1
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 29, 2002
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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
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Applebee's International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-1461763
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(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. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act).
Yes X No
--- ---
The aggregate market value of the voting and non-voting common stock equity held
by non-affiliates of the registrant as of the last day of the second fiscal
quarter ended June 30, 2002 was $1,273,824,875 based on the closing sale price
on June 28, 2002.
The number of shares of the registrant's common stock outstanding as of March
10, 2003 was 55,221,320.
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 29, 2002
INDEX
Page
PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 12
Item 3. Legal Proceedings....................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders..................................... 14
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................................... 15
Item 6. Selected Financial Data................................................................. 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 17
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
Item 14. Controls and Procedures................................................................. 27
PART IV
Item 15. Exhibits and Reports on Form 8-K........................................................ 28
Signatures.............................................................................................. 29
Certifications.......................................................................................... 31
2
PART I
Item 1. Business
General
References to "Applebee's," "we," "us," and "our" in this document are
references to Applebee's International, Inc. and its subsidiaries and any
predecessor companies of Applebee's International, Inc. We develop, franchise
and operate casual dining restaurants under the name "Applebee's Neighborhood
Grill & Bar." With nearly 1,500 restaurants and $3.24 billion in system sales
for the fiscal year ended December 29, 2002, Applebee's Neighborhood Grill & Bar
is the largest casual dining concept in America, both in terms of number of
restaurants and market share. Applebee's International, Inc. maintains an
Internet website address at www.applebees.com. We make available free of charge
through our website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as they are reasonably available after these materials are electronically filed
with or furnished to the Securities and Exchange Commission.
We opened our first restaurant in 1986. We 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, we acquired substantially all the assets of our franchisor. When we
acquired the Applebee's Division, it operated 13 restaurants and had ten
franchisees, including us, operating 41 franchise restaurants.
As of December 29, 2002, there were 1,496 Applebee's restaurants. Franchisees
operated 1,139 of these restaurants and 357 restaurants were company operated.
The restaurants were located in 49 states and eight international countries.
During 2002, 107 new restaurants were opened, including 81 franchise restaurants
and 26 company restaurants.
We acquired the Rio Bravo Cantina chain of Mexican casual dining restaurants and
four specialty restaurants in March 1995. In April 1999, we completed the sale
of the Rio Bravo Cantina concept and our four specialty restaurants. At the time
of divestiture, we operated 40 Rio Bravo restaurants and franchisees operated
the remaining 25 restaurants.
Although we may acquire a new concept in the future, our current strategy is to
focus on the Applebee's concept. We currently expect that the Applebee's system
will encompass at least 2,300 restaurants in the United States.
3
The following table sets forth certain unaudited financial information and other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:
Fiscal Year Ended
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December 29, December 30, December 31,
2002 2001 2000
----------------- ---------------- -----------------
Number of restaurants:
Company:
Beginning of year............................ 310 285 262
Restaurant openings.......................... 26 25 25
Restaurant closings.......................... -- -- (2)
Restaurants acquired from franchisees........ 21 -- --
----------------- ---------------- -----------------
End of year.................................. 357 310 285
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 1,082 1,001 906
Restaurant openings.......................... 81 84 100
Restaurant closings.......................... (3) (3) (5)
Restaurants acquired from franchisees........ (21) -- --
----------------- ---------------- -----------------
End of year.................................. 1,139 1,082 1,001
----------------- ---------------- -----------------
Total:
Beginning of year............................ 1,392 1,286 1,168
Restaurant openings.......................... 107 109 125
Restaurant closings.......................... (3) (3) (7)
----------------- ---------------- -----------------
End of year.................................. 1,496 1,392 1,286
================= ================ =================
Weighted average weekly sales per restaurant:
Company...................................... $ 43,019 $ 42,660 $ 42,183
Franchise.................................... $ 43,823 $ 42,241 $ 41,137
Total........................................ $ 43,641 $ 42,334 $ 41,370
Change in comparable restaurant sales(1):
Company...................................... 1.8% 2.5% 1.8%
Franchise.................................... 3.6% 3.0% 1.6%
Total........................................ 3.2% 2.9% 1.7%
Total system sales (in thousands)..................... $ 3,243,989 $ 2,926,288 $ 2,668,539
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
4
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. Our restaurants
appeal to a wide range of customers including young adults, senior citizens and
families with young children.
Applebee's also offers its customers the convenience of carry-out service. In
2002, we initiated phase one of a new two phase "To Go" program. Phase one
included the use of standardized state-of-the-art packaging, interior and
exterior signage and a focused training program. The second phase will include
the additional convenience of curbside service, and will be implemented
throughout the system during 2003 and 2004.
We have set certain specifications for the design of our restaurants. Our
restaurants are primarily located in free-standing buildings, end caps of strip
shopping centers, and shopping malls. Each 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. Restaurants also frequently display photographs, magazine
articles and newspaper articles highlighting local history and personalities.
These items give each restaurant an individual, neighborhood identity. In
addition, we require that each restaurant be remodeled every six years to embody
the design elements of the current prototype.
Menu. Each restaurant offers a diverse menu of high quality, moderately priced
food and beverage items consisting of traditional favorites and signature
dishes. The restaurants feature a broad selection of entrees, including beef,
chicken, pork, 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 2002, alcoholic beverages accounted for 13.5% of company owned
restaurant sales.
Restaurant Operations. We and our franchisees operate all restaurants in
accordance with uniform operating standards and specifications. These standards
pertain to the quality and preparation of menu items, selection of menu items,
maintenance and cleanliness of premises, and employee conduct. We develop all
standards and specifications with input from franchisees, and they are applied
on a system-wide basis.
Training. We have 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. We ensure that new restaurants comply with our standards by
providing training programs and systems to conduct hands-on training for all
restaurant employees. We also provide periodic training for our restaurant
managers regarding various topics, generally through classroom instruction and
video presentations.
Advertising. We have historically concentrated our advertising and marketing
efforts primarily on food-specific promotions. We advertise on a national,
regional and local basis, utilizing primarily television, radio and print media.
In 2002, approximately 4.1% of sales for company restaurants was spent on
advertising. This amount includes contributions to the national advertising pool
which develops and funds the specific national promotions. We focus the
remainder of our advertising expenditures on local advertising in areas with
company owned restaurants.
5
Purchasing. Maintaining high food quality and system-wide consistency is a
central focus of our purchasing program. We mandate quality standards for all
products used in the restaurants, and we maintain a limited list of approved
suppliers from which we and our franchisees must select. We have negotiated
purchasing agreements with most of our approved suppliers which result in volume
discounts for us and our franchisees. Additionally, we purchase and maintain
inventories of certain specialty products to assure sufficient supplies for the
system. In 2001, we began a new multi-year supply chain management initiative
designed to leverage our size, improve sourcing of products and optimize
distribution.
Company Restaurants
Company Restaurant Openings and Acquisitions. Our expansion strategy is to
cluster restaurants in targeted markets, thereby increasing consumer awareness.
Our strategy enables us to take advantage of operational, distribution and
advertising efficiencies. Our development experience indicates that when we open
multiple restaurants within a particular market, our market share increases.
In order to maximize overall system growth, our expansion strategy through 1992
emphasized franchise arrangements with experienced, successful and financially
capable restaurant operators. We continue to expand the Applebee's system across
the United States through franchise operations, but beginning in 1992, our
growth strategy also included increasing the number of company owned
restaurants. We have tried to achieve this goal in two ways. First, we have
developed strategic territories. Second, when franchises are available for
purchase under acceptable financial terms, we have selectively acquired existing
franchise restaurants and terminated the selling franchisee's related
development rights. Using this strategy, we have opened 260 new restaurants and
acquired 102 franchise restaurants over the last ten years and have expanded
from a total of 31 company owned or operated restaurants as of December 27, 1992
to a total of 357 as of December 29, 2002. In addition, as part of our portfolio
management strategy, we have sold 26 restaurants to franchisees during this
ten-year period.
We opened 26 new Applebee's restaurants in 2002 and anticipate opening
approximately 25 new Applebee's restaurants in 2003. We may open more or fewer
restaurants depending upon the availability of appropriate new sites. The
following table shows the areas where our company restaurants were located as of
December 29, 2002:
Area
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New England (includes Maine, Massachusetts, New Hampshire, New York,
Rhode Island and Vermont).............................................. 58
Detroit/Southern Michigan.............................................. 57
Minneapolis/St. Paul, Minnesota........................................ 49
North/Central Texas.................................................... 41
Virginia............................................................... 39
St. Louis, Missouri/Illinois........................................... 27
Kansas City, Missouri/Kansas........................................... 27
Washington, D.C........................................................ 21
Las Vegas/Reno, Nevada................................................. 13
Atlanta, Georgia....................................................... 9
Albuquerque, New Mexico................................................ 8
San Diego/Southern California.......................................... 7
Ontario, Canada........................................................ 1
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357
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6
Restaurant Operations. The staff for a typical 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 our standards. As of December 29, 2002, we employed ten Regional
Vice Presidents of Operations/Directors of Operations and 54 Area Directors. The
Area Directors' duties include regular restaurant visits and inspections which
ensure the ongoing maintenance of our standards of quality, service,
cleanliness, value, and courtesy. In addition to providing a significant
contribution to revenues and operating earnings, we use company owned
restaurants 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.
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. We currently have exclusive
franchise arrangements with 66 franchise groups, including 15 international
franchisees. We have generally selected franchisees that are experienced
multi-unit restaurant operators who have been involved with other restaurant
concepts. Our franchisees operate Applebee's restaurants in 42 states and eight
international countries. We have assigned the vast majority of all territories
in all states except Hawaii or have designated them for company development.
As of December 29, 2002, there were 1,139 franchise restaurants. Franchisees
opened 100 restaurants in 2000, 84 restaurants in 2001, and 81 restaurants in
2002. We anticipate between 70 to 80 franchise restaurant openings in 2003.
Development of Restaurants. We make available to franchisees the physical
specifications for a typical restaurant, and we retain the right to prohibit or
modify the use of any plan. Each franchisee is responsible for selecting the
site for each restaurant within their territory. We assist franchisees in
selecting appropriate sites, and any selection made by a franchisee is subject
to our approval. We also conduct a physical inspection, review any proposed
lease or purchase agreement, and make available demographic studies.
Domestic Franchise Arrangements. Each 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. The franchisee enters into a separate franchise agreement for the
operation of each restaurant. Each agreement 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 an
initial franchisee fee (which typically ranges from $30,000 to $35,000) and a
royalty fee equal to 4% of the restaurant's monthly gross sales. We have
executed agreements with a majority of our franchisees which maintain the
existing royalty fees of 4% and extend the current franchise and development
agreements until January 1, 2020. The revised agreements establish new
restaurant development obligations over the next several years. These revised
agreements contain provisions which allow for the continued development of the
Applebee's concept and support our long-term expectation of at least 2,300
restaurants in the United States. 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.
7
Advertising. We currently require domestic franchisees to contribute 2.25% of
gross sales to the national advertising pool. This amount is in addition to
their required spending of at least 1.5% of gross sales on local advertising and
promotional activities. Franchisees also promote the opening of each restaurant
and we reimburse the franchisee for 50% of the out-of-pocket opening advertising
expenditures, subject to certain conditions. The maximum amount we will
reimburse for these expenditures is $2,500. Under our franchise agreements, we
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. We provide 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. We also assist franchisees with business planning, development,
technology and human resource efforts.
Operations Quality Control. We continuously monitor franchise restaurant
operations, principally through our full-time franchise consultants (25 as of
December 29, 2002). We make both scheduled and unannounced inspections of
restaurants to ensure that only approved products are in use and that our
prescribed operations practices and procedures are being followed. During 2002,
representatives made an average of approximately two visits to each of our
franchise restaurants during which they conducted an inspection and consultation
in the restaurant. We have the right to terminate a franchise if a franchisee
does not operate and maintain a restaurant in accordance with our requirements.
Franchise Business Council. We maintain a Franchise Business Council which
provides us with advice about operations, marketing, product development and
other aspects of restaurant operations for the purpose of improving the
franchise system. As of December 29, 2002, the Franchise Business Council
consisted of eight franchisee representatives and three members of our senior
management. Two franchisee representatives are permanent members, 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. Franchisees elect the remaining franchisee
representatives annually.
International Franchise Agreements. We continue to pursue 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 those with
familiarity with the specific local business environment. We are currently
focusing on international franchising in Canada, Latin America and the
Mediterranean/Middle East. In this regard, we currently have development
agreements with 15 international franchisees. Franchisees operated 44
international restaurants as of December 29, 2002. The success of further
international expansion will depend on, among other things, local acceptance of
the Applebee's concept and our ability to attract qualified franchisees and
operating personnel. We must also comply with the regulatory requirements of the
local jurisdictions, and supervise international franchisee operations
effectively.
Franchise Financing. Although financing is the sole responsibility of the
franchisee, we make available to franchisees information about financial
institutions interested in financing the costs of restaurant development for
qualified franchisees. None of these financial institutions is our affiliate or
agent, and we have no control over the terms or conditions of any financing
arrangement offered by these financial institutions. Under a previous franchise
financing program, we provided a limited guaranty of loans made to certain
franchisees.
