Back to GetFilings.com
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 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the transition period from to
----------------- -----------------
Commission File Number: 000-17962
Applebee's International, Inc.
--------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1461763
- ------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(913) 967-4000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1996 was $667,170,456 based upon the closing sale
price on March 1, 1996.
The number of shares of the registrant's common stock outstanding as of March 1,
1996 was 31,031,184.
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. Certain Exhibits in
Part IV hereof are incorporated from the Registration Statement filed with the
Securities and Exchange Commission on February 13, 1992, as amended, and the
Registration Statement filed with the Securities and Exchange Commission on
December 20, 1994, as amended.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1995
INDEX
Page
PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 15
Item 3. Legal Proceedings....................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders..................................... 17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................................... 18
Item 6. Selected Financial Data................................................................. 19
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 20
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...................................... 28
Item 11. Executive Compensation.................................................................. 28
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 28
Item 13. Certain Relationships and Related Transactions.......................................... 28
PART IV
Item 14. Exhibits and Reports on Form 8-K........................................................ 29
Signatures.............................................................................................. 30
2
PART I
Item 1. Business
General
Applebee's International, Inc. and its subsidiaries (the "Company") develops,
franchises and operates casual dining restaurants principally under the names
"Applebee's Neighborhood Grill & Bar" and "Rio Bravo Cantina."
The Company opened its first restaurant in 1986 and initially developed and
operated six restaurants as a franchisee of the Applebee's Division. In March
1988, the Company acquired substantially all the assets of its franchisor, the
Applebee's Neighborhood Grill & Bar Division (the "Applebee's Division") of
Creative Food 'N Fun Company (an indirect subsidiary of W.R. Grace & Co.). At
the time of this acquisition, the Applebee's Division operated 14 restaurants
and had ten franchisees, including the Company, operating 41 franchise
restaurants.
As of December 31, 1995, there were 666 Applebee's restaurants, of which 538
were operated by franchisees and 128 were owned or operated by the Company. The
restaurants were located in 45 states, Canada, the Netherlands, and the
Caribbean. During 1995, 162 new restaurants were opened and one restaurant was
closed system-wide. The new restaurants were comprised of 135 restaurants opened
by franchisees and 27 restaurants opened by the Company.
As part of its long-term growth strategy, the Company acquired the Rio Bravo
Cantina chain of Mexican casual dining restaurants in March 1995. As of December
31, 1995, the Company operated 16 Rio Bravo Cantina restaurants in Florida,
Georgia and Tennessee and four other specialty restaurants. The Company has
begun franchising of the Rio Bravo Cantina concept and expects six to eight
franchise restaurants to open in 1996.
3
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees.
Fiscal Year Ended
-----------------------------------------------------
December 31, December 25, December 26,
1995 1994 1993
----------------- ---------------- -----------------
Number of restaurant openings:
Applebee's:
Company owned or operated.................... 27 23 17
Franchise.................................... 135 122 96
----------------- ---------------- -----------------
Total Applebee's............................. 162 145 113
Rio Bravo Cantinas.............................. 4 3 2
Restaurants open (end of period):
Applebee's:
Company owned or operated(1) ................ 128 97 75
Franchise.................................... 538 408 286
----------------- ---------------- -----------------
Total Applebee's............................. 666 505 361
Rio Bravo Cantinas.............................. 16 12 9
Specialty restaurants(2) ....................... 4 4 6
----------------- ---------------- -----------------
Total........................................... 686 521 376
================= ================ =================
Weighted average weekly sales per restaurant:
Applebee's:
Company owned or operated(1)................. $ 39,977 $ 39,924 $ 40,146
Franchise.................................... $ 40,922 $ 41,010 $ 39,852
Total Applebee's............................. $ 40,737 $ 40,789 $ 39,904
Rio Bravo Cantinas(3) .......................... $ 66,158 $ 68,637 $ 65,346
Change in comparable restaurant sales(4):
Applebee's:
Company owned or operated(1)................. 0.3% 3.7% 12.1%
Franchise.................................... 0.5% 3.1% 7.6%
Total Applebee's............................. 0.5% 3.2% 8.5%
Rio Bravo Cantinas.............................. 0.9% 9.5% 7.6%
Total system sales (in thousands):
Applebee's...................................... $ 1,248,383 $ 882,515 $ 604,813
Rio Bravo Cantinas.............................. 48,135 36,679 24,962
Specialty restaurants........................... 14,339 14,833 15,652
----------------- ---------------- -----------------
Total........................................ $ 1,310,857 $ 934,027 $ 645,427
================= ================ =================
- --------
(1) Company owned or operated data includes certain Texas restaurants operated
by the Company under a management agreement since July 1990 (three at the
end of 1993 and two at the end of 1994 and 1995).
(2) Specialty restaurants as of December 26, 1993 included two restaurants
which were subsequently converted to Rio Bravo Cantina restaurants.
(3) Excludes one restaurant which is open for dinner only.
(4) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
4
The Applebee's System
Concept. Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately priced, high quality food and
beverage items, table service and a comfortable atmosphere. Applebee's
restaurants appeal to a wide range of customers including families with
children, young adults and senior citizens.
Applebee's restaurants are designed according to Company specifications and are
located in free-standing buildings, end caps of strip shopping centers, and
shopping malls. The Company's two current free-standing restaurant prototypes
are approximately 5,000 and 5,400 square feet and seat approximately 175 and 200
patrons, respectively. Each Applebee's restaurant has a centrally located bar
and many restaurants offer patio seating. The decor of each restaurant
incorporates artifacts and memorabilia such as old movie posters, musical
instruments and sports equipment along with photographs and magazine and
newspaper articles highlighting local history and personalities, giving each
restaurant an individual, neighborhood identity.
Menu. Each Applebee's restaurant offers a diverse menu of high quality,
moderately priced food and beverage items consisting of traditional favorites
and innovative dishes. The restaurants feature a broad selection of entrees,
including beef, chicken, seafood and pasta items prepared in a variety of
cuisines, as well as appetizers, salads, sandwiches, specialty drinks and
desserts. The Company's core menu is supplemented by four food-specific
promotions each year. Most restaurants offer beer, wine, liquor and premium
specialty drinks. During 1995, alcoholic beverages accounted for 16.4% of
Company owned Applebee's restaurant sales. The Company continuously develops and
tests new menu items through regional consumer tastings and additional tests in
selected Company and franchise restaurants. Franchisees are required to present
a menu consisting of approximately 65% of selections from the Company approved
list of national core items and approximately 35% of additional items selected
from the Company approved list of optional items.
Restaurant Operations. All restaurants are operated in accordance with uniform
operating standards and specifications relating to the quality and preparation
of menu items, selection of menu items, maintenance and cleanliness of premises,
and employee conduct. The Company's operational standards are based upon "QSCVC"
quality, service, cleanliness, value and courtesy. All standards and
specifications are developed by the Company, with input from franchisees, and
applied on a system-wide basis.
Training. The Company has an extensive 10 to 12 week restaurant operations
training course for general managers, kitchen managers and other restaurant
managers with development or supervisory responsibility over more than one
restaurant. The operations training course consists of in-store task-oriented
training and formal administrative, customer service, and financial training. A
team of Company employed trainers conducts hands-on training for all restaurant
employees to ensure compliance with Company standards.
The Company also operates Applebee University, which offers restaurant managers
specialized training programs, and conducts regular meetings that emphasize
leadership, quality of food preparation, and service. In 1995, the Company
conducted 12 Applebee University sessions consisting of approximately four days
of continuing education in a classroom setting. The Company, generally through
in-restaurant seminars and video presentations, provides periodic training for
its restaurant employees regarding topics such as the responsible service of
alcohol and food sanitation and storage.
5
Advertising. The Company has historically concentrated its advertising and
marketing efforts primarily on four food-specific promotions each year, with
each promotion featuring a specific theme or ethnic cuisine. The Company
advertises on a national, regional and local basis, utilizing primarily
television, radio and print media. In 1995, the Company spent approximately 3.6%
of sales on advertising, including 1.5% contributed to the national advertising
pool which develops and funds the specific national promotions. All franchisees
are also required to contribute 1.5% to the national advertising account. The
remainder of the Company's advertising expenditures are focused on local
advertising in areas with Company owned restaurants.
Purchasing. Maintaining high food quality and system-wide consistency is a
central focus of the Company's purchasing program. The Company mandates quality
standards for all products used in the restaurants and maintains a limited list
of approved suppliers from which the Company and its franchisees must select.
The Company has negotiated purchasing agreements with most of its approved
suppliers which result in volume discounts for the Company and its franchisees,
and when necessary, purchases food items to assure sufficient supplies for the
system.
Company Applebee's Restaurants
Company Restaurant Openings and Acquisitions. The Company's expansion strategy
is to cluster restaurants in targeted markets, thereby increasing consumer
awareness and enabling the Company to take advantage of operational,
distribution, and advertising efficiencies. The Company's experience in
developing markets indicates that market penetration through the opening of
multiple restaurants within a particular market results in increased average
restaurant sales in that market.
In order to maximize overall system growth, the Company's expansion strategy
through 1992 emphasized franchise arrangements with experienced, successful and
financially capable restaurant operators. Although the Company continues to
expand the Applebee's system across the United States through franchise
operations, commencing in 1992, the system growth strategy also included
increasing the number of Company restaurants through the direct development of
strategic territories and, if available under acceptable financial terms, by
selectively acquiring existing franchise restaurants and terminating related
development rights held by the selling franchisee. In that regard, the Company
has expanded from a total of 31 owned or operated restaurants as of December 27,
1992 to a total of 128 as of December 31, 1995 through the opening of 64 new
restaurants and the acquisition of 37 franchise restaurants over the last three
years.
The Company anticipates opening at least 30 new Applebee's restaurants in 1996,
although it may open more restaurants depending upon the availability of new
sites, the rate at which the concept is accepted in new markets, and available
capital. The areas in which the Company's restaurants are located and the areas
where the Company opened new restaurants or acquired restaurants from
franchisees during 1995 are set forth in the following table. The Company
currently intends to continue developing restaurants in all of the following
areas, with the exception of Atlanta, Georgia.
6
Company Company
Restaurants Restaurants
Opened and as of
Acquired in December 31,
Area 1995 1995
------------------------------------------------------------- ------------------ ------------------
North/Central Texas......................................... 4 21
Minneapolis/St. Paul, Minnesota............................. 4 20
Detroit/Southern Michigan................................... 5 18
New England (includes Massachusetts, Vermont,
New Hampshire, Rhode Island, Maine and
parts of Connecticut)..................................... 3 18
Kansas City, Missouri/Kansas................................ 3 16
San Diego/Southern California............................... 5 13
Atlanta, Georgia............................................ -- 8
Philadelphia, Pennsylvania.................................. 5 5
Las Vegas/Reno, Nevada...................................... 1 5
Albuquerque, New Mexico..................................... 2 3
Long Island, New York....................................... -- 1
------------------ ------------------
32 128
================== ==================
Restaurant Operations. The staff for a typical Applebee's restaurant consists of
one general manager, one kitchen manager, three assistant managers and
approximately 85 hourly employees. All managers of Company owned restaurants
receive a salary, performance bonus based on restaurant sales, profits and
adherence to Company standards, and, historically, an annual stock option grant.
As of December 31, 1995, the Company employed five Regional Vice Presidents of
Operations/Directors of Operations and 23 District Managers, whose duties
include regular restaurant visits and inspections and the ongoing maintenance of
the Company standards of quality, service, cleanliness, value, and courtesy. In
addition to providing a significant contribution to revenues and operating
earnings, Company restaurants are used for many purposes which are integral to
the development of the entire system, including testing of new menu items and
training of franchise restaurant managers and operating personnel. In addition,
the operation of Company restaurants enables the Company to develop and refine
its operating standards and specifications further and to understand and better
respond to day-to-day management and operating concerns of franchisees.
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. The Company currently has exclusive
franchise arrangements with approximately 60 franchisees, including four
international franchisees. The Company has generally selected franchisees that
are experienced multi-unit restaurants operators who have been involved with
other restaurant concepts. The Company's franchisees operate Applebee's
restaurants in 38 states, Canada, the Netherlands, and the Caribbean. Virtually
all territories in the contiguous 48 states have been granted to franchisees or
designated for Company development.
As of December 31, 1995, there were 538 franchise restaurants. Franchisees
opened 96 restaurants in 1993, 122 restaurants in 1994, and 135 restaurants in
1995. The Company anticipates more than 100 franchise restaurant openings in
1996.
Development of Restaurants. The Company makes available to franchisees the
physical specifications for a typical restaurant, retaining the right to
prohibit or modify the use of any plan. Each franchisee, with assistance from
7
the Company, is responsible for selecting the site for each restaurant within
its territory, subject to Company approval. The Company conducts a physical
inspection, reviews any proposed lease or purchase agreement, and makes
available demographic studies.
Domestic Franchise Arrangements. Each Applebee's franchise arrangement consists
of a development agreement and separate franchise agreements. Development
agreements grant the exclusive right to develop a number of restaurants in a
designated geographical area. The term of a domestic development agreement is
generally 20 years. A separate franchise agreement is entered into by the
franchisee relating to the operation of each restaurant which has a term of 20
years and permits renewal for up to an additional 20 years in accordance with
the terms contained in the then current franchise agreement (including the then
current royalty rates and advertising fees) and upon payment of an additional
franchise fee.
For each restaurant developed, a franchisee is currently obligated to pay to the
Company a royalty fee equal to 4% of the restaurant's monthly gross sales. The
Company's current form of development agreement requires an initial franchise
fee of $35,000 for each restaurant developed during its term. The terms,
royalties and advertising fees under a limited number of franchise agreements
and the franchise fees under older development agreements vary from the
currently offered arrangements.
Advertising. Domestic franchisees are required to spend at least 1.5% of annual
gross sales on local advertising and promotional activities, in addition to
their 1.5% annual contribution to the national advertising account. Franchisees
also promote the opening of each restaurant and the Company, subject to certain
conditions, reimburses the franchisee for 50% of the out-of-pocket opening
advertising expenditures, up to a maximum of $2,500. The Company can increase
the combined amount of the monthly advertising fee and the amount required to be
spent on local advertising and promotional activities to a maximum of 5% of
gross sales.
Training and Support. The Company provides ongoing advice and assistance to
franchisees in connection with the operation and management of each restaurant
through training sessions, meetings, seminars, on-premises visits, and by
written or other material. Such advice and assistance relates to revisions to
operating manual policies and procedures, and new developments, techniques, and
improvements in restaurant management, food and beverage preparation, sales
promotion, and service concepts.
Quality Control. The Company continuously monitors franchisee operations and
inspects restaurants, principally through its full-time franchise consultants
(22 at December 31, 1995) who report to the Company's Executive Director of
Franchise Operations. The Company makes both scheduled and unannounced
inspections of restaurants to ensure that only approved products are in use and
that Company prescribed practices and procedures are being followed. A minimum
of three planned visits are made each year, during which a representative of the
Company conducts an inspection and consultation at each restaurant. Franchisees
must comply with the Company's high standards of quality, service, cleanliness,
value, and courtesy. The Company has the right to terminate a franchise if a
franchisee does not operate and maintain a restaurant in accordance with the
Company's requirements.
