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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2003
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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
- --------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Overland Park, Kansas 66207
- --------------------------------------------------------------------------------
(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 29, 2003 was $1,744,093,318 based on the closing sale price
on June 27, 2003.
The number of shares of the registrant's common stock outstanding as of March 8,
2004 was 54,567,964.
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 28, 2003
INDEX
Page
PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 13
Item 3. Legal Proceedings....................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................................... 15
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters....................................................... 16
Item 6. Selected Financial Data................................................................. 17
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 18
Item 8. Financial Statements and Supplementary Data............................................. 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 28
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 29
Item 11. Executive Compensation.................................................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 29
Item 13. Certain Relationships and Related Transactions.......................................... 29
Item 14. Principal Accounting Fees and Services.................................................. 29
PART IV
Item 15. Exhibits and Reports on Form 8-K........................................................ 30
Signatures.............................................................................................. 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 1,600 restaurants as of the fiscal year ended December
28, 2003, Applebee's Neighborhood Grill & Bar is the largest casual dining
concept in America, 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
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 28, 2003, there were 1,585 Applebee's restaurants. Franchisees
operated 1,202 of these restaurants and 383 restaurants were company operated.
The restaurants were located in 49 states and nine international countries.
During 2003, 100 new restaurants were opened, including 74 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 with additional
restaurant potential internationally.
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
----------------------------------------------------
December 28, December 29, December 30,
2003 2002 2001
---------------- ---------------- ----------------
Number of restaurants:
Company:
Beginning of year........................... 357 310 285
Restaurant openings......................... 26 26 25
Restaurant closings......................... (2) -- --
Restaurants acquired from franchisees....... 11 21 --
Restaurants acquired by franchisees......... (9) -- --
----------------- ---------------- -----------------
End of year................................. 383 357 310
----------------- ---------------- -----------------
Franchise:
Beginning of year........................... 1,139 1,082 1,001
Restaurant openings......................... 74 81 84
Restaurant closings......................... (9) (3) (3)
Restaurants acquired from franchisees....... (11) (21) --
Restaurants acquired by franchisees......... 9 -- --
----------------- ---------------- -----------------
End of year................................. 1,202 1,139 1,082
----------------- ---------------- -----------------
Total:
Beginning of year........................... 1,496 1,392 1,286
Restaurant openings......................... 100 107 109
Restaurant closings......................... (11) (3) (3)
----------------- ---------------- -----------------
End of year................................. 1,585 1,496 1,392
================= ================ =================
Weighted average weekly sales per restaurant:
Company..................................... $ 45,000 $ 43,019 $ 42,660
Franchise................................... $ 45,271 $ 43,823 $ 42,241
Total....................................... $ 45,205 $ 43,641 $ 42,334
Change in comparable restaurant sales(1):
Company..................................... 5.2% 1.8% 2.5%
Franchise................................... 3.7% 3.6% 3.0%
Total....................................... 4.1% 3.2% 2.9%
Total operating revenues (in thousands):
Company restaurant sales.................... $ 867,158 $ 724,616 $ 651,119
Franchise royalties and fees(2)............. 109,833 102,180 93,225
Other franchise income(3)................... 13,147 2,688 --
----------------- ---------------- -----------------
Total....................................... $ 990,138 $ 829,484 $ 744,344
================= ================ =================
(1) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
(2) Franchise royalties are generally 4% of each franchise restaurant's
reported monthly gross sales. Reported franchise sales, in thousands, were
$2,725,179, $2,519,373 and $2,275,169 in fiscal 2003, 2002 and 2001,
respectively. Franchise fees typically range from $30,000 to $35,000 for
each restaurant opened.
(3) Other franchise income includes insurance premiums from franchisee
participation in our captive insurance company and revenue from information
technology products and services provided to certain franchisees.
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. Phase two of the program
features the additional convenience of our Carside To Go(TM) initiative in which
customers place their orders by telephone, park in designated spots at our
restaurants and servers deliver their orders to their vehicles. In November
2003, we completed the implementation of the Carside To Go(TM) service at all
company-owned restaurants where practicable. The implementation of this service
will be substantially complete by the end of 2004 in our franchise restaurants.
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 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 to seven 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 2003, alcoholic beverages accounted for 13.1% of company owned
restaurant sales.
Restaurant Operations. We and our franchisees operate 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 handling of food, maintenance and cleanliness of premises and employee
conduct. Our quality assurance department is responsible for establishing and
monitoring our food safety programs. We develop all standards and specifications
with input from franchisees, and they are applied on a system-wide basis.
Training. We have a comprehensive training program for restaurant associates and
managers. The training programs utilize a combination of on-the-job training,
video, computer and print-based materials. Program materials are routinely
revised to reflect the most recent operational procedures and standards.
Restaurant associates are provided with a structured orientation and five-day
training program upon hire. This training is provided by restaurant trainers who
have completed an extensive certification process to become a trainer. In
addition, associates receive ongoing training to further develop their job
skills and knowledge.
Restaurant managers complete a 12-week training and orientation process upon
hire. The program is executed at certified training restaurants located
throughout the Applebee's system. The training program provides skill and
knowledge training for key operations and management processes. In addition,
ongoing training and development programs are offered for experienced managers
regarding leadership and operations management.
When opening new restaurants, a six-day training program is provided for all new
associates. The training is conducted by certified, experienced trainers from
Applebee's restaurants located throughout the system. Upon the opening of the
restaurant, the training team remains for an additional six days to provide
support and coaching of the new associates.
5
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 2003, approximately 4.0% 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.
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 multi-year supply chain management initiative
designed to leverage our size, improve sourcing of products and optimize
distribution.
We are committed to providing our customers with products that meet or exceed
regulatory and industry standards for food safety as well as our high quality
standards. Our quality assurance department establishes and monitors our food
safety programs, including supplier and distributor audits, food safety and
sanitation monitoring and product testing.
Company Restaurants
Company Restaurant Openings and Acquisitions. Our expansion strategy is to
cluster restaurants in targeted markets, thereby increasing consumer awareness
and convenience, and enabling 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 286 new restaurants and
acquired 113 franchise restaurants over the last eleven years and have expanded
from a total of 31 company owned or operated restaurants as of December 27, 1992
to a total of 383 as of December 28, 2003. In addition, as part of our portfolio
management strategy, we have sold 35 restaurants to franchisees during this
eleven-year period.
6
We opened 26 new company Applebee's restaurants in 2003 and anticipate opening
at least 28 new company Applebee's restaurants in 2004. 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 28, 2003:
Area
-----------------------------------------------------------------------
Detroit/Southern Michigan.............................................. 60
New England (includes Maine, Massachusetts, New Hampshire, New York,
Rhode Island and Vermont)............................................ 60
Minneapolis/St. Paul, Minnesota........................................ 56
North/Central Texas.................................................... 42
St. Louis, Missouri/Illinois........................................... 41
Virginia............................................................... 39
Kansas City, Missouri/Kansas........................................... 28
Washington, D.C. (Maryland, Virginia).................................. 27
Las Vegas/Reno, Nevada................................................. 15
Albuquerque, New Mexico................................................ 8
San Diego/Southern California.......................................... 7
-------------------
383
===================
Restaurant Operations. The staff for a typical restaurant consists of one
general manager, one kitchen manager, two or three 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 28, 2003, we employed 12 Regional Vice Presidents of
Operations/Directors of Operations and 58 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 70 franchise groups, including 20 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 nine
international countries. We have assigned the vast majority of all domestic
territories in all states except Hawaii or have designated them for company
development.
As of December 28, 2003, there were 1,202 franchise restaurants. Franchisees
opened 84 restaurants in 2001, 81 restaurants in 2002, and 74 restaurants in
2003. We anticipate between 70 to 80 franchise restaurant openings in 2004.
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.
7
Domestic Franchise Arrangements. Generally, franchise arrangements consist 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
previously 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.
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, restaurant
development, technology and human resource efforts.
Operations Quality Control. We continuously monitor franchise restaurant
operations, principally through our full-time franchise consultants (27 as of
December 28, 2003). 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 2003,
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 28, 2003, the Franchise Business Council
consisted of eight franchisee representatives and three members of our senior
management. Two franchisee representatives are permanent members and one
franchisee representative must be a franchisee with five or less restaurants.
Franchisees elect the remaining franchisee representatives annually.
International Franchise Arrangements. 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, Mexico, Central and South
8
America and the Mediterranean/Middle East. In this regard, we currently have
development agreements with 20 international franchisees. Franchisees operated
47 international restaurants as of December 28, 2003. 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.
In 2003, we arranged for a lease financing company to provide capital to
qualified franchisees for investments in certain sales and technology
initiatives over a three-year period ending in September 2006 under standard
leasing terms and conditions. Under the terms of the arrangement, we do not
guarantee any portion of the financing.
In November 2003, we arranged for a financing company to provide up to $75
million to qualified franchisees for short-term loans to fund remodel
investments. Under the terms of this financing program, we will provide a
limited guarantee pool for the loans advanced during the three-year period
ending December 2006. There were no loans outstanding under this program as of
December 28, 2003.
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 and to other service marks used in our system 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.
9
We are subject to various federal and state environmental regulations, but these
regulations have not had a material adverse effect on our operations. New
environmental requirements and regulations could delay or prevent development of
new restaurants in particular locations.
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.
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 28, 2003, we employed approximately 26,900 full and part-time
employees. Of those, approximately 520 were corporate personnel, 1,630 were
restaurant managers or managers in training and 24,750 were employed in
non-management full and part-time restaurant positions. Of the 520 corporate
employees, approximately 180 were in management positions and 340 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.
10
Executive and Other Senior Officers of the Registrant
Our executive and other senior officers as of December 28, 2003 are shown below.
