60% after the employee's third year
of service, 80% after four years of service and 100% after five years of
service. The number of common shares authorized pursuant to the 401(k) plan is
50,000. During 1994, the Company established a non-qualified defined
contribution retirement plan for key employees. The Company's contributions
under both plans in 1999, 1998 and 1997 were $939,000, $945,000 and $702,000,
respectively.
Employee stock purchase plan: During 1996, the Company established an employee
stock purchase plan in accordance with Section 423 of the Internal Revenue Code,
and the plan was approved at the 1997 Annual Meeting of Stockholders. The plan
allows employees to purchase shares of the Company's common stock at a 10%
discount through payroll deductions. The number of common shares authorized
pursuant to the plan is 200,000. During 1999, 1998 and 1997, employees purchased
44,299, 46,204 and 20,143 shares, respectively, under this plan.
Employee stock ownership plan: The Company's Board of Directors approved an
employee stock ownership plan in January 1997. The Company's contributions to
this plan are completely discretionary and are made in shares of the Company's
common stock. The Company's contributions to the plan were $400,000 for 1999 and
1998 and $500,000 for 1997.
14. Related Party Transactions
The Company leases a restaurant site from a corporation whose ownership is
composed of certain current and former stockholders, directors and officers of
the Company. The lease has a term of 20 years with two renewal options. The
lease provides for rentals in an amount equal to approximately 7% of gross sales
of the restaurants. During 1995, the Company entered into an agreement with this
party to lease additional parking space at the same site. Rents incurred under
both leases totaled $158,000, $148,000 and $166,000 for 1999, 1998 and 1997,
respectively, and are included in direct and occupancy costs in the consolidated
statements of earnings.
In March 1998, the Company entered into an agreement to purchase a tract of land
for future restaurant development for $290,000 from an entity in which the
Chairman of the Company has a one-third ownership interest. The purchase price
was less than current appraised value.
In February 1999, the Company entered into an agreement to sell its four
specialty restaurants to an entity owned by the Company's Chairman and certain
members of his family (see Note 4). In addition, the same entity became a
franchisee of the Company by purchasing seven existing Applebee's restaurants
from another franchisee.
F-20
Pursuant to its policy to loan executives amounts used by the executive to
invest in the Company's stock, and in keeping with the Company's executive stock
ownership guidelines, the Company had loans of $455,000 outstanding to three
officers at December 26, 1999 at interest rates ranging from 4.7% to 6.2% which
are collateralized by the stock. These loans are reflected as a reduction to
additional paid-in capital in the Company's consolidated 1999 balance sheet.
15. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 1999 and 1998 (in thousands, except per share amounts). During
the first quarter of 1999, the Company recognized a loss of $9,000,000 relating
to the sale of the Rio Bravo Cantina and specialty restaurants. During the
fourth quarter of 1999, the Company recognized a gain of $4,193,000 relating to
the sale of the Philadelphia restaurants.
1999
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 28, June 27, September 26, December 26,
1999 1999 1999 1999
------------- ------------- ------------- -------------
Revenues:
Company restaurant sales....................... $161,760 $145,832 $145,434 $143,728
Franchise income............................... 17,540 18,151 18,259 18,880
------------- ------------- ------------- -------------
Total operating revenues.................... 179,300 163,983 163,693 162,608
------------- ------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 44,765 39,776 39,633 39,691
Labor.......................................... 51,786 45,773 45,753 45,226
Direct and occupancy........................... 41,004 36,124 34,312 34,307
Pre-opening expense............................ 378 240 645 319
------------- ------------- ------------- -------------
Total cost of Company restaurant sales...... 137,933 121,913 120,343 119,543
------------- ------------- ------------- -------------
General and administrative expenses................. 16,133 14,484 15,568 17,153
Amortization of intangible assets................... 1,533 1,518 1,490 1,456
(Gain) loss on disposition of restaurants and
equipment........................................... 9,288 215 213 (4,109)
------------- ------------- ------------- -------------
Operating earnings.................................. 14,413 25,853 26,079 28,565
------------- ------------- ------------- -------------
Other income (expense):
Investment income.............................. 180 430 293 292
Interest expense............................... (3,055) (2,522) (2,444) (2,793)
Other income (expense)......................... 168 (164) 170 270
------------- ------------- ------------- -------------
Total other expense......................... (2,707) (2,256) (1,981) (2,231)
------------- ------------- ------------- -------------
Earnings before income taxes........................ 11,706 23,597 24,098 26,334
Income taxes........................................ 4,331 8,731 8,916 9,559
------------- ------------- ------------- -------------
Net earnings........................................ $ 7,375 $ 14,866 $ 15,182 $ 16,775
============= ============= ============= =============
Basic net earnings per common share................. $ 0.25 $ 0.51 $ 0.54 $ 0.62
============= ============= ============= =============
Diluted net earnings per common share............... $ 0.25 $ 0.51 $ 0.53 $ 0.62
============= ============= ============= =============
Basic weighted average shares outstanding........... 29,526 29,070 28,100 26,919
============= ============= ============= =============
Diluted weighted average shares outstanding......... 29,648 29,245 28,454 27,233
============= ============= ============= =============
F-21
1998
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 29, June 28, September 27, December 27,
1998 1998 1998 1998
------------- ------------- ------------- -------------
Revenues:
Company restaurant sales....................... $129,758 $149,829 $151,648 $149,605
Franchise income............................... 16,845 16,580 17,002 16,295
------------- ------------- ------------- -------------
Total operating revenues.................... 146,603 166,409 168,650 165,900
------------- ------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 35,368 40,917 41,680 41,455
Labor.......................................... 42,323 47,291 47,589 48,057
Direct and occupancy........................... 33,219 37,191 38,301 37,982