Franchise Business Council. The Company maintains a Franchise Business Council
which provides advice to the Company regarding operations, marketing, product
development and other aspects of restaurant operations for the purpose of
improving the franchise system. As of December 31, 1995, the Franchise Business
Council consisted of seven franchisee representatives and two members of the
Company's management. One of the franchisee representatives is a permanent
8
member and any franchisee who operates at least 10% of the total number of
system restaurants is reserved a seat (currently one franchisee). The remaining
franchisee representatives are elected prior to and announced at the annual
franchise convention. In early 1996, the Franchise Business Council was
increased to eight franchisee representatives (including one from a franchisee
with five or less restaurants) and three members of the Company's management.
International Franchise Agreements. The Company has begun pursuing international
franchising of the Applebee's concept under a long-term strategy of controlled
expansion. This strategy includes seeking highly qualified franchisees with the
resources to open multiple restaurants in each territory and the familiarity
with the specific local business environment. The Company is currently focusing
on international franchising in Canada, Europe and the Mediterranean region.
In this regard, the Company currently has three development agreements with
European franchisees. The agreements involve the potential development of more
than 35 Applebee's restaurants over several years in the Benelux region of
Northern Europe, Germany and Sweden. One restaurant was opened during 1995 in
the Netherlands, and franchisees opened restaurants in Canada and the Caribbean
in both 1994 and 1995. In addition, the Company is in negotiations with
potential franchisees for several other countries. In early 1996, the Company
became aware that its Caribbean franchisee was experiencing financial
difficulties unrelated to the operations of its restaurants, and as a result,
may sell two of its three leased properties and close such restaurants.
The success of further international expansion will be dependent upon, among
other things, foreign acceptance of the Applebee's concept, and the Company's
ability to attract qualified franchisees and operating personnel, to comply with
the regulatory requirements of foreign jurisdictions, and to supervise
international franchisee operations effectively.
Franchise Financing. Although financing is the sole responsibility of the
franchisee, the Company makes available to franchisees the names and addresses
of financial institutions interested in financing the costs of restaurant
development for qualified franchisees. None of these financial institutions is
an affiliate or agent of the Company, and the Company has no control over the
terms or conditions of any financing arrangement offered by these financial
institutions. Under a previous franchise financing program, the Company provided
a limited guaranty of loans made to certain franchisees. See Notes to
Consolidated Financial Statements of the Company included elsewhere herein. On
infrequent occasions, when the Company believes it is necessary to support
franchise development in a strategic territory, the Company has made secured
loans to franchisees, agreed to defer collection of royalties, or guaranteed
equipment leases.
Rio Bravo Cantina Restaurants
General. In March 1995, a wholly-owned subsidiary of the Company merged with and
into Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein as the
"IRC Merger," through which the Company acquired the Rio Bravo Cantina chain of
Mexican casual dining restaurants. As a result of the IRC Merger, IRC became a
wholly-owned subsidiary of the Company. At the time of the IRC Merger, IRC
operated 17 restaurants, including 13 Rio Bravo Cantina restaurants, and four
other specialty restaurants. As of December 31, 1995, the Company operated 16
Rio Bravo Cantina restaurants (eight in Florida, seven in Georgia, and one in
Tennessee).
Expansion. The Company will continue developing Rio Bravo Cantina restaurants in
the market areas where it currently has Rio Bravo Cantinas and will begin in
1996 to open restaurants in other selected markets. The Company opened four
Company owned Rio Bravo Cantina restaurants in 1995, and expects to open five
9
Company owned Rio Bravo Cantina restaurants in 1996. In addition, in late 1995,
the Company appointed the first nine Rio Bravo Cantina franchisees, all of whom
are successful, experienced Applebee's franchisees. The first group of
franchisees has commitments to build more than 50 restaurants over the next
several years, and the Company expects that those franchisees will open six to
eight restaurants in the second half of 1996. In addition, the Company expects
to appoint a second group of franchisees in mid-1996.
Concept. Rio Bravo Cantina restaurants offer generous portions of fresh Tex-Mex
and Mexican cuisine at attractive prices. The restaurants feature tortillas made
on the premises, fresh daily specials, a variety of signature margaritas and
distinctive Mexican architecture and interior decor which create a festive
atmosphere reminiscent of an authentic Mexican cantina. The design of the
restaurants incorporates materials such as exposed brick, barn wood, Mexican
tile floors and stucco walls embellished with various signs, inscriptions and
other items depicting a rustic border motif.
Rio Bravo Cantina restaurants can be located in either free-standing buildings
or strip shopping centers and are adaptable to conversions of pre-existing
restaurant sites. Existing locations, many of which are conversions of other
restaurants, range in size from 6,600 to 10,300 square feet and seat between 225
and 450 customers. Most of the restaurants have a patio area providing
additional seating during much of the year. The current free-standing prototype
is approximately 6,900 square feet, and seats approximately 240 people with an
optional outdoor patio area that seats approximately 45 patrons.
Menu. Most Rio Bravo Cantina restaurants are open for lunch and dinner seven
days a week. The menu includes traditional Mexican food items such as burritos,
enchiladas, tamales and tacos. In addition, the menu offers a wide variety of
other favorites such as beef, chicken and shrimp fajitas, quesadillas, shrimp
dishes, and a variety of salads and desserts. A large variety of Mexican and
domestic beers, Sangria, and signature margaritas are also featured. The lunch
menu offers entrees priced from $4.55 to $7.75 and dinner entrees priced from
$5.50 to $12.99. Rio Bravo Cantina restaurants currently have an average guest
check, including alcoholic beverages, of between $11.75 and $12.75. During 1995,
alcoholic beverages accounted for approximately 32% of total restaurant sales.
The Rio Bravo Franchise System
Franchise Arrangements. The Company has prepared its Uniform Franchise Offering
Circular which allows it to offer Rio Bravo Cantina franchises in all but the
limited number of states that require registration; with respect to those
states, the Company has prepared and is in the process of qualifying its
franchise disclosure documents. Each Rio Bravo Cantina franchise arrangement
consists of a development agreement and separate franchise agreements.
Development agreements grant the exclusive right to develop a number of
restaurants in a designated geographical area. The term of a domestic
development agreement is generally 15 years. A separate franchise agreement is
entered into by the franchisee relating to the operation of each restaurant
which has a term of 15 years and permits renewal for up to an additional 15
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 obligated to pay to the Company a
royalty fee equal to 4% of the restaurant's monthly gross sales through 1999 and
4.25% thereafter. The development agreement requires an initial franchise fee of
$40,000 for each restaurant developed during its term. Franchisees are currently
required to spend at least 1.5% of annual gross sales on local advertising and
promotional activities, in addition to a 2.0% annual contribution to the
national advertising account.
10
Specialty Restaurants
In connection with the acquisition of the Rio Bravo Cantina concept, the Company
also acquired four specialty restaurants, comprised of two Green Hills Grille
restaurants in Nashville, Tennessee and Huntsville, Alabama, an upscale Rio
Bravo Cantina called the Rio Bravo Grill in Atlanta, Georgia and Ray's on the
River, in Atlanta, Georgia. The Company currently does not intend to expand any
of the specialty restaurant concepts.
Competition
The restaurant industry is highly competitive with respect to price, service,
location, concept and food type and quality, and competition is expected to
intensify. There are a number of well-established competitors with substantially
greater financial and other resources than the Company. Some of the Company's
competitors have been in existence for a substantially longer period than the
Company and may be better established in the markets where the Company's
restaurants are or may be located. The restaurant business is often affected by
changes in consumer tastes, national, regional or local economic conditions,
demographic trends, traffic patterns, the availability and cost of suitable
locations, and the type, number, and location of competing restaurants. The
Company has begun to experience increased competition in attracting and
retaining qualified management level operating personnel. In addition, factors
such as inflation, increased food, labor and benefits costs, and the
availability of and competition for hourly employees may adversely affect the
restaurant industry in general and the Company's restaurants in particular.
Service Marks
The Company owns the rights to the "Applebee's Neighborhood Grill & Bar" and
"Rio Bravo Cantina" service marks and certain variations thereof in the United
States and, with respect to the Applebee's mark, in various foreign countries.
The Company is aware of names and marks similar to the service marks of the
Company used by third parties in certain limited geographical areas. The Company
does not know of any infringing uses that it believes would materially affect
its business. The Company intends to protect its service marks by appropriate
legal action where and when necessary.
Government Regulation
The Company's restaurants are subject to numerous federal, state, and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant
requires appropriate licenses from regulatory authorities allowing it to sell
liquor, beer, and wine, and each restaurant requires food service licenses from
local health authorities. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to assure compliance with all applicable codes and
regulations.
The Company is subject to a variety of federal and state laws governing
franchise sales and the franchise relationship. In general, these laws and
regulations impose certain disclosure and registration requirements prior to the
sale and marketing of franchises. Recent decisions of several state and federal
11
courts and recently enacted or proposed federal and state laws demonstrate a
trend toward increased protection of the rights and interests of franchisees
against franchisors. Such decisions and laws may limit the ability of
franchisors to enforce certain provisions of franchise agreements or to alter or
terminate franchise agreements. Due to the scope of the Company's business and
the complexity of franchise regulations, minor compliance problems may be
encountered in the future; however, the Company does not believe any such
compliance problems will have a material adverse effect on its business.
Under certain court decisions and statutes, owners of restaurants and bars in
some states in which the Company owns or operates restaurants may be held liable
for serving alcohol to intoxicated customers whose subsequent conduct results in
injury or death to a third party, and no assurance can be given that the Company
will not be subject to such liability. The Company believes its insurance
presently provides adequate coverage for such liability.
Employees
At December 31, 1995, the Company employed approximately 14,400 full and
part-time employees, of whom approximately 300 were corporate personnel, 850
were restaurant managers or manager trainees and 13,250 were employed in
non-management full and part-time restaurant positions. Of the 300 corporate
employees, 85 were in management positions and 215 were general office
employees, including part-time employees.
The Company considers its employee relations to be good. Most employees, other
than restaurant management and corporate personnel, are paid on an hourly basis.
The Company believes that it provides working conditions and wages that compare
favorably with those of its competition. The Company has never experienced a
work stoppage due to labor difficulty and the Company's employees are not
covered by a collective bargaining agreement.
12
Executive Officers of the Registrant
The executive officers of the Company as of December 31, 1995 are shown below.
Name Age Position
Abe J. Gustin, Jr................61 Chairman of the Board of Directors and Chief Executive Officer
Lloyd L. Hill....................51 President, Chief Operating Officer and Member of the Board of
Directors
Ronald B. Reck...................47 Executive Vice President and Chief Administrative Officer (resigned
as an officer effective January 31, 1996)
Burton M. Sack...................58 Executive Vice President of New Business Development and Member of
the Board of Directors
George D. Shadid.................41 Executive Vice President, Chief Financial Officer and Treasurer
Robert A. Martin.................65 Senior Vice President of Marketing and Member of the Board of
Directors (promoted to Executive Vice President of Marketing
effective January 1, 1996)
Stuart F. Waggoner...............50 Senior Vice President of Operations
Philip J. Hickey, Jr.............41 President and Chief Operating Officer of Rio Bravo International,
Inc. (a wholly-owned subsidiary of Applebee's International, Inc.)
Steven K. Lumpkin................41 Vice President of Administration (promoted to Senior Vice President
of Administration effective January 1, 1996)
Abe J. Gustin, Jr. has been a director of the Company since September 1983 when
the Company was formed. He served as Chairman of the Board of Directors of the
Company from September 1983 until January 1988 and was again elected as Chairman
in September 1992. He was Vice President from November 1987 to January 1988, and
from January 1988 until December 1994, he served as President of the Company.
Mr. Gustin continues to serve as Chief Executive Officer of the Company. From
1983 to 1990, he also served as Chairman of Juneau Holding Co., a Kansas City,
Missouri-based franchisee which operated Taco Bell restaurants.
Lloyd L. Hill was elected a director of the Company in August 1989 and was
appointed Executive Vice President and Chief Operating Officer of the Company in
January 1994. In December 1994, he assumed the role of President in addition to
his role as Chief Operating Officer. From 1980 to 1994, he served as President
and a director of Kimberly Quality Care, a home health care and nurse personnel
staffing company.
Ronald B. Reck was employed by the Company in March 1991. He served as Executive
Vice President of Human Resources and Training until January 1993 when he was
named Executive Vice President and Chief Administrative Officer. From 1987 until
March 1991, he was a self-employed consultant to the Company in the personnel,
human resources and corporate development areas. During the period from 1984
through 1990, he was President of Aero-Mark Services, Inc., a temporary health
care personnel leasing service company located in Kansas City, Missouri. Mr.
Reck is the husband of Johyne Reck, a director of the Company. Effective January
31, 1996, Mr. Reck resigned as an officer of the Company but will continue as an
employee until December 31, 1996.
Burton M. Sack was elected a director and appointed an Executive Vice President
of the Company effective October 24, 1994. In January 1996, Mr. Sack was
appointed Executive Vice President of New Business Development with
13
responsibility for international franchising. Mr. Sack was the principal
shareholder, a director and the President of Pub Ventures of New England, Inc.,
a former franchisee of the Company which was acquired by the Company in October
1994. Mr. Sack is on the board of advisors of Restaurant Associates, Inc.
George D. Shadid was employed by the Company in August 1992, and served as
Senior Vice President and Chief Financial Officer until January 1994 when he was
promoted to Executive Vice President and Chief Financial Officer. He also became
Treasurer in March 1995. From 1985 to 1987, he served as Corporate Controller of
Gilbert/Robinson, Inc., at which time he was promoted to Vice President, and in
1988 assumed the position of Vice President and Chief Financial Officer, which
he held until joining the Company. In November 1991, Gilbert/Robinson, Inc.
filed a petition for bankruptcy, which was discharged in December 1992. From
1976 until 1985, Mr. Shadid was employed by Deloitte & Touche LLP.
Robert A. Martin was elected a director of the Company in August 1989. In April
1991, he became Vice President of Marketing, and in January 1994, he was
promoted to Senior Vice President of Marketing. In January 1996, Mr. Martin was
promoted to Executive Vice President of Marketing. From January 1990 to April
1991, he served as President of Kayemar Enterprises, a Kansas City-based
marketing consulting firm. From 1983 to January 1990, he served as the
President, Chief Operating Officer and a director of Juneau Holding Co., of
which Mr. Gustin, Chief Executive Officer of the Company, was Chairman. From
July 1977 to June 1981, he served as President of United Vintners Winery and
prior to that time was employed for 25 years by Schlitz Brewing Company, most
recently in the position of Senior Vice President of Sales and Marketing.
Stuart F. Waggoner has been an employee of the Company since December 1988 and
served as the Executive Director of Franchise Operations until March 1991, when
he became Vice President of Franchise Operations. In December 1994, Mr. Waggoner
assumed the newly created position of Senior Vice President of Operations, and
has overall responsibility for franchise and Company owned Applebee's restaurant
operations. From October 1987 to December 1988, Mr. Waggoner was a Vice
President of Operations for Eateries', Inc., a restaurant company based in
Oklahoma City, Oklahoma. From 1985 to July 1987, Mr. Waggoner was President of
Pendleton's Bar & Grill in Dallas, Texas. From October 1974 to March 1985, Mr.
Waggoner was Vice President of Restaurant Administration for TGI Friday's, Inc.,
in Dallas, Texas.