Name Age Position
------------------------------- ----- -------------------------------------------------------------------------------
Lloyd L. Hill.................... 59 Chairman of the Board of Directors, Chief Executive Officer and
President
Steven K. Lumpkin................ 49 Executive Vice President, Chief Financial Officer and Treasurer (Member of the
Board of Directors effective January 2004)
David L. Goebel.................. 53 Executive Vice President of Operations (Chief Operating Officer effective
January 2004)
Louis A. Kaucic.................. 52 Executive Vice President and Chief People Officer
John C. Cywinski................. 41 Senior Vice President (Executive Vice President effective January 2004)
and Chief Marketing Officer
Larry A. Cates................... 55 President of International Division
Philip R. Crimmins............... 52 Senior Vice President of Development
Kurt Hankins..................... 43 Senior Vice President of Menu Development and Innovation
David R. Parsley................. 57 Senior Vice President of Supply Chain Management
Carin L. Stutz................... 47 Senior Vice President of Company Operations
Beverly O. Elving................ 50 Vice President of Accounting
Janell E. Jones.................. 42 Vice President of Performance Systems
Robert T. Steinkamp.............. 58 Vice President, Secretary and General Counsel
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.
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. In January 2004, he was appointed to the Board
of Directors. Prior to joining Applebee's, Mr. Lumpkin was a Senior Vice
President of a division of the Olsten Corporation, 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 and was promoted to the position of Executive
Vice President of Operations in December 2002. In January 2004, Mr. Goebel was
promoted to Chief Operating Officer. 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.
11
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
and Executive Vice President in March 2003. 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, Inc. 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.
John C. Cywinski was employed by Applebee's in July 2001 as Senior Vice
President and Chief Marketing Officer and he was promoted to Executive Vice
President in January 2004. 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 The Walt Disney Company, Mr. Cywinski was Vice President of
U.S. Marketing for Burger King Corporation, where he held various positions of
increasing responsibility from 1989 to 1996. He started his career with the Leo
Burnett Advertising Agency in 1984.
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.
Philip R. Crimmins was employed by Applebee's in August 2002 as Vice President
of Operations Excellence. In September 2003, Mr. Crimmins was promoted to Senior
Vice President of Development. Prior to joining Applebee's, he was employed by
Pizza Hut, Inc. for 27 years, most recently as Vice President of Service
Strategies. While at Pizza Hut, Inc., Mr. Crimmins held several other positions
of increasing responsibility, including senior leadership positions in research
and development, concept development, customer satisfaction, field training, and
restaurant operations.
Kurt Hankins was employed by Applebee's in August 2001 as Vice President of
Research and Development. In December 2003, Mr. Hankins was promoted to Senior
Vice President of Menu Development and Innovation. Prior to joining Applebee's,
he served as Vice President of Food and Beverage for Darden Restaurants, Inc.
from July 1999 through July 2001. From August 1994 to July 1999, he served as
Director of Food Research and Development for Darden Restaurants, Inc. Prior to
his employment with Darden Restaurants, Inc., he held various positions in food
and beverage research and development within the restaurant industry.
David R. Parsley was employed by Applebee's in April 2000 as Senior Vice
President of Purchasing and Distribution. In January 2003, Mr. Parsley was named
Senior Vice President of Supply Chain Management. 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 Vice
President of Corporate Operations. Prior to 1990, Ms. Stutz was employed for 12
years with Wendy's International.
12
Beverly O. Elving was employed by Applebee's in June 1998 as Director of
Corporate Accounting. In September 2002, Ms. Elving was promoted to Vice
President of Accounting. Prior to joining Applebee's, she was Chief Financial
Officer from 1996 to 1998 for Integrated Medical Resources, a publicly-held
management services company. From 1990 to 1996, Ms. Elving was employed by the
Federal Deposit Insurance Corporation as Director of Financial Operations and
was later promoted to Vice President of Financial Operations & Accounting. Ms.
Elving, a certified public accountant, was also employed by Arthur Andersen &
Co.
Janell E. Jones was employed by Applebee's in February 2000 as Vice President of
Performance Systems. Prior to joining Applebee's, Ms. Jones was Regional Market
Leader of the Hay Group, a nationally recognized independent compensation
consulting firm. From 1993 to 1998, she was a Regional Director with the Hay
Group. Ms. Jones has also held several management positions relating to
compensation and employee benefits with several other companies. Ms. Jones
resigned from Applebee's effective December 31, 2003.
Robert T. Steinkamp was employed by Applebee's in January 1990 as General
Counsel. In March 1991, he was promoted to Vice President and General Counsel.
Prior to joining Applebee's, Mr. Steinkamp was a partner in the law firm of
Beckett & Steinkamp. Mr. Steinkamp resigned from Applebee's effective January 5,
2004.
Item 2. Properties
As of December 28, 2003, we owned and operated 383 restaurants. Of these, we
leased the land and building for 63 sites, owned the building and leased the
land for 165 sites, and owned the land and building for 155 sites. In addition,
as of December 28, 2003, we owned 6 sites for future development of restaurants
and had entered into 18 lease agreements for restaurant sites we plan to open
during 2004. 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 and lease a 23,000 square foot
office building in Overland Park, Kansas, located in the Kansas City
metropolitan area, in which our corporate offices are headquartered. 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.
13
The following table sets forth the 49 states and the nine international
countries in which Applebee's are located and the number of restaurants
operating in each state or country as of December 28, 2003:
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- ------------- --------------
Domestic:
Alabama........................ -- 28 28
Alaska......................... -- 2 2
Arizona........................ -- 25 25
Arkansas....................... -- 7 7
California..................... 8 78 86
Colorado....................... -- 30 30
Connecticut.................... -- 10 10
Delaware....................... 2 5 7
Florida........................ -- 89 89
Georgia........................ -- 67 67
Idaho.......................... -- 9 9
Illinois....................... 10 46 56
Indiana........................ 3 56 59
Iowa........................... -- 23 23
Kansas......................... 13 17 30
Kentucky....................... 4 28 32
Louisiana...................... -- 17 17
Maine.......................... 7 -- 7
Maryland....................... 9 11 20
Massachusetts.................. 30 -- 30
Michigan....................... 60 14 74
Minnesota...................... 52 2 54
Mississippi.................... -- 14 14
Missouri....................... 39 9 48
Montana........................ -- 7 7
Nebraska....................... -- 17 17
Nevada......................... 14 -- 14
New Hampshire.................. 12 -- 12
New Jersey..................... -- 34 34
New Mexico..................... 8 6 14
New York....................... 1 82 83
North Carolina................. 1 49 50
North Dakota................... -- 9 9
Ohio........................... -- 80 80
Oklahoma....................... -- 15 15
Oregon......................... -- 15 15
Pennsylvania................... 1 49 50
Rhode Island................... 7 -- 7
South Carolina................. -- 42 42
South Dakota................... -- 4 4
Tennessee...................... -- 46 46
Texas.......................... 42 30 72
Utah........................... -- 12 12
Vermont........................ 3 -- 3
Virginia....................... 52 -- 52
Washington..................... -- 21 21
West Virginia.................. 1 12 13
Wisconsin...................... 4 34 38
Wyoming........................ -- 4 4
-------------- ------------- --------------
Total Domestic................. 383 1,155 1,538
-------------- ------------- --------------
14
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
International:
Bahrain........................ -- 1 1
Canada......................... -- 17 17
Egypt.......................... -- 1 1
Greece......................... -- 5 5
Honduras....................... -- 2 2
Kuwait......................... -- 2 2
Mexico......................... -- 17 17
Qatar.......................... -- 1 1
Saudi Arabia................... -- 1 1
-------------- -------------- --------------
Total International............ -- 47 47
-------------- -------------- --------------
383 1,202 1,585
============== ============== ==============
Item 3. Legal Proceedings
We are involved in various legal actions which include, without limitation,
employment law related matters, dram shop claims, personal injury claims and
other such normal restaurant operational matters. 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 statements.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
15
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.
2003 2002
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 28.30 $ 23.09 $ 25.41 $ 21.20
Second Quarter $ 31.75 $ 26.75 $ 27.67 $ 22.26
Third Quarter $ 33.47 $ 29.74 $ 23.50 $ 19.13
Fourth Quarter $ 40.19 $ 30.80 $ 26.35 $ 19.03
2. Number of stockholders of record at December 28, 2003: 1,349
3. We declared an annual dividend of $0.07 per common share on December 11,
2003 for stockholders of record on December 26, 2003, and the dividend was
paid on January 23, 2004. 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 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 2004 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."
16
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.
Fiscal Year Ended
-------------------------------------------------------------------------------
December 28, December 29, December 30, December 31, December 26,
2003 2002 2001 2000 1999
--------------- --------------- --------------- --------------- ---------------
(in thousands, except per share amounts)
STATEMENT OF EARNINGS DATA:
Company restaurant sales................. $ 867,158 $ 724,616 $ 651,119 $ 605,414 $ 596,754
Franchise royalties and fees............. 109,833 102,180 93,225 84,738 72,830
Other franchise income................... 13,147 2,688 -- -- --
--------------- --------------- --------------- --------------- ---------------
Total operating revenues............. $ 990,138 $ 829,484 $ 744,344 $ 690,152 $ 669,584
=============== =============== =============== =============== ===============
Operating earnings....................... $ 153,647 $ 129,708 $ 112,427 $ 107,207 $ 94,910
Net earnings............................. $ 93,558 $ 83,027 $ 64,401 $ 63,161 $ 54,198
Basic net earnings per share............. $ 1.69 $ 1.49 $ 1.16 $ 1.07 $ 0.85
Diluted net earnings per share........... $ 1.64 $ 1.46 $ 1.13 $ 1.07 $ 0.84
Dividends declared per share............. $ 0.07 $ 0.06 $ 0.05 $ 0.05 $ 0.04
Basic weighted average shares
outstanding.......................... 55,296 55,605 55,512 58,841 63,908
Diluted weighted average shares
outstanding.......................... 56,939 56,922 56,877 59,170 64,353
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets............................. $ 644,001 $ 566,114 $ 500,411 $ 471,707 $ 442,216
Long-term debt, including
current portion........................ $ 20,862 $ 52,563 $ 74,568 $ 91,355 $ 108,100
Stockholders' equity..................... $ 459,732 $ 392,581 $ 325,183 $ 281,718 $ 253,873
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Our results for 2003 were driven by the execution of integrated strategies,
including improved food, promotions backed by effective advertising, meeting our
guests' desires for more convenience, our focus on operations excellence and the
retention of better people.
