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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-17962
Applebee's International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-1461763
- ------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
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(Address of principal executive offices and zip code)
(913) 967-4000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01
per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 3, 1997 was $790,907,669 based upon the closing sale
price on March 3, 1997.
The number of shares of the registrant's common stock outstanding as of March 3,
1997 was 31,323,076.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement to be filed pursuant to regulation 14A under the Securities
Exchange Act of 1934 is incorporated into Part III hereof.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 29, 1996
INDEX
Page
PART I
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 16
Item 3. Legal Proceedings....................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders..................................... 18
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................................................... 19
Item 6. Selected Financial Data................................................................. 20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 21
Item 8. Financial Statements and Supplementary Data............................................. 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 28
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 29
Item 11. Executive Compensation.................................................................. 29
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 29
Item 13. Certain Relationships and Related Transactions.......................................... 29
PART IV
Item 14. Exhibits and Reports on Form 8-K........................................................ 30
Signatures.............................................................................................. 31
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 Neighborhood Grill &
Bar Division (the "Applebee's Division") of an indirect subsidiary of W.R. Grace
& Co. In March 1988, the Company acquired substantially all the assets of its
franchisor. At the time of this acquisition, the Applebee's Division operated 14
restaurants and had ten franchisees, including the Company, operating 41
franchise restaurants.
As of December 29, 1996, there were 819 Applebee's restaurants, of which 671
were operated by franchisees and 148 were owned or operated by the Company. The
restaurants were located in 45 states, Canada, Europe, and the Caribbean. During
1996, 163 new restaurants were opened, including 134 franchise restaurants and
29 Company restaurants.
As part of its long-term growth strategy, the Company acquired the Rio Bravo
Cantina chain of Mexican casual dining restaurants in March 1995. In late 1995
and early 1996, the Company identified the first Rio Bravo Cantina franchisees
and began franchise expansion in 1996. During 1996, 14 new restaurants were
opened, including nine franchise restaurants and five Company restaurants. As of
December 29, 1996, there were 30 Rio Bravo Cantina restaurants located in 11
states, of which nine were operated by franchisees and 21 were owned by the
Company. The Company also owns four other specialty restaurants.
3
The following table sets forth certain unaudited financial information and other
restaurant data relating to Company and franchise restaurants, as reported to
the Company by franchisees.
Fiscal Year Ended
-----------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
----------------- ---------------- -----------------
Number of restaurants:
Applebee's:
Company(1):
Beginning of year............................ 128 97 75
Restaurant openings.......................... 29 27 23
Restaurant closings.......................... (3) (1) (1)
Restaurants acquired from (by) franchisees... (6) 5 --
----------------- ---------------- -----------------
End of year.................................. 148 128 97
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 538 408 286
Restaurant openings.......................... 134 135 122
Restaurant closings.......................... (7) -- --
Restaurants acquired by (from) franchisees... 6 (5) --
----------------- ---------------- -----------------
End of year.................................. 671 538 408
----------------- ---------------- -----------------
Total Applebee's:
Beginning of year............................ 666 505 361
Restaurant openings.......................... 163 162 145
Restaurant closings.......................... (10) (1) (1)
----------------- ---------------- -----------------
End of year.................................. 819 666 505
================= ================ =================
Rio Bravo Cantinas:
Company:
Beginning of year............................ 16 12 9
Restaurant openings.......................... 5 4 3
----------------- ---------------- -----------------
End of year.................................. 21 16 12
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ -- -- --
Restaurant openings.......................... 9 -- --
----------------- ---------------- -----------------
End of year.................................. 9 -- --
----------------- ---------------- -----------------
Total Rio Bravo Cantinas:
Beginning of year............................ 16 12 9
Restaurant openings.......................... 14 4 3
----------------- ---------------- -----------------
End of year.................................. 30 16 12
================= ================ =================
Specialty restaurants:
Beginning of year............................ 4 4 6
Restaurant closings(2)....................... -- -- (2)
----------------- ---------------- -----------------
End of year.................................. 4 4 4
================= ================ =================
Total number of restaurants:
Beginning of year............................ 686 521 376
Restaurant openings.......................... 177 166 148
Restaurant closings.......................... (10) (1) (3)
----------------- ---------------- -----------------
End of year.................................. 853 686 521
================= ================ =================
4
Fiscal Year Ended
-----------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
----------------- ---------------- -----------------
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).................................. $ 40,366 $ 39,977 $ 39,924
Franchise................................... $ 39,870 $ 40,922 $ 41,010
Total Applebee's............................ $ 39,961 $ 40,737 $ 40,789
Rio Bravo Cantinas (Company)(3) ................ $ 66,743 $ 66,158 $ 68,637
Change in comparable restaurant sales(4) :
Applebee's:
Company(1).................................. 1.1 % 0.3% 3.7%
Franchise................................... (1.2)% 0.5% 3.1%
Total Applebee's............................ (0.8)% 0.5% 3.2%
Rio Bravo Cantinas (Company).................... 3.9 % 0.9% 9.5%
Total system sales (in thousands):
Applebee's...................................... $ 1,539,277 $ 1,248,383 $ 882,515
- --------
(1) Includes certain Texas restaurants operated by the Company under a
management agreement since July 1990 (two at the end of 1994 and 1995 and
one at the end of 1996).
(2) Represents two specialty restaurants which were converted to Rio Bravo
Cantina restaurants during 1994.
(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.
5
The Applebee's System
Concept. Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately priced, high quality food and
beverage items, table service and a comfortable atmosphere. Applebee's
restaurants appeal to a wide range of customers including families with
children, young adults and senior citizens.
Applebee's restaurants are designed according to Company specifications and are
located in free-standing buildings, end caps of strip shopping centers, and
shopping malls. The Company's two current free-standing restaurant prototypes
are approximately 5,000 and 5,400 square feet and seat approximately 175 and 200
patrons, respectively. The Company is currently developing a third prototype
that will be less than 5,000 square feet and seat almost 200 patrons. 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. Most restaurants offer beer, wine, liquor and premium specialty
drinks. During 1996, alcoholic beverages accounted for 15.8% 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 operations training course for general managers,
kitchen managers and other restaurant managers. The course consists of in-store
task-oriented training and formal administrative, customer service, and
financial training which may last from 10 to 12 weeks. A team of Company
employed trainers is provided for each new restaurant to conduct 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 1996, 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.
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 will
6
add two optional promotions in 1997. The Company advertises on a national,
regional and local basis, utilizing primarily television, radio and print media.
In 1996, approximately 3.9% of sales for Company Applebee's restaurants was
spent on advertising, including 1.5% contributed to the national advertising
pool which develops and funds the specific national promotions. All franchisees
are also required to contribute 1.5% of sales to the national advertising pool.
The remainder of the Company's advertising expenditures are focused on local
advertising in areas with Company owned restaurants.
Purchasing. Maintaining high food quality and system-wide consistency is a
central focus of the Company's purchasing program. The Company mandates quality
standards for all products used in the restaurants and maintains a limited list
of approved suppliers from which the Company and its franchisees must select.