Philip J. Hickey, Jr. joined the Company in connection with the merger with
Innovative Restaurant Concepts, Inc. ("IRC") in March 1995 where he had been
President and Chief Operating Officer since 1992. He currently serves as
President and Chief Operating Officer of Rio Bravo International, Inc., a
wholly-owned subsidiary of Applebee's International, Inc. He co-founded the
Green Hills Grille concept in 1990 in Nashville, Tennessee, which was acquired
by IRC in 1992. Mr. Hickey was the co-creator of the Cooker Restaurant concept,
founded in 1984, and was President and Chief Operating Officer of the Cooker
Restaurant Corporation from 1984 to 1989. From 1976 to 1983, Mr. Hickey was
employed by Gilbert/Robinson, Inc., operators of the Houlihan's restaurant
chain.
Steven K. Lumpkin was employed by the Company in May 1995 as Vice President of
Administration. In January 1996, he was promoted to Senior Vice President of
Administration. From July 1993 until January 1995, Mr. Lumpkin was a Senior Vice
President with a division of the Olsten Corporation, Olsten Kimberly Quality
Care. From June 1990 until July 1993, Mr. Lumpkin was an Executive Vice
President and a member of the board of directors of Kimberly Quality Care. From
January 1978 until June 1990, Mr. Lumpkin was employed by Price Waterhouse LLP,
where he served as a management consulting partner and certified public
accountant.
14
Item 2. Properties
At December 31, 1995, the Company owned or operated 148 restaurants, of which it
leased the land and building for 62 sites, owned the building and leased the
land for 31 sites, and owned the land and building for 55 sites. In addition, as
of December 31, 1995, the Company owned four sites for future development of
restaurants and had entered into 13 lease agreements for restaurant sites the
Company plans to open during 1996. The Company's leases generally have an
initial term of 10 to 25 years, with renewal terms of 5 to 20 years, and provide
for a fixed rental plus, in certain instances, percentage rentals based on gross
sales.
The Company owns an 80,000 square foot office building in which its corporate
offices are headquartered in Overland Park, Kansas, located in the metropolitan
Kansas City area. As of December 31, 1995, approximately 40% of the building was
leased to third parties until such time as the Company may need additional
office space. The Company also leases office space in certain of the regions in
which it operates restaurants.
15
The following table sets forth the 45 states and the four international areas in
which Applebee's restaurants are located and the number of restaurants operating
in each state or area as of December 31, 1995:
Number of Restaurants
-----------------------------------------------------
State Company
or Owned or
Area Franchise Operated Total System
-------------------------------- -------------- -------------- --------------
Domestic:
Alabama........................ 15 -- 15
Arizona........................ 12 -- 12
Arkansas....................... 4 -- 4
California..................... 23 13 36
Colorado....................... 20 -- 20
Florida........................ 47 -- 47
Georgia........................ 34 8 42
Idaho.......................... 1 -- 1
Illinois....................... 19 -- 19
Indiana........................ 25 -- 25
Iowa........................... 10 -- 10
Kansas......................... 7 6 13
Kentucky....................... 17 -- 17
Louisiana...................... 9 -- 9
Maryland....................... 5 -- 5
Massachusetts.................. -- 7 7
Michigan....................... 3 18 21
Minnesota...................... -- 20 20
Mississippi.................... 8 -- 8
Missouri....................... 14 10 24
Montana........................ 1 -- 1
Nebraska....................... 5 -- 5
Nevada......................... -- 5 5
New Hampshire.................. -- 7 7
New Jersey..................... 5 -- 5
New Mexico..................... -- 3 3
New York....................... 19 1 20
North Carolina................. 25 -- 25
North Dakota................... 5 -- 5
Ohio........................... 35 -- 35
Oklahoma....................... 4 -- 4
Oregon......................... 3 -- 3
Pennsylvania................... 10 5 15
Rhode Island................... -- 3 3
South Carolina................. 32 -- 32
South Dakota................... 2 -- 2
Tennessee...................... 38 -- 38
Texas.......................... 19 21 40
Utah........................... 2 -- 2
Vermont........................ -- 1 1
Virginia....................... 34 -- 34
Washington..................... 6 -- 6
West Virginia.................. 1 -- 1
Wisconsin...................... 12 -- 12
Wyoming........................ 1 -- 1
International:
Canada......................... 2 -- 2
The Netherlands................ 1 -- 1
The Caribbean.................. 3 -- 3
-------------- -------------- --------------
538 128 666
============== ============== ==============
16
Under its franchise agreements, the Company has certain rights to gain control
of a restaurant site in the event of default under the lease or the franchise
agreement.
Item 3. Legal Proceedings
As of December 31, 1995, the Company was using assets owned by a former
franchisee in the operation of two restaurants under a purchase rights agreement
which required the Company to make certain payments to the franchisee's lender.
In 1991, a dispute arose between the lender and the Company over the amount of
the payments due the lender. Based upon a then current independent appraisal,
the Company offered to settle the dispute and purchase the assets for $1,000,000
in 1991. The lender rejected the Company's offer and claimed that the Company
had guaranteed the entire $2,400,000 debt of the franchisee. In November 1992,
the lender was declared insolvent by the FDIC and has since been liquidated. The
Company was contacted by the FDIC, and in 1993, the Company offered to settle
the issue and purchase the assets at the three restaurants then being operated
for $182,000. The Company closed one of the three restaurants in 1994 and
lowered its offer to $120,000 to settle the issue and purchase the assets at the
two then remaining restaurants. The FDIC has declined to accept the Company's
offer, indicating instead its preliminary position that the Company should pay
the entire debt of the franchisee. The Company closed one of the two remaining
restaurants in February 1996, and does not currently intend to make an
additional settlement offer to the FDIC. In the event that the Company were to
pay an amount determined to be in excess of the fair market value of the assets,
the Company will recognize a loss at the time of such payment.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
1. The common stock of the Company is traded on The Nasdaq Stock Market
under the symbol APPB.
The table below sets forth for the fiscal quarters indicated the
reported high and low last sale prices of the Company's common stock,
as reported on The Nasdaq Stock Market.
1995 1994
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 22.00 $ 13.38 $ 25.00 $ 18.75
Second Quarter $ 26.50 $ 20.50 $ 25.25 $ 11.00
Third Quarter $ 31.50 $ 23.50 $ 19.75 $ 11.25
Fourth Quarter $ 29.75 $ 21.63 $ 20.25 $ 12.75
2. Number of stockholders of record at December 31, 1995: 1,296
3. An annual dividend of $0.05 per common share was declared on December
8, 1994 for stockholders of record on December 20, 1994, and the
dividend was payable on January 27, 1995. An annual dividend of $0.06
per common share was declared on November 21, 1995 for stockholders of
record on December 6, 1995, and the dividend was payable on January 12,
1996.
The Company presently anticipates continuing the payment of cash
dividends based upon its expected annual net income. The actual amount
of such dividends will depend upon future earnings, results of
operations, capital requirements, the financial condition of the
Company and certain other factors. There can be no assurance as to the
amount of net income that the Company will generate in 1996 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.
18
Item 6. Selected Financial Data
The following table sets forth for the periods and the dates indicated selected
financial data of the Company. All amounts reflect the mergers with Pub Ventures
of New England, Inc. and Innovative Restaurant Concepts, Inc., which were
accounted for as poolings of interests. The fiscal year ended December 31, 1995
contained 53 weeks, and all other periods presented contained 52 weeks. The
following should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this Form
10-K.
Fiscal Year Ended
--------------------------------------------------------------------------------
December 31, December 25, December 26, December 27, December 29,
1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- ----------------
(in thousands, except per share amounts)
STATEMENT OF
EARNINGS DATA:
Company restaurant sales.............. $ 299,824 $ 222,445 $ 159,482 $ 85,459 $ 73,877
Franchise income...................... 43,739 31,419 21,324 14,319 9,464
--------------- --------------- --------------- --------------- ----------------
Total operating revenues........... $ 343,563 $ 253,864 $ 180,806 $ 99,778 $ 83,341
=============== =============== =============== =============== ================
Operating earnings.................... $ 45,712 $ 29,311 $ 19,677 $ 9,226 $ 7,033
Pro forma net earnings................ $ 27,420 $ 17,823 $ 12,551 $ 6,335 $ 4,245
Pro forma net earnings per
common share....................... $ 0.94 $ 0.64 $ 0.46 $ 0.26 $ 0.21
Dividends per share................... $ 0.06 $ 0.05 $ 0.04 $ 0.03 $ 0.02
Weighted average shares
outstanding........................ 29,319 27,970 27,543 24,755 19,763
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets.......................... $ 270,680 $ 180,014 $ 138,680 $ 92,383 $ 47,318
Long-term obligations, including
current portion.................... $ 27,427 $ 38,697 $ 19,845 $ 10,212 $ 7,438
Stockholders' equity.................. $ 203,993 $ 108,788 $ 92,680 $ 68,561 $ 30,732
19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 per restaurant opened). Beverage sales include sales of alcoholic
beverages, while non-alcoholic beverages are included in food sales. Certain
expenses (food and beverage, labor, direct and occupancy costs, and pre-opening
expenses) relate directly to Company restaurants, and other expenses (general
and administrative and amortization expenses) relate to both Company restaurants
and franchise operations.
Beginning in fiscal 1995, the cost of meals provided to employees and other
complimentary meals have been classified as labor costs and direct and occupancy
costs, respectively. Previously, the retail price of such meals was reflected in
Company restaurant sales with corresponding amounts reflected as labor costs or
direct and occupancy costs. The consolidated financial statements for all
periods presented have been reclassified to conform to the presentation adopted
in fiscal 1995, the effects of which were not material.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal years ended December 26, 1993 and December 25,
1994 each contained 52 weeks, and are referred to hereafter as 1993 and 1994,
respectively. The Company's fiscal year ended December 31, 1995 contained 53
weeks, and is referred to hereafter as 1995.
Recent Acquisitions
During 1993, the Company acquired 14 franchise restaurants in Minnesota,
effective for financial reporting purposes on February 27, 1993. The Minnesota
acquisition was accounted for as a purchase and, accordingly, the results of
operations of such restaurants are included in the Company's consolidated
statements of earnings subsequent to February 26, 1993 and are hereafter
referred to as the "Minnesota operations."
On October 24, 1994, a wholly-owned subsidiary of the Company merged with and
into Pub Ventures of New England, Inc. ("PVNE"), the Company's franchisee for
the New England area, referred to herein as the "PVNE Merger." As a result of
the PVNE Merger, PVNE became a wholly-owned subsidiary of the Company. The PVNE
Merger was accounted for as a pooling of interests and, accordingly, the
accompanying consolidated financial statements include the accounts and
operations of the merged entities for all periods presented. At the time of the
PVNE Merger, PVNE operated 14 Applebee's restaurants.
On March 23, 1995, a wholly-owned subsidiary of the Company merged with and into
Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein as the "IRC
Merger." As a result of the IRC Merger, IRC became a wholly-owned subsidiary of
the Company. The IRC Merger was accounted for as a pooling of interests and,
accordingly, the accompanying consolidated financial statements include the
accounts and operations of the merged entities for all periods presented. At the
time of the IRC Merger, IRC operated 17 restaurants, including 13 Rio Bravo
Cantina restaurants, and four other specialty restaurants, comprised of Ray's on
the River, two Green Hills Grille restaurants, and the Rio Bravo Grill. During
1993, IRC acquired six Casa Gallardo restaurant sites which have been
20
subsequently converted to Rio Bravo Cantina restaurants. The four specialty
restaurants and the Casa Gallardo restaurants prior to their conversion to Rio
Bravo Cantina restaurants are included in "specialty restaurants."
On April 3, 1995, the Company acquired the operations and assets of five
franchise restaurants in the Philadelphia metropolitan area, referred to herein
as the "Philadelphia Acquisition." The Philadelphia Acquisition was accounted
for as a purchase and, accordingly, the results of operations of such
restaurants have been reflected in the 1995 financial statements subsequent to
the date of acquisition.
Prior to September 7, 1994, PVNE was classified as an S Corporation and
accordingly, stockholders were responsible for paying their proportionate share
of federal and certain state income taxes. In addition, the combined earnings of
IRC included earnings of limited partnerships which were not taxable entities
for federal and state income tax purposes. The accompanying consolidated
statements of earnings reflect provisions for income taxes on a pro forma basis
as if the Company had been liable for federal and state income taxes on PVNE's
earnings prior to September 7, 1994 and the earnings of IRC's limited
partnerships at statutory rates.
Results of Operations
The following table sets forth, for the periods indicated, information derived
from the Company's consolidated statements of earnings expressed as a percentage
of total operating revenues, except where otherwise noted.
Percentages may not add due to rounding.
Fiscal Year Ended
------------------------------------------------
December 31, December 25, December 26,
1995 1994 1993
--------------- ---------------- ---------------
Revenues:
Company restaurant sales........................... 87.3% 87.6% 88.2%
Franchise income................................... 12.7 12.4 11.8
--------------- ---------------- ---------------
Total operating revenues........................ 100.0% 100.0% 100.0%
=============== ================ ===============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage.................................. 28.3% 29.2% 29.3%
Labor.............................................. 31.7 31.8 31.9
Direct and occupancy............................... 24.1 24.2 23.4
Pre-opening expense................................ 0.8 0.9 1.0
--------------- ---------------- ---------------
Total cost of sales............................. 84.8% 86.1% 85.6%
=============== ================ ===============
General and administrative expenses................... 11.3% 11.5% 12.5%
Merger costs.......................................... 0.5 0.4 --
Amortization of intangible assets..................... 0.7 0.8 1.1
Loss on disposition of restaurants and equipment...... 0.2 0.3 0.1
--------------- ---------------- ---------------
Operating earnings.................................... 13.3 11.6 10.9
--------------- ---------------- ---------------
Other income (expense):
Investment income................................. 0.5 0.4 0.9
Interest expense.................................. (0.7) (0.8) (0.6)
Other income...................................... 0.1 0.1 0.1
--------------- ---------------- ---------------
Total other income (expense)................... (0.1) (0.3) 0.4
--------------- ---------------- ---------------
Earnings before income taxes.......................... 13.2 11.3 11.3
Income taxes (including pro forma provision for
income taxes)...................................... 5.2 4.3 4.4
--------------- ---------------- ---------------
Pro forma net earnings................................ 8.0% 7.0% 6.9%
=============== ================ ===============
21
Fiscal Year Ended December 31, 1995 Compared With Fiscal Year Ended December 25,
1994
Company Restaurant Sales. Overall Company restaurant sales increased $77,379,000
(35%) from $222,445,000 in 1994 to $299,824,000 in 1995. Sales for Company owned
Applebee's restaurants increased $66,417,000 (39%) from $170,933,000 in 1994 to
$237,350,000 in 1995, due primarily to Company restaurant openings and sales
from the five Philadelphia restaurants acquired in April 1995. Sales for the Rio
Bravo Cantina restaurants were $36,679,000 and $48,135,000 in 1994 and 1995,
respectively, and sales for the specialty restaurants were $14,833,000 and
$14,339,000 in 1994 and 1995, respectively. The increase in sales for the Rio
Bravo Cantina restaurants resulted primarily from Company restaurant openings.
The decrease in sales for the specialty restaurants was due to the conversion of
two Casa Gallardo restaurants to Rio Bravo Cantina restaurants during 1994.