8
Competition
We expect competition in the casual dining segment of the restaurant industry 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. Our competitors
include national, regional and local chains, as well as local owner-operated
restaurants. We have a number of well-established competitors. Some of these
companies have been in existence longer than we have, and therefore they may be
better established in the markets where our restaurants are or may be located.
Service Marks
We own 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. We are aware of names and marks similar to our service marks used by
third parties in certain limited geographical areas. We intend to protect our
service marks by appropriate legal action where and when necessary.
Government Regulation
Our restaurants are subject to numerous federal, state, and local laws affecting
health, sanitation and safety standards. Our restaurants are also subject to
state and local licensing regulation of the sale of alcoholic beverages. Each
restaurant is required to obtain appropriate licenses from regulatory
authorities allowing it to sell liquor, beer, and wine. We also require that
each restaurant obtain food service licenses from local health authorities. Our
licenses to sell alcoholic beverages must be renewed annually and may be
suspended or revoked at any time for cause. This would include violation of any
law or regulation pertaining to alcoholic beverage control by us or our
employees. Among such laws are those regulating the minimum age of patrons or
employees, advertising, wholesale purchasing, and inventory control. If one of
our restaurants failed to maintain its license to sell alcohol or serve food, it
would significantly harm the success of that restaurant. In order to reduce this
risk, we operate each restaurant in accordance with standardized procedures
designed to facilitate compliance with all applicable codes and regulations.
Our employment practices are governed by various governmental employment
regulations. These include minimum wage, overtime, immigration, family leave and
working condition regulations.
We are 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 our business and the complexity of franchise
regulations, we may encounter minor compliance issues from time to time. We do
not believe, however, that any of these issues will have a material adverse
effect on our business.
9
Under certain court decisions and statutes, owners of restaurants and bars in
some states in which we own or operate restaurants may be held liable for
serving alcohol to intoxicated customers whose subsequent conduct results in
injury or death to a third party. We cannot guarantee that we will not be
subject to such liability. We do believe, however, that our insurance presently
provides adequate coverage for such liability.
Employees
As of December 29, 2002, we employed approximately 23,500 full and part-time
employees. Of those, approximately 480 were corporate personnel, 1,420 were
restaurant managers or managers in training and 21,600 were employed in
non-management full and part-time restaurant positions. Of the 480 corporate
employees, approximately 170 were in management positions and 310 were general
office employees, including part-time employees.
We consider our employee relations to be good. Most employees, other than
restaurant management and corporate personnel, are paid on an hourly basis. We
believe that we provide working conditions and wages that compare favorably with
those of our competition. We have never experienced a work stoppage due to labor
difficulty, and our employees are not covered by a collective bargaining
agreement.
Executive Officers of the Registrant
Our executive officers as of December 29, 2002 are shown below.
Name Age Position
--------------------------------- --- -----------------------------------------------------------------------
Lloyd L. Hill.................... 58 Chairman of the Board of Directors, Chief Executive Officer and
President
George D. Shadid................. 48 Executive Vice President and Chief Operating Officer (resigned
effective January 12, 2003), and Member of the Board of Directors
Steven K. Lumpkin................ 48 Executive Vice President, Chief Financial Officer and Treasurer
David L. Goebel.................. 52 Executive Vice President of Operations
John C. Cywinski................. 40 Senior Vice President and Chief Marketing Officer
Louis A. Kaucic.................. 51 Senior Vice President and Chief People Officer
Larry A. Cates................... 54 President of International Division
David R. Parsley................. 56 Senior Vice President of Purchasing and Distribution
Carin L. Stutz................... 46 Senior Vice President of Company Operations
Lloyd L. Hill was elected a director in August 1989. Mr. Hill was appointed
Executive Vice President and Chief Operating Officer 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. In January 1998, he assumed the full duties of Chief
Executive Officer. In May 2000, Mr. Hill was elected Chairman of the Board of
Directors. Prior to joining Applebee's, he served as President of Kimberly
Quality Care, a home health care and nurse personnel staffing company from
December 1989 to December 1993, where he also served as a director from 1988 to
1993, having joined that organization in 1980.
10
George D. Shadid was employed by Applebee's 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. In
March 2002, he assumed the position of Chief Operating Officer. In January 2003,
Mr. Shadid resigned as an executive officer of Applebee's. Prior to joining
Applebee's, he served as Corporate Controller of Gilbert/Robinson, Inc. from
1985 to 1987, 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 August 1992. From 1976 until 1985, Mr. Shadid was employed by
Deloitte & Touche LLP.
Steven K. Lumpkin was employed by Applebee's 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. He was named Chief Development Officer
in March 2001. In March 2002, Mr. Lumpkin assumed the position of Chief
Financial Officer and Treasurer. Prior to joining Applebee's, Mr. Lumpkin was a
Senior Vice President with a division of the Olsten Corporation, Olsten Kimberly
Quality Care from July 1993 until January 1995. 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.
David L. Goebel was employed by Applebee's in February 2001 as Senior Vice
President of Franchise Operations. In December 2002, Mr. Goebel was promoted to
the position of Executive Vice President of Operations. Prior to joining
Applebee's, Mr. Goebel headed a management company that provided consulting and
strategic planning services to various businesses from April 1998 to February
2001. Prior to 1998, he was a franchise principal with an early developer group
of the Boston Market concept. Mr. Goebel's business experience also includes
positions as Vice President of Business Development for Rent-a-Center (a
subsidiary of Thorn, EMI) and Vice President of Operations for Ground Round
restaurants.
John C. Cywinski was employed by Applebee's in July 2001 as Senior Vice
President and Chief Marketing Officer. Prior to joining Applebee's, Mr. Cywinski
was employed as Vice President of Brand Strategy for McDonald's Corporation from
April 1999 to July 2001. From October 1996 to April 1999, he was President of
Buena Vista Pictures Marketing, the motion picture division of The Walt Disney
Company. Prior to 1996, Mr. Cywinski held various positions with Burger King
Corporation.
Louis A. Kaucic was employed by Applebee's in October 1997 as Senior Vice
President of Human Resources. He was named Chief People Officer in March 2001.
Prior to joining Applebee's, Mr. Kaucic was Vice President of Human Resources
and later promoted to Senior Vice President of Human Resources with Unique
Casual Restaurants, Inc., which operated several restaurant concepts, from July
1992 until October 1997. 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.
Larry A. Cates was employed by Applebee's in May 1997 as President of the
International Division. Prior to joining Applebee's, Mr. Cates spent 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.
11
David R. Parsley was employed by Applebee's in April 2000 as Senior Vice
President of Purchasing and Distribution. Prior to joining Applebee's, Mr.
Parsley held several positions with Prandium, Inc., operator of El Torito,
Chi-Chi's and Koo Koo Roo, from November 1996 to April 2000, most recently as
Senior Vice President of Quality and Supply Chain Management. He has also held
purchasing positions with The Panda Management Company, Carl Karcher
Enterprises, Proficient Food Company, Inc., and Baxter Healthcare Corporation.
Carin L. Stutz was employed by Applebee's in November 1999 as Senior Vice
President of Company Operations. Prior to joining Applebee's, Ms. Stutz was
Division Vice President with Wendy's International from July 1994 to November
1999. 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.
Item 2. Properties
As of December 29, 2002, we owned and operated 357 restaurants. Of these, we
leased the land and building for 64 sites, owned the building and leased the
land for 143 sites, and owned the land and building for 150 sites. In addition,
as of December 29, 2002, we owned 2 sites for future development of restaurants
and had entered into 12 lease agreements for restaurant sites we plan to open
during 2003. Our 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.
We own an 80,000 square foot office building in Overland Park, Kansas, located
in the Kansas City metropolitan area, in which our corporate offices are
headquartered. In December 2002, we entered into a lease agreement for a 23,000
square foot office building in Overland Park, Kansas, which will be used as
additional corporate office space beginning in 2003. We also lease office space
in certain regions in which we operate restaurants.
Under our franchise agreements, we have 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 29, 2002:
12
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
Domestic:
--------
Alabama........................ -- 28 28
Alaska......................... -- 2 2
Arizona........................ -- 24 24
Arkansas....................... -- 7 7
California..................... 7 73 80
Colorado....................... -- 28 28
Connecticut.................... -- 10 10
Delaware....................... 2 4 6
Florida........................ -- 86 86
Georgia........................ 9 55 64
Idaho.......................... -- 8 8
Illinois....................... 7 44 51
Indiana........................ -- 55 55
Iowa........................... -- 23 23
Kansas......................... 12 16 28
Kentucky....................... -- 31 31
Louisiana...................... -- 17 17
Maine.......................... 7 -- 7
Maryland....................... 9 10 19
Massachusetts.................. 29 -- 29
Michigan....................... 57 14 71
Minnesota...................... 45 2 47
Mississippi.................... -- 14 14
Missouri....................... 35 11 46
Montana........................ -- 7 7
Nebraska....................... -- 16 16
Nevada......................... 13 -- 13
New Hampshire.................. 12 -- 12
New Jersey..................... -- 31 31
New Mexico..................... 8 5 13
New York....................... 1 73 74
North Carolina................. 1 45 46
North Dakota................... -- 8 8
Ohio........................... -- 77 77
Oklahoma....................... -- 15 15
Oregon......................... -- 14 14
Pennsylvania................... 1 46 47
Rhode Island................... 7 -- 7
South Carolina................. -- 42 42
South Dakota................... -- 4 4
Tennessee...................... -- 44 44
Texas.......................... 41 27 68
Utah........................... -- 11 11
Vermont........................ 2 -- 2
Virginia....................... 46 -- 46
Washington..................... -- 21 21
West Virginia.................. 1 12 13
Wisconsin...................... 4 31 35
Wyoming........................ -- 4 4
-------------- -------------- --------------
Total Domestic................. 356 1,095 1,451
-------------- -------------- --------------
13
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
International:
-------------
Canada......................... 1 14 15
Egypt.......................... -- 1 1
Greece......................... -- 5 5
Honduras....................... -- 2 2
Kuwait......................... -- 2 2
Mexico......................... -- 14 14
Netherlands.................... -- 5 5
Qatar.......................... -- 1 1
-------------- -------------- --------------
Total International............ 1 44 45
-------------- -------------- --------------
357 1,139 1,496
============== ============== ==============
Item 3. Legal Proceedings
We are involved in various legal actions arising in the normal course of
business. These matters include, without limitation, such matters as employment
law related claims and disputes with two international franchisees regarding
disclosures we allegedly made or omitted. In each instance, we believe that we
have meritorious defenses to the allegations made and we are vigorously
defending these claims.
While the resolution of the matters described above may have an impact on our
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
1. Our 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 our common stock, as reported on
The Nasdaq Stock Market.
2002 2001
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 25.41 $ 21.20 $ 16.19 $ 12.44
Second Quarter $ 27.67 $ 22.26 $ 21.33 $ 15.88
Third Quarter $ 23.50 $ 19.13 $ 22.05 $ 17.32
Fourth Quarter $ 26.35 $ 19.03 $ 24.59 $ 17.60
2. Number of stockholders of record at December 29, 2002: 1,203
3. We declared an annual dividend of $0.06 per common share on December
12, 2002 for stockholders of record on December 27, 2002, and the
dividend was paid on January 30, 2003. We declared an annual dividend
of $0.05 per common share on December 13, 2001 for stockholders of
record on December 26, 2001, and the dividend was paid on January 29,
2002.
We presently anticipate continuing the payment of cash dividends based
upon our annual net income. The actual amount of such dividends will
depend upon future earnings, results of operations, capital
requirements, our financial condition and certain other factors. There
can be no assurance as to the amount of net income that we will
generate in 2003 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.
4. For information on our equity compensation plans, refer to Item 12,
"Security Ownership of Certain Beneficial Owners and Management."
15
Item 6. Selected Financial Data
The following table sets forth for the periods and the dates indicated our
selected financial data. The fiscal year ended December 31, 2000 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. All per share and
weighted average share information has been restated to reflect a three-for-two
stock split in 2002.
Fiscal Year Ended
---------------------------------------------------------------------------------
December 29, December 30, December 31, December 26, December 27,
2002 2001 2000 1999 1998
--------------- --------------- --------------- --------------- -----------------
(in thousands, except per share amounts)
STATEMENT OF EARNINGS DATA:
Company restaurant sales................. $ 724,616 $ 651,119 $ 605,414 $ 596,754 $ 580,840
Franchise income......................... 102,180 93,225 84,738 72,830 66,722
--------------- --------------- --------------- --------------- -----------------
Total operating revenues............ $ 826,796 $ 744,344 $ 690,152 $ 669,584 $ 647,562
=============== =============== =============== =============== =================
Operating earnings....................... $ 129,708 $ 112,427 $ 107,207 $ 94,910 $ 88,562
Net earnings............................. $ 83,027 $ 64,401 $ 63,161 $ 54,198 $ 50,015
Basic net earnings per share............. $ 1.49 $ 1.16 $ 1.07 $ 0.85 $ 0.73
Diluted net earnings per share........... $ 1.46 $ 1.13 $ 1.07 $ 0.84 $ 0.73
Dividends per share...................... $ 0.06 $ 0.05 $ 0.05 $ 0.04 $ 0.04
Basic weighted average shares
outstanding........................... 55,605 55,512 58,841 63,908 68,111
Diluted weighted average shares
outstanding........................... 56,922 56,877 59,170 64,353 68,366
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets............................. $ 566,114 $ 500,411 $ 471,707 $ 442,216 $ 510,904
Long-term debt, including
current portion........................ $ 52,563 $ 74,568 $ 91,355 $ 108,100 $ 147,188
Stockholders' equity..................... $ 392,581 $ 325,183 $ 281,718 $ 253,873 $ 296,053
16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Our revenues are generated from two primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise income
Franchise income consists 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 relate only to company operated restaurants. These include:
o Food and beverage costs
o Labor costs
o Direct and occupancy costs
o Pre-opening expenses
Other expenses, such as general and administrative and amortization expenses,
relate to both company operated restaurants and franchise operations.