The Company has negotiated purchasing agreements with most of its approved
suppliers which result in volume discounts for the Company and its franchisees,
and when necessary, purchases and maintains inventories of Riblets, a specialty
item on the Applebee's menu, to assure sufficient supplies for the system.
Company Applebee's Restaurants
Company Restaurant Openings and Acquisitions. The Company's expansion strategy
is to cluster restaurants in targeted markets, thereby increasing consumer
awareness and enabling the Company to take advantage of operational,
distribution, and advertising efficiencies. The Company's experience in
developing markets indicates that the opening of multiple restaurants within a
particular market results in increased market share.
In order to maximize overall system growth, the Company's expansion strategy
through 1992 emphasized franchise arrangements with experienced, successful and
financially capable restaurant operators. Although the Company continues to
expand the Applebee's system across the United States through franchise
operations, commencing in 1992, the system growth strategy also included
increasing the number of Company restaurants through the direct development of
strategic territories and, if available under acceptable financial terms, by
selectively acquiring existing franchise restaurants and terminating related
development rights held by the selling franchisee. In that regard, the Company
has expanded from a total of 31 owned or operated restaurants as of December 27,
1992 to a total of 148 as of December 29, 1996 through the opening of 93 new
restaurants and the acquisition of 37 franchise restaurants over the last four
years. In February 1997, the Company entered into an agreement to purchase the
assets of 11 operating Applebee's franchise restaurants located in the St. Louis
metropolitan area. Final closing is subject to obtaining licenses and third
party consents and is expected to occur early in the second quarter of 1997.
The Company anticipates opening approximately 35 new Applebee's restaurants in
1997, including two new restaurants in the St. Louis market, although it may
open more restaurants depending upon the availability of appropriate new sites.
The areas in which the Company's restaurants are located and the areas where the
Company opened new restaurants during 1996 are set forth in the following table.
The Company currently intends to continue developing restaurants in all of the
following areas:
7
Company
Company Restaurants
Restaurants as of
Opened in December 29,
Area 1996 1996
--------------------------------------------------------------- ----------------- ------------------
Minneapolis/St. Paul, Minnesota............................. 5 25
New England (includes Massachusetts, Vermont,
New Hampshire, Rhode Island, Maine and
parts of Connecticut)..................................... 6 24
Detroit/Southern Michigan................................... 5 23
North/Central Texas......................................... 1 20
Kansas City, Missouri/Kansas................................ 2 18
Las Vegas/Reno, Nevada...................................... 4 9
San Diego/Southern California............................... 1 8
Atlanta, Georgia............................................ -- 7
Philadelphia, Pennsylvania.................................. 1 6
Albuquerque, New Mexico..................................... 1 4
Long Island, New York....................................... 3 4
------------------ ------------------
29 148
================== ==================
In October 1996, the Company completed the sale of six of its eight Company
owned Applebee's restaurants located in the San Bernardino and Riverside
counties of southern California. The operations of the six restaurants and
future restaurant development in the market area were assumed by an existing
Applebee's franchisee. The Company intends to dispose of the two remaining
restaurants in the territory during 1997, and in March 1997, entered into a
lease termination agreement for one of these restaurants.
The Company is also currently assessing its strategic direction with respect to
the operations of its remaining southern California presence, comprised of six
Company owned Applebee's restaurants in the San Diego market area, and future
restaurant development in this territory. The Company's alternatives for the San
Diego market may include continued operation of the restaurants and development
of new restaurants, a franchisee alliance for future development of the
remainder of the market, or the possible sale of the existing restaurants to a
franchisee.
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 and performance bonus based on restaurant sales, profits and
adherence to Company standards. As of December 29, 1996, the Company employed
eight Regional Vice Presidents of Operations/Directors of Operations and 25
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.
8
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. The Company currently has exclusive
franchise arrangements with approximately 55 franchise groups, including eight
international franchisees. The Company has generally selected franchisees that
are experienced multi-unit restaurant operators who have been involved with
other restaurant concepts. The Company's franchisees operate Applebee's
restaurants in 39 states, Canada, Europe, and the Caribbean. Virtually all
territories in the contiguous 48 states have been granted to franchisees or
designated for Company development.
As of December 29, 1996, there were 671 franchise restaurants. Franchisees
opened 122 restaurants in 1994, 135 restaurants in 1995, and 134 restaurants in
1996. The Company anticipates at least 100 franchise restaurant openings in
1997.
Development of Restaurants. The Company makes available to franchisees the
physical specifications for a typical restaurant, retaining the right to
prohibit or modify the use of any plan. Each franchisee, with assistance from
the Company, is responsible for selecting the site for each restaurant within
its territory, subject to Company approval. The Company conducts a physical
inspection, reviews any proposed lease or purchase agreement, and makes
available demographic studies.
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 gross
sales on local advertising and promotional activities, in addition to their
contribution of 1.5% of gross sales 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 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.
9
Quality Control. The Company continuously monitors franchisee operations and
inspects restaurants, principally through its full-time franchise consultants
(23 at December 29, 1996) 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. 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 29, 1996, the Franchise Business
Council consisted of eight franchisee representatives and three members of the
Company's senior management. One franchisee representative is a permanent
member, one franchisee representative must be a franchisee with five or less
restaurants, and any franchisee who operates 10% or more of the total number of
system restaurants is reserved a seat (currently one franchisee). The remaining
franchisee representatives are elected by franchisees prior to and announced at
the annual franchise convention.
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 development agreements with eight
international franchisees. The agreements involve the development of Applebee's
restaurants in Canada, the Benelux region of Northern Europe, Germany, Sweden,
Greece, and certain countries in the Middle East. Five restaurants were opened
during 1996 --one in the Netherlands, two in Germany, and two in Canada. In
addition, the Company is considering potential franchisees for several other
countries.
The success of further international expansion will be dependent upon, among
other things, local acceptance of the Applebee's concept, and the Company's
ability to attract qualified franchisees and operating personnel, to comply with
the regulatory requirements of the local jurisdictions, and to supervise
international franchisee operations effectively.
Franchise Financing. Although financing is the sole responsibility of the
franchisee, the Company makes available to franchisees 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.
10
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.
Expansion. As of December 29, 1996, the Company operated 21 Rio Bravo Cantina
restaurants and franchisees operated nine Rio Bravo Cantina restaurants in 11
states. During 1996, the Rio Bravo Cantina concept was expanded into eight new
states. The Company opened five Rio Bravo Cantina restaurants in 1996, and
expects to open nine Rio Bravo Cantina restaurants in 1997. In addition, the
Company has identified 15 Rio Bravo Cantina franchisees, all of whom are
experienced Applebee's franchisees. The related development territories for the
15 franchisees encompass all or parts of 20 states. These franchisees have
commitments to build more than 100 restaurants over the next several years,
including nine which were opened in 1996, and the Company expects approximately
18 franchise restaurants to open in 1997.