Comparable restaurant sales at Company owned or operated Applebee's restaurants
increased by 0.3% in 1995. The Company does not expect significant comparable
restaurant sales increases and may experience comparable restaurant sales
decreases during the 1996 fiscal year for Company owned Applebee's restaurants,
as many of its restaurants are operating near sales capacity and are
experiencing increased competition in certain markets. Weighted average weekly
sales at Company owned or operated Applebee's restaurants increased slightly
from $39,924 in 1994 to $39,977 in 1995.
Comparable restaurant sales for the Rio Bravo Cantina restaurants increased by
0.9% in 1995, although weighted average weekly sales (excluding one restaurant
that is open for dinner only) declined from $68,637 in 1994 to $66,158 in 1995.
The decrease in weighted average weekly sales was due primarily to the lower
than average sales volumes of two new restaurants opened during 1994 which were
opened in a market where there was already an existing Rio Bravo Cantina
restaurant.
Weighted average weekly sales at Company owned Applebee's restaurants continue
to be adversely affected by the southern California and Texas territories.
Weighted average weekly sales in the Texas market improved steadily throughout
1995, increasing from $31,000 in 1994 to $33,000 in 1995, and operating margins
improved accordingly. However, the California market has not yet shown
improvements in either weighted average weekly sales, which decreased from
$28,000 in 1994 to $26,000 in 1995, or operating margins. When entering highly
competitive new markets, or territories where the Company has not yet
established a market presence, early sales levels and profit margins are
expected to be lower than in markets where the Company has a concentration of
restaurants or has established customer awareness.
Franchise Income. Franchise income increased $12,320,000 (39%) from $31,419,000
in 1994 to $43,739,000 in 1995. This increase was due primarily to the increased
number of franchise restaurants operating during 1995 as compared to 1994.
Franchise restaurant weighted average weekly sales decreased 0.2%, and
comparable franchise restaurant sales increased 0.5% in 1995. The remaining
increase in franchise income was due to an increase in franchise fees of
$409,000 in 1995 resulting from an increase in the number of franchise
restaurant openings from 122 in 1994 to 135 in 1995.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 29.2%
in 1994 to 28.3% in 1995, primarily as a result of the menu price increase
implemented in mid-July 1994 at Applebee's restaurants, operational
improvements, purchasing efficiencies resulting from the Company's rapid growth
and early payment discounts. These items were partially offset by an increase in
food costs in the second quarter of 1995 as a result of the winter flooding in
California which caused shortages of certain produce items and a significant
increase in related costs. The Company did not increase its menu prices to
offset the effects of such increased costs. In addition, food and beverage costs
22
were negatively impacted by the effect of the continued decline in beverage
sales, as a percentage of overall Company restaurant sales, from 20.5% in 1994
to 18.9% in 1995, as margins on alcoholic beverage sales are higher than those
for food sales. Management believes that the reduction in beverage sales is due
in part to the continuation of the overall trend toward increased awareness of
responsible alcohol consumption.
Labor costs decreased slightly from 31.8% in 1994 to 31.7% in 1995. Labor costs,
as a percentage of sales, were positively impacted by an overall reduction in
workers' compensation insurance costs due to favorable historical claims
experience, but were adversely affected by an increase in management costs and
the lower sales volumes in the southern California market.
Direct and occupancy costs decreased slightly from 24.2% in 1994 to 24.1% in
1995. The decrease was due primarily to a decrease in rent expense resulting
from an increase in the proportion of owned versus leased properties. The
southern California and Texas markets continue to have a negative impact on
overall direct and occupancy costs due to the absorption of such expenses, which
are primarily fixed in nature, over a lower sales base in those markets.
General and Administrative Expenses. General and administrative expenses
decreased in 1995 to 11.3% from 11.5% in 1994, due primarily to the absorption
of general and administrative expenses over a larger revenue base. General and
administrative expenses increased by $9,586,000 during 1995 compared to 1994 due
primarily to the costs of additional personnel associated with the Company's
development efforts and system-wide expansion, and higher incentive compensation
expense. A portion of the increase was due to an increase in the Company's
training costs relating to new Company and franchise restaurant openings and the
training of restaurant managers.
Merger Costs. The Company incurred merger costs of $1,770,000 in 1995 relating
to the IRC Merger. The impact of these costs on pro forma net earnings per
common share was approximately $0.06 in 1995. The Company also incurred merger
costs of $920,000 in 1994 relating to the PVNE Merger. The impact of these costs
on pro forma net earnings per common share was approximately $0.03 in 1994.
Loss on Disposition of Restaurants and Equipment. During 1995, the Company
recognized a loss of $615,000 relating to the planned disposition of two
restaurants in early 1996, including $275,000 relating to one restaurant managed
under a purchase rights agreement. The Company continues to operate one
restaurant under this agreement. During 1994, the Company recognized a loss of
$223,000 resulting from the closure and termination of the lease agreement of
one restaurant managed under the purchase rights agreement. This loss was
partially offset by a gain of $54,000 resulting from the sale of one restaurant
to a new franchisee. In addition, during 1994 the Company replaced a majority of
its restaurant point-of-sale systems with upgraded systems technology which
resulted in a write-off of approximately $552,000 for the costs of the existing
equipment in 1994.
Investment Income. Investment income increased in 1995 compared to 1994
primarily as a result of increases in cash and cash equivalents and short-term
investments resulting from the proceeds of the Company's stock offering in July
1995.
Interest Expense. Interest expense increased in 1995 compared to 1994 primarily
as a result of interest related to the $20,000,000 of senior unsecured notes
issued in the second quarter of 1994 and borrowings under the revolving credit
facility prior to the Company's stock offering in July 1995. This increase was
partially offset by a decrease in long-term debt resulting from the payoff of
the debt assumed in connection with the IRC Merger.
23
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 39.5% in 1995 compared to 37.7% in 1994. Excluding
non-deductible merger costs, the effective income tax rate would have been 38.0%
in 1995 compared to 36.7% in 1994. The increase in the Company's overall
effective tax rate in 1995 was due to an increase in state income taxes, the
elimination of the Targeted Jobs Tax Credit in 1995, and a reduction in
tax-exempt interest.
Fiscal Year Ended December 25, 1994 Compared With Fiscal Year Ended December 26,
1993
Company Restaurant Sales. Company restaurant sales increased $62,963,000 (39%)
from $159,482,000 in 1993 to $222,445,000 in 1994. Company restaurant sales for
Applebee's restaurants increased $52,065,000 (44%) from $118,868,000 in 1993 to
$170,933,000 in 1994. Sales from the Minnesota operations accounted for
$8,317,000 of the increase, due primarily to the inclusion of such operations
for the entire 1994 fiscal year while the 1993 fiscal year included only 43
weeks of sales from the Minnesota operations. The remaining increase in sales
resulted primarily from Company restaurant openings, other acquisitions in 1993
and 1994, and increases in comparable restaurant sales. Sales for the Rio Bravo
Cantina restaurants were $24,962,000 and $36,679,000 in 1993 and 1994,
respectively, and sales for the specialty restaurants were $15,652,000 and
$14,833,000 in 1993 and 1994, respectively.
Comparable restaurant sales at Company owned or operated Applebee's restaurants
increased by 3.7% in 1994. The increase in comparable restaurant sales was due
in part to a menu price increase implemented in mid-July 1994 in selected
markets for certain menu items. Such increase was partially offset by lower
guest check averages resulting from the "triple choice" special offered as part
of the Company's 1994 "Summerfare" promotion. The "triple choice" special was a
combination of an appetizer, salad, and dessert for one relatively low price.
Weighted average weekly sales at Company owned or operated Applebee's
restaurants decreased from $40,146 in 1993 to $39,924 in 1994. Excluding the
California and Texas markets, weighted average weekly sales at Company owned
Applebee's restaurants increased 4.2% from $41,668 in 1993 to $43,428 in 1994.
The increase in sales for the Rio Bravo Cantina restaurants of $11,717,000
resulted primarily from increases in sales volumes of existing restaurants, the
full year impact of two Casa Gallardo restaurants which were converted to Rio
Bravo Cantina restaurants during 1993, and the conversion of three additional
Casa Gallardo restaurants to Rio Bravo Cantina restaurants during 1994.
Comparable restaurant sales for the Rio Bravo Cantina restaurants increased by
9.5% in 1994 and weighted average weekly sales (excluding one restaurant that is
open for dinner only) increased 5.0% from $65,346 in 1993 to $68,637 in 1994.
Overall weighted average weekly sales for Applebee's restaurants were adversely
affected by the southern California and Texas territories where the weighted
average weekly sales of Company owned restaurants were approximately $28,000 and
$31,000, respectively, in 1994. Profitability in the southern California and
Texas markets was adversely affected by the lower sales volumes and operating
inefficiencies at recently opened restaurants. The operations of the Company
owned restaurants in these markets increased overall cost of sales excluding
pre-opening expense (as a percentage of Company restaurant sales) by
approximately 2.1% during 1994. As of December 25, 1994, the Company had eight
restaurants open in southern California, of which six opened in 1994. In
addition, the Company owned 15 restaurants in the Texas area, of which seven
were opened or acquired in 1994.
24
Franchise Income. Franchise income increased $10,095,000 (47%) from $21,324,000
in 1993 to $31,419,000 in 1994. This increase was due primarily to the increased
number of franchise restaurants operating during 1994 as compared to 1993.
Weighted average weekly sales and comparable restaurant sales at franchise
restaurants increased 2.9% and 3.1%, respectively, in 1994, but were adversely
affected by lower guest check averages resulting from the "triple choice"
special offered as part of the Company's 1994 "Summerfare" promotion.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 29.3%
in 1993 to 29.2% in 1994 as a result of the menu price increase implemented in
mid-July 1994 at Applebee's restaurants and operational efficiencies. Such
decreases were partially offset by the effect of the continued decline in
beverage sales, as a percentage of overall Company restaurant sales, from 21.9%
in 1993 to 20.5% in 1994.
Labor costs decreased slightly from 31.9% in 1993 to 31.8% in 1994. Labor costs
were positively impacted by an overall reduction in workers' compensation and
medical insurance costs due to favorable claims experience, but these decreases
were offset, in part, by the effect of the lower sales volumes in the southern
California and Texas markets.
Direct and occupancy costs increased from 23.4% in 1993 to 24.2% in 1994. The
increase was due primarily to increased levels of advertising expenditures,
higher utility costs in certain newer markets and higher depreciation expense
relating to new restaurants during 1994. In addition, the full year effect of
the Minnesota operations resulted in an increase in overall rent expense as the
Minnesota region has both a higher percentage of leased properties and higher
rental rates than the Company restaurants as a whole. The increase in direct and
occupancy costs, as a percentage of Company restaurant sales, was also due, in
part, to the absorption of such expenses, which are primarily fixed in nature,
over a lower sales base in the southern California and Texas markets. Such
increases were offset, in part, by a decrease in rent expense for the IRC
restaurants due to an increase in the proportion of its owned versus leased
properties.
General and Administrative Expenses. General and administrative expenses
decreased in 1994 to 11.5% from 12.5% in 1993, due primarily to the absorption
of general and administrative expenses over a larger revenue base. General and
administrative expenses increased by $6,641,000 during 1994 compared to 1993 due
primarily to the costs of additional personnel associated with the Company's
development efforts and system-wide expansion, and related fringe benefit costs.
A portion of the increase was also due to an increase in the Company's training
costs relating to new Company and franchise restaurant openings and the training
of restaurant managers. Such increases in general and administrative expenses
were partially offset by a decrease resulting from management fees associated
with the Minnesota operations of $1,117,000 incurred in 1993.
The Company realized operating losses of $284,000 and $326,000 during 1994 and
1993, respectively, for the Texas restaurants it operates under an agreement
with a former franchisee. The Company closed one of the three restaurants during
the second quarter of 1994 and recognized a loss of $223,000, due primarily to
the termination of the related lease agreement. The operating results of this
restaurant had deteriorated, and by closing this restaurant and incurring the
one-time costs of disposition, the Company avoided potentially significant
losses in the future.
Merger Costs. The Company incurred merger costs of $920,000 in the fourth
quarter of 1994 relating to the PVNE Merger. The impact of these costs on pro
forma net earnings per common share was approximately $0.03 in 1994.
25
Loss on Disposition of Restaurants and Equipment. As discussed above, during the
second quarter of 1994, the Company recognized a loss of $223,000 resulting from
the closure and termination of the lease agreement of one of the Texas
restaurants. This loss was partially offset by a gain of $54,000 resulting from
the sale of one restaurant to a new franchisee. In addition, during 1994 the
Company replaced a majority of its restaurant point-of-sale systems with
upgraded systems technology which resulted in a write-off of approximately
$552,000 for the costs of the existing equipment in 1994.
Investment Income. Investment income decreased in 1994 compared to 1993
primarily as a result of decreases in cash and cash equivalents, short-term
investments and marketable securities resulting from the Company's utilization
of such funds for capital expenditures and for acquisitions in 1993 and 1994. In
addition, a gain of $312,000 was realized on the sale of investments in 1993,
while a gain of only $112,000 was realized on the sale of investments in 1994.
Interest Expense. Interest expense increased in 1994 compared to 1993 primarily
as a result of interest on the senior unsecured notes issued in the second
quarter of 1994 and borrowings under a line of credit.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.7% in 1994 compared to 38.6% in 1993. The decrease in the
Company's overall effective tax rate in 1994 was due primarily to the effect of
tax benefits allowed by the Omnibus Budget Reconciliation Act of 1993 beginning
in 1994 for FICA taxes paid by the Company on employee tip income. In addition,
the Company also earned increased tax credits in 1994 relating to the Targeted
Jobs Tax Credit. The effect of these items on the income tax rate was partially
offset by the non-deductibility of a majority of the merger costs incurred
relating to PVNE.
Liquidity and Capital Resources
The Company's need for capital resources historically has resulted from and for
the foreseeable future is expected to relate primarily to the construction and
acquisition of restaurants. Such capital has been provided by public stock
offerings, debt financing, and ongoing Company operations, including cash
generated from Company and franchise operations, credit from trade suppliers,
real estate lease financing, and landlord contributions to leasehold
improvements. The Company has also used its common stock as consideration in the
acquisition of restaurants. In addition, the Company assumed debt or issued new
debt in connection with the Minnesota acquisition and the PVNE and IRC Mergers.
Capital expenditures were $48,734,000 in 1994 (which includes the acquisition of
two franchise restaurants) and $61,581,000 in 1995 (which includes $9,682,000
related to the Philadelphia Acquisition). The Company presently anticipates
capital expenditures of between $75,000,000 and $80,000,000 in 1996 primarily
for the development of new restaurants, refurbishments of and capital
replacements for existing restaurants, and enhancements to information systems
for the Company's restaurants and corporate office. The Company currently
expects to open approximately 30 Applebee's restaurants and five Rio Bravo
Cantina restaurants in 1996. In addition, during 1996 the Company will increase
capital spending for refurbishing and remodeling of certain restaurants and for
further enhancements to the Company's information systems and related
technology. The amount of actual capital expenditures will be dependent upon,
among other things, the proportion of leased versus owned properties as the
Company expects to continue to purchase a significant portion of its sites. In
addition, if the Company opens more restaurants than it currently anticipates or
acquires additional restaurants, its capital requirements will increase
accordingly.