Pre-opening expense............................ 481 527 912 1,173
------------- ------------- ------------- -------------
Total cost of Company restaurant sales...... 111,391 125,926 128,482 128,667
------------- ------------- ------------- -------------
General and administrative expenses................. 14,454 14,564 14,398 14,628
Amortization of intangible assets................... 875 1,546 1,546 1,571
Loss on disposition of restaurants and equipment.... 458 213 187 94
------------- ------------- ------------- -------------
Operating earnings.................................. 19,425 24,160 24,037 20,940
------------- ------------- ------------- -------------
Other income (expense):
Investment income.............................. 220 394 249 268
Interest expense............................... (751) (3,298) (2,853) (3,020)
Other income................................... 167 108 135 228
------------- ------------- ------------- -------------
Total other expense......................... (364) (2,796) (2,469) (2,524)
------------- ------------- ------------- -------------
Earnings before income taxes and
extraordinary item............................. 19,061 21,364 21,568 18,416
Income taxes........................................ 7,091 7,947 8,024 6,691
------------- ------------- ------------- -------------
Earnings before extraordinary item.................. 11,970 13,417 13,544 11,725
Extraordinary loss from early extinguishment
of debt, net of income taxes................... -- (641) -- --
------------- ------------- ------------- -------------
Net earnings........................................ $ 11,970 $ 12,776 $ 13,544 $ 11,725
============= ============= ============= =============
Basic net earnings per common share:
Basic earnings before extraordinary item....... $ 0.39 $ 0.44 $ 0.45 $ 0.39
Extraordinary item............................. -- (0.02) -- --
------------- ------------- ------------- -------------
Basic net earnings per common share................. $ 0.39 $ 0.42 $ 0.45 $ 0.39
============= ============= ============= =============
Diluted net earnings per common share:
Diluted earnings before extraordinary item..... $ 0.39 $ 0.44 $ 0.45 $ 0.39
Extraordinary item............................. -- (0.02) -- --
------------- ------------- ------------- -------------
Diluted net earnings per common share............... $ 0.39 $ 0.42 $ 0.45 $ 0.39
============= ============= ============= =============
Basic weighted average shares outstanding........... 30,611 30,381 30,184 29,911
============= ============= ============= =============
Diluted weighted average shares outstanding......... 30,734 30,522 30,278 29,976
============= ============= ============= =============
F-22
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
3.2 Restated and Amended By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1996).
4.1 Shareholder Rights Plan contained in Rights Agreement dated as
of September 7, 1994, between Applebee's International, Inc.
and Chemical Bank, as Rights Agent (incorporated by reference
to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 25, 1994).
4.2 Amendment dated May 13, 1999 to Shareholder Rights Plan
contained in Rights Agreement dated as of September 7, 1994,
between Applebee's International, Inc. and Chemical Bank, as
Rights Agent (incorporated by reference to Exhibit 4.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 27, 1999).
4.3 Certificate of the Voting Powers, Designations, Preferences and
Relative Participating, Optional and Other Special Rights and
Qualifications of Series A Participating Cumulative Preferred
Stock of Applebee's International, Inc. (incorporated by
reference to Exhibit 4.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.1 Indemnification Agreement, dated March 16, 1988, between John
Hamra and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.2 Indemnification Agreement, dated March 16, 1988, between Abe J.
Gustin, Jr. and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.3 Indemnification Agreement, dated March 16, 1988, between Johyne
Reck and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.4 Form of Applebee's Development Agreement.
10.5 Form of Applebee's Franchise Agreement.
10.6 Schedule of Applebee's Development and Franchise Agreements as
of December 26, 1999.
E-1
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.7 Purchase Rights Agreement dated January 17, 1990 by and between
Applebee's International, Inc. and Apple Star, Inc.
(incorporated by reference to Exhibit 10.7 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
25, 1994).
10.8 Credit Agreement dated as of March 30, 1998 (incorporated by
reference to Exhibit 10.4 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 1998).
10.9 Asset Purchase Agreement dated February 10, 1999 by and among
Applebee's International, Inc., Rio Bravo International, Inc.,
Innovative Restaurant Concepts, Inc., IRC Kansas, Inc.,
Applebee's of Michigan, Inc., Rio Bravo Services, Inc., Chevys
Holdings, Inc., Chevys, Inc. and Rio Bravo Acquisitions, Inc.
(incorporated by reference to the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 28, 1999).
10.10 Asset Purchase Agreement dated February 8, 1999 by and among
Rio Bravo International, Inc., Innovative Restaurant Concepts,
Inc., Summit Restaurants, Inc. and Specialty Restaurant
Development, L.L.C. (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q dated March 28,
1999).
Management Contracts and Compensatory Plans or Arrangements
10.11 1995 Equity Incentive Plan, as amended.
10.12 Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.14 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 28, 1997).
10.13 1999 Management and Executive Incentive Plan.
10.14 1999 Employee Incentive Plan.
10.15 Employment Agreement, dated January 27, 1994, with Lloyd L.
Hill (incorporated by reference to Exhibit 10.4 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1994).
10.16 Severance and Noncompetition Agreement, dated January 27, 1994,
with Lloyd L. Hill (incorporated by reference to Exhibit 10.5
of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 27, 1994).
10.17 Employment Agreement, dated March 1, 1995, with George D.
Shadid (incorporated by reference to Exhibit 10.3 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 1995).
10.18 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.29 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 25, 1994).
10.19 Schedule of parties to Indemnification Agreement.
E-2
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.20 Previous Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 1998) and
schedule of parties thereto.
10.21 New Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.23 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 27, 1998) and
schedule of parties thereto.
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney (see page 29 of the Form 10-K).
27 Financial Data Schedule.
E-3