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. Of the 14 openings in 1996, seven were conversions. 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. A new smaller prototype is currently being
developed which is approximately 5,600 square feet and seats approximately 210
people with an optional outdoor patio area that seats 36 patrons.
Menu. All but one Rio Bravo Cantina restaurant 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 $4.75 to $7.75 and
dinner entrees priced from $5.99 to $12.99. During 1996, alcoholic beverages
accounted for approximately 30% of total Company restaurant sales.
The Rio Bravo Franchise System
Franchise Arrangements. 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
11
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 gross sales. Beginning in 2000, the
royalty fee will increase to 4.25%. 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 gross sales on
local advertising and promotional activities, in addition to a contribution of
2.0% of gross sales to the national advertising account.
Rio Bravo Roundtable. The Company maintains a Rio Bravo Roundtable 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 29, 1996, the Rio Bravo
Roundtable consisted of five franchisee representatives appointed by the Company
and two members of the Company's senior management. Beginning in 1997, the
franchisee representatives will be elected by franchisees at an annual meeting.
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 has no expansion plan for these
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 significant
financial and other resources. 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
restaurant management personnel as well as continued competition for sites. 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
intends to protect its service marks by appropriate legal action where and when
necessary.
12
Government Regulation
The Company's restaurants are subject to numerous federal, state, and local laws
affecting health, sanitation and safety standards, as well as to state and local
licensing regulation of the sale of alcoholic beverages. Each restaurant
requires appropriate licenses from regulatory authorities allowing it to sell
liquor, beer, and wine, and each restaurant requires food service licenses from
local health authorities. The Company's licenses to sell alcoholic beverages
must be renewed annually and may be suspended or revoked at any time for cause,
including violation by the Company or its employees of any law or regulation
pertaining to alcoholic beverage control, such as those regulating the minimum
age of patrons or employees, advertising, wholesale purchasing, and inventory
control. The failure of a restaurant to obtain or retain liquor or food service
licenses could have a material adverse effect on its operations. In order to
reduce this risk, each restaurant is operated in accordance with standardized
procedures designed to facilitate compliance with all applicable codes and
regulations.
The Company's employment practices are governed by various governmental
employment regulations, including minimum wage, overtime, immigration, family
leave and working condition regulations.
The Company is subject to a variety of federal and state laws governing
franchise sales and the franchise relationship. In general, these laws and
regulations impose certain disclosure and registration requirements prior to the
sale and marketing of franchises. Recent decisions of several state and federal
courts and recently enacted or proposed federal and state laws demonstrate a
trend toward increased protection of the rights and interests of franchisees
against franchisors. Such decisions and laws may limit the ability of
franchisors to enforce certain provisions of franchise agreements or to alter or
terminate franchise agreements. Due to the scope of the Company's business and
the complexity of franchise regulations, minor compliance issues may be
encountered from time to time; however, the Company does not believe any such
issues will have a material adverse effect on its business.
Under certain court decisions and statutes, owners of restaurants and bars in
some states in which the Company owns or operates restaurants may be held liable
for serving alcohol to intoxicated customers whose subsequent conduct results in
injury or death to a third party, and no assurance can be given that the Company
will not be subject to such liability. The Company believes its insurance
presently provides adequate coverage for such liability.
Employees
At December 29, 1996, the Company employed approximately 16,300 full and
part-time employees, of whom approximately 350 were corporate personnel, 950
were restaurant managers or managers in training and 15,000 were employed in
non-management full and part-time restaurant positions. Of the 350 corporate
employees, 95 were in management positions and 255 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.
13
Executive Officers of the Registrant
The executive officers of the Company as of December 29, 1996 are shown below.
Name Age Position
Abe J. Gustin, Jr................62 Chairman of the Board of Directors and Chief Executive Officer
(Co-Chief Executive Officer effective January 1, 1997)
Lloyd L. Hill....................52 President, Chief Operating Officer and Member of the Board
of Directors (Co-Chief Executive Officer effective
January 1, 1997)
Burton M. Sack...................59 Executive Vice President of New Business Development and
Member of the Board of Directors
George D. Shadid.................42 Executive Vice President, Chief Financial Officer and Treasurer
Robert A. Martin.................66 Executive Vice President of Marketing and Member of the
Board of Directors
Steven K. Lumpkin................42 Senior Vice President of Administration
Ronald J. Marks..................41 Vice President of Research & Development (promoted to Senior Vice
President effective January 1, 1997)
Stuart F. Waggoner...............51 Senior Vice President of Operations
Philip J. Hickey, Jr.............42 President and Chief Operating Officer of Rio Bravo
International, Inc. (a wholly-owned subsidiary of
Applebee's International, Inc.)
Abe J. Gustin, Jr. has been a director of the Company since September 1983 when
the Company was formed. He served as Chairman of the Board of Directors of the
Company from September 1983 until January 1988 and was again elected as Chairman
in September 1992. He was Vice President from November 1987 to January 1988, and
from January 1988 until December 1994, he served as President of the Company.
Mr. Gustin served as Chief Executive Officer of the Company through 1996, and
effective January 1, 1997, became Co-Chief Executive Officer along with Lloyd L.
Hill. 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. Effective January 1, 1997, Mr. Hill assumed
the role of Co-Chief Executive Officer along with Mr. Gustin. From 1990 to 1994,
he served as President of Kimberly Quality Care, a home health care and nurse
personnel staffing company, where he also served as a director from 1988 to
1994, having joined that organization in 1980.
Mr. Gustin and Mr. Hill will share the responsibilities of Chief Executive
Officer through 1997. Beginning in 1998, Mr. Gustin will retain his position as
the Chairman of the Board and Mr. Hill will remain Chief Executive Officer.
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
responsibility for international franchising. Mr. Sack was the principal
14
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.
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.
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.
Ronald J. Marks has been an employee of the Company since March 1988 and served
as Director of Product Development until March 1991, when he became Director of
Menu Development. In February 1992, he was promoted to Executive Director of
Research and Development, and in February 1993, Mr. Marks was promoted to Vice
President of Research and Development. He was promoted to Senior Vice President
of Research and Development in January 1997.
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
15
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.
Item 2. Properties
At December 29, 1996, the Company owned or operated 173 restaurants, of which it
leased the land and building for 63 sites, owned the building and leased the
land for 51 sites, and owned the land and building for 59 sites. In addition, as
of December 29, 1996, the Company owned three sites for future development of
restaurants and had entered into 24 lease agreements for restaurant sites the
Company plans to open during 1997. The Company's leases generally have an
initial term of 15 to 20 years, with renewal terms of 5 to 20 years, and provide
for a fixed rental plus, in certain instances, percentage rentals based on gross
sales.
The Company owns an 80,000 square foot office building in which its corporate
offices are headquartered in Overland Park, Kansas, located in the metropolitan
Kansas City area. As of December 29, 1996, approximately 14% 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.
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.