We completed the rollout of our Carside To Go(TM) program in all company
restaurants in November 2003 where practicable and our franchisees will continue
implementation during 2004. We expect Carside To Go(TM) to be a significant
driver of sales and traffic growth in 2004.
Our revenues are generated from three primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise royalties and fees
o Other franchise income
Beverage sales consist of sales of alcoholic beverages, while non-alcoholic
beverages are included in food sales. Franchise royalties are generally 4% of
each franchise restaurant's monthly gross sales. Franchise fees typically range
from $30,000 to $35,000 for each restaurant opened. Other franchise income
includes insurance premiums from franchisee participation in our captive
insurance company and revenue from information technology products and services
provided to certain franchisees.
Comparable restaurant sales are based upon those restaurants open for at least
18 months and are compared from period to period.
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
Cost of other franchise income includes the costs related to franchisee
participation in our captive insurance company and costs related to information
technology products and services provided to certain franchisees.
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 28, 2003, December 29, 2002 and December 30,
2001 each contained 52 weeks and are referred to hereafter as 2003, 2002 and
2001, respectively.
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 qualified franchisees with workers' compensation and
general liability insurance. Applebee's International, Inc. and covered
18
franchisees make premium payments to the captive insurance company which pays
administrative fees and insurance claims, subject to individual and aggregate
maximum claim limits under the captive insurance company's reinsurance policies.
Franchisee premium amounts billed by the captive insurance company are
established based upon third-party actuarial estimates of ultimate settlement
costs for incurred claims and administrative fees. The franchisee premiums are
included in other franchise income ratably over the policy year. The related
offsetting expenses are included in cost of other franchise income. Accordingly,
we do not expect franchisee participation in the captive insurance company to
have a material impact on our net earnings.
As of December 28, 2003 we have included in our consolidated balance sheet
approximately $10,000,000 of assets restricted for the payment of claims, held
primarily in cash equivalent investments, and approximately $1,000,000 of other
restricted assets. In addition, we have recorded current liabilities of
approximately $11,000,000 in loss and premium reserves related to the captive
insurance subsidiary.
Application of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is 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 our consolidated financial statements.
We believe that the following significant accounting policies involve a higher
degree of judgment or complexity.
Franchise revenues: Franchise revenues consist of franchise royalties, franchise
fees and other franchise income. We recognize royalties on a franchisee's sales
in the period in which the sales are reported to have occurred. We also receive
a franchise fee for each restaurant that a franchisee opens. The recognition of
franchise fees is deferred until we have performed substantially all of our
related obligations as franchisor, typically when the restaurant opens. Other
franchise income includes insurance premiums from franchisee participation in
our captive insurance company and revenue from information technology products
and services provided to certain franchisees. Income from franchise premiums and
information technology services is recognized ratably over the related contract
period. Income from information technology products is recognized when the
products are installed at the restaurant.
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.
Impairment of long-lived assets: We periodically review property and equipment
for impairment on a restaurant by restaurant basis 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 judgment. 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. 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.
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.
19
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
developments.
We periodically reassess our assumptions and judgments 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.
Acquisitions
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 March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition.
The following table is comprised of actual company restaurant sales for the
restaurants acquired included in our consolidated financial statements for each
period presented and pro forma company restaurant sales assuming the
acquisitions occurred at the beginning of each respective period (in thousands):
2003 2002 2001
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 66,300 $ 6,300 $ --
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 72,400 $ 68,400 $ 63,800
=============== =============== ===============
Disposition
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. This transaction did not have a significant impact
on our net earnings for fiscal 2003. Actual company restaurant sales included in
our consolidated financial statements for the nine restaurants were
approximately $10,300,000, $18,300,000 and $18,900,000 for 2003, 2002 and 2001,
respectively.
20
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 28, December 29, December 30,
2003 2002 2001
--------------- --------------- ---------------
Revenues:
Company restaurant sales......................... 87.6% 87.4% 87.5%
Franchise royalties and fees..................... 11.1 12.3 12.5
Other franchise income........................... 1.3 0.3 --
--------------- --------------- ---------------
Total operating revenues.................... 100.0% 100.0% 100.0%
=============== =============== ===============
Cost of sales (as a percentage of company restaurant
sales):
Food and beverage................................ 26.0% 26.6% 27.0%
Labor............................................ 32.7 32.9 32.1
Direct and occupancy............................. 25.0 25.1 25.3
Pre-opening expense.............................. 0.2 0.3 0.3
--------------- --------------- ---------------
Total cost of sales......................... 83.9% 84.8% 84.7%
=============== =============== ===============
Cost of other franchise income (as a percentage of
other franchise income).......................... 96.6% 80.8% --
General and administrative expenses................... 9.6 9.8 9.8%
Amortization of intangible assets..................... -- -- 0.8
Loss on disposition of restaurants and equipment...... 0.1 0.1 0.2
--------------- --------------- ---------------
Operating earnings.................................... 15.5 15.6 15.1
--------------- --------------- ---------------
Other income (expense):
Investment income................................ 0.2 0.2 0.2
Interest expense................................. (0.2) (0.3) (1.0)
Impairment of Chevys note receivable............. (0.9) -- --
Other income (expense)........................... 0.2 0.1 (0.6)
--------------- --------------- ---------------
Total other income (expense)................ (0.8) 0.1 (1.4)
--------------- --------------- ---------------
Earnings before income taxes.......................... 14.8 15.7 13.7
Income taxes.......................................... 5.3 5.7 5.0
--------------- --------------- ---------------
Net earnings.......................................... 9.4% 10.0% 8.7%
=============== =============== ===============
(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.
21
Fiscal Year Ended December 28, 2003 Compared With Fiscal Year Ended December 29,
2002
- --------------------------------------------------------------------------------
Company Restaurant Sales. Total company restaurant sales increased $142,542,000
(20%) from $724,616,000 in 2002 to $867,158,000 in 2003. Company restaurant
openings and weighted average weekly sales contributed approximately 9% and 5%,
respectively, of the increase in total company restaurant sales in 2003. The
acquisition of 21 franchise restaurants in the Washington D.C. area in November
2002 and 11 restaurants in Illinois, Indiana, Kentucky, and Missouri in late
March 2003 contributed approximately 8% of the increase in company restaurant
sales. These increases were partially offset by the sale of 8 restaurants in the
Atlanta, Georgia market in July 2003.
Comparable restaurant sales at company restaurants increased by 5.2% in 2003.
Weighted average weekly sales at company restaurants increased 4.6% from $43,019
in 2002 to $45,000 in 2003. 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 1.5% in fiscal 2003.
In November 2003, we completed the implementation of our Carside To Go(TM)
program in all company restaurants where practicable. To Go sales mix increased
from 5.0% of company restaurant sales in 2002 to 7.1% of company restaurant
sales in 2003.
Franchise Royalties and Fees. Franchise royalties and fees increased $7,653,000
(7%) from $102,180,000 in 2002 to $109,833,000 in 2003 due primarily to the
increased number of franchise restaurants operating during 2003 as compared to
2002 and increases in comparable restaurant sales. Weighted average weekly sales
and franchise comparable restaurant sales increased 3.3% and 3.7%, respectively,
in 2003.
Other Franchise Income. Other franchise income increased from $2,688,000 in 2002
to $13,147,000 in 2003 due primarily to an increase of $10,200,000 in revenues
recognized related to the franchise premium amounts billed by the captive
insurance company, which was formed in September 2002. Franchise premiums are
recognized in other franchise income ratably over the policy year.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 26.6%
in 2002 to 26.0% in 2003. This decrease was due to menu price increases and
operational improvements resulting from our supply chain management initiatives.
Labor costs decreased from 32.9% in 2002 to 32.7% in 2003. This decrease was due
to lower hourly costs due to higher sales volume at company restaurants and was
partially offset by higher costs related to the addition of dedicated To Go
hourly labor at most of our restaurants during the second half of 2003 and
higher workers' compensation costs.
Direct and occupancy costs decreased from 25.1% in 2002 to 25.0% in 2003 due
primarily to lower rent expense and depreciation expense, as a percentage of
sales, and was partially offset by higher insurance costs and higher packaging
costs relating to our To Go initiative.
Cost of Other Franchise Income. Cost of other franchise income increased from
$2,173,000 in 2002 to $12,697,000 in 2003 due primarily to an increase in costs
of $10,260,000 related to the operation of our captive insurance company, which
was formed in September 2002.
General and Administrative Expenses. General and administrative expenses
decreased from 9.8% in 2002 to 9.6% in 2003 as a result of the absorption of
general and administrative expenses over a larger revenue base. This decrease
was partially offset by higher depreciation expense related to our new
information systems and increased incentive compensation.
22
Impairment of Chevys Note Receivable. In June 2003, Chevys announced the sale of
the majority of its restaurants. Subsequent to the announcement, we received
Chevys' audited financial statements for the fiscal year ended December 31,
2002. During the fiscal quarter ended June 29, 2003, we fully impaired the
principal and accrued interest of approximately $8,800,000. In October 2003,
Chevys Inc. filed a voluntary petition to reorganize under Chapter 11 of the
U.S. Bankruptcy Code.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.2% in 2002 to 36.0% in 2003 due to a reduction
in state and local income taxes.