We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal years ended December 29, 2002, December 30, 2001 and December 31,
2000 contained 52, 52 and 53 weeks, respectively, and are referred to hereafter
as 2002, 2001 and 2000, respectively.
Application of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and notes thereto. Actual results may differ from these estimates,
and such differences may be material to the consolidated financial statements.
We believe that the following significant accounting policies involve a higher
degree of judgement or complexity (see Note 2 of our Consolidated Financial
Statements for a complete discussion of our significant accounting policies).
Franchise income: Franchise income consists of franchise royalties and franchise
fees. We recognize royalties on a franchisee's sales in the period in which the
sales occur. We also receive a franchise fee for each restaurant that a
franchisee opens. Franchise fees are deferred until we have performed
substantially all of our related obligations as franchisor, typically when the
restaurant opens.
Property and equipment: Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets. The useful
lives of the assets are based upon management's expectations. We periodically
review the assets for changes in circumstances which may impact their useful
lives.
17
Impairment of long-lived assets: We periodically review property and equipment
for impairment using historical cash flows as well as current estimates of
future cash flows and/or appraisals. This assessment process requires the use of
estimates and assumptions which are subject to a significant degree of
judgement. In addition, we periodically assess the recoverability of goodwill
and other intangible assets, which requires us to make assumptions regarding the
future cash flows and other factors to determine the fair value of the assets.
If these assumptions change in the future, we may be required to record
impairment charges for these assets.
Legal and insurance reserves: We are periodically involved in various legal
actions arising in the normal course of business. We are required to assess the
probability of any adverse judgements as well as the potential range of loss. We
determine the required accruals after a review of the facts of each legal
action.
We use estimates in the determination of the appropriate liabilities for general
liability, workers' compensation and health insurance. The estimated liability
is established based upon historical claims data and third-party actuarial
estimates of settlement costs for incurred claims. Unanticipated changes in
these factors may require us to revise our estimates.
Employee incentive compensation plans: We have various long-term employee
incentive compensation plans which require us to make estimates to determine our
liability based upon projected performance of plan criteria. If actual
performance against the criteria differs from our estimates in the future, we
will be required to adjust our liability accordingly.
Receivables: We continually assess the collectibility of our franchise
receivables. We establish our allowance for bad debts based on several factors,
including historical collection experience, the current economic environment and
other specific information available to us at the time. The allowance for bad
debts may change in the future due to changes in the factors above or other new
developments.
We periodically reassess our assumptions and judgements and make adjustments
when significant facts and circumstances dictate. A change in any of the above
estimates could impact our consolidated statements of earnings and the related
asset or liability recorded in the consolidated balance sheets would be adjusted
accordingly. Historically, actual results have not been materially different
than the estimates that are described above.
Acquisition
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition.
18
Results of Operations
The following table contains information derived from our 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 29, December 30, December 31,
2002 2001(1) 2000
---------------- --------------- ----------------
Revenues:
Company restaurant sales......................... 87.6% 87.5% 87.7%
Franchise income................................. 12.4 12.5 12.3
---------------- --------------- ----------------
Total operating revenues...................... 100.0% 100.0% 100.0%
================ =============== ================
Cost of sales (as a percentage of company restaurant
sales):
Food and beverage................................ 26.6% 27.0% 27.4%
Labor............................................ 32.9 32.1 31.6
Direct and occupancy............................. 25.1 25.3 25.0
Pre-opening expense.............................. 0.3 0.3 0.3
---------------- --------------- ----------------
Total cost of sales........................... 84.8% 84.7% 84.4%
================ =============== ================
General and administrative expenses................... 9.8% 9.8% 9.4%
Amortization of intangible assets..................... -- 0.8 0.9
Loss on disposition of restaurants and equipment...... 0.1 0.2 0.2
---------------- --------------- ----------------
Operating earnings.................................... 15.7 15.1 15.5
---------------- --------------- ----------------
Other income (expense):
Investment income................................ 0.2 0.2 0.2
Interest expense................................. (0.3) (1.0) (1.3)
Other income (expense)........................... 0.1 (0.6) 0.1
---------------- --------------- ----------------
Total other income (expense).................. 0.1 (1.4) (1.1)
---------------- --------------- ----------------
Earnings before income taxes.......................... 15.7 13.7 14.5
Income taxes.......................................... 5.7 5.0 5.3
---------------- --------------- ----------------
Net earnings.......................................... 10.0% 8.7% 9.2%
================ =============== ================
(1) As a result of the adoption of Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," the extraordinary loss from the
extinguishment of debt and the related tax benefit previously recognized in
fiscal 2001 have been reclassified to other expense.
19
Fiscal Year Ended December 29, 2002 Compared With Fiscal Year Ended
December 30, 2001
- --------------------------------------------------------------------------------
Company Restaurant Sales. Total company restaurant sales increased $73,497,000
(11%) from $651,119,000 in 2001 to $724,616,000 in 2002. Company restaurant
openings contributed approximately 9% to the 11% increase in total company
restaurant sales. The remaining increase was due to the acquisition of 21
franchise restaurants in the Washington, D.C. area in November 2002 and
increases in weighted average weekly sales.
Comparable restaurant sales at company restaurants increased by 1.8% in 2002.
Weighted average weekly sales at company restaurants increased 0.8% from $42,660
in 2001 to $43,019 in 2002. These increases were due primarily to increases in
guest traffic and in the average guest check resulting from our food promotions.
In addition, a portion of the increase resulted from the implementation of our
To Go initiative and menu price increases of approximately 1.0% in 2002. To Go
sales mix increased from approximately 4% of company restaurant sales in 2001 to
5% of company restaurant sales in 2002.
Franchise Income. Overall franchise income increased $8,955,000 (10%) from
$93,225,000 in 2001 to $102,180,000 in 2002. The increased number of franchise
restaurants operating during 2002 as compared to 2001 contributed approximately
7% to the 10% total increase in franchise income. In addition, comparable
restaurant sales and weighted average weekly sales for franchise restaurants
increased 3.6% and 3.7%, respectively, in 2002.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.0%
in 2001 to 26.6% in 2002. This decrease was due primarily to lower commodity
costs and operational improvements resulting from our supply chain management
initiatives implemented in 2001.
Labor costs increased from 32.1% in 2001 to 32.9% in 2002. This increase was due
to increased hourly wage rates and higher management salaries due to our new
employee retention program and increased incentive compensation.
Direct and occupancy costs decreased from 25.3% in 2001 to 25.1% in 2002 due
primarily to lower utility costs and advertising costs, as a percentage of
sales. These decreases were partially offset by higher packaging costs relating
to our To Go initiative.
General and Administrative Expenses. General and administrative expenses were
9.8% in both 2001 and 2002. General and administrative expenses were impacted by
higher incentive compensation and higher legal fees in 2002. These increases
were offset by the costs incurred in 2001 associated with our purchasing supply
chain and strategic brand assessment projects and the absorption of general and
administrative expenses over a larger revenue base in 2002.
Amortization of Intangible Assets. Amortization of intangible assets decreased
from $5,851,000 in 2001 to $381,000 in 2002. This decrease was due to the
elimination of goodwill amortization in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets."
Interest Expense. Interest expense decreased in 2002 compared to 2001 due
primarily to a reduction in our debt levels and lower interest rates in 2002 as
compared to 2001.
20
Other Income (Expense). Other income was $1,098,000 in 2002 compared to other
expense of $4,720,000 in 2001. This favorable variance was due primarily to a
payment of $4,470,000 to terminate our interest rate swap agreements and the
write-off of deferred financing costs of $1,976,000 in connection with the
refinancing of our debt in 2001 in accordance with SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections."
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.8% in 2001 to 36.2% in 2002 due to lower state
and local income taxes.
Fiscal Year Ended December 30, 2001 Compared With Fiscal Year Ended
December 31, 2000
- --------------------------------------------------------------------------------
Company Restaurant Sales. Total company restaurant sales increased $45,705,000
(8%) from $605,414,000 in 2000 to $651,119,000 in 2001 due primarily to company
restaurant openings and increases in comparable restaurant sales which were
partially offset by the fifty-third week in 2000.
Comparable restaurant sales at company restaurants increased by 2.5% in 2001.
Weighted average weekly sales at company restaurants increased 1.1% from $42,183
in 2000 to $42,660 in 2001. These increases were due primarily to an increase in
the average guest check resulting from the company's food promotions and menu
price increases of approximately 2.0%.
Franchise Income. Overall franchise income increased $8,487,000 (10%) from
$84,738,000 in 2000 to $93,225,000 in 2001 due primarily to the increased number
of franchise restaurants operating during 2001 as compared to 2000 and increases
in comparable restaurant sales. This increase was partially offset by the
fifty-third week in 2000. Comparable restaurant sales and weighted average
weekly sales for franchise restaurants increased 3.0% and 2.7%, respectively, in
2001.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.4%
in 2000 to 27.0% in 2001. This decrease was due primarily to the impact of the
menu price increases in 2001, a supply chain management initiative in 2001, and
higher costs relating to the implementation of a new menu in the fourth quarter
of 2000.
Labor costs increased from 31.6% in 2000 to 32.1% in 2001. This increase was due
to higher costs related to management staffing levels and higher management
incentive compensation.
Direct and occupancy costs increased from 25.0% in 2000 to 25.3% in 2001 due
primarily to higher utility costs and repairs and maintenance expense. This
increase was partially offset by a decrease in advertising costs, as a
percentage of sales, due to increased advertising in 2000 relating to the
implementation of our new menu in company restaurants.
General and Administrative Expenses. General and administrative expenses
increased from 9.4% in 2000 to 9.8% in 2001 due primarily to costs associated
with our supply chain management initiative and strategic brand assessment
project as well as higher incentive compensation expense. These costs were
partially offset by the absorption of general and administrative expenses over a
larger revenue base.
Interest Expense. Interest expense decreased in 2001 compared to 2000 due
primarily to a reduction in our debt levels, the termination of our interest
rate swap agreements in November 2001 and lower interest rates in 2001 as
compared to 2000.
Other Expense. Other expense increased in 2001 compared to 2000 due primarily to
a payment of $4,470,000 to terminate our interest rate swap agreements and the
write-off of deferred financing costs of $1,976,000 in connection with the
refinancing of our debt in 2001 in accordance with SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections."
21
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 36.8% in both 2000 and 2001.
Liquidity and Capital Resources
Our need for capital historically has resulted from the construction and
acquisition of restaurants, investment in information technology systems and the
repurchase of our common shares. In the past, we have obtained capital through
public stock offerings, debt financing, and our ongoing operations. Cash flows
from our ongoing operations include cash generated from company and franchise
operations, credit from trade suppliers, real estate lease financing, and
landlord contributions to leasehold improvements. We have also used our common
stock as consideration in the acquisition of restaurants. In addition, we have
assumed debt or issued new debt in connection with certain mergers and
acquisitions.
Capital expenditures increased from $50,086,000 in 2001 to $64,874,000 in 2002
(excluding $34,250,000 related to the acquisition of 21 restaurants in the
Washington, D.C. area) due primarily to expenditures related to the enhancement
of our information systems. We currently expect to open approximately 25 company
restaurants, and capital expenditures excluding acquisitions are expected to be
between $65,000,000 and $75,000,000 in 2003. These expenditures will primarily
be for the development of new restaurants, refurbishment and capital replacement
for existing restaurants, and the enhancement of information systems. Because we
expect to continue to purchase a portion of our sites, the amount of actual
capital expenditures will be dependent upon, among other things, the proportion
of leased versus owned properties. In addition, if we open more restaurants than
we currently anticipate or acquire additional restaurants, our capital
requirements will increase accordingly.
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition.
On January 20, 2003, we reached an agreement with a franchisee to acquire the
operations and assets of 11 Applebee's restaurants located in Illinois, Indiana,
Kentucky and Missouri for $23,200,000 in cash at closing, subject to adjustment.
The acquisition of the restaurants is anticipated to close late in the first
quarter of 2003, subject to obtaining operating licenses and other third-party
consents.
Our bank credit agreement provides for a $150,000,000 three-year unsecured
revolving credit facility, of which $25,000,000 may be used for the issuance of
letters of credit. The facility is subject to various covenants and restrictions
which, among other things, require the maintenance of stipulated fixed charge,
leverage and indebtedness to capitalization ratios, as defined, and limit
additional indebtedness and capital expenditures in excess of specified amounts.
Cash dividends are limited to $10,000,000 annually. The facility is subject to
standard other terms, conditions, covenants, and fees. We are currently in
compliance with the covenants contained in our credit agreement. As of December
29, 2002, we had borrowings of $48,000,000 and standby letters of credit of
$11,691,000 outstanding under our revolving credit facility. We also had a
standby letter of credit for $827,000 outstanding with another financial
institution.