16
The following table sets forth the 45 states and the four international
countries in which Applebee's and Rio Bravo Cantina restaurants are located and
the number of restaurants operating in each state or country as of December 29,
1996:
Number of Restaurants
-----------------------------------------------------------------------------------------
State or Country Franchise Company Total System
- ----------------------- ----------------------------- ----------------------------- -----------------------------
Applebee's Rio Bravo Applebee's Rio Bravo Applebee's Rio Bravo
-------------- -------------- -------------- -------------- -------------- --------------
Domestic:
Alabama................ 15 -- -- -- 15 --
Arizona................ 15 -- -- -- 15 --
Arkansas............... 6 -- -- -- 6 --
California............. 39 -- 8 -- 47 --
Colorado............... 21 -- -- -- 21 --
Florida................ 59 1 -- 8 59 9
Georgia................ 36 2 7 7 43 9
Idaho.................. 1 -- -- -- 1 --
Illinois............... 31 -- -- -- 31 --
Indiana................ 31 1 -- -- 31 1
Iowa................... 12 -- -- -- 12 --
Kansas................. 7 1 7 1 14 2
Kentucky............... 19 1 -- -- 19 1
Louisiana.............. 12 -- -- -- 12 --
Maryland............... 12 -- -- -- 12 --
Massachusetts.......... -- -- 12 -- 12 --
Michigan............... 4 -- 23 2 27 2
Minnesota.............. -- -- 25 2 25 2
Mississippi............ 10 -- -- -- 10 --
Missouri............... 16 1 11 -- 27 1
Montana................ 4 -- -- -- 4 --
Nebraska............... 7 -- -- -- 7 --
Nevada................. -- -- 9 -- 9 --
New Hampshire.......... -- -- 7 -- 7 --
New Jersey............. 7 -- -- -- 7 --
New Mexico............. 2 -- 4 -- 6 --
New York............... 22 -- 4 -- 26 --
North Carolina......... 29 1 -- -- 29 1
North Dakota........... 5 -- -- -- 5 --
Ohio................... 47 1 -- -- 47 1
Oklahoma............... 7 -- -- -- 7 --
Oregon................. 5 -- -- -- 5 --
Pennsylvania........... 11 -- 6 -- 17 --
Rhode Island........... -- -- 4 -- 4 --
South Carolina......... 33 -- -- -- 33 --
South Dakota........... 2 -- -- -- 2 --
Tennessee.............. 39 -- -- 1 39 1
Texas.................. 17 -- 20 -- 37 --
Utah................... 6 -- -- -- 6 --
Vermont................ -- -- 1 -- 1 --
Virginia............... 38 -- -- -- 38 --
Washington............. 10 -- -- -- 10 --
West Virginia.......... 4 -- -- -- 4 --
Wisconsin.............. 19 -- -- -- 19 --
Wyoming................ 2 -- -- -- 2 --
International:
Canada................. 4 -- -- -- 4 --
Germany................ 2 -- -- -- 2 --
The Netherlands........ 2 -- -- -- 2 --
Curacao................ 1 -- -- -- 1 --
-------------- -------------- -------------- -------------- -------------- --------------
671 9 148 21 819 30
============== ============== ============== ============== ============== ==============
17
Item 3. Legal Proceedings
As of December 29, 1996, the Company was using assets owned by a former
franchisee in the operation of one restaurant 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 declined 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 fourth quarter of 1996, the
Company received information indicating that the franchisee's indebtedness to
the FDIC had been acquired by a third party. The Company has not been contacted
by the third party. 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.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
1. The Company's common stock trades on the Nasdaq National Market tier of
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.
1996 1995
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 25.75 $ 17.75 $ 22.00 $ 13.38
Second Quarter $ 32.50 $ 25.00 $ 26.50 $ 20.50
Third Quarter $ 34.25 $ 25.00 $ 31.50 $ 23.50
Fourth Quarter $ 30.00 $ 23.12 $ 29.75 $ 21.63
2. Number of stockholders of record at December 29, 1996: 1,246
3. An annual dividend of $0.06 per common share was declared on November
21, 1995 for stockholders of record on December 26, 1995, and the
dividend was payable on January 12, 1996. An annual dividend of $0.07
per common share was declared on November 25, 1996 for stockholders of
record on December 6, 1996, and the dividend was payable on January 13,
1997.
The Company presently anticipates continuing the payment of cash
dividends based upon its annual net income. The actual amount of such
dividends will depend upon future earnings, results of operations,
capital requirements, the financial condition of the Company and
certain other factors. There can be no assurance as to the amount of
net income that the Company will generate in 1997 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.
19
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 29, December 31, December 25, December 26, December 27,
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ----------------
(in thousands, except per share amounts)
STATEMENT OF
EARNINGS DATA:
Company restaurant sales.............. $ 358,990 $ 299,824 $ 222,445 $ 159,482 $ 85,459
Franchise income...................... 54,141 43,739 31,419 21,324 14,319
--------------- --------------- --------------- --------------- ----------------
Total operating revenues......... $ 413,131 $ 343,563 $ 253,864 $ 180,806 $ 99,778
=============== =============== =============== =============== ================
Operating earnings.................... $ 58,833 $ 45,712 $ 29,311 $ 19,677 $ 9,226
Net earnings.......................... $ 38,014 $ 27,420 $ 17,823 $ 12,551 $ 6,335
Net earnings per common share......... $ 1.22 $ 0.94 $ 0.64 $ 0.46 $ 0.26
Dividends per share................... $ 0.07 $ 0.06 $ 0.05 $ 0.04 $ 0.03
Weighted average shares
outstanding........................ 31,188 29,319 27,970 27,543 24,755
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets.......................... $ 314,111 $ 270,680 $ 180,014 $ 138,680 $ 92,383
Long-term obligations, including
current portion..................... $ 25,843 $ 27,427 $ 38,697 $ 19,845 $ 10,212
Stockholders' equity.................. $ 244,764 $ 203,993 $ 108,788 $ 92,680 $ 68,561
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company's revenues are generated from two primary sources: Company
restaurant sales (food and beverage sales) and franchise income consisting of
franchise restaurant royalties (generally 4% of each franchise restaurant's
monthly gross sales) and franchise fees (which typically range from $30,000 to
$35,000 for each Applebee's restaurant opened and $40,000 for each Rio Bravo
Cantina restaurant opened). Beverage sales include sales of alcoholic beverages,
while non-alcoholic beverages are included in food sales. Certain expenses (food
and beverage, labor, direct and occupancy costs, and pre-opening expenses)
relate directly to Company restaurants, and other expenses (general and
administrative and amortization expenses) relate to both Company restaurants and
franchise operations.
The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in
December. The Company's fiscal years ended December 29, 1996, December 31, 1995
and December 25, 1994 contained 52, 53 and 52 weeks, respectively, and are
referred to hereafter as 1996, 1995 and 1994, respectively.
Acquisitions
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.
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 consolidated financial statements
subsequent to the date of acquisition.
In February 1997, the Company entered into an agreement to purchase the assets
of 11 operating Applebee's franchise restaurants located in the St. Louis
metropolitan area for approximately $36.1 million, subject to adjustment. The
purchase price will be paid in a combination of cash and $2.5 million of
promissory notes, and the transaction will be accounted for as a purchase. Final
closing is subject to obtaining licenses and third party consents and is
expected to occur early in the second quarter of 1997.