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 Royalties and Fees. Franchise royalties and fees 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.
Other Franchise Income. Other franchise income was $2,688,000 in 2002 due
primarily to revenues recognized related to the franchise premium amounts billed
by the captive insurance company, which was formed in September 2002. Franchise
premiums are recognized in other franchise income ratably over the policy year.
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.
Cost of Other Franchise Income. Cost of other franchise income was $2,173,000 in
2002 due primarily to the costs related to the operation of our captive
insurance company, which was formed in September 2002.
23
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.
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.
Liquidity and Capital Resources
Our need for capital historically has resulted from the construction and
acquisition of restaurants, the repurchase of our common shares and investment
in information technology systems. 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 were $64,874,000 in 2002 (excluding the acquisition of 21
restaurants) and $82,562,000 in 2003 (excluding the acquisition of 11
restaurants). We currently expect to open at least 28 company restaurants, and
capital expenditures excluding acquisitions are expected to be between
$80,000,000 and $90,000,000 in 2004. 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 March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition.
24
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. This transaction did not have a significant impact
on our net earnings for fiscal 2003.
Our bank credit agreement, as amended, expires in November of 2005 and provides
for a $150,000,000 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 28, 2003, we had
borrowings of $15,000,000 and had standby letters of credit of $12,000,000
outstanding under our revolving credit facility.
During 2003, we repurchased 1,679,500 shares of our common stock at an average
price of $29.63 for an aggregate cost of $49,800,000. In December 2003, our
Board of Directors authorized an additional repurchase of $80,000,000 of our
common stock. As of December 28, 2003, we had $99,800,000 remaining under these
authorizations.
As of December 28, 2003, our liquid assets totaled $17,894,000. These assets
consisted of cash and cash equivalents in the amount of $17,867,000 and
short-term investments in the amount of $27,000. The working capital deficit
increased from $45,607,000 as of December 29, 2002 to $62,710,000 as of December
28, 2003. This increase was due primarily to the increase in the loss reserve
and unearned premiums related to the captive insurance subsidiary and increases
in accrued bonuses and accounts payable and was partially offset by increases in
inventories and receivables.
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.
25
The following table shows our debt amortization schedule, future capital lease
commitments (including principal and interest payments), future operating lease
commitments and future purchase obligations as of December 28, 2003 (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).......................... $ 16,654 $ 119 $ 15,241 $ 118 $ 1,176
Capital Lease Obligations....................... 9,838 741 1,561 1,673 5,863
Operating Leases................................ 215,486 18,863 35,328 34,658 126,637
Purchase Obligations - Company(1)............... 143,331 85,869 39,388 14,198 3,876
Purchase Obligations - Franchise(2)............. 318,134 181,215 103,522 21,708 11,689
(1) The amounts for company purchase obligations include commitments for food
items and supplies, severance and employment agreements, and other miscellaneous
commitments.
(2) The amounts for franchise purchase obligations include commitments for food
items and supplies made by Applebee's International, Inc. for our franchisees.
Applebee's International, Inc. contracts with certain suppliers to ensure
competitive pricing. These amounts will only be payable by Applebee's
International, Inc. if our franchisees do not meet certain minimum contractual
requirements.
Other Contractual Obligations
We have outstanding lease guarantees of approximately $24,300,000 as of December
28, 2003 (see Note 15 to our Consolidated Financial Statements). We have not
recorded a liability for these guarantees as of December 28, 2003 or December
29, 2002.
We have severance and employment agreements with certain officers and other
senior executives 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 28, 2003, we would have been
required to make payments totaling approximately $11,400,000. 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 $6,800,000 if such officers
had been terminated as of December 28, 2003.
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. The purchase
agreement provides for additional consideration in July 2004 if the restaurants
achieve cash flows in excess of historical levels. The amount of additional
payments, if any, under this agreement will not be material to our consolidated
financial statements.
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.
26
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 June 2002, the Financial Accounting Standards Board ("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. The initial adoption of this Statement in
January 2003 did not 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 were 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 initial adoption of Interpretation No. 45 did not have a material
impact on our results of operations or financial position.
In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R,
"Consolidation of Variable Interest Entities and Interpretation of ARB No. 51."
This interpretation, which replaces FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. This
interpretation is required in financial statements for periods ending after
March 15, 2004 for those companies that have yet to adopt the provisions of FIN
46. We are currently assessing FIN 46R and, although we have not completed our
analysis, we do not expect the adoption to have a material impact on our
consolidated financial statements.
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 ability
of our franchisees to obtain financing, the continued growth of our franchisees,
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 11,
2004. We disclaim any obligation to update forward-looking statements.
27
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 either at the
bank's prime rate or LIBOR plus 0.625%, at our option. As of December 28, 2003,
the total amount of debt subject to interest rate fluctuations was $15,000,000.
A 1% change in interest rates would result in an increase or decrease in
interest expense of $150,000 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.
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.
Item 9A. Controls and Procedures
As of December 28, 2003, 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. During our most recent fiscal quarter, there have been no changes in
our internal control over financial reporting that occurred that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
28
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 and Other Senior Officers of the Registrant" in Part
I of this report. You should read the information under the caption "Information
About the Board of Directors and Executive and Other Senior Officers" for
information on our Board of Directors and the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" for information regarding our Section 16(a)
ownership compliance located in the Proxy Statement for the Annual Meeting of
Stockholders to be held on or about May 13, 2004. We incorporate that
information in this document by reference.
Our Board of Directors has adopted a Code of Conduct for all employees and
directors. A copy of this document is available on our website at
www.applebees.com, free of charge under the Invester/Media Relations section. We
will satisfy any disclosure requirements under Item 10 on Form 8-K regarding an
amendment to, or waiver from, any provision of the Code with respect to our
principal executive officer, principal financial officer, principal accounting
officer and persons performing similar functions by disclosing the nature of
such amendment or waiver on our website or in a report on Form 8-K.
Our Board of Directors has determined that Mr. Eric L. Hansen, a member of the
audit committee and an independent director, is an audit committee financial
expert, as defined under 401(h) of Regulation S-K.
Item 11. Executive Compensation
If you would like information about our executive compensation, you should read
the information under the caption "Executive Compensation" and "Information
About the Board of Directors and Executive and Other Senior Officers" in the
Proxy Statement for the Annual Meeting of Stockholders to be held on or about
May 13, 2004. 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 13,
2004. 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 13, 2004. We
incorporate that information in this document by reference.
Item 14. Principal Accounting Fees and Services
If you would like information about fees paid to our auditors, you should read
the information under the caption "Fees and Services of Deloitte & Touche LLP"
in the Proxy Statement for the Annual Meeting of Stockholders to be held on or
about May 13, 2004. We incorporate that information in this document by
reference.
29
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. Financial Statement Schedules:
None.
3. 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 20, 2003, announcing the
temporary suspension of trading under one of our benefit plans.
We furnished a report on Form 8-K on October 23, 2003 announcing the
broadcast of our third quarter 2003 earnings conference call over the
Internet.
We furnished a report on Form 8-K on October 30, 2003, announcing third
quarter 2003 diluted earnings per share of 45 cents.
We furnished a report on Form 8-K on November 10, 2003, announcing our
presentation at the Oppenheimer & Company 2003 Restaurant Conference.
We filed a report on Form 8-K on December 1, 2003, announcing November
comparable sales.
We filed a report on Form 8-K on December 12, 2003, announcing an
increased annual dividend and a stock repurchase authorization.