22
In February 2001, our Board of Directors authorized the repurchase of up to
$55,000,000 of our common stock through 2001, subject to market conditions and
applicable restrictions imposed by our then-current credit agreement. As of
December 30, 2001, we had $20,600,000 remaining on this authorization. In
February 2002, our Board of Directors extended the 2001 authorization through
2002. In May 2002, our Board of Directors authorized an additional repurchase of
$75,000,000 of our common stock through May 2005. During 2002, we repurchased
1,210,000 shares of our common stock at an average price of $21.58 for an
aggregate cost of $26,100,000. As of December 29, 2002, we had $69,500,000
remaining under the 2002 authorization.
As of December 29, 2002, our liquid assets totaled $15,672,000. These assets
consisted of cash and cash equivalents in the amount of $15,169,000 and
short-term investments in the amount of $503,000. The working capital deficit
increased from $29,747,000 as of December 30, 2001 to $45,607,000 as of December
29, 2002. This increase was due primarily to decreases in cash and cash
equivalents due to payments on long-term debt, the acquisition of 21 restaurants
in the Washington, D.C. area and an increase in accrued compensation and gift
certificate liabilities.
On September 20, 2002, we formed Neighborhood Insurance, Inc., a Vermont
corporation and a wholly-owned subsidiary, as a captive insurance company.
Neighborhood Insurance, Inc. was established to provide Applebee's
International, Inc. and certain franchisees with workers compensation and
general liability insurance. Applebee's International, Inc. and covered
franchisees will make premium payments to the captive insurance company which
will pay administrative fees and insurance claims, subject to individual and
aggregate maximum claim limits under the captive insurance company's reinsurance
policies. As a result, our cash and cash equivalents and accrued liabilities may
increase in future periods due to the operation of the captive insurance
company.
We believe that our liquid assets and cash generated from operations, combined
with borrowings available under our credit facilities, will provide sufficient
funds for our operating, capital and other requirements for the foreseeable
future.
The following table shows our debt amortization schedule, our future capital
lease commitments (including principal and interest payments) and our future
operating lease commitments as of December 29, 2002 (in thousands):
Payments due by period
----------------------------------------------------------------------
Certain Less than 1 1-3 3-5 More than 5
Contractual Obligations Total year years years years
- ------------------------------------------- -------------- ------------- ------------- ------------- -------------
Long-term Debt (excluding capital
lease obligations)................ $ 48,325 $ 325 $ 48,000 $ -- $ --
Capital Lease Obligations................ $ 10,554 $ 716 $ 1,508 $ 1,616 $ 6,714
Operating Leases......................... $ 184,702 $ 16,430 $ 30,665 $ 27,888 $ 109,719
In addition, we have outstanding lease guarantees of approximately $24,200,000
as of December 29, 2002 (see Note 12 to our Consolidated Financial Statements).
23
Inflation
Substantial increases in costs and expenses could impact our operating results
to the extent such increases cannot be passed along to customers. In particular,
increases in food, supplies, labor and operating expenses could have a
significant impact on our operating results. We do not believe that inflation
has materially affected our operating results during the past three years.
A majority of our employees are paid hourly rates related to federal and state
minimum wage laws and various laws that allow for credits to that wage. The
Federal government continues to consider an increase in the minimum wage.
Several state governments have increased the minimum wage and other state
governments are also considering an increased minimum wage. In the past, we have
been able to pass along cost increases to customers through food and beverage
price increases, and we will attempt to do so in the future. We cannot
guarantee, however, that all future cost increases can be reflected in our
prices or that increased prices will be absorbed by customers without at least
somewhat diminishing customer spending in our restaurants.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." SFAS No. 141 requires that all business
combinations be accounted for using the purchase method of accounting and
requires separate recognition of intangible assets that meet certain criteria.
This Statement applies to all business combinations after June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", and we adopted this Statement effective December 31, 2001. SFAS No. 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. This Statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. In the first quarter of fiscal 2002, we
completed the first step of the required two-step goodwill impairment testing
and ceased amortization of goodwill. The first step of the impairment test
required us to compare the fair value of each reporting unit to its carrying
value to determine whether there was an indication that an impairment existed.
If there had been an indication of impairment, we would have allocated the fair
value of the reporting unit to its assets and liabilities as if the reporting
unit had been acquired in a business combination. During 2002, no impairment
losses were recorded under SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets", which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
the accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. We adopted SFAS No. 144
effective December 31, 2001. The adoption of SFAS No. 144 did not have a
material impact on our consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS Nos. 4 and 64 required gains and losses from extinguishment of debt to be
classified as extraordinary items. SFAS No. 145 rescinds this requirement and
stipulates that gains or losses on extinguishment of debt would have to meet the
criteria of APB Opinion No. 30 to be classified as an extraordinary item. In
addition, any extraordinary gains or losses on extinguishment of debt in prior
periods presented would require reclassification. SFAS No. 145 is required, with
early adoption encouraged, for fiscal years beginning after May 15, 2002. We
early adopted SFAS No. 145 during the fourth quarter of fiscal 2002 and as a
result, we reclassified the $1,249,000 (net of a related tax benefit of
$727,000) extraordinary loss from the extinguishment of debt in our 2001
consolidated statements of earnings to other expense and income taxes.
24
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized only when the
liability is incurred and measured at fair value. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. We do
not expect the initial adoption of this Statement to have a material impact on
our results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
prospectively. The disclosure requirements are effective for financial
statements for interim or annual periods ending after December 15, 2002. We
adopted the initial recognition provisions of Interpretation No. 45 in January
of 2003. The disclosure provisions of this Interpretation are effective for us
as of December 29, 2002. The initial adoption of Interpretation No. 45 did not
have a material impact on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. We have adopted the disclosure provisions of SFAS No.
148.
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development, capital expenditures and financial commitments 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. These
risks include but are not limited to our ability and the ability of our
franchisees to open and operate additional restaurants profitably, the continued
growth of our franchisees and our ability to attract and retain qualified
franchisees, the impact of intense competition in the casual dining segment of
the restaurant industry and our ability to control restaurant operating costs
which are impacted by market changes, minimum wage and other employment laws,
food costs and inflation. For a more detailed discussion of the principal
factors that could cause actual results to be materially different, you should
read our current report on Form 8-K which we filed with the Securities and
Exchange Commission on February 12, 2003. We disclaim any obligation to update
forward-looking statements.
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in
commodity prices. Our revolving credit facility bears interest at either the
bank's prime rate or LIBOR plus 1.0%, at our option. As of December 29, 2002,
the total amount of debt subject to interest rate fluctuations was $48,000,000
which was outstanding on our revolving credit facility. A 1% change in interest
rates would result in an increase or decrease in interest expense of $480,000
per year. We may from time to time enter into interest rate swap agreements to
manage the impact of interest rate changes on our earnings. Many of the food
products we purchase are subject to price volatility due to factors that are
outside of our control such as weather and seasonality. As part of our strategy
to moderate this volatility, we have entered into fixed price purchase
commitments with terms of one year or less.
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
If you would like information about our executive officers, you should read the
section entitled "Executive Officers of the Registrant" in Part I of this
report. If you would like information about our Directors, you should read the
information under the caption "Information About the Board of Directors and
Executive Officers" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on or about May 8, 2003. We incorporate that Proxy
Statement in this document by reference.
Item 11. Executive Compensation
If you would like information about our executive compensation, you should read
the information under the caption "Executive Compensation" in the Proxy
Statement for the Annual Meeting of Stockholders to be held on or about May 8,
2003. We incorporate that information in this document by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
If you would like information about the stock owned by our management and
certain large stockholders and our equity compensation plans, you should read
the information under the caption "Stock Ownership of Officers, Directors and
Major Stockholders" and "Equity Compensation Plan Information" in the Proxy
Statement for the Annual Meeting of Stockholders to be held on or about May 8,
2003. We incorporate that information in this document by reference.
Item 13. Certain Relationships and Related Transactions
If you would like information about certain transactions which we have completed
or certain relationships which we have entered into, you should read the
information under the caption "Certain Transactions" in the Proxy Statement for
the Annual Meeting of Stockholders to be held on or about May 8, 2003. We
incorporate that information in this document by reference.
Item 14. Controls and Procedures
Within ninety days prior to the filing of this report, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures under the supervision and with the participation of the Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on this
evaluation, our management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
27
PART IV
Item 15. 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 Consolidated 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:
We filed a report on Form 8-K on October 1, 2002, announcing an
agreement to acquire certain secured debt of Apple Capitol Group, LLC
owed to Lehman Brothers Holdings, Inc. for $34.3 million.
We filed a report on Form 8-K on October 9, 2002, announcing that the
Bankruptcy Court for the Southern District of Florida had entered an
order approving the sale of 21 franchise restaurants located in the
Washington, D.C. area operated by Apple Capitol Group, LLC to
Applebee's International, Inc.
We furnished a report on Form 8-K on October 25, 2002 announcing the
broadcast of our third quarter 2002 earnings conference call over the
Internet.
We filed a report on Form 8-K on October 31, 2002, announcing third
quarter 2002 diluted earnings per share of 37 cents.
We filed a report on Form 8-K on November 8, 2002, announcing the
completion of the acquisition of 21 franchise restaurants located in
the Washington, D.C. area.
We filed a report on Form 8-K on December 12, 2002, announcing
executive changes.
We filed a report on Form 8-K on December 12, 2002, announcing an
increased annual dividend.
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 14, 2003 By: /s/ Lloyd L. Hill
-------------------- -------------------------------------
Lloyd L. Hill
Chairman and 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 14, 2003
-------------------------------------- ------------------------
Lloyd L. Hill
Director, Chairman of the Board and Chief
Executive Officer
(principal executive officer)
By: /s/ Steven K. Lumpkin Date: March 14, 2003
-------------------------------------- ------------------------
Steven K. Lumpkin
Executive Vice President and Chief
Financial Officer
(principal financial officer)
By: /s/ Beverly O. Elving Date: March 14, 2003
-------------------------------------- ------------------------
Beverly O. Elving
Vice President, Accounting
(principal accounting officer)
29
By: /s/ Erline Belton Date: March 14, 2003
-------------------------------------- ------------------------
Erline Belton
Director
By: /s/ Douglas R. Conant Date: March 14, 2003
-------------------------------------- ------------------------
Douglas R. Conant
Director
By: /s/ D. Patrick Curran Date: March 14, 2003
-------------------------------------- ------------------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 14, 2003
-------------------------------------- ------------------------
Eric L. Hansen
Director
By: /s/ Mark S. Hansen Date: March 14, 2003
-------------------------------------- ------------------------
Mark S. Hansen
Director
By: /s/ Jack P. Helms Date: March 14, 2003
-------------------------------------- ------------------------
Jack P. Helms
Director
By: /s/ Burton M. Sack Date: March 14, 2003
-------------------------------------- ------------------------
Burton M. Sack
Director
By: /s/ George D. Shadid Date: March 14, 2003
-------------------------------------- ------------------------
George D. Shadid
Director
30
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Lloyd L. Hill, certify that:
1. I have reviewed this annual report on Form 10-K of Applebee's
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003 By: /s/ Lloyd L. Hill
--------------------- ------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
31
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven K. Lumpkin, certify that:
1. I have reviewed this annual report on Form 10-K of Applebee's
International, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 14, 2003 By: /s/ Steven K. Lumpkin
--------------------- ------------------------------------
Steven K. Lumpkin
Executive Vice President and
Chief Financial Officer
(principal financial officer)
32
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
Index to consolidated Financial Statements
Page
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of December 29, 2002 and
December 30, 2001 .................................................................................. F-3
Consolidated Statements of Earnings for the fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000........................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal Years
Ended December 29, 2002, December 30, 2001 and December 31, 2000..................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 29, 2002, December 30, 2001 and December 31, 2000........................................... 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 29, 2002 and
December 30, 2001, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 29, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 29, 2002
and December 30, 2001, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended December 29, 2002, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets with
the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets," on December 31, 2001.