21
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 29, December 31, December 25,
1996 1995 1994
--------------- ---------------- ---------------
Revenues:
Company restaurant sales......................... 86.9% 87.3% 87.6%
Franchise income................................. 13.1 12.7 12.4
--------------- ---------------- ---------------
Total operating revenues...................... 100.0% 100.0% 100.0%
=============== ================ ===============
Cost of sales (as a percentage of
Company restaurant sales):
Food and beverage................................ 28.0% 28.3% 29.2%
Labor............................................ 31.5 31.7 31.8
Direct and occupancy............................. 24.4 24.1 24.2
Pre-opening expense.............................. 1.0 0.8 0.9
--------------- ---------------- ---------------
Total cost of sales........................... 84.9% 84.8% 86.1%
=============== ================ ===============
General and administrative expenses................... 10.6% 11.3% 11.5%
Merger costs.......................................... -- 0.5 0.4
Amortization of intangible assets..................... 0.6 0.7 0.8
Loss on disposition of restaurants and equipment...... 0.8 0.2 0.3
--------------- ---------------- ---------------
Operating earnings.................................... 14.2 13.3 11.6
--------------- ---------------- ---------------
Other income (expense):
Investment income................................ 0.7 0.5 0.4
Interest expense................................. (0.4) (0.7) (0.8)
Other income..................................... 0.1 0.1 0.1
--------------- ---------------- ---------------
Total other income (expense).................. 0.5 (0.1) (0.3)
--------------- ---------------- ---------------
Earnings before income taxes.......................... 14.7 13.2 11.3
Income taxes (including pro forma provision for
income taxes).................................... 5.5 5.2 4.3
--------------- ---------------- ---------------
Net earnings.......................................... 9.2% 8.0% 7.0%
=============== ================ ===============
22
Fiscal Year Ended December 29, 1996 Compared With Fiscal Year Ended December 31,
1995
Company Restaurant Sales. Overall Company restaurant sales increased $59,166,000
(20%) from $299,824,000 in 1995 to $358,990,000 in 1996. Sales for Company owned
Applebee's restaurants increased $47,743,000 (20%) from $237,350,000 in 1995 to
$285,093,000 in 1996, due primarily to Company restaurant openings and sales
from the five Philadelphia restaurants acquired in April 1995, as well as an
increase in comparable restaurant sales. Sales for Company owned Rio Bravo
Cantina restaurants were $48,135,000 and $59,523,000 in 1995 and 1996,
respectively, and sales for the specialty restaurants were $14,339,000 and
$14,374,000 in 1995 and 1996, respectively. The increase in sales for the Rio
Bravo Cantina restaurants resulted primarily from Company restaurant openings
and an increase in comparable restaurant sales.
Comparable restaurant sales at Company owned or operated Applebee's restaurants
increased by 1.1% in 1996. Weighted average weekly sales at Company owned or
operated Applebee's restaurants increased 1.0% from $39,977 in 1995 to $40,366
in 1996. The Company believes these increases were due, in part, to successful
food-specific promotions backed by an increase in advertising spending, as a
percentage of sales, in 1996.
The Company does not expect significant comparable restaurant sales increases
and may experience comparable restaurant sales decreases during the 1997 fiscal
year for Company owned Applebee's restaurants, as many of its restaurants
operate near sales capacity and various markets continue to experience
competitive pressures. A menu price increase was implemented during the fourth
quarter of 1996 for certain menu items. Although the Company's experience in
developing markets indicates that the opening of multiple restaurants within a
particular market results in increased market share, decreases in comparable
restaurant sales may result.
Comparable restaurant sales for Company owned Rio Bravo Cantina restaurants
increased by 3.9% in 1996. Weighted average weekly sales (excluding one
restaurant that is open for dinner only) increased slightly from $66,158 in 1995
to $66,743 in 1996 and were impacted by the expected lower sales volumes at new
restaurants.
Franchise Income. Overall franchise income increased $10,402,000 (24%) from
$43,739,000 in 1995 to $54,141,000 in 1996. This increase was due primarily to
the increased number of franchise Applebee's restaurants operating during 1996
as compared to 1995. The remaining increase in franchise income resulted
primarily from franchise fees earned relating to the opening of the first nine
franchise Rio Bravo Cantina restaurants during 1996. These increases were
partially offset by decreases in weighted average weekly sales and comparable
sales for franchise Applebee's restaurants which decreased 2.6% and 1.2%,
respectively, in 1996.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 28.3%
in 1995 to 28.0% in 1996, due primarily to operational improvements, purchasing
efficiencies resulting from the Company's rapid growth and early payment
discounts, and the menu price increase implemented in the fourth quarter of
1996. In addition, the Company experienced an increase in food costs in the
second quarter of 1995 as a result of winter flooding in California which caused
shortages of certain produce items and a significant increase in related costs.
Beverage sales, as a percentage of Company restaurant sales, declined from 18.9%
in 1995 to 18.3% in 1996, which had a negative impact on overall food and
beverage costs. 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.
23
Labor costs decreased from 31.7% in 1995 to 31.5% in 1996. Labor costs, as a
percentage of sales, were positively affected by an overall reduction in
workers' compensation costs due to favorable historical claims experience and
improved hourly labor efficiency. Such decreases were partially offset by higher
management costs in 1996. Overall labor costs continue to be adversely affected
by the lower sales volumes in the southern California market. The Company does
not expect a significant increase in labor costs resulting from the first phase
of the minimum wage increase which became effective October 1, 1996.
Direct and occupancy costs increased from 24.1% in 1995 to 24.4% in 1996 due
primarily to higher advertising expense and depreciation expense which were
partially offset by lower rent expense. The southern California market continues
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.
Pre-opening expense increased from $2,234,000 in 1995 to $3,557,000 in 1996 due
primarily to the opening of two additional Applebee's restaurants and one
additional Rio Bravo Cantina restaurant in 1996 and costs incurred relating to
the reopening of two Applebee's restaurants after being rebuilt. The Company
also incurred higher pre-opening costs for each of the five Rio Bravo Cantina
restaurants that were opened in 1996 as compared to those opened in 1995.
General and Administrative Expenses. General and administrative expenses
decreased in 1996 to 10.6% from 11.3% in 1995, due primarily to the absorption
of general and administrative expenses over a larger revenue base. General and
administrative expenses increased by $5,134,000 during 1996 compared to 1995 due
primarily to the costs of additional personnel associated with the Company's
development efforts and system-wide expansion, including costs related to the
franchising and expansion of the Rio Bravo Cantina concept.
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.
Loss on Disposition of Restaurants and Equipment. In October 1996, the Company
completed the sale of six of its eight Company owned Applebee's restaurants
located in the San Bernardino and Riverside counties of southern California. The
operations of the six restaurants and future restaurant development in the
market area were assumed by an existing Applebee's franchisee. The sales price
was $8,500,000 and a loss on the disposition of the properties of $75,000 was
recorded in the third quarter of 1996. During the fourth quarter of 1996, the
Company recognized a loss of $2,500,000 primarily relating to the intended
disposition of the two remaining restaurants in the territory.