26
In June 1994, the Company completed a $20,000,000 senior unsecured private debt
placement with institutional lenders unaffiliated with the Company. In addition,
in February 1995, the Company obtained additional long-term debt financing in
the form of a $20,000,000 unsecured bank revolving credit facility which expires
on December 31, 1997. The debt agreements contain various covenants and
restrictions which, among other things, require the maintenance of a stipulated
fixed charge coverage ratio and minimum consolidated net worth, as defined, and
also limit additional indebtedness in excess of specified amounts. The debt
agreements also restrict the amount of retained earnings available for the
payment of cash dividends. At December 31, 1995, retained earnings were not
restricted for the payment of cash dividends. The Company has been and is
currently in compliance with the covenants of all of its debt agreements.
On July 28, 1995, the Company completed a public offering of its common stock
consisting of 2,100,000 shares sold by the Company and 300,000 shares sold by
certain stockholders of the Company. In addition, the Company and the selling
stockholders granted the underwriters an option to purchase 315,000 and 45,000
shares, respectively, to cover over-allotments, which was exercised on August 9,
1995. Net proceeds of $60,434,000, after expenses, were received from the
offering. A portion of the net proceeds of the offering was used to retire
approximately $12,500,000 of debt assumed in connection with the PVNE and IRC
Mergers, and to repay the outstanding balance of the Company's revolving credit
facility of $5,000,000.
The Company believes that the proceeds of the 1995 stock offering, liquid
assets, and cash generated from operations, combined with borrowings available
under the $20,000,000 revolving credit facility, will provide sufficient funds
for its capital requirements for the foreseeable future. As of December 31,
1995, the Company held liquid assets totaling $52,024,000, consisting of cash
and cash equivalents ($30,188,000) and short-term investments ($21,836,000). No
amounts were outstanding under the revolving credit facility; however, standby
letters of credit issued under the facility totaling $213,000 were outstanding
as of December 31, 1995.
Inflation
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
27
Item 8. Financial Statements and Supplementary Data
See the Index to Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
For information with respect to the executive officers of the Company, see
"Executive Officers of the Registrant" in Part I of this report. For information
with respect to the Directors of the Company, see the Proxy Statement for the
Annual Meeting of Stockholders to be held on or about May 13, 1996, which is
incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the caption "Executive Compensation" in the
Proxy Statement for the Annual Meeting of Stockholders to be held on or about
May 13, 1996, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Officers,
Directors and Certain Beneficial Owners" in the Proxy Statement for the Annual
Meeting of Stockholders to be held on or about May 13, 1996, is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" in the Proxy
Statement for the Annual Meeting of Stockholders to be held on or about May 13,
1996, is incorporated herein by reference.
28
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) List of documents filed as part of this report:
1. Financial Statements:
The financial statements are listed in the accompanying "Index
to Financial Statements" on Page F-1.
2. Exhibits:
The exhibits filed with or incorporated by reference in this
report are listed on the Exhibit Index beginning on page E-1.
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on November 27, 1995, announcing
the declaration of a dividend on its common stock to stockholders of
record as of December 6, 1995, payable on January 12, 1996.
29
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.
By: /s/ Abe J. Gustin, Jr.
------------------------
Abe J. Gustin, Jr.
Chairman and Chief Executive Officer
Date: March 13, 1996
---------------------
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Abe J. Gustin, Jr. and Robert T. Steinkamp, and
each of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any amendments to this Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Abe J. Gustin, Jr. Date: March 13, 1996
---------------------------------------------- ----------------
Abe J. Gustin, Jr.
Director, Chairman and Chief Executive Officer
(principal executive officer)
By: /s/ George D. Shadid Date: March 13, 1996
---------------------------------------------- ----------------
George D. Shadid
Executive Vice President and Chief Financial Officer
(principal financial officer)
By: /s/ David R. Smith Date: March 13, 1996
---------------------------------------------- ----------------
David R. Smith
Vice President and Controller
(principal accounting officer)
30
By: /s/ D. Patrick Curran Date: March 12, 1996
---------------------------------------------- ----------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 13, 1996
---------------------------------------------- ----------------
Eric L. Hansen
Director
By: /s/ Jack P. Helms Date: March 11, 1996
---------------------------------------------- ----------------
Jack P. Helms
Director
By: /s/ Kenneth D. Hill Date: March 8, 1996
---------------------------------------------- ----------------
Kenneth D. Hill
Director
By: /s/ Lloyd L. Hill Date: March 13, 1996
---------------------------------------------- ----------------
Lloyd L. Hill
Director
By: /s/ Robert A. Martin Date: March 13, 1996
---------------------------------------------- ----------------
Robert A. Martin
Director
By: /s/ Johyne H. Reck Date: March 13, 1996
---------------------------------------------- ----------------
Johyne H. Reck
Director
By: /s/ Burton M. Sack Date: March 11, 1996
---------------------------------------------- ----------------
Burton M. Sack
Director
By: /s/ Raymond D. Schoenbaum Date: March 13, 1996
---------------------------------------------- ----------------
Raymond D. Schoenbaum
Director
31
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Reports.........................................................................F-2
Consolidated Balance Sheets as of December 31, 1995 and
December 25, 1994.................................................................................F-5
Consolidated Statements of Earnings for the Fiscal Years Ended
December 31, 1995, December 25, 1994 and December 26, 1993....................................... F-6
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 31, 1995, December 25, 1994 and December 26, 1993................................ F-7
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 31, 1995, December 25, 1994 and December 26, 1993....................................... F-8
Notes to Consolidated Financial Statements.......................................................... F-10
F-1
INDEPENDENT AUDITORS' REPORT
Applebee's International, Inc.:
We have audited the accompanying consolidated balance sheets of
Applebee's International, Inc. and subsidiaries (the "Company") as of December
31, 1995 and December 25, 1994 and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three fiscal years
in the period ended December 31, 1995. The consolidated financial statements
give effect to the merger on March 23, 1995 of a wholly-owned subsidiary of
Applebee's International, Inc. with and into Innovative Restaurant Concepts,
Inc., which has been accounted for using the pooling of interests method as
described in Note 4 to the consolidated financial statements. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We did not audit the financial statements of Pub
Ventures of New England, Inc. for the fiscal year ended December 31, 1993, which
financial statements reflect total operating revenues constituting approximately
15% of the related consolidated financial statement total for the fiscal year
ended December 26, 1993. We also did not audit the combined financial statements
of Innovative Restaurant Concepts, Inc. for the fiscal years ended December 25,
1994 and December 26, 1993, which financial statements reflect total assets
constituting approximately 16% of the related consolidated financial statement
total for 1994 and which reflect total operating revenues constituting
approximately 20% and 22% of the related consolidated financial statement totals
for each of the fiscal years ended December 25, 1994 and December 26, 1993,
respectively. The financial statements of Pub Ventures of New England, Inc. and
the combined financial statements of Innovative Restaurant Concepts, Inc. and
subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P., and CG Restaurant
Partners, Ltd. (collectively referred to as "IRC") were audited by other
auditors, whose reports thereon have been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts indicated for Pub
Ventures of New England, Inc. and IRC in the consolidated financial statements,
is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the aforementioned reports of
other auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Applebee's International, Inc. and subsidiaries at December 31, 1995 and
December 25, 1994, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 23, 1996
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Innovative Restaurant Concepts, Inc. and
the Partners of Cobb/Gwinnett Rio, Ltd.,
Rio Real Estate, L.P., and
CG Restaurant Partners, Ltd.:
We have audited the combined balance sheet of INNOVATIVE RESTAURANT CONCEPTS,
INC. (a Georgia corporation) AND SUBSIDIARIES, COBB/GWINNETT RIO, LTD. (a
Georgia limited partnership), RIO REAL ESTATE, L.P. (a Georgia limited
partnership), AND CG RESTAURANT PARTNERS, LTD. (a Georgia limited partnership)
as of December 25, 1994 and the related combined statements of operations,
stockholders' equity and partners' capital, and cash flows for each of the two
years in the period ended December 25, 1994 (not separately presented herein).
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovative Restaurant Concepts,
Inc. and subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P., and CG
Restaurant Partners, Ltd., as of December 25, 1994 and the results of their
operations and their cash flows for each of the two years in the period ended
December 25, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 9 to the financial statements (not separately presented
herein), the stockholders and partners of the Companies entered into an
agreement on October 14, 1994 to exchange 100% of the outstanding common stock
and partnership units of the Companies for common stock of an unrelated entity.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 22, 1995
F-3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pub Ventures of New England, Inc.:
We have audited the statements of income, retained earnings and cash flows of
Pub Ventures of New England, Inc. for the year ended December 31, 1993 (not
presented separately herein). 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 also 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Pub Ventures
of New England, Inc. for the year ended December 31, 1993 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
January 29, 1994
F-4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
December 31, December 25,
1995 1994
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 30,188 $ 9,634
Short-term investments, at market value (amortized cost of $21,530
in 1995 and $9,046 in 1994)............................................... 21,836 8,893
Receivables (less allowance for bad debts of $723 in 1995 and $740 in 1994).. 9,843 7,396
Inventories.................................................................. 10,036 5,159
Prepaid and other current assets............................................. 2,654 2,887
------------ ------------
Total current assets...................................................... 74,557 33,969
Property and equipment, net..................................................... 159,832 114,729
Goodwill, net................................................................... 25,780 21,113
Franchise interest and rights, net.............................................. 5,805 6,401
Deferred income taxes........................................................... 719 --
Other assets.................................................................... 3,987 3,802
------------ ------------
$ 270,680 $ 180,014
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 935 $ 3,505
Current portion of obligations under noncompetition and consulting agreement. 220 220
Accounts payable............................................................. 11,183 10,750
Accrued expenses and other current liabilities............................... 22,635 16,713
Accrued dividends............................................................ 1,861 1,269
Accrued income taxes......................................................... 1,641 1,169
------------ ------------
Total current liabilities................................................. 38,475 33,626
------------ ------------
Non-current liabilities:
Long-term debt - less current portion........................................ 25,832 34,312
Franchise deposits........................................................... 1,168 1,355
Obligations under noncompetition and consulting agreement - less current 440 660
portion...................................................................
Deferred income taxes........................................................ -- 715
------------ ------------
Total non-current liabilities............................................. 27,440 37,042
------------ ------------
Total liabilities......................................................... 65,915 70,668
Minority interest in joint venture.............................................. 772 558
Commitments and contingencies (Notes 7, 8 and 12)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued.......................................................... -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued - 31,298,517 shares in 1995 and 28,295,479 shares in 1994.......... 313 283
Additional paid-in capital................................................... 148,081 78,675
Retained earnings............................................................ 56,258 30,775
Unrealized gain (loss) on short-term investments, net of income taxes........ 190 (96)
------------ ------------
204,842 109,637
Treasury stock - 281,772 shares in 1995 and 1994, at cost.................... (849) (849)
------------ ------------
Total stockholders' equity................................................ 203,993 108,788
------------ ------------
$ 270,680 $ 180,014
============ ============
See notes to consolidated financial statements.
F-5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Fiscal Year Ended
----------------------------------------------------
December 31, December 25, December 26,
1995 1994 1993
------------- ------------- --------------
Revenues:
Company restaurant sales................................ $ 299,824 $ 222,445 $ 159,482
Franchise income........................................ 43,739 31,419 21,324
------------- ------------- --------------
Total operating revenues............................. 343,563 253,864 180,806
------------- ------------- --------------
Cost of Company restaurant sales:
Food and beverage....................................... 84,776 64,819 46,757
Labor................................................... 94,935 70,777 50,950
Direct and occupancy.................................... 72,228 53,883 37,283
Pre-opening expense..................................... 2,234 2,093 1,588
------------- ------------- --------------
Total cost of Company restaurant sales............... 254,173 191,572 136,578
------------- ------------- --------------
General and administrative expenses........................ 38,753 29,167 22,526
Merger costs............................................... 1,770 920 --
Amortization of intangible assets.......................... 2,305 2,033 1,934
Loss on disposition of restaurants and equipment........... 850 861 91
------------- ------------- --------------
Operating earnings......................................... 45,712 29,311 19,677
------------- ------------- --------------
Other income (expense):
Investment income....................................... 1,764 1,065 1,675
Interest expense........................................ (2,507) (2,029) (1,075)
Other income............................................ 357 253 179
------------- ------------- --------------
Total other income (expense)......................... (386) (711) 779
------------- ------------- --------------
Earnings before income taxes............................... 45,326 28,600 20,456
Income taxes............................................... 17,833 9,453 6,693
------------- ------------- --------------
Net earnings............................................... 27,493 19,147 13,763
Pro forma provision for income taxes of pooled companies... 73 1,324 1,212
------------- ------------- --------------
Pro forma net earnings..................................... $ 27,420 $ 17,823 $ 12,551
============= ============= ==============
Pro forma net earnings per common share.................... $ 0.94 $ 0.64 $ 0.46
============= ============= ==============
Weighted average shares outstanding........................ 29,319 27,970 27,543
See notes to consolidated financial statements.
F-6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
Unrealized
Gain (Loss)
Common Stock Additional on Total
------------------------- Paid-In Retained Short-Term Treasury Stockholders'
Shares Amount Capital Earnings Investments Stock Equity
-------------- ---------- ------------ ----------- ----------- ---------- -------------
Balance, December 27, 1992.......... 8,877,475 $ 89 $ 60,791 $ 8,530 $ -- $ (849) $ 68,561
Effect of stock splits........... 17,754,950 187 -- (187) -- -- --
Issuance of common stock in
connection with acquisition of
restaurants................... 1,276,596 4 9,996 -- -- -- 10,000
Dividends on common stock,
at a rate of $0.04 per share.. -- -- -- (879) -- -- (879)
Stock options exercised.......... 276,699 2 1,230 -- -- -- 1,232
Income tax benefit upon exercise
of stock options.............. -- -- 801 -- -- -- 801
Transactions of pooled companies
prior to acquisition, net..... -- -- 579 (1,377) -- -- (798)
Pro forma provision for income
taxes of pooled companies..... -- -- -- 1,212 -- -- 1,212
Pro forma net earnings........... -- -- -- 12,551 -- -- 12,551
-------------- ---------- ------------ ----------- ----------- ---------- -------------
Balance, December 26, 1993.......... 28,185,720 282 73,397 19,850 -- (849) 92,680
Dividends on common stock,
at a rate of $0.05 per share.. -- -- -- (1,269) -- -- (1,269)
Stock options exercised.......... 109,759 1 661 -- -- -- 662
Income tax benefit upon exercise
of stock options.............. -- -- 215 -- -- -- 215
Unrealized loss on short-term
investments, net of income
taxes......................... -- -- -- -- (96) -- (96)
Transactions of pooled companies
prior to acquisition, net..... -- -- 4,402 (6,953) -- -- (2,551)
Pro forma provision for income
taxes of pooled companies..... -- -- -- 1,324 -- -- 1,324
Pro forma net earnings........... -- -- -- 17,823 -- -- 17,823
-------------- ---------- ------------ ----------- ----------- ---------- -------------
Balance, December 25, 1994.......... 28,295,479 283 78,675 30,775 (96) (849) 108,788
Issuance of common stock from
public offering............... 2,415,000 24 60,410 -- -- -- 60,434
Dividends on common stock,
$0.06 per share............... -- -- -- (1,861) -- -- (1,861)
Stock options exercised:
Company....................... 588,038 6 4,649 -- -- -- 4,655
IRC........................... -- -- 1,333 -- -- -- 1,333
Income tax benefit upon exercise
of stock options.............. -- -- 2,615 -- -- -- 2,615
Unrealized gain on short-term
investments, net of income
taxes......................... -- -- -- -- 286 -- 286
Adjustment related to tax basis
of pooled entities............ -- -- 250 -- -- -- 250
Pro forma provision for income
taxes of pooled company....... -- -- -- 73 -- -- 73
Reclassification of net income
of IRC partnerships........... -- -- 149 (149) -- -- --
Pro forma net earnings........... -- -- -- 27,420 -- -- 27,420
-------------- ---------- ------------ ----------- ----------- ---------- --------------
Balance, December 31, 1995.......... 31,298,517 $ 313 $ 148,081 $ 56,258 $ 190 $ (849) $ 203,993
============== ========== ============ =========== =========== ========== ==============
See notes to consolidated financial statements.