30
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 8, 2004 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 Rebecca R. Tilden, 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 8, 2004
------------------------------ -----------------------------------
Lloyd L. Hill
Director, Chairman of the Board and Chief
Executive Officer
(principal executive officer)
By: /s/ Steven K. Lumpkin Date: March 8, 2004
------------------------------ ----------------------------------
Steven K. Lumpkin
Director, Executive Vice President and Chief
Financial Officer
(principal financial officer)
By: /s/ Beverly O. Elving Date: March 8, 2004
------------------------------ ----------------------------------
Beverly O. Elving
Vice President, Accounting
(principal accounting officer)
31
By: /s/ Erline Belton Date: March 8, 2004
------------------------------ ----------------------------------
Erline Belton
Director
By: /s/ Douglas R. Conant Date: March 8, 2004
------------------------------ ----------------------------------
Douglas R. Conant
Director
By: /s/ D. Patrick Curran Date: March 8, 2004
------------------------------ ----------------------------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 8, 2004
------------------------------ ----------------------------------
Eric L. Hansen
Director
By: /s/ Mark S. Hansen Date: March 8, 2004
------------------------------ ----------------------------------
Mark S. Hansen
Director
By: /s/ Jack P. Helms Date: March 8, 2004
------------------------------ ----------------------------------
Jack P. Helms
Director
By: /s/ Burton M. Sack Date: March 8, 2004
------------------------------ ----------------------------------
Burton M. Sack
Director
32
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
Index to consolidated Financial Statements
Page
Independent Auditors' Report.............................................................................. F-2
Consolidated Balance Sheets as of December 28, 2003 and
December 29, 2002 .................................................................................. F-3
Consolidated Statements of Earnings for the fiscal years ended
December 28, 2003, December 29, 2002 and December 30, 2001........................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal Years
Ended December 28, 2003, December 29, 2002 and December 30, 2001..................................... F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 2003, December 29, 2002 and December 30, 2001........................................... F-6
Notes to Consolidated Financial Statements................................................................ F-8
F-1
Independent Auditors' Report
To the Board of Directors
Applebee's International, Inc. and Subsidiaries
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 28, 2003 and
December 29, 2002, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 2003. 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 28, 2003
and December 29, 2002, and the results of their operations and their cash flows
for each of the three fiscal years in the period ended December 28, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 8 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 4, 2004
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 28, December 29,
2003 2002
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 17,867 $ 15,169
Short-term investments, at market value........................................ 27 503
Receivables, net of allowance.................................................. 31,950 26,092
Receivables related to captive insurance subsidiary............................ 450 1,803
Inventories.................................................................... 20,799 11,504
Prepaid income taxes........................................................... 5,800 5,002
Prepaid and other current assets............................................... 9,729 9,506
------------ ------------
Total current assets...................................................... 86,622 69,579
Property and equipment, net........................................................ 419,802 383,002
Goodwill........................................................................... 105,326 88,715
Restricted assets related to captive insurance subsidiary.......................... 10,763 --
Franchise interest and rights, net................................................. 1,137 1,468
Other assets, net.................................................................. 20,351 23,350
------------ ------------
$ 644,001 $ 566,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 192 $ 377
Accounts payable............................................................... 37,633 27,479
Accrued expenses and other current liabilities................................. 96,637 82,204
Loss reserve and unearned premiums related to captive insurance subsidiary..... 11,007 1,803
Accrued dividends.............................................................. 3,863 3,323
------------ ------------
Total current liabilities................................................. 149,332 115,186
------------ ------------
Non-current liabilities:
Long-term debt - less current portion.......................................... 20,670 52,186
Other non-current liabilities.................................................. 14,267 6,161
------------ ------------
Total non-current liabilities............................................. 34,937 58,347
------------ ------------
Total liabilities......................................................... 184,269 173,533
------------ ------------
Commitments and contingencies (Notes 10, 11 and 15)
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................................................ 723 723
Additional paid-in capital..................................................... 200,574 187,523
Retained earnings.............................................................. 524,316 434,621
Accumulated other comprehensive income, net of income taxes.................... -- 16
------------ ------------
725,613 622,883
Treasury stock - 17,143,845 shares in 2003 and 16,948,371 shares in 2002, at
cost...................................................................... (265,881) (230,302)
------------ ------------
Total stockholders' equity................................................ 459,732 392,581
------------ ------------
$ 644,001 $ 566,114
============ ============
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 28, December 29, December 30,
2003 2002 2001
-------------- -------------- --------------
Revenues:
Company restaurant sales................................ $ 867,158 $ 724,616 $ 651,119
Franchise royalties and fees............................ 109,833 102,180 93,225
Other franchise income.................................. 13,147 2,688 --
-------------- -------------- --------------
Total operating revenues........................... 990,138 829,484 744,344
-------------- -------------- --------------
Cost of company restaurant sales:
Food and beverage....................................... 225,346 192,424 175,977
Labor................................................... 283,745 238,266 208,996
Direct and occupancy.................................... 216,677 181,767 164,965
Pre-opening expense..................................... 1,950 1,974 1,701
-------------- -------------- --------------
Total cost of company restaurant sales............. 727,718 614,431 551,639
-------------- -------------- --------------
Cost of other franchise income.............................. 12,697 2,173 --
General and administrative expenses......................... 95,013 81,653 72,935
Amortization of intangible assets........................... 364 381 5,851
Loss on disposition of restaurants and equipment............ 699 1,138 1,492
-------------- -------------- --------------
Operating earnings.......................................... 153,647 129,708 112,427
-------------- -------------- --------------
Other income (expense):
Investment income....................................... 1,554 1,498 1,650
Interest expense........................................ (1,733) (2,168) (7,456)
Impairment of Chevys note receivable (Note 5)........... (8,803) -- --
Other income (expense).................................. 1,520 1,098 (4,720)
-------------- -------------- --------------
Total other income (expense)....................... (7,462) 428 (10,526)
-------------- -------------- --------------
Earnings before income taxes................................ 146,185 130,136 101,901
Income taxes................................................ 52,627 47,109 37,500
-------------- -------------- --------------
Net earnings................................................ $ 93,558 $ 83,027 $ 64,401
============== ============== ==============
Basic net earnings per common share......................... $ 1.69 $ 1.49 $ 1.16
============== ============== ==============
Diluted net earnings per common share....................... $ 1.64 $ 1.46 $ 1.13
============== ============== ==============
Basic weighted average shares outstanding................... 55,296 55,605 55,512
============== ============== ==============
Diluted weighted average shares outstanding................. 56,939 56,922 56,877
============== ============== ==============
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 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 benefit 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.......................... -- -- -- 183,027 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 benefit 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
Comprehensive income:
Net earnings..................................... -- -- -- 93,558 -- -- 93,558
Change in unrealized gain on short-term
investments, net of income taxes............. -- -- -- -- (16) -- (16)
----------- ------- ---------- ---------- ------------ ---------- -------------
Total comprehensive income.......................... -- -- -- 93,558 (16) -- 93,542
----------- ------- ---------- ---------- ------------ ---------- -------------
Purchases of treasury stock...................... -- -- -- -- -- (49,757) (49,757)
Dividends declared on common stock, $0.07 per
share........................................ -- -- -- (3,863) -- -- (3,863)
Stock options exercised and related tax benefit.. -- -- 9,884 -- -- 11,898 21,782
Shares issued under employee benefit plans....... -- -- 2,554 -- -- 1,732 4,286
Restricted shares awarded under equity
incentive plan, net of cancellations......... -- -- (497) -- -- 548 51
Unearned compensation relating to restricted
shares....................................... -- -- 1,011 -- -- -- 1,011
Net repayments of notes receivable from officers
for stock sales.............................. -- -- 99 -- -- -- 99
----------- ------- ---------- ---------- ------------ ---------- -------------
Balance, December 28, 2003.......................... 72,336,788 $ 723 $ 200,574 $524,316 $ -- $(265,881) $ 459,732
=========== ======= ========== ========== ============ ========== =============
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 28, December 29, December 30,
2003 2002 2001
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 93,558 $ 83,027 $ 64,401
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.............................. 40,663 35,110 31,780
Amortization of intangible assets.......................... 364 381 5,851
Write-off of deferred financing costs...................... -- -- 1,976
Amortization of deferred financing costs................... 195 195 648
Deferred income tax provision (benefit).................... 1,995 3,296 (4,520)
Gain on sale of investments................................ (24) -- --
Loss on disposition of restaurants and equipment........... 699 1,138 1,492
Impairment of Chevys note receivable....................... 8,803 -- --
Income tax benefit from exercise of stock options.......... 7,606 1,905 4,807
Changes in assets and liabilities (exclusive of effects of
acquisitions or dispositions):
Receivables................................................ (5,962) (3,158) (3,067)
Receivables related to captive insurance subsidiary........ 1,353 -- --
Inventories................................................ (9,139) (1,067) 2,451
Prepaid income taxes....................................... (798) -- --
Prepaid and other current assets........................... 1,063 (4,358) (3,992)
Accounts payable........................................... 10,233 5,283 (4,360)
Accrued expenses and other current liabilities............. 15,074 10,795 9,040
Loss reserve and unearned premiums related to captive
insurance subsidiary..................................... 9,204 -- --
Accrued income taxes....................................... -- (979) (121)
Other...................................................... 1,002 1,065 (2,323)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 175,889 132,633 104,063
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (82,562) (64,874) (50,086)
Acquisition of restaurants.................................... (21,557) (34,250) --
Proceeds from sale of restaurants and equipment............... 9,228 279 433
Purchases of short-term investments........................... -- (150) (200)
Maturities and sales of short-term investments................ 480 350 774
Restricted assets related to captive insurance subsidiary..... (10,763) -- --
-------------- -------------- --------------
NET CASH USED BY INVESTING ACTIVITIES...................... (105,174) (98,645) (49,079)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock................................... (49,757) (26,113) (44,987)
Dividends paid................................................ (3,323) (3,010) (2,779)
Issuance of common stock upon exercise of stock options....... 14,176 5,386 19,183
Shares issued under employee benefit plans.................... 4,286 4,870 2,262
Proceeds from issuance of long-term debt...................... -- -- 70,000
Deferred financing costs relating to issuance of long-term
debt....................................................... -- -- (577)
Net payments on long-term debt................................ (33,399) (22,000) (86,801)
-------------- -------------- --------------
NET CASH USED BY FINANCING ACTIVITIES...................... (68,017) (40,867) (43,699)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 2,698 (6,879) 11,285
CASH AND CASH EQUIVALENTS, beginning of period..................... 15,169 22,048 10,763
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 17,867 $ 15,169 $ 22,048
============== ============== ==============
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 28, December 29, December 30,
2003 2002 2001
----------------- ----------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................... $ 45,557 $ 44,983 $ 40,147
================= ================= ================
Interest........................................ $ 1,079 $ 1,532 $ 7,728
================= ================= ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued restricted common stock, net of forfeitures, of $1,842,000 in 2003,
$1,258,000 in 2002 and $764,000 in 2001.
On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection
with the acquisition of 11 restaurants.
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 28, 2003, there were 1,585 Applebee's restaurants.
Franchisees operated 1,202 of these restaurants and 383 restaurants were company
operated. These restaurants were located in 49 states and nine international
countries.
On September 20, 2002, we formed Neighborhood Insurance, Inc., a regulated
Vermont corporation and a wholly-owned subsidiary, as a captive insurance
company. Neighborhood Insurance, Inc. was established to provide Applebee's
International, Inc. and qualified franchisees with workers' compensation and
general liability insurance (see Note 12).
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 28, 2003, December 29, 2002 and December 30, 2001
each contained 52 weeks. These fiscal years will be referred to as 2003, 2002
and 2001, 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 28, 2003, we have classified all
short-term investments as available-for-sale.
Financial instruments: Our financial instruments as of December 28, 2003 and
December 29, 2002 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 2001 consolidated statement of
income. These interest rate swap agreements were the only derivative instruments
held during fiscal year 2001 as defined under SFAS No. 133. We have not held any
financial derivative instruments since we terminated our interest rate swap
agreements in fiscal year 2001.
F-8
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.