The Company is also currently assessing its strategic direction with respect to
the operations of its remaining southern California presence, comprised of six
Company owned Applebee's restaurants in the San Diego market area, and future
restaurant development in this territory. The Company's alternatives for the San
Diego market may include continued operation of the restaurants and development
of new restaurants, a franchisee alliance for future development of the
remainder of the market, or the possible sale of the existing restaurants to a
franchisee.
During 1995, the Company recognized a loss of $615,000 relating to the planned
disposition of two restaurants in 1996, including $275,000 relating to one
restaurant managed under a purchase rights agreement. The Company continues to
operate one restaurant under this agreement.
24
Investment Income. Investment income increased in 1996 compared to 1995
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 decreased in 1996 compared to 1995 primarily
as a result of a decrease in interest related to the revolving credit facility
incurred in 1995 and a decrease in long-term debt resulting from the payoff in
August 1995 of the debt assumed in connection with the IRC Merger.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.4% in 1996 compared to 39.5% in 1995. Excluding
non-deductible merger costs, the effective income tax rate would have been 38.0%
in 1995. The remaining decrease in the Company's overall effective tax rate in
1996 was due primarily to a reduction in state income taxes.
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. 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 continued
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 did not show 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
25
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
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.
26
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.
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.
Liquidity and Capital Resources
The Company's need for capital resources historically has resulted from, and for
the foreseeable future is expected to relate primarily to, the construction and
acquisition of restaurants. Such capital has been provided by public stock
offerings, debt financing, and ongoing Company operations, including cash
generated from Company and franchise operations, credit from trade suppliers,
real estate lease financing, and landlord contributions to leasehold
improvements. The Company has also used its common stock as consideration in the
acquisition of restaurants. In addition, the Company assumed debt or issued new
debt in connection with certain mergers and acquisitions.
Capital expenditures were $61,581,000 in 1995 (which includes $9,682,000 related
to the Philadelphia Acquisition) and $65,672,000 in 1996. The Company currently
expects to open approximately 35 Applebee's restaurants (including two new
restaurants in the St. Louis area) and nine Rio Bravo Cantina restaurants in
1997. Capital expenditures in fiscal 1997 are expected to be between
$120,000,000 and $125,000,000 primarily for the development of new restaurants,
acquisitions of restaurants (including $36,100,000 relating to the St. Louis
acquisition), refurbishments of and capital replacements for existing
restaurants, and enhancements to information systems for the Company's
restaurants and corporate office. The amount of actual capital expenditures will
be dependent upon, among other things, the proportion of leased versus owned
properties as the Company expects to continue to purchase a portion of its
sites. In addition, if the Company opens more restaurants than it currently
anticipates or acquires additional restaurants, its capital requirements will
increase accordingly.
The Company has certain debt agreements containing 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 limited 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 29, 1996, retained earnings were not
restricted for the payment of cash dividends. The Company is currently in
compliance with the covenants of all of its debt agreements.
27
The Company believes that its liquid assets and cash generated from operations,
combined with borrowings available under its $20,000,000 revolving credit
facility, will provide sufficient funds for its capital requirements for the
foreseeable future. As of December 29, 1996, the Company held liquid assets
totaling $57,410,000, consisting of cash and cash equivalents ($17,346,000) and
short-term investments ($40,064,000). No amounts were outstanding under the
revolving credit facility; however, standby letters of credit issued under the
facility totaling $1,324,000 were outstanding as of December 29, 1996.
Inflation
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
A majority of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. An increase in the minimum wage has recently been passed by the Federal
government and is also being discussed by various state governments. Although
the Company has been able to and will continue to attempt to pass along
increases in costs through food and beverage price increases, there can be no
assurance that all such increases can be reflected in its prices or that
increased prices will be absorbed by customers without diminishing, to some
degree, customer spending at its restaurants.
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.
28
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 14, 1997, 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 14, 1997, 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 14, 1997, 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 14,
1997, is incorporated herein by reference.
29
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 25, 1996, announcing
the declaration of a dividend on its common stock to stockholders of
record as of December 6, 1996, payable on January 13, 1997.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
Date: March 6, 1997 By: /s/ Abe J. Gustin, Jr.
---------------- --------------------------------
Abe J. Gustin, Jr.
Chairman and Co-Chief Executive Officer
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 6, 1997
--------------------------- ---------------
Abe J. Gustin, Jr.
Director, Chairman and Co-Chief Executive Officer
(co-principal executive officer)
By: /s/ Lloyd L. Hill Date: March 7, 1997
--------------------------- ---------------
Lloyd L. Hill
Director and Co-Chief Executive Officer
(co-principal executive officer)
By: /s/ George D. Shadid Date: March 10, 1997
--------------------------- ---------------
George D. Shadid
Executive Vice President and Chief Financial Officer
(principal financial officer)
By: /s/ Mark A. Peterson Date: March 7, 1997
--------------------------- ---------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
31
By: /s/ D. Patrick Curran Date: March 4, 1997
--------------------------- ---------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 4, 1997
--------------------------- ---------------
Eric L. Hansen
Director
By: /s/ Jack P. Helms Date: March 6, 1997
--------------------------- ---------------
Jack P. Helms
Director
By: /s/ Kenneth D. Hill Date: March 4, 1997
--------------------------- ---------------
Kenneth D. Hill
Director
By: /s/ Robert A. Martin Date: March 6, 1997
--------------------------- ---------------
Robert A. Martin
Director
By: /s/ Johyne H. Reck Date: March 4, 1997
--------------------------- ---------------
Johyne H. Reck
Director
By: /s/ Burton M. Sack Date: March 7, 1997
--------------------------- ---------------
Burton M. Sack
Director
By: /s/ Raymond D. Schoenbaum Date: March 4, 1997
--------------------------- ---------------
Raymond D. Schoenbaum
Director
32
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Reports............................................................................ F-2
Consolidated Balance Sheets as of December 29, 1996 and
December 31, 1995 .................................................................................. F-4
Consolidated Statements of Earnings for the Fiscal Years Ended
December 29, 1996, December 31, 1995 and December 25, 1994........................................... F-5
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 29, 1996, December 31, 1995 and December 25, 1994..................................... F-6
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 29, 1996, December 31, 1995 and December 25, 1994........................................... F-7
Notes to Consolidated Financial Statements............................................................... F-9
F-1
INDEPENDENT AUDITORS' REPORT
Applebee's International, Inc.:
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 29, 1996 and
December 31, 1995 and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 29, 1996. 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 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") for the fiscal
year ended December 25, 1994, which financial statements reflect total operating
revenues constituting approximately 20% of the related consolidated financial
statement total for the fiscal year ended December 25, 1994. The combined
financial statements of IRC were audited by other auditors, whose report thereon
has been furnished to us, and our opinion expressed herein, insofar as it
relates to the amounts indicated for IRC in the consolidated financial
statements, is based solely on the report 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 report 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 29, 1996 and
December 31, 1995, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended December 29, 1996
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 21, 1997
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 statements of operations, stockholders' equity and
partners' capital, and cash flows 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) for the year 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 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 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 Innovative
Restaurant Concepts, Inc. and subsidiaries, Cobb/Gwinnett Rio, Ltd., Rio Real
Estate, L.P., and CG Restaurant Partners, Ltd., for the year 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