F-7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Fiscal Year Ended
-----------------------------------------------
December 31, December 25, December 26,
1995 1994 1993
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Pro forma net earnings........................................ $ 27,420 $ 17,823 $ 12,551
Adjustments to reconcile pro forma net earnings to net cash
provided by operating activities:
Depreciation and amortization.............................. 11,964 8,997 6,159
Amortization of intangible assets.......................... 2,305 2,033 1,934
Gain on sale of investments................................ (67) (112) (312)
Deferred income tax provision (benefit).................... (179) 100 (271)
Loss on disposition of restaurants and equipment........... 850 661 91
Pro forma provision for income taxes of pooled companies... 73 1,324 1,212
Changes in assets and liabilities (exclusive of effects of
acquisitions
other than pooled companies):
Receivables................................................ (2,447) (1,101) (1,699)
Inventories................................................ (4,877) (2,879) (1,008)
Prepaid and other current assets........................... 155 (802) (509)
Assets held for resale..................................... -- -- 725
Accounts payable........................................... 433 1,293 5,068
Accrued expenses and other current liabilities............. 5,307 5,269 4,268
Accrued income taxes....................................... (328) (672) 1,631
Franchise deposits......................................... (187) 92 189
Other...................................................... 356 (1,198) (2,325)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 40,778 30,828 27,704
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................... (16,809) (8,306) (5,460)
Maturities and sales of short-term investments................ 4,392 9,942 30,717
Purchases of property and equipment........................... (51,899) (45,419) (45,664)
Acquisitions of restaurants................................... (9,682) (3,315) (12,800)
Proceeds from sale of restaurants and equipment............... 104 1,474 3,078
--------------- --------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES...................... (73,894) (45,624) (30,129)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........................ 60,434 -- --
Dividends paid................................................ (1,269) (879) (613)
Cash transactions of pooled companies prior to acquisition, net -- (2,543) (1,018)
Issuance of common stock upon exercise of stock options....... 5,988 662 1,232
Income tax benefit upon exercise of stock options............. 2,615 215 801
Proceeds from issuance of long-term debt...................... 8,087 27,116 13,709
Payments on long-term debt.................................... (22,179) (8,020) (7,675)
Payments under noncompetition and consulting agreement........ (220) (244) --
Minority interest in net earnings of joint venture............ 214 69 54
--------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 53,670 16,376 6,490
--------------- --------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................ 20,554 1,580 4,065
CASH AND CASH EQUIVALENTS, beginning of period................... 9,634 8,054 3,989
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period......................... $ 30,188 $ 9,634 $ 8,054
=============== =============== ===============
See notes to consolidated financial statements.
F-8
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(dollars in thousands)
Fiscal Year Ended
-----------------------------------------------------
December 31, December 25, December 26,
1995 1994 1993
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................... $ 15,537 $ 9,806 $ 5,114
================= ================= =================
Interest........................................ $ 3,060 $ 1,927 $ 849
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisition of 14 restaurants during 1993, the Company
issued or assumed notes payable aggregating $2,463,000, entered into a
noncompetition and consulting agreement in the amount of $1,124,000 and issued
additional common stock aggregating $10,000,000 (see Note 4).
Capitalized leases of $2,608,000 were recorded in April 1995 when the Company
acquired the operations and assets of five franchise restaurants. A capitalized
lease of $424,000 was recorded in July 1995 when the Company entered into a
lease for a new restaurant.
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
See notes to consolidated financial statements.
F-9
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Applebee's International, Inc. and its subsidiaries (the "Company") develops,
franchises and operates casual dining restaurants principally under the names
"Applebee's Neighborhood Grill & Bar" and "Rio Bravo Cantina." As of December
31, 1995, there were 666 Applebee's restaurants, of which 538 were operated by
franchisees and 128 were owned or operated by the Company, and the Company also
operated 16 Rio Bravo Cantina restaurants and four other specialty restaurants.
Such restaurants were located in 45 states, Canada, the Netherlands and the
Caribbean.
2. Summary of Significant Accounting Policies
Basis of presentation: The consolidated financial statements have been prepared
to give retroactive effect to the merger with Innovative Restaurant Concepts,
Inc. ("IRC") on March 23, 1995 (see Note 4). Beginning in fiscal 1995, the cost
of meals provided to employees and other complimentary meals have been
classified as labor costs and direct and occupancy costs, respectively.
Previously, the retail price of such meals was reflected in Company restaurant
sales with corresponding amounts reflected as labor costs or direct and
occupancy costs. The consolidated financial statements for fiscal years 1994 and
1993 have been reclassified to conform to the presentation adopted in fiscal
1995, the effects of which were not material.
Principles of consolidation: The consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and its
controlled-interest joint venture. All material intercompany profits,
transactions and balances have been eliminated.
Fiscal year: The Company's fiscal year ends on the last Sunday of the calendar
year. The fiscal year ended December 31, 1995 contained 53 weeks, and the fiscal
years ended December 25, 1994 and December 26, 1993 each contained 52 weeks, and
are referred to hereafter as 1995, 1994 and 1993, respectively.
Short-term investments: Short-term investments are comprised of U.S. government
and agency securities, certificates of deposit, state and municipal bonds and
preferred stocks. Gains and losses from sales are determined using the specific
identification method.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," as of
the beginning of its 1994 fiscal year, the cumulative effect of which was not
material. SFAS No. 115 addresses the accounting and reporting for certain
investments in debt and equity securities by requiring such investments to be
classified in hold-to-maturity, available-for-sale, or trading categories. In
accordance with SFAS No. 115, prior years' financial statements have not been
restated to reflect the change in accounting method. As of December 31, 1995,
all short-term investments have been classified as available-for-sale.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. At December 31, 1995 and December 25, 1994, $7,132,000 and
$2,821,000, respectively of "Riblets" were included in inventories in the
accompanying consolidated balance sheets. The Company purchases large quantities
of Riblets, a specialty menu item on the Applebee's menu, to use in Company
owned or operated restaurants as well as to make them available to franchisees
generally at its cost.
Pre-opening costs: The Company expenses direct training and other costs related
to opening new or relocated restaurants in the month of opening.
F-10
Property and equipment: Property and equipment are stated at cost. Depreciation
is provided primarily on a straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term of the related asset. The general ranges
of original depreciable lives are as follows:
Years
Buildings................................................... 20
Leasehold improvements...................................... 5-20
Furniture and equipment..................................... 3-7
Interest has been capitalized in connection with the development of new
restaurants and is amortized over the estimated useful life of the related
asset. Interest costs of $624,000, $201,000 and $43,000 were capitalized during
1995, 1994 and 1993, respectively.
Goodwill: Goodwill represents the excess of cost over fair market value of net
assets acquired by the Company. Goodwill is being amortized over periods ranging
from 15 to 20 years on a straight-line basis. Accumulated amortization at
December 31, 1995 and December 25, 1994 was $3,739,000 and $2,275,000,
respectively.
Franchise interest and rights: Franchise interest and rights represent
allocations of purchase price to either the purchased restaurants or franchise
operations acquired. The allocated costs are amortized over the estimated life
of the restaurants or the franchise agreements on a straight-line basis ranging
from 7 to 20 years. Accumulated amortization at December 31, 1995 and December
25, 1994 was $5,126,000 and $4,549,000, respectively.
Franchise revenues: Franchise revenues are recognized in accordance with SFAS
No. 45 which requires deferral until substantial performance of franchisor
obligations is complete. Initial franchise fees, included in franchise income in
the consolidated statements of earnings, totaled $4,162,000, $3,753,000, and
$2,893,000 for 1995, 1994 and 1993, respectively.
Advertising costs: The Company expenses advertising costs for Company owned
restaurants as incurred except for production costs of advertising which are
expensed the first time the advertising takes place. Advertising expense related
to Company owned restaurants was $12,749,000, $8,793,000 and $6,367,000 for
1995, 1994 and 1993, respectively.
Earnings per share: Earnings per share are computed based on the weighted
average number of common shares outstanding. The shares issuable under the 1989
Employee Stock Option Plan or the 1995 Equity Incentive Plan (see Note 14) are
excluded from the computations, because their dilutive effect is not material.
All references to the number of shares and per share amounts have been restated
to reflect all stock splits declared by the Company.
New Accounting Standards: Effective for fiscal years beginning after December
15, 1995, SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets,"
establishes accounting standards for the impairment of long-lived assets,
certain intangibles, and goodwill related to those assets. The Company does not
currently expect the adoption of this Statement to have a material effect on its
consolidated financial statements.
Effective January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," will require increased disclosure of compensation expense arising
from stock compensation plans. The Statement encourages rather than requires
companies to adopt a new method that accounts for stock compensation awards
based on their estimated fair value at the date they are granted. Companies will
be permitted, however, to continue accounting under APB Opinion No. 25 which
requires compensation cost be recognized based on the excess, if any, between
the quoted market price of the stock at the date of grant and the amount an
employee must pay to acquire the stock. The Company will continue to apply APB
F-11
Opinion No. 25 in its consolidated financial statements and will disclose pro
forma net income and earnings per share in a footnote to its consolidated
financial statements, determined as if the new method were applied.
Pervasiveness of Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. Disclosures about Fair Value of Financial Instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," the following methods were used in estimating fair value
disclosures for significant financial instruments of the Company. The carrying
amount of cash and cash equivalents approximates fair value because of the short
maturity of those instruments. The carrying amount of short-term investments is
based on quoted market prices. The fair value of the Company's long-term debt,
excluding capitalized lease obligations is estimated based on quotations made on
similar issues.
The estimated fair values of the Company's financial instruments are as follows
(in thousands):
December 31, 1995 December 25, 1994
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- ----------------
Cash and cash equivalents.............. $ 30,188 $ 30,188 $ 9,634 $ 9,634
Short-term investments................. $ 21,836 $ 21,836 $ 8,893 $ 8,893
Long-term debt, excluding
capitalized lease obligations....... $ 23,725 $ 24,811 $ 37,817 $ 36,567
4. Acquisitions
IRC Merger: On March 23, 1995, a wholly-owned subsidiary of the Company merged
with and into Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein
as the "IRC Merger." Immediately prior to the IRC Merger, IRC's affiliated
limited partnerships, Cobb/Gwinnett Rio, Ltd., Rio Real Estate, L.P. and CG
Restaurant Partners, Ltd., were liquidated, and contemporaneously with the IRC
Merger, the Company acquired the interests of the limited partners in the
distributed assets of these partnerships. As a result of the IRC Merger, IRC
became a wholly-owned subsidiary of the Company. A total of approximately
2,630,000 shares of the Company's newly-issued common stock was issued to the
shareholders and limited partners of IRC, including IRC shares issued in 1995
upon the exercise of IRC stock options prior to the IRC Merger. IRC employees
also exchanged pre-existing stock options for options to purchase approximately
147,000 shares of the Company's common stock. In addition, the Company assumed
approximately $13,700,000 of IRC indebtedness, of which $1,270,000 was repaid at
closing and the remainder was repaid during 1995. At the time of the IRC Merger,
IRC operated 17 restaurants, 13 of which were Rio Bravo Cantinas, a Mexican
restaurant concept, and four were other specialty restaurants.
F-12
The IRC Merger was accounted for as a pooling of interests and accordingly, the
accompanying consolidated financial statements have been restated to include the
accounts and operations of the merged entities for all periods presented. All
share amounts have been restated to reflect the total number of shares issued in
the IRC Merger for all periods presented. Combined and separate results of the
Company and IRC during the periods preceding the IRC Merger were as follows
(amounts in thousands):
Pro Forma Pro Forma
Company IRC Adjustments Combined
----------------- ------------------ ------------------ ------------------
13 Weeks Ended
March 26, 1995:
Net sales.......... $ 52,199 $ 13,822 $ -- $ 66,021
Net earnings....... $ 5,519 $ 577 $ (1,843) $ 4,253
1994:
Net sales.......... $ 170,933 $ 51,512 $ -- $ 222,445
Net earnings....... $ 15,780 $ 2,242 $ (199) $ 17,823
1993:
Net sales.......... $ 118,868 $ 40,614 $ -- $ 159,482
Net earnings....... $ 11,375 $ 1,222 $ (46) $ 12,551
Adjustments have been made to eliminate the impact of intercompany balances and
to record provisions for pro forma income taxes for certain affiliates of IRC.
Merger costs of $1,770,000 relating to the IRC Merger were expensed in the first
quarter of 1995. Merger costs include investment banking fees, legal and
accounting fees, and other merger related expenses. The impact of these costs on
pro forma net earnings per common share was approximately $0.06 in 1995.
PVNE Merger: On October 24, 1994, a wholly-owned subsidiary of the Company
merged with and into Pub Ventures of New England, Inc. ("PVNE"), referred to
herein as the "PVNE Merger." As a result of the PVNE Merger, PVNE became a
wholly-owned subsidiary of the Company. The shareholders of PVNE received an
aggregate of 3,300,000 shares of the Company's newly-issued common stock. At the
time of the PVNE Merger, PVNE operated 14 Applebee's restaurants, and several
restaurant sites were under development. The PVNE Merger was accounted for as a
pooling of interests. Merger costs of $920,000 relating to the PVNE Merger were
expensed in the fourth quarter of 1994. Merger costs include investment banking
fees, legal and accounting fees, and severance and benefits-related costs. The
impact of these costs on pro forma net earnings per common share was
approximately $0.03 in 1994.
Minnesota restaurant acquisition: Effective February 26, 1993, the Company
acquired 14 franchise restaurants and certain restaurant sites under development
in Minnesota, referred to herein as the "Minnesota Acquisition." The Minnesota
Acquisition has been recorded under the purchase method of accounting and,
accordingly, the 1993 financial statements reflect the results of operations of
the acquired restaurants subsequent to the date of acquisition. The purchase
price, including related transaction costs, aggregated $23,548,000, composed of
(i) cash payments of $10,741,000, (ii) newly issued promissory notes totaling
$1,664,000, (iii) a promissory note in the amount of $799,000 which was assumed
by the Company, and (iv) $10,000,000 of aggregate value of the Company's common
stock (1,276,596 shares). The Company also entered into a noncompetition and
consulting agreement with certain affiliates of the Partnership. This agreement
provides for annual payments over a five year term aggregating $1,124,000. The
purchase price has been allocated to the fair value of net assets acquired, and
resulted in an allocation to goodwill totaling $17,959,000, which is being
amortized over 20 years on a straight-line basis.