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 $264,000 in interest costs during 2003, $300,000 during 2002 and
$523,000 during 2001.
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.
In accordance with SFAS No. 86, "Accounting for the Costs of Computer Software
to Be Sold, Leased, or Otherwise Marketed," we have also capitalized
approximately $1,700,000 and $1,200,000 as of December 28, 2003 and December 29,
2002, respectively, for costs incurred for software projects that may be sold to
our franchisees. We have not made these products available to our customers and
accordingly, have not begun amortization of these costs.
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 8). Accumulated amortization as
of December 28, 2003 and December 29, 2002 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.
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.
Franchise royalties and fees: We recognize royalties on a franchisee's sales in
the period in which the sales are reported to have occurred. We also receive a
franchise fee for each restaurant that a franchisee opens. The recognition of
franchise fees is deferred until we have performed substantially all of our
related obligations as franchisor, typically when the restaurant opens.
Franchise fees, included in franchise royalties and fees in the consolidated
statements of earnings, totaled $2,769,000 for 2003, $2,692,000 for 2002 and
$3,800,000 for 2001.
F-9
Other franchise income: Other franchise income includes insurance premiums from
franchisee participation in our captive insurance company and revenue from
information technology products and services provided to certain franchisees.
Income from franchisee premiums and information technology services is
recognized ratably over the related contract period. Income from information
technology products is recognized when the products are installed at the
restaurant.
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 $41,177,000 for 2003, $34,547,000 for 2002 and
$32,259,000 for 2001.
Income taxes: We use the asset and liability method to determine deferred income
taxes. Deferred tax assets and liabilities are computed based upon future tax
consequences associated with differences between the financial statement
carrying amount and the tax bases of assets and liabilities.
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-based compensation awards under
the intrinsic method of Accounting Principles Board ("APB") Opinion No. 25.
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).
2003 2002 2001
---------------- ---------------- ----------------
Net earnings, as reported.......................... $ 93,558 $ 83,027 $ 64,401
Add: Compensation expense included in
net earnings, net of related taxes.......... 2,354 972 792
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes........................ 9,752 6,570 5,204
---------------- ---------------- ----------------
Pro forma net earnings............................. $ 86,160 $ 77,429 $ 59,989
================ ================ ================
Basic net earnings per common share,
as reported................................. $ 1.69 $ 1.49 $ 1.16
================ ================ ================
Basic net earnings, per common share,
pro forma................................... $ 1.56 $ 1.39 $ 1.08
================ ================ ================
Diluted net earnings per common share,
as reported................................. $ 1.64 $ 1.46 $ 1.13
================ ================ ================
Diluted net earnings per common share,
pro forma................................... $ 1.51 $ 1.36 $ 1.05
================ ================ ================
F-10
The weighted average fair value at date of grant for options granted during
2003, 2002 and 2001 was $10.66, $9.66 and $7.33 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 2003, 2002 and
2001: dividend yield of 0.3%, 0.3% and 0.4%, respectively; expected volatility
of 44.9%, 46.9% and 48.7%, respectively; risk-free interest rate of 2.8%, 2.5%
and 4.2%, respectively; and expected lives of 4.9, 5.2 and 5.0 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
the related earnings per share. All amounts in the chart, except per share
amounts, are expressed in thousands.
2003 2002 2001
---------------- ---------------- ----------------
Net earnings....................................... $ 93,558 $ 83,027 $ 64,401
================ ================ ================
Basic weighted average shares outstanding.......... 55,296 55,605 55,512
Dilutive effect of stock options and
equity-based compensation..................... 1,643 1,317 1,365
---------------- ---------------- ----------------
Diluted weighted average shares outstanding........ 56,939 56,922 56,877
================ ================ ================
Basic net earnings per common share................ $ 1.69 $ 1.49 $ 1.16
================ ================ ================
Diluted net earnings per common share.............. $ 1.64 $ 1.46 $ 1.13
================ ================ ================
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 34,000 of
these options for 2003, 118,000 options for 2002 and 183,000 options for 2001.
Gift cards: We record a liability in the period in which a gift card is issued
and proceeds are received. As gift cards are redeemed, this liability is reduced
and revenue is recognized as a sale.
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 $20,013,000 in 2003, $14,072,000 in 2002 and $12,222,000 in 2001
related to these types of insurance in our consolidated financial statements.
Unanticipated changes in these factors may require us to revise our estimates.
F-11
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.
New accounting pronouncements: In June 2002, the Financial Accounting Standards
Board ("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. The
initial adoption of this Statement in January 2003 did not 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 were 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 initial adoption of Interpretation No. 45 did not have a material
impact on our results of operations or financial position.
In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R,
"Consolidation of Variable Interest Entities and Interpretation of ARB No. 51."
This interpretation, which replaces FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," to certain entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. This
interpretation is required in financial statements for periods ending after
March 15, 2004 for those companies that have yet to adopt the provisions of FIN
46. We are currently assessing FIN 46R and, although we have not completed our
analysis, we do not expect the adoption to have a material impact on our
consolidated financial statements.
Reclassifications: We have made certain reclassifications to the consolidated
financial statements to conform to the 2003 presentation.
3. Acquisitions
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 $10,100,000
and other net current liabilities of $1,050,000.
F-12
On March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition. The purchase price of $23,200,000 has
been allocated to the fair value of property and equipment of $7,900,000,
goodwill of $16,600,000, and other net liabilities of $1,300,000.
The following table is comprised of actual company restaurant sales for the
restaurants acquired included in our consolidated financial statements for each
period presented and pro forma company restaurant sales assuming the
acquisitions occurred at the beginning of each respective period (in thousands):
2003 2002 2001
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 66,300 $ 6,300 $ --
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 72,400 $ 68,400 $ 63,800
=============== =============== ===============
4. Disposition
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. This transaction did not have a significant impact
on our net earnings for fiscal 2003. Actual company restaurant sales included in
our consolidated financial statements for the nine restaurants were
approximately $10,300,000, $18,300,000 and $18,900,000 for 2003, 2002 and 2001,
respectively.
5. Impairment of Chevys Note Receivable
In 1999, we received a $6,000,000, 8% subordinated note in connection with the
sale of the Rio Bravo concept to Chevys Holdings, Inc ("Chevys") due in 2009.
The note receivable balance of approximately $8,800,000 and $8,600,000 as of
December 28, 2003 and December 29, 2002, respectively, is included in other
assets in our consolidated balance sheets. In June 2003, Chevys announced the
sale of the majority of its restaurants. Subsequent to the announcement, we
received Chevys' audited financial statements for the fiscal year ended December
31, 2002. During the fiscal quarter ended June 29, 2003, we fully impaired the
principal of approximately $8,800,000. A charge for the impairment of this note
is included in our consolidated statements of earnings for the fiscal year ended
December 28, 2003. In October 2003, Chevys Inc. filed a voluntary petition to
reorganize under Chapter 11 of the U.S. Bankruptcy Code. We no longer accrue
interest receivable on this note and will record future interest income on this
note only upon the receipt of any related cash payments.
F-13
6. Receivables
Receivables are comprised of the following (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 25,595 $ 24,011
Credit card receivables.......................................... 6,212 4,724
Franchise fee receivables........................................ 318 418
Other............................................................ 3,942 1,028
----------------- -----------------
36,067 30,181
Less allowance for bad debts..................................... 4,117 4,089
----------------- -----------------
$ 31,950 $ 26,092
================= =================
The bad debts provision totaled $99,000 for 2003, $795,000 for 2002 and
$1,253,000 for 2001. We had write-offs against the allowance for bad debts of
$71,000 during 2003, $1,049,000 during 2002 and $47,000 during 2001.
7. Prepaid and Other Current Assets
Prepaid and other current assets are comprised of the following (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Deferred income taxes............................................ $ 5,858 $ 4,601
Deferred assets related to the captive insurance subsidiary...... 657 --
Other............................................................ 3,214 4,905
----------------- -----------------
$ 9,729 $ 9,506
================= =================
8. 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 and 2003, 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 or 2003.
The changes in goodwill are summarized below (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Carrying amount, beginning of the year........................... $ 88,715 $ 78,614
Goodwill acquired................................................ 16,611 10,101
----------------- -----------------
$ 105,326 $ 88,715
================= =================
F-14
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):
2003 2002 2001
---------------- ---------------- ----------------
Net earnings, as reported................................... $ 93,558 $ 83,027 $ 64,401
Goodwill amortization (net of income taxes)................. -- -- 3,350
---------------- ---------------- ----------------
Net earnings, as adjusted.................................. $ 93,558 $ 83,027 $ 67,751
================ ================ ================
Basic net earnings per common share, as reported............ $ 1.69 $ 1.49 $ 1.16
Goodwill amortization (net of income taxes)................. -- -- 0.06
---------------- ---------------- ----------------
Basic net earnings per common share, as adjusted............ $ 1.69 $ 1.49 $ 1.22
================ ================ ================
Diluted net earnings per common share, as reported.......... $ 1.64 $ 1.46 $ 1.13
Goodwill amortization (net of income taxes)................. -- -- 0.06
---------------- ---------------- ----------------
Diluted net earnings per common share, as adjusted.......... $ 1.64 $ 1.46 $ 1.19
================ ================ ================
Intangible assets subject to amortization pursuant to SFAS No. 142 consist of
franchise interest and rights and are summarized below (in thousands):
December 28, December 29,
2003 2002
------------------ ------------------
Gross carrying amount...................................... $ 6,371 $ 6,371
Less, accumulated amortization............................. $ 5,234 4,903
------------------ ------------------
Net........................................................ $ 1,137 $ 1,468
================== ==================
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $40,000 to $335,000.