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
December 29, December 31,
1996 1995
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 17,346 $ 30,188
Short-term investments, at market value...................................... 40,064 21,836
Receivables, net of allowance................................................ 19,245 9,843
Inventories.................................................................. 4,557 10,036
Prepaid and other current assets............................................. 2,780 2,654
------------- --------------
Total current assets...................................................... 83,992 74,557
Property and equipment, net....................................................... 196,950 159,832
Goodwill, net..................................................................... 22,607 25,780
Franchise interest and rights, net................................................ 5,236 5,805
Deferred income taxes............................................................. 1,366 719
Other assets...................................................................... 3,960 3,987
------------- --------------
$ 314,111 $ 270,680
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ $ 968 $ 935
Current portion of obligations under noncompetition and consulting agreement. 220 220
Accounts payable............................................................. 11,949 11,183
Accrued expenses and other current liabilities............................... 25,597 22,635
Accrued dividends............................................................ 2,191 1,861
Accrued income taxes......................................................... 918 1,641
------------- --------------
Total current liabilities................................................. 41,843 38,475
------------- --------------
Non-current liabilities:
Long-term debt - less current portion........................................ 24,435 25,832
Franchise deposits........................................................... 1,793 1,168
Obligations under noncompetition and consulting agreement - less current
portion................................................................... 220 440
------------- --------------
Total non-current liabilities............................................. 26,448 27,440
------------- --------------
Total liabilities......................................................... 68,291 65,915
Minority interest in joint venture................................................ 1,056 772
Commitments and contingencies (Notes 7, 8 and 13) 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 - 31,580,955 shares in 1996 and 31,298,517 shares in 1995.......... 316 313
Additional paid-in capital................................................... 153,028 148,081
Retained earnings............................................................ 92,081 56,258
Unrealized gain on short-term investments, net of income taxes............... 188 190
------------- --------------
245,613 204,842
Treasury stock - 281,772 shares in 1996 and 1995, at cost.................... (849) (849)
------------- --------------
Total stockholders' equity................................................ 244,764 203,993
------------- --------------
$ 314,111 $ 270,680
============= ==============
See notes to consolidated financial statements.
F-4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Fiscal Year Ended
--------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------- ------------- -------------
Revenues:
Company restaurant sales................................ $ 358,990 $ 299,824 $ 222,445
Franchise income........................................ 54,141 43,739 31,419
------------- ------------- -------------
Total operating revenues............................. 413,131 343,563 253,864
------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage....................................... 100,534 84,776 64,819
Labor................................................... 112,969 94,935 70,777
Direct and occupancy.................................... 87,740 72,228 53,883
Pre-opening expense..................................... 3,557 2,234 2,093
------------- ------------- -------------
Total cost of Company restaurant sales............... 304,800 254,173 191,572
------------- ------------- -------------
General and administrative expenses.......................... 43,887 38,753 29,167
Merger costs................................................. -- 1,770 920
Amortization of intangible assets............................ 2,293 2,305 2,033
Loss on disposition of restaurants and equipment............. 3,318 850 861
------------- ------------- -------------
Operating earnings........................................... 58,833 45,712 29,311
------------- ------------- -------------
Other income (expense):
Investment income....................................... 2,863 1,764 1,065
Interest expense........................................ (1,571) (2,507) (2,029)
Other income............................................ 600 357 253
------------- ------------- -------------
Total other income (expense)......................... 1,892 (386) (711)
------------- ------------- -------------
Earnings before income taxes................................. 60,725 45,326 28,600
Income taxes................................................. 22,711 17,906 10,777
------------- ------------- -------------
Net earnings................................................. $ 38,014 $ 27,420 $ 17,823
============= ============= ==============
Net earnings per common share................................ $ 1.22 $ 0.94 $ 0.64
============= ============= =============
Weighted average shares outstanding.......................... 31,188 29,319 27,970
See notes to consolidated financial statements.
F-5
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 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
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
Change in 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) -- -- --
Net earnings.................... -- -- -- 27,420 -- -- 27,420
-------------- ---------- ------------ ----------- ---------- ----------- -------------
Balance, December 31, 1995......... 31,298,517 $ 313 $ 148,081 $ 56,258 $ 190 $ (849) $ 203,993
Dividends on common stock,
$0.07 per share............... -- -- -- (2,191) -- -- (2,191)
Stock options exercised......... 282,438 3 3,798 -- -- -- 3,801
Income tax benefit upon exercise
of stock options.............. -- -- 1,149 -- -- -- 1,149
Change in unrealized gain on
short-term investments, net of (2) (2)
income taxes..................
Net earnings.................... -- -- -- 38,014 -- -- 38,014
-------------- ---------- ------------ ----------- ---------- -------------------------
Balance, December 29, 1996......... 31,580,955 $ 316 $ 153,028 $ 92,081 $ 188 $ (849) $ 244,764
============== ========== ============ =========== ========== =========== =============
See notes to consolidated financial statements.
F-6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Fiscal Year Ended
----------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................... $ 38,014 $ 27,420 $ 17,823
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization............................... 15,652 11,964 8,997
Amortization of intangible assets........................... 2,293 2,305 2,033
Loss (gain) on sale of investments.......................... 27 (67) (112)
Deferred income tax provision (benefit)..................... 128 (179) 100
Loss on disposition of restaurants and equipment............ 3,318 850 661
Pro forma provision for income taxes of pooled companies.... -- 73 1,324
Changes in assets and liabilities (exclusive of effects of
acquisitions other than pooled companies):
Receivables................................................. (2,702) (2,447) (1,101)
Inventories................................................. 5,479 (4,877) (2,879)
Prepaid and other current assets............................ (898) 155 (802)
Accounts payable............................................ 766 433 1,293
Accrued expenses and other current liabilities.............. 2,806 5,307 5,269
Accrued income taxes........................................ (723) (328) (672)
Franchise deposits.......................................... 625 (187) 92
Other....................................................... (139) 356 (1,198)
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 64,646 40,778 30,828
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............................ (49,487) (16,809) (8,306)
Maturities and sales of short-term investments................. 31,149 4,392 9,942
Purchases of property and equipment............................ (65,672) (51,899) (45,419)
Acquisitions of restaurants.................................... -- (9,682) (3,315)
Proceeds from sale of restaurants and equipment................ 4,314 104 1,474
--------------- --------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES....................... (79,696) (73,894) (45,624)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......................... -- 60,434 --
Dividends paid................................................. (1,861) (1,269) (879)
Issuance of common stock upon exercise of stock options........ 3,801 5,988 662
Income tax benefit upon exercise of stock options.............. 1,149 2,615 215
Proceeds from issuance of long-term debt....................... -- 8,087 27,116
Payments on long-term debt..................................... (945) (22,179) (8,020)
Payments under noncompetition and consulting agreement......... (220) (220) (244)
Minority interest in net earnings of joint venture............. 284 214 69
Cash transactions of pooled companies prior to acquisition, net -- -- (2,543)
--------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 2,208 53,670 16,376
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (12,842) 20,554 1,580
CASH AND CASH EQUIVALENTS, beginning of period...................... 30,188 9,634 8,054
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period............................ $ 17,346 $ 30,188 $ 9,634
=============== =============== ===============
See notes to consolidated financial statements.