Deloitte & Touche LLP
Kansas City, Missouri
March 5, 2003
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 29, December 30,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 15,169 $ 22,048
Short-term investments, at market value........................................ 503 699
Receivables, net of allowance.................................................. 27,895 22,827
Inventories.................................................................... 11,504 10,165
Prepaid and other current assets............................................... 14,508 12,260
-------------- --------------
Total current assets........................................................ 69,579 67,999
Property and equipment, net......................................................... 383,002 330,924
Goodwill............................................................................ 88,715 78,614
Franchise interest and rights, net.................................................. 1,468 1,800
Other assets........................................................................ 23,350 21,074
-------------- --------------
$ 566,114 $ 500,411
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 377 $ 43
Accounts payable............................................................... 27,479 22,196
Accrued expenses and other current liabilities................................. 84,007 71,551
Accrued dividends.............................................................. 3,323 2,977
Accrued income taxes........................................................... -- 979
-------------- --------------
Total current liabilities................................................... 115,186 97,746
-------------- --------------
Non-current liabilities:
Long-term debt - less current portion.......................................... 52,186 74,525
Other non-current liabilities.................................................. 6,161 2,957
-------------- --------------
Total non-current liabilities............................................... 58,347 77,482
-------------- --------------
Total liabilities........................................................... 173,533 175,228
-------------- --------------
Commitments and contingencies (Notes 8, 9, and 12)
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 - 72,336,788 shares in 2002 and 2001................................. 723 723
Additional paid-in capital..................................................... 187,523 180,802
Retained earnings.............................................................. 434,621 354,950
Accumulated other comprehensive income, net of income taxes.................... 16 14
-------------- --------------
622,883 536,489
Treasury stock - 16,948,371 shares in 2002 and 16,522,099 shares in 2001, at
cost........................................................................ (230,302) (211,306)
-------------- --------------
Total stockholders' equity.................................................. 392,581 325,183
-------------- --------------
$ 566,114 $ 500,411
============== ==============
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 29, December 30, December 31,
2002 2001 2000
-------------- -------------- --------------
Revenues:
Company restaurant sales................................ $ 724,616 $ 651,119 $ 605,414
Franchise income........................................ 102,180 93,225 84,738
-------------- -------------- --------------
Total operating revenues............................. 826,796 744,344 690,152
-------------- -------------- --------------
Cost of company restaurant sales:
Food and beverage....................................... 192,424 175,977 166,014
Labor................................................... 238,266 208,996 191,402
Direct and occupancy.................................... 181,767 164,965 151,611
Pre-opening expense..................................... 1,974 1,701 1,659
-------------- -------------- --------------
Total cost of company restaurant sales............... 614,431 551,639 510,686
-------------- -------------- --------------
General and administrative expenses.......................... 81,138 72,935 65,060
Amortization of intangible assets............................ 381 5,851 5,934
Loss on disposition of restaurants and equipment............. 1,138 1,492 1,265
-------------- -------------- --------------
Operating earnings........................................... 129,708 112,427 107,207
-------------- -------------- --------------
Other income (expense):
Investment income....................................... 1,498 1,650 1,484
Interest expense........................................ (2,168) (7,456) (9,304)
Other income (expense).................................. 1,098 (4,720) 551
-------------- -------------- --------------
Total other income (expense)......................... 428 (10,526) (7,269)
-------------- -------------- --------------
Earnings before income taxes................................. 130,136 101,901 99,938
Income taxes................................................. 47,109 37,500 36,777
-------------- -------------- --------------
Net earnings................................................. $ 83,027 $ 64,401 $ 63,161
============== ============== ==============
Basic net earnings per common share.......................... $ 1.49 $ 1.16 $ 1.07
============== ============== ==============
Diluted net earnings per common share........................ $ 1.46 $ 1.13 $ 1.07
============== ============== ==============
Basic weighted average shares outstanding.................... 55,605 55,512 58,841
============== ============== ==============
Diluted weighted average shares outstanding.................. 56,922 56,877 59,170
============== ============== ==============
See notes to consolidated financial statements.
F-4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
Accumulated
Other
Common Stock Additional Comprehensive Total
------------------- Paid-In Retained Income Treasury Stockholders'
Shares Amount Capital Earnings (Loss) Stock Equity
----------- ------- ---------- --------- ------------- ---------- -------------
Balance, December 26, 1999.......................... 72,336,788 $ 723 $168,584 $233,146 $ 50 $(148,630) $ 253,873
Comprehensive income:
Net earnings..................................... -- -- -- 63,161 -- -- 63,161
Change in unrealized gain on short-term
investments, net of income taxes............... -- -- -- -- (11) -- (11)
----------- ------- ---------- --------- ------------- ---------- -------------
Total comprehensive income.......................... -- -- -- 63,161 (11) -- 63,150
----------- ------- ---------- --------- ------------- ---------- -------------
Purchases of treasury stock...................... -- -- -- -- -- (43,192) (43,192)
Dividends declared on common stock, $0.05 per
share.......................................... -- -- -- (2,776) -- -- (2,776)
Stock options exercised and related tax benefit.. -- -- 2,298 -- -- 4,201 6,499
Shares issued under employee stock and 401(k)
plans.......................................... -- -- 760 -- -- 2,066 2,826
Restricted shares awarded under equity
incentive plan, net of cancellations........... -- -- 556 -- -- 943 1,499
Unearned compensation relating to restricted
shares......................................... -- -- 350 -- -- -- 350
Notes receivable from officers for stock sales,
net of repayments.............................. -- -- (511) -- -- -- (511)
----------- ------- ---------- --------- ------------- ---------- -------------
Balance, December 31, 2000.......................... 72,336,788 723 172,037 293,531 39 (184,612) 281,718
Comprehensive income:
Net earnings..................................... -- -- -- 64,401 -- -- 64,401
Change in unrealized gain on short-term
investments, net of income taxes............... -- -- -- -- (25) -- (25)
Transition adjustment related to financial
instruments, net of taxes...................... -- -- -- -- (250) -- (250)
Change in fair value of derivative instruments... -- -- -- -- (4,220) -- (4,220)
Adjustment for termination of interest rate
swap agreements................................ -- -- -- -- 4,470 -- 4,470
----------- ------- ---------- --------- ------------- ---------- -------------
Total comprehensive income.......................... -- -- -- 64,401 (25) -- 64,376
----------- ------- ---------- --------- ------------- ---------- -------------
Purchases of treasury stock...................... -- -- -- -- -- (44,987) (44,987)
Dividends declared on common stock, $0.05 per
share.......................................... -- -- -- (2,982) -- -- (2,982)
Stock options exercised and related tax benefit.. -- -- 7,472 -- -- 16,518 23,990
Shares issued under employee stock and 401(k)
plans.......................................... -- -- 870 -- -- 1,392 2,262
Restricted shares awarded under equity
incentive plan, net of cancellations........... -- -- (254) -- -- 383 129
Unearned compensation relating to restricted
shares......................................... -- -- 326 -- -- -- 326
Net repayments of notes receivable from officers
for stock sales................................ -- -- 351 -- -- -- 351
----------- ------- ---------- --------- ------------- ---------- -------------
Balance, December 30, 2001.......................... 72,336,788 723 180,802 354,950 14 (211,306) 325,183
Comprehensive income:
Net earnings..................................... -- -- -- 83,027 -- -- 83,027
Change in unrealized gain on short-term
investments, net of income taxes............... -- -- -- -- 2 -- 2
----------- ------- ---------- --------- ------------- ---------- -------------
Total comprehensive income.......................... -- -- -- 83,027 2 -- 83,029
----------- ------- ---------- --------- ------------- ---------- -------------
Purchases of treasury stock...................... -- -- -- -- -- (26,113) (26,113)
Dividends declared on common stock, $0.06 per
share.......................................... -- -- -- (3,323) -- -- (3,323)
Stock options exercised and related tax benefit.. -- -- 2,796 -- -- 4,495 7,291
Shares issued under employee stock and 401(k)
plans.......................................... -- -- 2,741 -- -- 2,129 4,870
Restricted shares awarded under equity incentive
plan........................................... -- -- 8 -- -- 493 501
Unearned compensation relating to restricted
shares......................................... -- -- 659 -- -- -- 659
Net repayments of notes receivable from officers
for stock sales................................ -- -- 517 -- -- -- 517
Dividends paid for fractional shares............. -- -- -- (33) -- -- (33)
----------- ------- ---------- --------- ------------- ---------- -------------
Balance, December 29, 2002.......................... 72,336,788 $ 723 $187,523 $434,621 $ 16 $(230,302) $ 392,581
=========== ======= ========== ========= ============= ========== =============
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 29, December 30, December 31,
2002 2001 2000
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................. $ 83,027 $ 64,401 $ 63,161
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.............................. 35,110 31,780 30,208
Amortization of intangible assets.......................... 381 5,851 5,934
Write-off of deferred financing costs...................... -- 1,976 --
Amortization of deferred financing costs................... 195 648 734
Deferred income tax provision (benefit).................... 3,296 (4,520) 118
Loss on disposition of restaurants and equipment........... 1,138 1,492 1,265
Income tax benefit from exercise of stock options.......... 1,905 4,807 554
Changes in assets and liabilities (exclusive of effects of
acquisitions):
Receivables................................................ (3,158) (3,067) (8,538)
Inventories................................................ (1,067) 2,451 (1,369)
Prepaid and other current assets........................... (4,358) (3,992) 393
Accounts payable........................................... 5,283 (4,360) 9,590
Accrued expenses and other current liabilities............. 13,497 10,068 10,353
Accrued income taxes....................................... (979) (121) (167)
Other...................................................... 1,069 (2,323) (1,393)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 135,339 105,091 110,843
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (64,874) (50,086) (46,220)
Acquisition of restaurants.................................... (34,250) -- --
Equity investment in unaffiliated company..................... -- -- (2,000)
Proceeds from sale of property and equipment.................. 279 433 1,038
Purchases of short-term investments........................... (150) (200) (100)
Maturities and sales of short-term investments................ 350 774 1,325
-------------- -------------- --------------
NET CASH USED BY INVESTING ACTIVITIES...................... (98,645) (49,079) (45,957)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock................................... (26,113) (44,987) (43,192)
Dividends paid................................................ (3,010) (2,779) (2,662)
Issuance of common stock upon exercise of stock options....... 5,386 19,183 5,945
Shares sold under employee stock purchase plan................ 2,164 1,234 1,136
Proceeds from issuance of long-term debt...................... -- 70,000 --
Deferred financing costs relating to issuance of
lonng-term debt............................................. -- (577) --
Net payments on long-term debt................................ (22,000) (86,801) (16,777)
-------------- -------------- --------------
NET CASH USED BY FINANCING ACTIVITIES...................... (43,573) (44,727) (55,550)
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............... (6,879) 11,285 9,336
CASH AND CASH EQUIVALENTS, beginning of period..................... 22,048 10,763 1,427
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 15,169 $ 22,048 $ 10,763
============== ============== ==============
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 29, December 30, December 31,
2002 2001 2000
----------------- ----------------- -----------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Income taxes.................................... $ 44,983 $ 40,147 $ 36,278
================= ================= =================
Interest........................................ $ 1,532 $ 7,728 $ 8,188
================= ================= =================
Supplemental disclosures of noncash investing and financing activities:
We issued restricted common stock of $1,258,000 in 2002 and $764,000, net of
forfeitures in 2001. We had forfeitures of restricted common stock of $107,000
in 2000.
Disclosure of Accounting Policy:
For purposes of the consolidated statements of cash flows, we consider 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 our subsidiaries develop, franchise and
operate casual dining restaurants under the name "Applebee's Neighborhood Grill
& Bar." As of December 29, 2002, there were 1,496 Applebee's restaurants.
Franchisees operated 1,139 of these restaurants and 357 restaurants were company
operated. These restaurants were located in 49 states and eight international
countries.
2. Summary of Significant Accounting Policies
Principles of consolidation: The consolidated financial statements include our
accounts and the accounts of our wholly-owned subsidiaries. We have eliminated
all intercompany profits, transactions and balances.
Fiscal year: Our fiscal year ends on the last Sunday of the calendar year. The
fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000
contained 52, 52 and 53 weeks, respectively. These fiscal years will be referred
to as 2002, 2001 and 2000, respectively.
Short-term investments: Short-term investments are comprised of certificates of
deposit and preferred stocks. We determine gains and losses from sales using the
specific identification method. As of December 29, 2002, we have classified all
short-term investments as available-for-sale.
Financial instruments: Our financial instruments as of December 29, 2002 and
December 30, 2001 consist of cash equivalents, short-term investments and
long-term debt, excluding capitalized lease obligations. The carrying amount of
cash equivalents approximates fair value because of the short maturity of those
instruments. We based the carrying amount of short-term investments on quoted
market prices. We based the fair value of our long-term debt, excluding
capitalized lease obligations, on quotations made on similar issues. The fair
value of these financial instruments approximates the carrying amounts reported
in the consolidated balance sheets.
Interest rate swap agreements: In 1998, we entered into interest rate swap
agreements to manage our exposure to interest rate fluctuations. Effective
January 1, 2001, we adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS Nos. 137 and 138, which require an entity to
recognize all derivatives as either assets or liabilities on the balance sheet.
The Statement also requires changes in the fair value of the derivative
instruments to be recorded in either net earnings or other comprehensive income
depending on their intended use. Our interest rate swap agreements met the
criteria for hedge accounting under the Statement. We recognized the
differential which we paid or received over the term of the swap agreements as a
component of interest expense. In November 2001, we terminated our interest rate
swap agreements in connection with the refinancing of our then-existing credit
facilities. The costs relating to the termination of these agreements of
$4,470,000 are reflected in other expense in the consolidated statements of
income. These interest rate swap agreements were the only derivative instruments
held during fiscal year 2001 as defined under SFAS No. 133. We did not hold any
derivative instruments during fiscal year 2002.
Inventories: We state inventories at the lower of cost, using the first-in,
first-out method, or market.
Pre-opening expense: We expense direct training and other costs related to
opening new or relocated restaurants in the month of opening.
F-8
Property and equipment: We state property and equipment at historical 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:
o Buildings 20 years
o Leasehold improvements 15-20 years
o Furniture and equipment 2-7 years
We record capitalized interest in connection with the development of new
restaurants and amortize it over the estimated useful life of the related asset.
We capitalized $300,000 in interest costs during 2002, $523,000 during 2001 and
$375,000 during 2000.
Software costs: In accordance with American Institute of Certified Public
Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," certain costs incurred in
connection with internal-use software projects are capitalized and amortized
over the expected useful life of the asset.