9. Other Assets
Other assets are comprised of the following (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Nonqualified deferred compensation plan
investments (Note 17)......................................... $ 5,872 $ 2,425
Liquor licenses.................................................. 4,420 4,445
Minority investment in unaffiliated company, at cost............. 2,250 2,250
Notes receivable, net (Note 5)................................... 1,011 9,371
Deferred financing costs, net.................................... 297 362
Other............................................................ 6,501 4,497
----------------- -----------------
$ 20,351 $ 23,350
================= =================
F-15
10. Property and Equipment
Property and equipment, net, is comprised of the following (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Land............................................................. $ 77,701 $ 74,415
Buildings and leasehold improvements............................. 343,316 307,818
Furniture and equipment.......................................... 187,147 157,278
Construction in progress......................................... 9,124 12,311
----------------- -----------------
617,288 551,822
Less accumulated depreciation and capitalized
lease amortization............................................ 197,486 168,820
----------------- -----------------
$ 419,802 $ 383,002
================= =================
We had property under capitalized leases of $4,055,000 at December 28, 2003 and
December 29, 2002 which is included in buildings and leasehold improvements. We
had accumulated amortization of such property of $1,607,000 at December 28, 2003
and $1,368,000 at December 29, 2002. 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.
We had depreciation and capitalized lease amortization expense relating to
property and equipment of $40,663,000 for 2003, $35,110,000 for 2002 and
$31,780,000 for 2001. Of these amounts, capitalized lease amortization was
$239,000 during each of 2003, 2002 and 2001.
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):
2003 2002 2001
------------------ ------------------ ------------------
Minimum rent................................. $ 17,274 $ 14,267 $ 12,105
Contingent rent.............................. 1,297 1,115 1,054
------------------ ------------------ ------------------
$ 18,571 $ 15,382 $ 13,159
================== ================== ==================
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 2004) as of December 28, 2003 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ ------------------
2004............................................................. $ 741 $ 18,863
2005............................................................. 767 17,958
2006............................................................. 794 17,370
2007............................................................. 822 17,541
2008............................................................. 851 17,117
Thereafter....................................................... 5,863 126,637
------------------ ------------------
Total minimum lease payments..................................... 9,838 $ 215,486
==================
Less amounts representing interest............................... 5,630
------------------
Present value of minimum lease payments.......................... $ 4,208
==================
F-16
11. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 28, December 29,
2003 2002
------------------ ------------------
Unsecured revolving credit facility; interest at LIBOR
plus 0.625% at December 28, 2003 and LIBOR plus 1.0% at
December 29, 2002 or prime rate, due November 2005.......... $ 15,000 $ 48,000
Capitalized lease obligations (Note 10).......................... 4,208 4,238
Other............................................................ 1,654 325
------------------ ------------------
Total long-term debt............................................. 20,862 52,563
Less current portion of long-term debt........................... 192 377
------------------ ------------------
Long-term debt - less current portion............................ $ 20,670 $ 52,186
================== ==================
In November 2001, we refinanced our then-current credit agreement and entered
into a three-year $150,000,000 unsecured revolving credit facility, of which
$25,000,000 may be used for the issuance of letters of credit. At the time of
our refinancing, we repaid $70,000,000 outstanding under our prior credit
agreement.
In December 2003, we amended our credit facility to extend the facility
expiration date to November 2005 and lower our fees and interest rate on any
LIBOR borrowings. The facility bears interest either at the bank's prime rate or
LIBOR plus 0.625%, at our option. We are required to pay a commitment fee of
0.125% on any unused portion of the facility. The interest rate and commitment
fee are subject to change based upon our leverage ratio.
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 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 28, 2003, borrowings of $15,000,000 and standby letters of credit
totaling $12,002,000 were outstanding under our $150,000,000 revolving credit
facility.
Maturities of long-term debt, including capitalized lease obligations ending
during the years indicated, are as follows (in thousands):
2004................................................................................. $ 192
2005................................................................................. 15,215
2006................................................................................. 258
2007................................................................................. 262
2008................................................................................. 293
Thereafter........................................................................... 4,642
----------------
$ 20,862
================
F-17
12. Loss and Loss Adjustment Reserve Related to Captive Insurance Subsidiary
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 qualified franchisees with workers' compensation and
general liability insurance. Applebee's International, Inc. and covered
franchisees make premium payments to the captive insurance company which pays
administrative fees and insurance claims, subject to individual and aggregate
maximum claim limits under the captive insurance company's reinsurance policies.
Franchisee premium amounts billed by the captive insurance company are
established based upon third-party actuarial estimates of ultimate settlement
costs for incurred claims and administrative fees. The franchisee premiums are
included in other franchise income ratably over the policy year. The related
offsetting expenses are included in cost of other franchise income. Accordingly,
we do not expect franchisee participation in the captive insurance company to
have a material impact on our net earnings.
As of December 28, 2003 we have included in our consolidated balance sheet
approximately $10,000,000 of assets restricted for the payment of claims, held
primarily in cash equivalent investments, and approximately $1,000,000 in other
restricted assets. In addition, we have recorded current liabilities of
approximately $11,000,000 in loss and premium reserves related to the captive
insurance subsidiary.
Our activity in the loss and loss adjustment reserve, which includes Applebee's
International, Inc. and participating franchisees, is summarized in the table
below (in thousands):
December 28, December 29,
2003 2002
----------------- -----------------
Net balance, beginning of the year............................... $ 1,044 $ --
Incurred related to:
Current year................................................ 13,369 1,044
Prior year.................................................. 219 --
----------------- -----------------
Total....................................................... 13,588 1,044
----------------- -----------------
Paid related to:
Current year................................................ 3,182 --
Prior year.................................................. 443 --
----------------- -----------------
Total paid.................................................. 3,625 --
----------------- -----------------
Balance, end of the year......................................... $ 11,007 $ 1,044
================= =================
Loss reserve estimates are established based upon third-party actuarial
estimates of ultimate settlement costs for incurred claims using data currently
available. The reserve estimates are regularly analyzed and adjusted when
necessary. Unanticipated changes in the data used to determine the reserve may
require us to revise our estimates.
Deferred policy acquisition costs include premium taxes, fronting fees and net
commissions and are deferred and amortized over our fiscal year. Accordingly, we
did not have any deferred policy acquisition costs recorded as of December 28,
2003. As of December 29, 2002 we had $759,000 of acquisition expenses payable
that were included in the loss reserve and unearned premiums related to captive
insurance subsidiary in the consolidated balance sheet.
F-18
13. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 28, December 29,
2003 2002
------------------ ------------------
Compensation and related taxes.................................... $ 38,313 $ 28,688
Gift cards........................................................ 24,121 21,197
Insurance......................................................... 5,926 8,123
Rent.............................................................. 5,908 5,113
Sales and use taxes............................................... 5,528 4,812
Other............................................................. 16,841 14,271
------------------ ------------------
$ 96,637 $ 82,204
================== ==================
14. Income Taxes
We, along with our subsidiaries, file a consolidated federal income tax return.
The income tax provision consists of the following (in thousands):
2003 2002 2001
--------------- --------------- ---------------
Current provision:
Federal........................................... $ 45,544 $ 39,136 $ 36,571
State and local................................... 5,088 4,677 5,449
Deferred provision (benefit)........................... 1,995 3,296 (4,520)
--------------- --------------- ---------------
Income taxes........................................... $ 52,627 $ 47,109 $ 37,500
=============== =============== ===============
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
2003 2002 2001
--------------- --------------- ---------------
Depreciation........................................... $ 2,964 $ 829 $ (3,201)
Other.................................................. (969) 2,467 (1,319)
--------------- --------------- ---------------
Deferred income tax provision (benefit)................ 1,995 3,296 (4,520)
Deferred income taxes related to change in
unrealized gain on investments.................... -- (9) (15)
--------------- --------------- ---------------
Net change in deferred income taxes.................... $ 1,995 $ 3,287 $ (4,535)
=============== =============== ===============
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):
2003 2002 2001
--------------- --------------- ---------------
Federal income tax at statutory rates.................. $ 51,166 $ 45,548 $ 35,665
Increase (decrease) to income tax expense:
State and local income taxes, net of federal
benefit.......................................... 3,450 3,247 3,127
Employment related tax credits, net................ (3,216) (2,871) (2,582)
Other.............................................. 1,227 1,185 1,290
--------------- --------------- ---------------
Income taxes........................................... $ 52,627 $ 47,109 $ 37,500
=============== =============== ===============
F-19
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 28, December 29,
2003 2002
----------------- -----------------
Classified as current:
Accrued expenses............................................ $ 2,950 $ 2,398
Allowance for bad debts..................................... 1,364 1,480
Other, net.................................................. 1,544 723
----------------- -----------------
Net deferred income tax asset............................... $ 5,858 $ 4,601
================= =================
Classified as non-current:
Depreciation................................................ $ (11,700) $ (6,007)
Franchise deposits.......................................... 571 401
Other, net.................................................. 5,249 2,978
----------------- -----------------
Net deferred income tax liability........................... $ (5,880) $ (2,628)
================= =================
15. Commitments and Contingencies
Litigation, claims and disputes: We are involved in various legal actions which
include, without limitation, employment law related matters, dram shop claims,
personal injury claims and other such normal restaurant operational matters. 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 statements.
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 28, 2003, the aggregate amount of these
lease payments totaled approximately $24,300,000. These leases expire at various
times throughout the next several years with the final lease agreement expiring
in 2025. The buyers have indemnified us from any losses related to these
guarantees. We have not recorded a liability as of December 28, 2003 or December
29, 2002.
Franchisee guarantees: In November 2003, we arranged for a financing company to
provide up to $75 million to qualified franchisees for short-term loans to fund
remodel investments. Under the terms of this financing program, we will provide
a limited guarantee pool for the loans advanced during the three-year period
ending December 2006. There were no loans outstanding under this program as of
December 28, 2003.