The following summarized unaudited pro forma results of operations of the
Company (in thousands, except per share amounts) for 1993 assume the Minnesota
Acquisition occurred as of the beginning of the 1993 fiscal year. The pro forma
results have been prepared for comparative purposes only and do not purport to
F-13
be indicative of the results of operations which would actually have resulted
had the Minnesota Acquisition been effected as of the date indicated, or which
may result in the future.
1993
---------------------------------
As Reported Pro Forma
---------------------------------
Company restaurant sales.................................................. $ 159,482 $ 164,322
Earnings before income taxes.............................................. $ 20,456 $ 21,545
Pro forma net earnings.................................................... $ 12,551 $ 13,147
Pro forma net earnings per common share................................... $ 0.46 $ 0.47
Weighted average shares outstanding....................................... 27,543 27,753
Other restaurant acquisitions: During 1993, the Company acquired the operations
of two franchise restaurants and the related leasehold improvements, furniture
and fixtures and rights to future development of restaurants in the franchise
territories. The Company also acquired the land and building related to one of
the restaurants. The total purchase price, for financial reporting purposes, was
approximately $1,903,000 (including cash payments to the seller of $1,800,000).
The purchase price has been allocated to the fair value of net assets acquired,
and resulted in an allocation to goodwill of approximately $612,000. The 1993
financial statements reflect the results of operations of such restaurants
subsequent to the date of acquisition.
During 1994, the Company acquired the operations of two franchise restaurants
and the related land, furniture and fixtures. The total purchase price was
approximately $3,315,000 and has been allocated to the fair value of net assets
acquired, and resulted in an allocation to goodwill of $515,000. The 1994
financial statements reflect the results of operations of such restaurants
subsequent to the date of acquisition.
On April 3, 1995, the Company acquired the operations of five franchise
restaurants and the related furniture and fixtures, certain land and leasehold
improvements and rights to future development of restaurants for a total
purchase price of $9,682,000. The acquisition was accounted for as a purchase,
and accordingly, the purchase price has been allocated to the fair value of net
assets acquired and resulted in an allocation to goodwill of $6,432,000. In
connection with this acquisition, the Company also recorded capitalized leases
of $2,608,000. The 1995 financial statements reflect the results of operations
of such restaurants subsequent to the date of acquisition. Results of operations
of such restaurants prior to acquisition were not material in relation to the
Company's operating results for the periods shown.
5. Short-Term Investments
The amortized cost, estimated market value and unrealized gains or losses on
short-term investments are as follows (in thousands):
December 31, 1995 December 25, 1994
------------------------------------------ ------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain (Loss) Value Cost Gain (Loss) Value
------------- -------------- ------------- ------------ -------------- --------------
Certificates of deposit........ $ 19 $ -- $ 19 $ 19 $ -- $ 19
Preferred stocks............... 1,832 115 1,947 2,041 (139) 1,902
U.S. government and
agency securities........... 16,809 67 16,876 -- -- --
State and local
municipal securities........ 2,870 124 2,994 6,986 (14) 6,972
------------- -------------- ------------- ------------ -------------- --------------
$ 21,530 $ 306 $ 21,836 $ 9,046 $ (153) $ 8,893
============= ============== ============= ============ ============== ==============
F-14
The amortized cost and estimated market value of debt securities as of December
31, 1995, by contractual maturity, are shown below (in thousands). Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Market
Cost Value
------------------ -----------------
Due within one year or less..................................... $ 14,288 $ 14,364
Due after one year through five years........................... 4,663 4,732
Due after five years through ten years.......................... 728 774
------------------ -----------------
$ 19,679 $ 19,870
================== =================
6. Receivables
Receivables are comprised of the following (in thousands):
December 31, December 25,
1995 1994
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 7,615 $ 5,598
Franchise fee receivables........................................ 589 536
Credit card receivables.......................................... 1,578 1,102
Interest and dividends receivable................................ 337 143
Other............................................................ 447 757
----------------- -----------------
10,566 8,136
Less allowance for bad debts..................................... 723 740
----------------- -----------------
$ 9,843 $ 7,396
================= =================
The provision for bad debts totaled $250,000, $418,000 and $100,000 for 1995,
1994 and 1993, respectively. Write-offs against the allowance for bad debts
totaled $267,000 during 1995. No amounts were written off during 1994 or 1993.
F-15
7. Property and Equipment
Property and equipment, net is comprised of the following (in thousands):
December 31, December 25,
1995 1994
----------------- ------------------
Land............................................................. $ 34,527 $ 25,492
Buildings and leasehold improvements............................. 95,933 65,735
Furniture and equipment.......................................... 59,430 45,081
Construction in progress......................................... 7,564 5,763
----------------- ------------------
197,454 142,071
Less accumulated depreciation and capitalized
lease amortization............................................ 37,622 27,342
----------------- ------------------
$ 159,832 $ 114,729
================= ==================
Property under capitalized leases in the amount of $3,032,000 at December 31,
1995 is included in buildings and leasehold improvements. Accumulated
amortization of such property amounted to $105,000 at December 31, 1995.
Capitalized leases relate to the buildings on certain restaurant properties. The
land portions of the restaurant property leases are accounted for as operating
leases.
Depreciation and capitalized lease amortization expense relating to property and
equipment totaled $11,964,000, $8,997,000 and $6,159,000 for 1995, 1994 and
1993, respectively. Of these amounts, $105,000 related to capitalized lease
amortization during 1995.
The Company leases certain of its restaurants. The leases generally provide for
payment of minimum annual rent, real estate taxes, insurance and maintenance
and, in some cases, contingent rent (calculated as a percentage of sales) in
excess of minimum rent. Total rental expense for all operating leases is
composed of the following (in thousands):
1995 1994 1993
------------------ ------------------ -----------------
Minimum rent................................. $ 7,300 $ 5,797 $ 5,339
Contingent rent.............................. 1,520 1,532 1,139
------------------ ------------------ -----------------
$ 8,820 $ 7,329 $ 6,478
================== ================== =================
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 1996) as of December 31, 1995 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ -----------------
1996............................................................. $ 288 $ 8,033
1997............................................................. 291 8,338
1998............................................................. 296 7,890
1999............................................................. 296 7,520
2000............................................................. 332 7,109
Thereafter....................................................... 6,049 55,048
------------------ -----------------
Total minimum lease payments..................................... 7,552 $ 93,938
=================
Less amounts representing interest............................... 4,510
------------------
Present value of minimum lease payments.......................... $ 3,042
==================
F-16
8. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 31, December 25,
1995 1994
---------------- -----------------
Unsecured notes payable; 7.70% interest per annum, with
principal payments beginning in 1998; due May 2004............... $ 20,000 $ 20,000
Secured debt assumed in connection with the IRC Merger
which was repaid during 1995..................................... -- 12,255
Secured bank note; 6.69% interest per annum; due in
quarterly installments of principal and interest through
October 1998..................................................... 1,800 2,400
Secured revolving credit facility; interest at the prime rate;
due October 1995................................................. -- 800
Unsecured promissory notes issued in connection with the
acquisition of restaurants; 8.00% interest per annum; due in
annual installments of principal and interest through February
2000............................................................. 1,874 2,180
Unsecured promissory note to stockholder; 8.00% interest per
annum; due in equal monthly installments of principal and
interest through October 1995.................................... -- 112
Capitalized lease obligations.................................... 3,042 --
Other............................................................ 51 70
---------------- -----------------
Total long-term debt............................................. 26,767 37,817
Less current portion of long-term debt........................... 935 3,505
---------------- -----------------
Long-term debt - less current portion............................ $ 25,832 $ 34,312
================ =================
During 1995, the Company obtained a $20,000,000 unsecured bank revolving credit
facility which expires on December 31, 1997. Of this amount, $5,000,000 can be
utilized for standby letters of credit. The revolving credit facility bears
interest at LIBOR plus 0.60% or the prime rate, at the Company's option, and
requires the Company to pay a commitment fee of 0.15% on any unused portion of
the facility. As of December 31, 1995, no amounts were outstanding under the
facility. Standby letters of credit issued under the facility totaling $213,000
were outstanding as of December 31, 1995. In addition, during 1994, the Company
completed a $20,000,000 senior unsecured private debt placement with
institutional lenders unaffiliated with the Company. The notes bear interest at
7.70% annually with principal payments beginning in 1998 through 2004.
The debt agreements contain various covenants and restrictions which, among
other things, require the maintenance of a stipulated fixed charge coverage
ratio and minimum consolidated net worth, as defined, and limit additional
indebtedness in excess of specified amounts. The debt agreements also restrict
the amount available for the payment of cash dividends. At December 31, 1995,
retained earnings were not restricted for the payment of cash dividends. The
Company has been and is currently in compliance with the covenants of all of its
debt agreements.
F-17
Maturities of long-term debt, including capitalized lease obligations, for each
of the five fiscal years subsequent to December 31, 1995, ending during the
years indicated, are as follows (in thousands):
1996.................................................... $ 935
1997.................................................... 961
1998.................................................... 3,851
1999.................................................... 3,231
2000.................................................... 3,297
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 31, December 25,
1995 1994
------------------ -----------------
Compensation and related taxes.................................... $ 8,962 $ 6,240
Gift certificates................................................. 2,382 1,690
Sales and use taxes............................................... 2,521 1,631
Insurance......................................................... 1,866 1,237
Rent.............................................................. 1,761 1,355
Other............................................................. 5,143 4,560
------------------ -----------------
$ 22,635 $ 16,713
================== =================
10. Joint Venture
In 1992, the Company entered into a joint venture arrangement with its
franchisee in Nevada. Based on its control over operating policies of the joint
venture, the Company has consolidated the joint venture for financial statement
purposes. The Company has an option to purchase the remaining 50% interest for
$1,275,000, which became exercisable in October 1995 and expires in October
1997.
11. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return
for periods subsequent to the IRC Merger and the PVNE Merger. Prior to September
7, 1994, PVNE, a pooled company, was classified as an S Corporation and
accordingly, stockholders were responsible for paying their proportionate share
of federal and certain state income taxes. In addition, the combined earnings of
IRC, a pooled company, included earnings of limited partnerships which were not
taxable entities for federal and state income tax purposes. The accompanying
consolidated statements of earnings reflect provisions for income taxes on a pro
forma basis as if the Company were liable for federal and state income taxes on
PVNE's earnings prior to September 7, 1994 and the earnings of IRC's limited
partnerships for periods prior to the IRC Merger at a statutory rate of 39%.
The income tax provision (benefit) consists of the following (in thousands):
1995 1994 1993
--------------- --------------- ----------------
Current provision:
Federal............................................ $ 15,163 $ 7,934 $ 5,810
State.............................................. 2,849 1,419 1,154
Deferred provision (benefit)........................... (179) 100 (271)
Pro forma provision for income taxes
of pooled companies................................ 73 1,324 1,212
--------------- --------------- ----------------
Income taxes........................................... $ 17,906 $ 10,777 $ 7,905
=============== =============== ================
F-18
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
1995 1994 1993
--------------- --------------- ----------------
Franchise deposits..................................... $ 85 $ (36) $ (74)
Depreciation........................................... 13 109 (4)
Allowance for bad debts................................ (72) (163) (39)
Accrued expenses....................................... (125) (99) (128)
Other.................................................. (80) 289 (26)
--------------- --------------- ----------------
Deferred income tax provision (benefit)................ (179) 100 (271)
Adjustment to tax basis of pooled companies............ (1,350) -- --
Deferred income taxes related to change in
unrealized gain (loss) on investments.............. 173 (57) --
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ (1,356) $ 43 $ (271)
=============== =============== ================
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):
1995 1994 1993
--------------- ---------------- ----------------
Federal income tax at statutory rates.................. $ 15,864 $ 9,916 $ 7,022
Increase (decrease) to income tax expense:
Amortization of goodwill .......................... 281 267 209
State income taxes, net of federal benefit......... 1,852 1,039 748
Merger costs....................................... 625 271 --
Tax exempt investment income....................... (169) (207) (377)
Meals and entertainment disallowance............... 258 186 60
FICA tip tax credit................................ (985) (641) --
Other.............................................. 180 (54) 243
--------------- ---------------- ----------------
Income taxes........................................... $ 17,906 $ 10,777 $ 7,905
=============== ================ ================
The net current deferred tax asset amounts are included in "prepaid and other
current assets" in the accompanying consolidated balance sheets. The significant
components of deferred tax assets and liabilities and the related balance sheet
classifications are as follows (in thousands):
December 31, December 25,
1995 1994
----------------- ------------------
Classified as current:
Allowance for bad debts..................................... $ 361 $ 289
Accrued expenses............................................ 510 238
Other, net.................................................. (334) 88
----------------- ------------------
Net deferred tax asset...................................... $ 537 $ 615
================= ==================
Classified as non-current:
Depreciation differences.................................... $ 166 $ (1,171)
Franchise deposits.......................................... 444 529
Other, net.................................................. 109 (73)
----------------- ------------------
Net deferred tax asset (liability).......................... $ 719 $ (715)
================= ==================
F-19
12. Commitments and Contingencies
Litigation, claims and disputes: As of December 31, 1995, the Company was using
assets owned by a former franchisee in the operation of two restaurants under a
purchase rights agreement which required the Company to make certain payments to
the franchisee's lender. In 1991, a dispute arose between the lender and the
Company over the amount of the payments due the lender. Based upon a then
current independent appraisal, the Company offered to settle the dispute and
purchase the assets for $1,000,000 in 1991. The lender rejected the Company's
offer and claimed that the Company had guaranteed the entire $2,400,000 debt of
the franchisee. In November 1992, the lender was declared insolvent by the FDIC
and has since been liquidated. The Company was contacted by the FDIC, and in
1993, the Company offered to settle the issue and purchase the assets at the
three restaurants then being operated for $182,000. The Company closed one of
the three restaurants in 1994 and lowered its offer to $120,000 to settle the
issue and purchase the assets at the two then remaining restaurants. The FDIC
has declined to accept the Company's offer, indicating instead its preliminary
position that the Company should pay the entire debt of the franchisee. The
Company closed one of the two remaining restaurants in February 1996, and does
not currently intend to make an additional settlement offer to the FDIC. In the
event that the Company were to pay an amount determined to be in excess of the
fair market value of the assets, the Company will recognize a loss at the time
of such payment.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Franchise financing: The Company entered into an agreement in 1992 with a
financing source to provide up to $75,000,000 of financing to Company
franchisees to fund development of new franchise restaurants. The Company
provided a limited guaranty of loans made under the agreement. The Company's
maximum recourse obligation of 10% of the amount funded is reduced beginning in
the second year of each long-term loan and thereafter decreases ratably to zero
after the seventh year of each loan. At December 31, 1995, approximately
$45,522,000 had been funded through this financing source. The Company has not
been apprised of any defaults under this agreement by franchisees. This
agreement expired on December 31, 1994 and was not renewed, although some loan
commitments as of the termination date were thereafter funded through December
31, 1995.
Severance agreements: The Company has severance and employment agreements with
certain officers providing for severance payments to be made in the event the
employee resigns or is terminated related to a change in control (as defined in
the agreements). If the severance payments had been due as of December 31, 1995,
the Company would have been required to make payments aggregating approximately
$5,500,000. In addition, the Company has severance and employment agreements
with certain officers which contain severance provisions not related to a change
in control, and such provisions would have required aggregate payments of
approximately $3,000,000 if such officers had been terminated as of December 31,
1995.