Goodwill: Goodwill represents the excess of cost over fair market value of net
assets we have acquired. Through 2001, we amortized goodwill over periods
ranging from 15 to 20 years on a straight-line basis. Beginning in fiscal 2002,
we ceased amortization of our goodwill in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" (see Note 6). Accumulated amortization as
of December 29, 2002 and December 30, 2001 was $30,348,000.
Impairment of long-lived assets: We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. We analyze potential impairments of tangible assets on a
restaurant-by-restaurant basis. In 2000, we adjusted the carrying value of
certain assets based on their historical cash flows and current estimates of
future cash flows. The related pre-tax charge of $263,000 is included in loss on
disposition of restaurants and equipment in the accompanying consolidated
statement of earnings. We determined the estimated fair value using financial
information available to us.
Franchise interest and rights: Franchise interest and rights represent
allocations of the purchase price of our 1988 acquisition of the Applebee's
concept to the restaurants we acquired and the franchise agreements that we
assumed based on an independent valuation. We amortize the allocated costs over
the estimated life of the restaurants or the franchise agreements on a
straight-line basis ranging from 7 to 20 years. Accumulated amortization as of
December 29, 2002 was $4,903,000, and as of December 30, 2001, it was
$4,571,000.
Franchise income: Franchise income consists of franchise royalties and franchise
fees. We recognize royalties on a franchisee's sales in the period in which the
sales occur. We also receive a franchise fee for each restaurant that a
franchisee opens. Franchise fees are deferred until we have performed
substantially all of our related obligations as franchisor, typically when the
restaurant opens. Franchise fees, included in franchise income in the
consolidated statements of earnings, totaled $2,692,000 for 2002, $3,800,000 for
2001 and $3,652,000 for 2000.
Advertising costs: We expense most advertising costs for company-owned
restaurants as we incur them, but we expense the production costs of advertising
the first time the advertising takes place. Advertising expense related to
company-owned restaurants was $34,547,000 for 2002, $32,259,000 for 2001 and
$31,014,000 for 2000.
F-9
Stock-based compensation: We have adopted the disclosure provisions of SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." The Statement requires prominent
disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. We account for stock compensation awards under the
intrinsic method of Accounting Principles Board ("APB") Opinion No. 25 (see Note
14). Opinion No. 25 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. All options
awarded under all of our plans are granted with an exercise price equal to the
fair market value on the date of the grant. The following table presents the
effect on our net earnings and earnings per share had we adopted the fair value
method of accounting for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation" (in thousands, except for per share
amounts).
2002 2001 2000
---------------- ---------------- ----------------
Net earnings, as reported.......................... $ 83,027 $ 64,401 $ 63,161
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes........................... 6,018 4,619 2,739
---------------- ---------------- ----------------
Pro forma net earnings............................. $ 77,009 $ 59,782 $ 60,422
================ ================ ================
Basic net earnings per common share,
as reported.................................... $ 1.49 $ 1.16 $ 1.07
================ ================ ================
Basic net earnings, per common share,
pro forma...................................... $ 1.38 $ 1.08 $ 1.03
================ ================ ================
Diluted net earnings per common share,
as reported.................................... $ 1.46 $ 1.13 $ 1.07
================ ================ ================
Diluted net earnings per common share,
pro forma...................................... $ 1.35 $ 1.05 $ 1.02
================ ================ ================
The weighted average fair value at date of grant for options granted during
2002, 2001 and 2000 was $9.66, $7.33 and $5.63 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 2002, 2001 and
2000: dividend yield of 0.3%, 0.4% and 0.3%, respectively; expected volatility
of 46.9%, 48.7% and 46.8%, respectively; risk-free interest rate of 2.5%, 4.2%
and 5.1%, respectively; and expected lives of 5.2, 5.0 and 4.9 years,
respectively.
Earnings per share: We compute basic earnings per share 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 holders of options or other contracts to
issue common stock exercised or converted their holdings into common stock.
Outstanding stock options and equity-based compensation represent the only
dilutive effects on weighted average shares. The chart below presents a
reconciliation between basic and diluted weighted average shares outstanding and
F-10
the related earnings per share. All references to the number of shares and per
share amounts of common stock have been restated to reflect the stock split
declared in May 2002 (see Note 13). All amounts in the chart, except per share
amounts, are expressed in thousands.
2002 2001 2000
---------------- ---------------- ----------------
Net earnings....................................... $ 83,027 $ 64,401 $ 63,161
================ ================ ================
Basic weighted average shares outstanding.......... 55,605 55,512 58,841
Dilutive effect of stock options and
equity-based compensation...................... 1,317 1,365 329
---------------- ---------------- ----------------
Diluted weighted average shares outstanding........ 56,922 56,877 59,170
================ ================ ================
Basic net earnings per common share................ $ 1.49 $ 1.16 $ 1.07
================ ================ ================
Diluted net earnings per common share.............. $ 1.46 $ 1.13 $ 1.07
================ ================ ================
We excluded stock options with exercise prices greater than the average market
price of our common stock for the applicable periods from the computation of
diluted weighted average shares outstanding. There were approximately 118,000 of
these options for 2002, 183,000 options for 2001 and 1,626,000 options for 2000.
Gift certificates: We record a liability in the period in which a gift
certificate is issued and proceeds are received. As gift certificates are
redeemed, this liability is reduced and revenue is recognized.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates, which
are frequently made in consultation with certain third-party advisors, include,
but are not limited to, estimates for legal actions and general liability,
workers' compensation and health insurance, long-term incentives, and the
collectibility of receivables.
We are periodically involved in various legal actions arising in the normal
course of business. We are required to assess the probability of any adverse
judgments as well as the potential range of loss. We determine the required
accruals after a review of the facts of each legal action.
The estimated liability for general liability, workers' compensation and health
insurance is established based upon historical claims data and third-party
actuarial estimates of settlement costs for incurred claims. We recognized
expense of $14,072,000 in 2002, $12,222,000 in 2001 and $10,428,000 in 2000
related to these types of insurance in our consolidated financial statements.
Unanticipated changes in these factors may require us to revise our estimates.
We have various long-term employee incentive compensation plans which require us
to make estimates to determine our liability based upon projected performance of
plan criteria. If actual performance against the criteria differs from our
estimates in the future, we will be required to adjust our liability
accordingly.
We continually assess the collectibility of our franchise receivables. We
establish our allowance for bad debts based on several factors, including
historical collection experience, the current economic environment and other
specific information available to us at the time. The allowance for bad debts
may change in the future due to changes in the factors above or other new
developments.
Estimates and assumptions used by management affect the reported amounts of
assets and liabilities, the 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.
F-11
New accounting pronouncements: In July 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141
requires that all business combinations be accounted for using the purchase
method of accounting and requires separate recognition of intangible assets that
meet certain criteria. This Statement applies to all business combinations after
June 30, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", and we adopted this Statement effective December 31, 2001. SFAS No. 142
requires that an intangible asset that is acquired shall be initially recognized
and measured based on its fair value. This Statement also provides that goodwill
should not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a comparison
of fair value to its carrying amount. In the first quarter of fiscal 2002, we
completed the first step of the required two-step goodwill impairment testing
and ceased amortization of goodwill. The first step of the impairment test
required us to compare the fair value of each reporting unit to its carrying
value to determine whether there was an indication that an impairment existed.
If there had been an indication of impairment, we would have allocated the fair
value of the reporting unit to its assets and liabilities as if the reporting
unit had been acquired in a business combination. During 2002, no impairment
losses were recorded under SFAS No. 142.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets", which supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
the accounting and reporting provisions of APB No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. We adopted SFAS No. 144
effective December 31, 2001. The adoption of SFAS No. 144 did not have a
material impact on our consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS Nos. 4 and 64 required gains and losses from extinguishment of debt to be
classified as extraordinary items. SFAS No. 145 rescinds this requirement and
stipulates that gains or losses on extinguishment of debt would have to meet the
criteria of APB Opinion No. 30 to be classified as an extraordinary item. In
addition, any extraordinary gains or losses on extinguishment of debt in prior
periods presented would require reclassification. SFAS No. 145 is required, with
early adoption encouraged, for fiscal years beginning after May 15, 2002. We
early adopted SFAS No. 145 during the fourth quarter of fiscal 2002 and as a
result, we reclassified the $1,249,000 (net of a related tax benefit of
$727,000) extraordinary loss from the extinguishment of debt in our 2001
consolidated statements of earnings to other expense and income taxes.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized only when the
liability is incurred and measured at fair value. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. We do
not expect the initial adoption of this Statement to have a material impact on
our results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No.
34, "Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
prospectively. The disclosure requirements are effective for financial
statements for interim or annual periods ending after December 15, 2002. We
adopted the initial recognition provisions of Interpretation No. 45 in January
of 2003. The disclosure provisions of this Interpretation are effective for us
as of December 29, 2002. The initial adoption of Interpretation No. 45 did not
have a material impact on our results of operations or financial position.
F-12
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. We have adopted the disclosure provision of SFAS No.
148.
Reclassifications: We have made certain reclassifications to the consolidated
financial statements to conform to the 2002 presentation.
3. Acquisition
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition. The purchase price of $34,250,000 has been allocated to
the fair value of property and equipment of $25,200,000, goodwill of $10,100,00
and other net current liabilities of $1,050,000.
4. Receivables
Receivables are comprised of the following (in thousands):
December 29, December 30,
2002 2001
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 24,011 $ 21,828
Credit card receivables.......................................... 4,724 3,769
Franchise fee receivables........................................ 418 183
Interest and dividends receivable................................ 20 34
Other............................................................ 2,811 1,356
----------------- -----------------
31,984 27,170
Less allowance for bad debts..................................... 4,089 4,343
----------------- -----------------
$ 27,895 $ 22,827
================= =================
The bad debts provision totaled $795,000 for 2002, $1,253,000 for 2001 and
$1,376,000 for 2000. We had write-offs against the allowance for bad debts of
$1,049,000 during 2002, $47,000 during 2001 and $674,000 during 2000.
F-13
5. Prepaid and Other Current Assets
Prepaid and other current assets are comprised of the following (in thousands):
December 29, December 30,
2002 2001
----------------- -----------------
Prepaid income taxes............................................. $ 5,002 $ --
Deferred income taxes............................................ 4,601 6,702
Other............................................................ 4,905 5,558
----------------- -----------------
$ 14,508 $ 12,260
================= =================
6. Goodwill and Other Intangible Assets
We adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective
December 31, 2001 (see Note 2). In November of 2002, we completed the annual
goodwill impairment test required under the provisions of SFAS No. 142. We
determined that no impairment exists and as a result, no impairment losses were
recorded in 2002.
The changes in goodwill are summarized below (in thousands):
December 29, December 30,
2002 2001
----------------- -----------------
Carrying amount, beginning of the year........................... $ 78,614 $ 83,265
Reclassification from intangible assets to goodwill.............. -- 649
Goodwill acquired................................................ 10,101 --
Amortization..................................................... -- (5,300)
----------------- -----------------
$ 88,715 $ 78,614
================= =================
The effect of the adoption of SFAS No. 142 on net income and earnings per share
is as follows (in thousands, except per share amounts):
Fiscal Year Ended
-----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Net earnings, as reported................................... $ 83,027 $ 64,401 $ 63,161
Goodwill amortization (net of income taxes)................. -- 3,350 3,414
---------------- ---------------- ----------------
Net earnings, as adjusted.................................. $ 83,027 $ 67,751 $ 66,575
================ ================ ================
Basic net earnings per common share, as reported............ $ 1.49 $ 1.16 $ 1.07
Goodwill amortization (net of income taxes)................. -- 0.06 0.06
---------------- ---------------- ----------------
Basic net earnings per common share, as adjusted............ $ 1.49 $ 1.22 $ 1.13
================ ================ ================
Diluted net earnings per common share, as reported.......... $ 1.46 $ 1.13 $ 1.07
Goodwill amortization (net of income taxes)................. -- 0.06 0.06
---------------- ---------------- ----------------
Diluted net earnings per common share, as adjusted.......... $ 1.46 $ 1.19 $ 1.13
================ ================ ================
F-14
Intangible assets subject to amortization pursuant to SFAS No. 142 consist of
franchise interest and rights and are summarized below (in thousands):
December 29, December 30,
2002 2001
------------------ ------------------
Gross carrying amount..................... $ 6,371 $ 6,371
Less, accumulated amortization............ 4,903 4,571
------------------ ------------------
Net....................................... $ 1,468 $ 1,800
================== ==================
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $280,000 to $380,000.
7. Other Assets
Other assets are comprised of the following (in thousands):
December 29, December 30,
2002 2001
----------------- -----------------
Notes receivable................................................. $ 9,371 $ 9,240
Liquor licenses.................................................. 4,445 4,426
Minority investment in unaffiliated company, at cost............. 2,250 2,250
Nonqualified deferred compensation plan investments.............. 2,425 --
Deferred financing costs, net.................................... 362 547
Other............................................................ 4,497 4,611
----------------- -----------------
$ 23,350 $ 21,074
================= =================
We have included in notes receivable above, an 8% subordinated note due in 2009
related to our divestiture of the Rio Bravo concept in 1999. The balance of this
notes receivable, including capitalized interest, totaled approximately
$8,600,000 and $7,800,000 as of December 29, 2002 and December 30, 2001,
respectively.