Severance agreements: We have severance and employment agreements with certain
officers and other senior executives 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 28, 2003, we
would have been required to make payments totaling approximately $11,400,000. 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 $6,800,000 if
such officers had been terminated as of December 28, 2003.
F-20
16. 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% (20% if an Institutional Investor, as defined) 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.
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. In February 2002, our
Board of Directors extended the 2001 authorization through 2002. Our Board of
Directors authorized additional repurchases of our common stock of $75,000,000
in May 2002 and $80,000,000 in December 2003. The 2002 authorization will expire
in May 2005. During 2003, we repurchased 1,679,500 shares of our common stock at
an average price of $29.63 for an aggregate cost of $49,800,000. As of December
28, 2003, we had $99,800,000 remaining under these authorizations.
17. 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 10,600,000 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 2003 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-21
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. In 2003, we
ceased granting options under this plan.
All three plans permit the committee to grant performance shares. Performance
shares represent rights to receive our common stock, cash or any combination
thereof, 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
$2,667,000 in 2003, $865,000 in 2002 and $926,000 in 2001 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 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
Granted................... 89,500 $24.38 964,510 $26.04 -- --
Exercised................. (204,101) $12.76 (1,005,248) $12.17 (52,600) $6.14
Canceled.................. (131,987) $19.03 (26,078) $23.00 -- --
-------------- -------------- --------------
Options outstanding at
December 28, 2003............ 1,183,460 $19.15 3,657,571 $19.26 4,175 $6.14
============== ============== ==============
Options available for grant at
December 28, 2003............ 162,439 2,481,060 --
============== ============== ==============
F-22
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 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
December 28, 2003............ 97,886 $12.84 1,060,598 $14.04 4,175 $6.14
The following table summarizes information relating to fixed-priced stock
options outstanding for all three plans at December 28, 2003:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Prices Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
--------------------------- --------------- --------------- -------------- --------------- ---------------
1989 Plan:
$ 6.13 to $ 6.15 4,175 0.6 years $ 6.14 4,175 $ 6.14
=============== ==============
1995 Plan:
$ 9.27 to $ 9.28 72,637 4.5 years $ 9.28 72,637 $ 9.28
$ 11.08 to $ 11.23 72,119 4.3 years $ 11.14 66,494 $ 11.15
$ 12.30 to $ 12.67 567,896 4.3 years $ 12.50 567,896 $ 12.50
$ 13.44 to $ 15.98 917,000 7.1 years $ 14.64 183,500 $ 14.18
$ 20.20 to $ 24.52 1,787,769 8.4 years $ 22.92 170,071 $ 22.23
$ 25.41 to $ 32.91 206,650 9.5 years $ 30.10 -- --
$ 34.19 to $ 39.89 33,500 9.9 years $ 37.65 -- --
--------------- --------------
$ 9.27 to $ 39.89 3,657,571 7.4 years $ 19.26 1,060,598 $ 14.04
=============== ==============
1999 Plan:
$ 10.33 to $ 10.87 7,875 6.7 years $ 10.63 7,875 $ 10.63
$ 12.30 to $ 15.98 469,877 7.0 years $ 14.37 88,511 $ 12.84
$ 17.07 to $ 26.39 705,708 8.2 years $ 22.42 1,500 $ 24.20
--------------- --------------
$ 10.33 to $ 26.39 1,183,460 7.7 years $ 19.15 97,886 $ 12.84
=============== ==============
Restricted stock awards: During 2001, 2002 and 2003, 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 $1,011,000,
$659,000 and $326,000 in 2003, 2002 and 2001, 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
F-23
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 28, 2003, 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, recorded in other income and the offsetting compensation expense,
recorded in general and administrative expenses.
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,
we ceased contributions to this plan and a new nonqualified deferred
compensation plan was established (see nonqualified deferred compensation plan
above). Our contributions under these plans were $1,755,000 in 2003, $1,697,000
in 2002 and $1,441,000 in 2001.
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 allows
employees to purchase shares of our common stock at a 15% discount through
payroll deductions. The Board has authorized 900,000 common shares under the
plan. Employees purchased 131,051 shares under this plan during 2003, 117,932
during 2002 and 93,810 shares during 2001.
18. 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, which had interest rates ranging from 4.7% to 6.8% and were
collateralized by the stock. These loans were paid in 2003 and are reflected as
an increase in additional paid-in capital in our consolidated balance sheets.
As of December 28, 2003 and December 29, 2002, 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.
We have a minority investment in a company that provides us and certain
franchisees with information technology services. We paid approximately
$270,000, $490,000 and $430,000 in 2003, 2002 and 2001, respectively, for these
services.
F-24
19. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 2003 and 2002. During the second quarter of 2003, we fully
impaired the principal and accrued interest of approximately $8,800,000 for a
note receivable. All amounts, except per share amounts, are expressed in
thousands.
2003
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 30, June 29, September 28, December 28,
2003 2003 2003 2003
------------- ------------- -------------- -------------
Revenues:
Company restaurant sales........................... $208,410 $220,107 $222,429 $216,212
Franchise royalties and fees....................... 27,163 27,331 27,594 27,745
Other franchise income............................. 2,641 3,268 2,972 4,266
------------- ------------- -------------- -------------
Total operating revenues...................... 238,214 250,706 252,995 248,223
------------- ------------- -------------- -------------
Cost of company restaurant sales:
Food and beverage.................................. 54,846 57,040 57,200 56,260
Labor.............................................. 68,364 71,804 73,018 70,559
Direct and occupancy............................... 50,561 54,386 55,869 55,861
Pre-opening expense................................ 221 334 576 819
------------- ------------- -------------- -------------
Total cost of company restaurant sales........ 173,992 183,564 186,663 183,499
------------- ------------- -------------- -------------
Cost of other franchise income......................... 2,500 3,173 2,837 4,187
General and administrative expenses.................... 22,620 22,887 23,589 25,917
Amortization of intangible assets...................... 99 92 87 86
Loss (gain) on disposition of restaurants and
equipment.......................................... 467 731 116 (615)
------------- ------------- -------------- -------------
Operating earnings..................................... 38,536 40,259 39,703 35,149
------------- ------------- -------------- -------------
Other income (expense):
Investment income.................................. 336 485 227 506
Interest expense................................... (521) (518) (330) (364)
Impairment of Chevys note receivable (Note 5)...... -- (8,803) -- --
Other income....................................... 205 1 395 919
------------- ------------- -------------- -------------
Total other income (expense).................. 20 (8,835) 292 1,061
------------- ------------- -------------- -------------
Earnings before income taxes........................... 38,556 31,424 39,995 36,210
Income taxes........................................... 13,954 11,239 14,398 13,036
------------- ------------- -------------- -------------
Net earnings........................................... $ 24,602 $ 20,185 $ 25,597 $ 23,174
============= ============= ============= ==============
Basic net earnings per common share.................... $ 0.45 $ 0.36 $ 0.46 $ 0.42
============= ============= ============== =============
Diluted net earnings per common share.................. $ 0.43 $ 0.35 $ 0.45 $ 0.41
============= ============= ============== =============
Basic weighted average shares outstanding.............. 55,272 55,435 55,556 54,920
============= ============= ============== =============
Diluted weighted average shares outstanding............ 56,677 57,032 57,184 56,675
============= ============= ============== =============
F-25
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
Other franchise income......................... 134 463 168 1,923
------------- ------------- ------------- -------------
Total operating revenues.................. 199,947 204,840 209,008 215,689
------------- ------------- ------------- -------------
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
------------- ------------- ------------- -------------
Cost of other franchise income..................... 60 93 99 1,921
General and administrative expenses................ 19,320 19,923 20,118 22,292
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................................... 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-26
20. Subsequent Event
In February 2004, we reached an agreement with a franchisee to acquire the
operations and assets of 10 Applebee's restaurants located in Southern
California for $13,400,000 in cash at closing, subject to adjustment. The
acquisition of the restaurants is anticipated to close in the second quarter of
2004, subject to obtaining operating licenses and other third-party consents.
F-27
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.
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 (incorporated by reference to Exhibit 4.3 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 29, 2002).
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 Form of Applebee's Development Agreement.
10.2 Form of Applebee's Franchise Agreement.
10.3 Schedule of Applebee's Development and Franchise Agreements as
of December 28, 2003.
10.4 Revolving Credit Agreement dated as of November 5, 2001, as
amended.
Management Contracts and Compensatory Plans or Arrangements
10.5 1995 Equity Incentive Plan, as amended (incorporated by
reference to Exhibit 10.9 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 2002 and
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 30, 2003).
E-1
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.6 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).
10.7 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).
10.8 Nonqualified Deferred Compensation Plan (incorporated by
reference to Exhibit 10.12 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 2002).
10.9 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).
10.10 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).
10.11 Employment Agreement, dated January 27, 1994, with Lloyd L.
Hill (incorporated by reference to Exhibit 10.4 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1994).
10.12 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).
10.13 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).
10.14 Memorandum of Understanding dated October 5, 2002 with Louis A.
Kaucic, as amended.
10.15 Memorandum of Understanding dated May 12, 2003 with Robert T.
Steinkamp (incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended September 28, 2003).
10.16 Confidentiality, Non-Solicitation and Non-Competition Agreement
dated May 12, 2003 with Robert T. Steinkamp (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 28, 2003).
10.17 Memorandum of Understanding dated June 6, with Larry A. Cates.
10.18 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.29 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 25, 1994).
10.19 Schedule of parties to Indemnification Agreement.
E-2
Exhibit
Number Description of Exhibit
- --------------- ----------------------------------------------------------------
10.20 Previous Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 29, 1998) and
schedule of parties thereto.
10.21 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.
10.22 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 31 of the Form 10-K).
31.1 Certification of Chairman and Chief Executive Officer Pursuant
to SEC Rule 13a-14.
31.2 Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14.
32 Certification of Chairman and Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350.
E-3