13. Stockholders' Equity
On July 28, 1995, the Company completed a public offering of its common stock
consisting of 2,100,000 shares sold by the Company and 300,000 shares sold by
certain stockholders of the Company. In addition, the Company and the selling
stockholders granted the underwriters an option to purchase 315,000 and 45,000
shares, respectively, to cover over-allotments, which was exercised on August 9,
1995. Net proceeds of $60,434,000, after expenses, were received from the
offering. A portion of the net proceeds of the offering was used to retire
approximately $12,500,000 of secured debt assumed in certain recent acquisitions
and to repay the outstanding balance of the Company's revolving credit facility
of $5,000,000.
F-20
On September 7, 1994, the Company's Board of Directors adopted a Shareholder
Rights Plan (the "Rights Plan") and declared a dividend, issued on September 19,
1994, of one Right for each outstanding share of Common Stock of the Company
(the "Common Shares"). The Rights become exercisable if a person or group
acquires more than 15% of the outstanding Common Shares, other than pursuant to
a Qualifying Offer (as defined) or makes a tender offer for more than 15% of the
outstanding Common Shares, other than pursuant to a Qualifying Offer. Upon the
occurrence of such an event, each Right entitles the holder (other than the
acquiror) to purchase for $75 the economic equivalent of Common Shares, or in
certain circumstances, stock of the acquiring entity, worth twice as much. The
Rights will expire on September 7, 2004 unless earlier redeemed by the Company,
and are redeemable prior to becoming exercisable at $0.01 per Right.
14. Employee Benefit Plans
Employee stock option plan: During 1989, the Company's Board of Directors
approved the 1989 Employee Stock Option Plan (the "1989 Plan") which provided
for the grant of both qualified and nonqualified options as determined by a
committee appointed by the Board of Directors. At the Annual Meeting of
Stockholders on May 26, 1995, the 1989 Employee Stock Option Plan was
terminated, and the 1995 Equity Incentive Plan (the "1995 Plan") was approved.
Stock options outstanding under the existing 1989 Stock Option Plan were not
affected by the termination of that plan.
Options outstanding at December 31, 1995 under the 1989 Plan were at prices
ranging from $3.02 to $21.75 per share and had an average exercise price of
$13.92 per share. The options were granted for a term of three to ten years and
were generally exercisable one year from date of grant. The 1995 Plan allows the
granting of stock options, stock appreciation rights, restricted stock awards,
performance unit awards and performance share awards (collectively, "Awards") to
eligible participants. The number of shares authorized to be issued pursuant to
the 1995 Plan is 2,000,000. Options outstanding at December 31, 1995 under the
1995 Plan were at prices ranging from $25.00 to $28.50 per share and had an
average exercise price of $28.00 per share. The options are granted for a term
of five to ten years and are generally exercisable three years from date of
grant. Subject to the terms of the 1995 Plan, the Committee has the sole
discretion to determine the employees and consultants who shall be granted
Awards, the size and types of such Awards, and the terms and conditions of such
Awards.
Under both plans, the option price for both qualified and nonqualified options
as of the date granted cannot be less than the fair market value of the
Company's common stock. Transactions relative to both plans are as follows:
1995 Plan 1989 Plan
--------------- -----------------------------------------------
1995 1995 1994 1993
--------------- -------------- -------------- ---------------
Options outstanding at beginning of period........... -- 1,594,679 1,149,388 916,573
Granted.......................................... 891,300 163,000 603,500 520,464
Exercised........................................ -- (588,038) (109,759) (276,699)
Canceled......................................... (15,000) (71,100) (48,450) (10,950)
-------------- -------------- --------------- ---------------
Options outstanding at end of period................. 876,300 1,098,541 1,594,679 1,149,388
============== ============== =============== ===============
Options exercisable at end of period................. -- 1,061,041 928,607 595,294
Options available for grant at end of period......... 1,123,700 -- 684,780 1,239,830
Employee retirement plans: During 1992, the Company established a profit sharing
plan and trust in accordance with Section 401(k) of the Internal Revenue code.
The Company matches 25% of employee contributions, not to exceed 2% of the
employee's total annual compensation, with the Company contributions vesting at
the rate of 20% each year beginning after the employee's second year of service.
F-21
During 1994, the Company established a non-qualified defined contribution
retirement plan for key employees. The Company's contributions under both plans
in 1995, 1994 and 1993 were $312,000, $127,000 and $175,000, respectively.
15. Related Party Transactions
The Company and certain franchisees have obtained restaurant equipment from a
company owned by an individual who is related to a director of the Company and
who is also related to an officer and stockholder of the Company. During 1995,
1994 and 1993, the Company paid $3,128,000, $3,869,000 and $369,000,
respectively, for equipment and services purchased from this company. In
addition, the Company had $194,000 in accounts payable to this company at
December 25, 1994.
The Company leases a restaurant site from a corporation whose ownership is
composed of certain current and former stockholders, directors and officers of
the Company. The lease has a term of 20 years with two renewal options. The
lease provides for rentals in an amount equal to approximately 7% of gross sales
of the restaurants. During 1995, the Company entered into an agreement with this
party to lease additional parking space at the same site. Rents incurred under
both leases totaled $186,000, $173,000 and $152,000 for 1995, 1994 and 1993,
respectively, and are included in direct and occupancy costs in the consolidated
statements of earnings.
The Company leases a restaurant site from a partnership in which a former
director who is related to a director of the Company and who is also related to
an officer and stockholder of the Company holds a 50% interest. The lease has a
term of 20 years with two options to renew. The lease provides for rentals in an
amount equal to approximately 7% of gross sales of the restaurant. Rents
incurred under the lease were $113,000 for each of 1995, 1994 and 1993,
respectively, and are included in direct and occupancy costs in the consolidated
statements of earnings.
The Company leases certain office space under an operating lease from a
partnership in which a director of the Company holds a 37.5% interest. The lease
expires in April 1998; however, the Company has the option to terminate the
lease with 30 days notice. Rents incurred under the lease were $84,000, $74,000
and $55,000 for 1995, 1994 and 1993, respectively, and are included in general
and administrative expenses in the consolidated statements of earnings.
F-22
16. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 1995 and 1994 (in thousands, except per share amounts). Merger
costs of $1,770,000 related to the IRC Merger were expensed in the first quarter
of 1995, while merger costs of $920,000 related to the PVNE Merger were expensed
in the fourth quarter of 1994.
1995
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 26, June 25, September 24, December 31,
1995 1995 1995 1995
------------- -------------- ------------- -------------
Revenues:
Company restaurant sales....................... $ 66,021 $ 73,120 $ 76,965 $ 83,718
Franchise income............................... 9,418 10,681 11,116 12,524
------------- -------------- ------------- -------------
Total operating revenues.................... 75,439 83,801 88,081 96,242
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 18,908 20,953 21,375 23,540
Labor.......................................... 21,068 23,061 24,284 26,522
Direct and occupancy........................... 15,378 17,807 18,708 20,335
Pre-opening expense............................ 633 423 326 852
------------- -------------- ------------- -------------
Total cost of Company restaurant sales...... 55,987 62,244 64,693 71,249
------------- -------------- ------------- -------------
General and administrative expenses............... 8,909 9,480 9,292 11,072
Merger costs...................................... 1,770 -- -- --
Amortization of intangible assets................. 515 595 588 607
Loss on disposition of restaurants and equipment.. 26 80 60 684
------------- -------------- ------------- -------------
Operating earnings................................ 8,232 11,402 13,448 12,630
------------- -------------- ------------- -------------
Other income (expense):
Investment income.............................. 237 210 563 754
Interest expense............................... (614) (679) (833) (381)
Other income................................... 82 71 111 93
------------- -------------- ------------- -------------
Total other income (expense)................ (295) (398) (159) 466
------------- -------------- ------------- -------------
Earnings before income taxes...................... 7,937 11,004 13,289 13,096
Income taxes...................................... 3,611 4,193 5,050 4,979
------------- -------------- ------------- -------------
Net earnings...................................... 4,326 6,811 8,239 8,117
Pro forma provision for income taxes
of pooled companies............................ 73 -- -- --
------------- -------------- ------------- -------------
Pro forma net earnings............................ $ 4,253 $ 6,811 $ 8,239 $ 8,117
============= ============== ============= =============
Pro forma net earnings per common share........... $ 0.15 $ 0.24 $ 0.28 $ 0.26
============= ============== ============= =============
Weighted average shares outstanding............... 28,078 28,244 29,821 31,000
F-23
1994
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 27, June 26, September 25 December 25,
1994 1994 1994 1994
------------- -------------- ------------- -------------
Revenues:
Company restaurant sales....................... $ 49,847 $ 54,859 $ 58,457 $ 59,282
Franchise income............................... 6,658 7,358 8,046 9,357
------------- -------------- ------------- -------------
Total operating revenues.................... 56,505 62,217 66,503 68,639
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 14,821 16,056 16,768 17,174
Labor.......................................... 16,237 17,426 18,585 18,529
Direct and occupancy........................... 12,319 13,152 14,088 14,324
Pre-opening expense............................ 136 631 559 767
------------- -------------- ------------- -------------
Total cost of Company restaurant sales...... 43,513 47,265 50,000 50,794
------------- -------------- ------------- -------------
General and administrative expenses............... 6,874 7,040 6,923 8,330
Merger costs...................................... -- -- -- 920
Amortization of intangible assets................. 547 518 517 451
Loss on disposition of restaurants and equipment.. 50 461 222 128
------------- -------------- ------------- -------------
Operating earnings................................ 5,521 6,933 8,841 8,016
------------- -------------- ------------- -------------
Other income (expense):
Investment income.............................. 306 185 302 272
Interest expense............................... (299) (385) (673) (672)
Other income................................... 60 53 55 85
------------- -------------- ------------- -------------
Total other income (expense)................ 67 (147) (316) (315)
------------- -------------- ------------- -------------
Earnings before income taxes...................... 5,588 6,786 8,525 7,701
Income taxes...................................... 1,904 2,192 2,431 2,926
------------- -------------- ------------- -------------
Net earnings...................................... 3,684 4,594 6,094 4,775
Pro forma provision for income taxes
of pooled companies............................ 283 337 678 26
------------- -------------- ------------- -------------
Pro forma net earnings............................ $ 3,401 $ 4,257 $ 5,416 $ 4,749
============= ============== ============= =============
Pro forma net earnings per common share........... $ 0.12 $ 0.15 $ 0.20 $ 0.17
============= ============== ============= =============
Weighted average shares outstanding............... 27,910 27,974 27,988 28,007
-----------------------------
F-24
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, of Registrant.
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 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).
9.1 Voting Agreement, dated as of July 15, 1989, among John Hamra,
Abe J. Gustin, Jr. and Johyne Hamra Reck, as amended by
Acknowledgment and Amendment to Stockholders' Voting Agreement
dated February 11, 1992 (incorporated by reference to Exhibit
9.1 of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 25, 1994).
9.2 Amendment to Stockholder's Voting Agreement dated March 17,
1995 (incorporated by reference to Exhibit 9.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 1995).
10.1 Indemnification Agreement, dated March 16, 1988, between John
Hamra and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.2 Indemnification Agreement, dated March 16, 1988, between Abe J.
Gustin, Jr. and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.3 Indemnification Agreement, dated March 16, 1988, between Johyne
Reck and Applebee's International, Inc. (incorporated by
reference to Exhibit 10.3 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.4 Form of Development Agreement in effect during the fiscal year
ended December 31, 1995.
10.5 Form of Franchise Agreement in effect during the fiscal year
ended December 31, 1995.
E-1
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.6 Schedule of Development and Franchise Agreements as of December
31, 1995.
10.7 Purchase Rights Agreement dated January 17, 1990 by and between
Applebee's International, Inc. and Apple Star, Inc.
(incorporated by reference to Exhibit 10.7 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
25, 1994).
10.8 Note Purchase Agreement, dated as of June 1, 1994, for
$20,000,000 7.70% Senior Notes due May 31, 2004 (incorporated
by reference to Exhibit 10.2 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 26,
1994).
10.9 Agreement and Plan of Merger dated October 14, 1994 among
Applebee's International, Inc., IRC Acquisition Corp.,
Innovative Restaurant Concepts, Inc., and certain other parties
thereto (incorporated by reference to Exhibit 2.1 of the
Registrant's Registration Statement on Form S-4, Registration
No. 33-87590, as amended, initially filed with the Securities
and Exchange Commission on December 20, 1994).
10.10 Acquisition Agreement dated October 14, 1994 among Applebee's
International, Inc., IRC Acquisition Corp., Innovative
Restaurant Concepts, Inc., and Rio Real Estate, L.P.
(incorporated by reference to Exhibit 2.2 of the Registrant's
Registration Statement on Form S-4, Registration No. 33-87590,
as amended, initially filed with the Securities and Exchange
Commission on December 20, 1994).
10.11 Acquisition Agreement dated October 14, 1994 among Applebee's
International, Inc., IRC Acquisition Corp., Innovative
Restaurant Concepts, Inc., and Cobb/Gwinnett Rio, Ltd.
(incorporated by reference to Exhibit 2.3 of the Registrant's
Registration Statement on Form S-4, Registration No. 33-87590,
as amended, initially filed with the Securities and Exchange
Commission on December 20, 1994).
Management Contracts and Compensatory Plans or Arrangements
10.12 1995 Equity Incentive Plan.
10.13 Employment Agreement, dated March 1, 1992, with Abe J. Gustin,
Jr. (incorporated by reference from the Registrant's
Registration Statement on Form S-1, Registration No. 33-45701,
as amended, initially filed with the Securities and Exchange
Commission on February 13, 1992), as amended March 1, 1995
(incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 26, 1995) and June 1, 1995 (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 26, 1995).
E-2
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.14 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).
10.15 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).
10.16 Employment Agreement, dated March 1, 1992, with Ronald B. Reck,
as amended February 28, 1994 (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended March 27, 1994), March 1, 1995
(incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 26, 1995) and June 1, 1995 (incorporated by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 26, 1995).
10.17 Employment Agreement, dated March 1, 1995, with George D.
Shadid (incorporated by reference to Exhibit 10.3 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 1995).
10.18 Employment Agreement dated October 24, 1994 by and between
Applebee's International, Inc. and Burton M. Sack (incorporated
by reference from the Registrant's Current Report on Form 8-K
dated October 24, 1994).
10.19 Consulting Agreement, dated as of March 1, 1995, between
Applebee's International, Inc. and Kenneth D. Hill
(incorporated by reference to Exhibit 10.20 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
25, 1994).
10.20 Consulting Agreement between Applebee's International, Inc. and
Raymond D. Schoenbaum.
10.21 Employment Agreement between Applebee's International, Inc. and
Philip J. Hickey.
10.22 1994 Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 26, 1994).
10.23 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).
10.24 Schedule of parties to Indemnification Agreement.
10.25 Form of Severance Agreement (incorporated by reference to
Exhibit 10.30 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 25, 1994).
10.26 Schedule of parties to Severance Agreement.
E-3
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (see page 30 of the Form 10-K).
27 Financial Data Schedule.
E-4