8. Property and Equipment
Property and equipment, net, is comprised of the following (in thousands):
December 29, December 30,
2002 2001
----------------- ------------------
Land............................................................. $ 74,415 $ 67,663
Buildings and leasehold improvements............................. 307,818 260,776
Furniture and equipment.......................................... 157,278 141,756
Construction in progress......................................... 12,311 3,672
----------------- ------------------
551,822 473,867
Less accumulated depreciation and capitalized
lease amortization............................................ 168,820 142,943
----------------- ------------------
$ 383,002 $ 330,924
================= ==================
We had property under capitalized leases of $4,055,000 at December 29, 2002 and
December 30, 2001 which is included in buildings and leasehold improvements. We
had accumulated amortization of such property of $1,368,000 at December 29, 2002
and $1,129,000 at December 30, 2001. These capitalized leases relate to the
buildings on certain restaurant properties. The land portion of the restaurant
property leases is accounted for as an operating lease.
F-15
We had depreciation and capitalized lease amortization expense relating to
property and equipment of $35,110,000 for 2002, $31,780,000 for 2001 and
$30,208,000 for 2000. Of these amounts, capitalized lease amortization was
$239,000 during 2002 and 2001, and $243,000 during 2000.
We lease certain of our 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):
2002 2001 2000
------------------ ------------------ -----------------
Minimum rent................................. $ 14,267 $ 12,105 $ 10,892
Contingent rent.............................. 1,115 1,054 1,112
------------------ ------------------ -----------------
$ 15,382 $ 13,159 $ 12,004
================== ================== =================
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 2003) as of December 29, 2002 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ ------------------
2003............................................................. $ 716 $ 16,430
2004............................................................. 741 15,770
2005............................................................. 767 14,895
2006............................................................. 794 14,301
2007............................................................. 822 13,587
Thereafter....................................................... 6,714 109,719
------------------ ------------------
Total minimum lease payments..................................... 10,554 $ 184,702
==================
Less amounts representing interest............................... 6,316
------------------
Present value of minimum lease payments.......................... $ 4,238
==================
9. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 29, December 30,
2002 2001
---------------- ----------------
Unsecured revolving credit facility; interest at LIBOR plus 1%
or prime rate, due November 2004............................. $ 48,000 $ 70,000
Capitalized lease obligations (Note 8)........................... 4,238 4,243
Other............................................................ 325 325
---------------- ----------------
Total long-term debt............................................. 52,563 74,568
Less current portion of long-term debt........................... 377 43
---------------- ----------------
Long-term debt - less current portion............................ $ 52,186 $ 74,525
================ ================
In November 2001, we completed the refinancing of our senior term loan and
working capital facilities. The new bank credit agreement provides for a
$150,000,000 three-year unsecured revolving credit facility, of which
$25,000,000 may be used for the issuance of letters of credit. The proceeds were
used to repay indebtedness related to our prior credit facilities.
F-16
The new facility bears interest at either the bank's prime rate or LIBOR plus
1%, at our option. We are required to pay a commitment fee of 0.20% on any
unused portion of the facility. The interest rate and commitment fee are subject
to change based upon our leverage ratio.
The new facility is subject to various covenants and restrictions which, among
other things, require the maintenance of stipulated fixed charge, leverage and
indebtedness to capitalization ratios, as defined, and limit additional
indebtedness and capital expenditures in excess of specified amounts. Cash
dividends are limited to $10,000,000 annually. The facility is subject to
standard other terms, conditions, covenants, and fees. We are currently in
compliance with the covenants contained in our credit agreement.
As a result of the refinancing in 2001, we wrote-off the remaining balance of
the deferred financing costs related to our prior agreement and terminated our
interest rate swap agreements. The interest rate swap termination costs of
$4,470,000 and the write-off of deferred financing costs of $1,976,000 are
reflected in other expense in the 2001 consolidated statement of income.
As of December 29, 2002, borrowings of $48,000,000 and standby letters of credit
totaling $11,691,000 were outstanding under our $150,000,000 revolving credit
facility. We also have a standby letter of credit for $827,000 outstanding with
another financial institution.
Maturities of long-term debt, including capitalized lease obligations ending
during the years indicated, are as follows (in thousands):
2003........................................... $ 377
2004........................................... 48,070
2005........................................... 98
2006........................................... 137
2007........................................... 188
Thereafter..................................... 3,693
--------------
$ 52,563
==============
10. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 29, December 30,
2002 2001
------------------ -----------------
Compensation and related taxes.................................... $ 28,688 $ 22,618
Gift certificates................................................. 21,197 18,421
Sales and use taxes............................................... 4,812 4,184
Insurance......................................................... 9,926 8,611
Rent.............................................................. 5,113 4,276
Other............................................................. 14,271 13,441
------------------ -----------------
$ 84,007 $ 71,551
================== =================
F-17
11. Income Taxes
We, along with our subsidiaries, file a consolidated federal income tax return.
The income tax provision consists of the following (in thousands):
2002 2001 2000
--------------- --------------- ---------------
Current provision:
Federal............................................ $ 39,136 $ 36,571 $ 31,289
State and local.................................... 4,677 5,449 5,370
Deferred provision (benefit)........................... 3,296 (4,520) 118
--------------- --------------- ---------------
Income taxes........................................... $ 47,109 $ 37,500 $ 36,777
=============== =============== ===============
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
2002 2001 2000
--------------- --------------- ---------------
Depreciation........................................... $ 829 $ (3,201) $ 1,311
Other.................................................. 2,467 (1,319) (1,193)
--------------- --------------- ---------------
Deferred income tax provision (benefit)................ 3,296 (4,520) 118
Deferred income taxes related to change in
unrealized gain on investments..................... (9) (15) (6)
--------------- --------------- ---------------
Net change in deferred income taxes.................... $ 3,287 $ (4,535) $ 112
=============== =============== ===============
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):
2002 2001 2000
--------------- --------------- ---------------
Federal income tax at statutory rates.................. $ 45,548 $ 35,665 $ 34,978
Increase (decrease) to income tax expense:
State and local income taxes, net of
federal benefit................................. 3,247 3,127 3,502
Employment related tax credits, net................ (2,871) (2,582) (2,207)
Other.............................................. 1,185 1,290 504
--------------- --------------- ---------------
Income taxes........................................... $ 47,109 $ 37,500 $ 36,777
=============== =============== ===============
F-18
The net current deferred income tax asset amounts are included in "prepaid and
other current assets" and the net non-current deferred income tax liability
amounts are included in "other non-current liabilities" 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 29, December 30,
2002 2001
----------------- -----------------
Classified as current:
Allowance for bad debts..................................... $ 1,480 $ 1,598
Accrued expenses............................................ 2,398 3,328
Other, net.................................................. 723 1,776
----------------- -----------------
Net deferred income tax asset............................... $ 4,601 $ 6,702
================= =================
Classified as non-current:
Depreciation................................................ $ (6,007) $ (2,864)
Franchise deposits.......................................... 401 557
Other, net.................................................. 2,978 865
----------------- -----------------
Net deferred income tax liability........................... $ (2,628) $ (1,442)
================= =================
12. Commitments and Contingencies
Litigation, claims and disputes: We are involved in various legal actions
arising in the normal course of business. These matters include, without
limitation, such matters as employment law related claims and disputes with two
international franchisees regarding disclosures we allegedly made or omitted. In
each instance, we believe that we have meritorious defenses to the allegations
made and we are vigorously defending these claims.
While the resolution of the matters described above may have an impact on our
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
Lease guarantees: In connection with the sale of restaurants to franchisees and
other parties, we have, in certain cases, remained contingently liable for the
remaining lease payments. As of December 29, 2002, the aggregate amount of these
lease payments totaled approximately $24,200,000. These leases expire at various
times throughout the next several years with the final lease agreement expiring
in 2018. The buyers have indemnified us from any losses related to these
guarantees. We have not recorded a liability as of December 29, 2002 or December
30, 2001.
Severance agreements: We have 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. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of December 29, 2002, we would have been required to
make payments totaling approximately $8,900,000. In addition, we have severance
and employment agreements with certain officers which contain severance
provisions not related to a change in control. Those provisions would have
required aggregate payments of approximately $5,500,000 if such officers had
been terminated as of December 29, 2002.
F-19
13. Stockholders' Equity
On September 7, 1994, our 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 our Common Stock (the "Common Shares").
Stockholders may exercise their Rights if any person or group acquires more than
15% of the outstanding Common Shares or makes a tender offer for more than 15%
(20% if an Institutional Investor, as defined) of our outstanding Common Shares
unless the person or group has acquired the shares or made the tender offer as
part of a Qualifying Offer (as defined). If such an event occurred, each Right
entitles its holder to purchase for $75 the economic equivalent of Common
Shares, or in certain circumstances, stock of the acquiring entity, worth twice
as much. This is true for all stockholders except the acquiror. The Rights will
expire on September 7, 2004 unless we redeem them earlier. If we redeem the
Rights before stockholders can exercise them, we will pay $0.01 per Right.
In February 2001, our Board of Directors authorized the repurchase of up to
$55,000,000 of our common stock through 2001, subject to market conditions and
applicable restrictions imposed by our then-current credit agreement. As of
December 30, 2001, we had $20,600,000 remaining on this authorization. In
February 2002, our Board of Directors extended the 2001 authorization through
2002. In May 2002, our Board of Directors authorized an additional repurchase of
$75,000,000 of our common stock through May 2005. During 2002, we repurchased
1,210,000 shares of our common stock at an average price of $21.58 for an
aggregate cost of $26,100,000. As of December 29, 2002, we had $69,500,000
remaining under the 2002 authorization.
On May 9, 2002, we declared a three-for-two stock split, effected in the form of
a 50% stock dividend, to shareholders of record on May 24, 2002, payable on June
11, 2002. We issued approximately 24,100,000 shares of common stock as a result
of the stock split. All references to the number of shares and per share amounts
of common stock have been restated to reflect the stock split. We have
reclassified an amount equal to the par value of the number of shares issued to
common stock from retained earnings.
14. Employee Benefit Plans
Employee stock option plans: During 1989, our 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. The termination of the 1989 Stock
Option Plan did not affect existing options which were outstanding when the plan
was terminated.
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
committee to grant stock options, stock appreciation rights, restricted stock
awards, performance unit awards and performance share awards (collectively,
"Awards") to eligible participants. The 1995 Plan authorizes the committee to
issue up to 8,100,000 shares. 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 1996 through 1998 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. Options granted under the 1995 Plan during 1999
through 2002 have a term of ten years and are generally exercisable at either
one, three or five years from the date of grant. Subject to the terms of the
1995 Plan, the committee has the sole discretion to determine the employees to
whom it grants Awards, the size and types of the Awards, and the terms and
conditions of the Awards.
F-20
During 1999, our Board of Directors approved the 1999 Employee Incentive Plan
(the "1999 Plan") which allows the committee to grant nonqualified stock
options, stock appreciation rights, restricted stock, performance units and
performance shares to eligible participants. The 1999 Plan authorizes the
committee to issue up to 1,649,250 shares. Options granted under the 1999 Plan
have a term of ten years and are generally exercisable one, two or three years
from the date of grant. Under all three plans, the option price for both
qualified and nonqualified options cannot be less than the fair market value of
our common stock on the date the committee grants the options.
All three plans permit the committee to grant performance shares. Performance
shares represent rights to receive our common stock based upon certain
performance criteria. In 2000, the committee approved performance share plans
which have a one-year and a three-year performance period. In 2001 and 2002, the
committee approved performance share plans with a three-year performance period.
We recorded compensation expense of $865,000 in 2002, $926,000 in 2001 and
$341,000 in 2000 related to these grants. These amounts were based on the market
price of our common stock at the end of each fiscal year.
We account for all three plans in accordance with APB Opinion No. 25 which
requires us to recognize compensation cost 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, we have recognized no
compensation cost for stock option awards.
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 26, 1999............ 186,722 $12.81 4,535,867 $11.69 300,375 $ 6.75
Granted.................. 245,250 $12.22 804,375 $12.44 -- --
Exercised................. -- -- (465,291) $11.77 (53,775) $ 8.46
Canceled.................. (55,125) $12.53 (505,497) $11.41 -- --
-------------- ---------------- -------------
Options outstanding at
December 31, 2000............ 376,847 $12.47 4,369,454 $11.97 246,600 $ 6.39
Granted.................. 807,375 $15.98 1,245,697 $15.75 -- --
Exercised................. -- -- (1,643,713) $11.93 (170,775) $ 6.49
Canceled.................. (82,950) $13.97 (269,724) $11.88 (1,125) $ 6.03
-------------- ---------------- -------------
Options outstanding at
December 30, 2001............ 1,101,272 $14.93 3,701,714 $13.27 74,700 $ 6.14
Granted.................. 543,875 $22.91 904,760 $22.04 -- --
Exercised................. (69,750) $12.88 (448,668) $12.02 (17,925) $ 6.14
Canceled.................. (145,349) $16.58 (433,419) $12.67 -- --
-------------- ---------------- -------------
Options outstanding at
December 29, 2002............ 1,430,048 $17.90 3,724,387 $15.62 56,775 $ 6.14
============== ================ =============
Options available for grant at
December 29, 2002............ 115,800 1,006,272 --
============== ================ =============
F-21
The number of options exercisable for each plan are summarized below:
1999 Plan 1995 Plan 1989 Plan
----------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Exercisable Price Exercisable Price Exercisable Price
-------------- -------------- ---------------- ------------ ------------- -------------
December 31, 2000............ -- -- 2,057,024 $12.38 246,600 $6.39
December 30, 2001............ -- -- 992,685 $12.31 74,700 $6.14
December 29, 2002............ 65,250 $12.93 1,284,463 $12.62 56,775 $6.14
The following table summarizes information relating to fixed-priced stock
options outstanding for all three plans at December 29, 2002:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Average Weighted Weighted
Weighted Remaining Average Average
Number Contractual Exercise Number Exercise Price
Range of Exercise Prices Outstanding Life Price Exercisable
--------------------------- --------------- --------------- -------------- --------------- ---------------
1989 Plan:
$ 6.13 to $ 6.15 56,775 1.6 years $ 6.14 56,775 $ 6.14
=============== ===============
1995 Plan:
$ 9.27 to $ 9.64 169,471 5.5 years $ 9.29 81,172 $ 9.29
$ 11.08 to $ 11.45 154,411 5.3 years $ 11.17 101,286 $ 11.17
$ 12.30 to $ 12.67 1,340,801 5.5 years $ 12.48 875,059 $ 12.58
$ 13.44 to $ 15.98 970,445 8.1 years $ 14.63 214,447 $ 14.21
$ 20.20 to $ 25.50 1,089,259 9.0 years $ 21.98 12,499 $ 22.07
--------------- ---------------
$ 9.27 to $ 25.50 3,724,387 7.2 years $ 15.62 1,284,463 $ 12.62
=============== ===============
1999 Plan:
$ 9.86 to $ 11.14 23,625 7.6 years $ 10.36 -- --
$ 12.30 to $ 15.98 717,628 7.8 years $ 14.04 65,250 $ 12.93
$ 17.07 to $ 26.39 688,795 9.1 years $ 22.18 -- --
--------------- ---------------
$ 9.86 to $ 26.39 1,430,048 8.4 years $ 17.90 65,250 $ 12.93
=============== ===============
Restricted stock awards: During 2001 and 2002, the committee granted restricted
stock awards to certain officers and key employees. These awards vest over
either a two-year or three-year period. We recorded unearned compensation for
the market value of the stock at the date of grant, and we showed this as a
reduction to stockholders' equity in the accompanying consolidated balance
sheets. We are amortizing unearned compensation ratably to expense over the
vesting period. Accordingly, we recognized compensation expense of $659,000,
$326,000 and $350,000 in 2002, 2001 and 2000, respectively.
Nonqualified deferred compensation plan: In 2002, we entered into a rabbi trust
agreement to protect the assets of the nonqualified deferred compensation plan
for certain of our employees. Each participant's account is comprised of their
contribution, our matching contribution and each participant's share of earnings
or losses in the plan. In accordance with EITF No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and
Invested," the accounts of the rabbi trust are reported in our consolidated
financial statements. As of December 29, 2002, our consolidated balance sheet
includes the investments in other assets and the offsetting obligation is
included in other non-current liabilities. The deferred compensation plan
investments are considered trading securities and are reported at fair value
with the realized and unrealized holding gains and losses related to these
investments, as well as the offsetting compensation expense, recorded in
operating income.
F-22
Employee retirement plans: During 1992, we established a profit sharing plan and
trust in accordance with Section 401(k) of the Internal Revenue Code. We make
matching contributions of 50% of employee contributions not to exceed 4.0% of an
employee's compensation in any year. We make our contributions in shares of our
common stock. Our contributions vest at the rate of 20% after the employee's
second year of service, 60% after three years of service, 80% after four years
of service and 100% after five years of service. During 1994, we established a
non-qualified defined contribution retirement plan for key employees. In 2002,
this plan was terminated and a new nonqualified deferred compensation plan was
established (see nonqualified deferred compensation plan above). Our
contributions under these plans were $1,697,000 in 2002, $1,441,000 in 2001 and
$1,170,000 in 2000.
Employee stock purchase plan: During 1996, we established an employee stock
purchase plan in accordance with Section 423 of the Internal Revenue Code. The
plan was approved at the 1997 Annual Meeting of Stockholders. The plan allowed
employees to purchase shares of our common stock at a 10% discount through
payroll deductions through 2000. In 2001, the plan was amended to increase the
discount to 15%. The Board has authorized 900,000 common shares under the plan.
Employees purchased 117,932 shares under this plan during 2002, 93,810 during
2001 and 104,595 shares during 2000.
Employee stock ownership plan: Our Board of Directors approved an employee stock
ownership plan in January 1997. We contributed to this plan completely at our
discretion. Our contributions to the plan were $200,000 for 2000 and were made
in shares of our common stock. During 2001, we terminated the employee stock
ownership plan and did not make any contributions to the plan. The assets of
this plan were transferred to the 401(k) plan.
15. Related Party Transactions
We had a policy which allowed us to loan executives money to be used to invest
in our stock to meet guidelines which require executives to own certain amounts
of our stock. This policy was terminated in June of 2002 and no new loans will
be granted. We had loans that were granted prior to the termination of this
policy outstanding for a total of $99,000 as of December 29, 2002 to two
officers and $615,000 to three officers as of December 30, 2001. These loans had
interest rates ranging from 4.7% to 6.8% and are collateralized by the stock.
These loans are reflected as a reduction to additional paid-in capital in our
consolidated balance sheets.
As of December 29, 2002 and December 30, 2001, we had a loan outstanding with an
interest rate of 5% to an officer for moving related assistance in the amount of
$310,000. This officer made an interest and principal payment in March 2003. The
remaining principal of $210,000, as well as accrued interest, is due in October
2004.
F-23
16. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 2002 and 2001. During the fourth quarter of 2001, we incurred
costs relating to the termination of interest rate swap agreements of $4,470,000
and a write-off of previously deferred financing costs related to the
refinancing of our prior credit facilities of $1,976,000, which are reflected in
other expense. All amounts, except per share amounts, are expressed in
thousands.
2002
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 31, June 30, September 29, December 29,
2002 2002 2002 2002
------------- ------------- ------------- -------------
Revenues:
Company restaurant sales....................... $174,973 $178,893 $182,807 $187,943
Franchise income............................... 24,840 25,484 26,033 25,823
------------- ------------- ------------- -------------
Total operating revenues.................... 199,813 204,377 208,840 213,766
------------- ------------- ------------- -------------
Cost of company restaurant sales:
Food and beverage.............................. 47,407 47,073 47,765 50,179
Labor.......................................... 57,457 58,881 60,054 61,874
Direct and occupancy........................... 42,872 44,291 47,009 47,595
Pre-opening expense............................ 335 305 792 542
------------- ------------- ------------- -------------
Total cost of company restaurant sales...... 148,071 150,550 155,620 160,190
------------- ------------- ------------- -------------
General and administrative expenses................. 19,246 19,553 20,049 22,290
Amortization of intangible assets................... 138 52 95 96
Loss (gain) on disposition of restaurants
and equipment.................................. 294 727 458 (341)
------------- ------------- ------------- -------------
Operating earnings.................................. 32,064 33,495 32,618 31,531
------------- ------------- ------------- -------------
Other income (expense):
Investment income.............................. 397 381 346 374
Interest expense............................... (633) (555) (414) (566)
Other income (expense)......................... 101 482 513 2
------------- ------------- ------------- -------------
Total other income (expense)................ (135) 308 445 (190)
------------- ------------- ------------- -------------
Earnings before income taxes........................ 31,929 33,803 33,063 31,341
Income taxes........................................ 11,654 12,338 12,068 11,049
------------- ------------- ------------- -------------
Net earnings........................................ $ 20,275 $ 21,465 $ 20,995 $ 20,292
============= ============= ============= =============
Basic net earnings per common share................. $ 0.36 $ 0.38 $ 0.38 $ 0.37
============= ============= ============= =============
Diluted net earnings per common share............... $ 0.35 $ 0.37 $ 0.37 $ 0.36
============= ============= ============= =============
Basic weighted average shares outstanding........... 55,878 55,872 55,654 55,212
============= ============= ============= =============
Diluted weighted average shares outstanding......... 57,327 57,374 56,714 56,512
============= ============= ============= =============
F-24
2001
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
April 1, July 1, September 30, December 30,
2001 2001 2001 2001
------------- ------------- ------------- -------------
Revenues:
Company restaurant sales....................... $160,143 $162,035 $164,238 $164,703
Franchise income............................... 22,234 23,885 23,787 23,319
------------- ------------- ------------- -------------
Total operating revenues.................... 182,377 185,920 188,025 188,022
------------- ------------- ------------- -------------
Cost of company restaurant sales:
Food and beverage.............................. 43,305 43,633 44,489 44,550
Labor.......................................... 50,900 51,533 52,864 53,699
Direct and occupancy........................... 40,759 41,104 41,459 41,643
Pre-opening expense............................ 135 132 632 802
------------- ------------- ------------- -------------
Total cost of company restaurant sales...... 135,099 136,402 139,444 140,694
------------- ------------- ------------- -------------
General and administrative expenses................. 17,166 18,085 19,197 18,487
Amortization of intangible assets................... 1,463 1,462 1,463 1,463
Loss on disposition of restaurants and equipment.... 187 571 329 405
------------- ------------- ------------- -------------
Operating earnings.................................. 28,462 29,400 27,592 26,973
------------- ------------- ------------- -------------
Other income (expense):
Investment income.............................. 357 415 479 399
Interest expense............................... (2,357) (2,043) (1,831) (1,225)
Other income (expense)......................... 90 385 322 (5,517)
------------- ------------- ------------- -------------
Total other expense......................... (1,910) (1,243) (1,030) (6,343)
------------- ------------- ------------- -------------
Earnings before income taxes........................ 26,552 28,157 26,562 20,630
Income taxes........................................ 9,771 10,361 9,776 7,592
------------- ------------- ------------- -------------
Net earnings........................................ $ 16,781 $ 17,796 $ 16,786 $ 13,038
============= ============= ============= =============
Basic net earnings per common share................. $ 0.30 $ 0.32 $ 0.30 $ 0.23
============= ============= ============= =============
Diluted net earnings per common share............... $ 0.30 $ 0.31 $ 0.30 $ 0.23
============= ============= ============= =============
Basic weighted average shares outstanding........... 55,674 55,371 55,366 55,636
============= ============= ============= =============
Diluted weighted average shares outstanding......... 56,442 56,808 56,820 57,163
============= ============= ============= =============
F-25
17. Subsequent Event
On January 20, 2003, we reached an agreement with a franchisee to acquire the
operations and assets of 11 Applebee's restaurants located in Illinois, Indiana,
Kentucky and Missouri for $23,200,000 in cash at closing, subject to adjustment.
The acquisition of the restaurants is anticipated to close late in the first
quarter of 2003, subject to obtaining operating licenses and other third-party
consents.
F-26
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, of the 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 Amendment dated December 12, 2002 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.
4.4 Certificate of Adjustment of Shareholder Rights Plan contained
in Rights Agreement dated as of September 7, 1994, between
Applebee's International, Inc. and Chemical Bank, as Rights
Agent, as amended (incorporated by reference to Exhibit 4.1 of
the Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 29, 2002).
4.5 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 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).
10.2 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).
10.3 Form of Applebee's Development Agreement (incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 and
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 1, 2001).
E-1
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.4 Form of Applebee's Franchise Agreement (incorporated by
reference to Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000 and
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 1, 2001).
10.5 Schedule of Applebee's Development and Franchise Agreements as
of December 29, 2002.
10.6 Revolving Credit Agreement dated as of November 5, 2001
(incorporated by reference to Exhibit 10.6 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
30, 2001).
10.7 Asset Purchase Agreement between Applebee's International, Inc.
and Apple Capitol Group, LLC dated as of July 16, 2002
(incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2002).
10.8 Assignment Agreement between Lehman Brothers Holdings, Inc. and
Applebee's International, Inc. dated as of October 1, 2002
(incorporated by reference to Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 29, 2002).
Management Contracts and Compensatory Plans or Arrangements
10.9 1995 Equity Incentive Plan, as amended (incorporated by
reference to Exhibit 10.7 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 30, 2001).
10.10 Employee Stock Purchase Plan, as amended (incorporated by
reference to Exhibit 10.10 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended September 30, 2001 and Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 30, 2002).
10.11 1999 Management and Executive Incentive Plan (incorporated by
reference to Exhibit 10.13 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1999).
10.12 Nonqualified Deferred Compensation Plan.
10.13 1999 Employee Incentive Plan, as amended (incorporated by
reference to Exhibit 10.11 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 30, 2001).
10.14 2001 Senior Executive Bonus Plan ___ (incorporated by reference
to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 30, 2001).
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).
E-2
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
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 Agreement Regarding Employment (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended September 30, 2001).
10.19 Employment Agreement dated August 7, 2002, with Steven K.
Lumpkin (incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 29, 2002).
10.20 Memorandum of Understanding dated October 5, 2002 with Louis A.
Kaucic.
10.21 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).
10.22 Schedule of parties to Indemnification Agreement.
10.23 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.
10.24 Previous 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.
10.25 Current 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 July 1, 2001) 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).
99.1 Certification of Chairman and Chief Executive Officer and
Executive Vice President and Chief Financial Officer.
E-3