F-7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(dollars in thousands)
Fiscal Year Ended
-----------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes................................................ $ 22,437 $ 15,537 $ 9,806
================= ================= =================
Interest.................................................... $ 1,061 $ 3,060 $ 1,927
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capitalized leases of $2,610,000 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. This lease was transferred to a franchisee in
connection with the sale of six restaurants in October 1996.
The Company received a $5,000,000 promissory note in connection with the sale of
six restaurants in October 1996 (see Note 11), which was paid in full in January
1997.
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-8
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
29, 1996, there were 819 Applebee's restaurants, of which 671 were operated by
franchisees and 148 were operated by the Company, and 30 Rio Bravo Cantina
restaurants, of which nine were operated by franchisees and 21 were operated by
the Company. The Company also operated four other specialty restaurants. Such
restaurants were located in 45 states, Canada, Europe and the Caribbean.
2. Summary of Significant Accounting Policies
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 years ended December 29, 1996, December 31, 1995 and December
25, 1994 contained 52, 53 and 52 weeks, respectively, and are referred to
hereafter as 1996, 1995 and 1994, 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. As of December 29, 1996, 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 29, 1996 and December 31, 1995, $1,285,000 and
$7,132,000, respectively of "Riblets" were included in inventories in the
accompanying consolidated balance sheets. The Company purchases large quantities
of Riblets, a specialty item on the Applebee's menu, to use in Company operated
restaurants as well as to make them available to franchisees generally at its
cost.
Pre-opening expense: The Company expenses direct training and other costs
related to opening new or relocated restaurants in the month of opening.
Property and equipment: Property and equipment are stated at cost. Depreciation
is provided primarily on a straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the 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...................................... 15-20
Furniture and equipment..................................... 3-7
Interest has been capitalized in connection with the development of new
restaurants and is amortized over the estimated useful life of the related
asset. Interest costs of $618,000, $624,000 and $201,000 were capitalized during
1996, 1995 and 1994, 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
F-9
December 29, 1996 and December 31, 1995 was $5,155,000 and $3,739,000,
respectively.
Impairment of long-lived assets: The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets," as of the beginning of its 1996 fiscal year. SFAS 121
establishes accounting standards for the impairment of long-lived assets,
certain intangibles, and goodwill related to those assets. The adoption of this
Statement did not have an effect on the Company's consolidated financial
statements.
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 29, 1996 and December
31, 1995 was $5,695,000 and $5,126,000, 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 $4,615,000, $4,162,000 and
$3,753,000 for 1996, 1995 and 1994, respectively.
Advertising costs: The Company expenses advertising costs for Company owned
restaurants as incurred except for production costs of advertising which are
expensed the first time the advertising takes place. Advertising expense related
to Company restaurants was $16,470,000, $12,749,000 and $8,793,000 for 1996,
1995 and 1994, respectively.
Stock-based compensation: The Company has adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." 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 are permitted, however, to continue accounting for
stock compensation awards under APB Opinion No. 25 which requires compensation
cost to be recognized based on the excess, if any, between the quoted market
price of the stock at the date of grant and the amount an employee must pay to
acquire the stock. The Company has elected to continue to apply APB Opinion No.
25 and has disclosed the pro forma net income and earnings per share, determined
as if the new method had been applied, in Note 15.
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 15) are
excluded from the computations, because their dilutive effect is not material.
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
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
F-10
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 29, 1996 December 31, 1995
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- ----------------
Cash and cash equivalents.............. $ 17,346 $ 17,346 $ 30,188 $ 30,188
Short-term investments................. $ 40,064 $ 40,064 $ 21,836 $ 21,836
Long-term debt, excluding
capitalized lease obligations........ $ 22,780 $ 23,099 $ 23,725 $ 24,811
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. The IRC Merger
was accounted for as a pooling of interests. 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 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.
Other restaurant acquisitions: 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,
F-11
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 these purchased 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 29, 1996 December 31, 1995
------------------------------------------ ------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain Value Cost Gain Value
-------------- ------------- ------------- ------------- ------------- --------------
Certificates of deposit........ $ 19 $ -- $ 19 $ 19 $ -- $ 19
Preferred stocks............... 1,374 52 1,426 1,832 115 1,947
U.S. government and
agency securities........... 19,829 150 19,979 16,809 67 16,876
State and local
municipal securities........ 18,541 99 18,640 2,870 124 2,994
-------------- ------------- ------------- ------------- ------------- --------------
$ 39,763 $ 301 $ 40,064 $ 21,530 $ 306 $ 21,836
============== ============= ============= ============= ============= ==============
The amortized cost and estimated market value of debt securities as of December
29, 1996, 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..................................... $ 9,030 $ 9,039
Due after one year through five years........................... 28,040 28,300
Due after five years through ten years.......................... 202 210
Due after ten years............................................. 1,098 1,070
------------------ -----------------
$ 38,370 $ 38,619
================== =================
6. Receivables
Receivables are comprised of the following (in thousands):
December 29, December 31,
1996 1995
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 9,801 $ 7,615
Notes receivable................................................. 6,305 --
Credit card receivables.......................................... 1,636 1,578
Interest and dividends receivable................................ 833 337
Franchise fee receivables........................................ 425 589
Other............................................................ 515 447
----------------- -----------------
19,515 10,566
Less allowance for bad debts..................................... 270 723
----------------- -----------------
$ 19,245 $ 9,843
================= =================
F-12
Included in notes receivable as of December 29, 1996 was a $5,000,000 promissory
note which was received from a franchisee in connection with the sale of six
restaurants in October 1996 (see Note 11), which was paid in full in January
1997.
No provision for bad debts was recorded during 1996. The provision for bad debts
totaled $250,000 and $418,000 for 1995 and 1994, respectively. Write-offs
against the allowance for bad debts totaled $453,000 and $267,000 during 1996
and 1995, respectively. No amounts were written off during 1994.
7. Property and Equipment
Property and equipment, net is comprised of the following (in thousands):
December 29, December 31,
1996 1995
----------------- ------------------
Land............................................................. $ 38,340 $ 34,527
Buildings and leasehold improvements............................. 125,486 95,933
Furniture and equipment.......................................... 77,034 59,430
Construction in progress......................................... 7,882 7,564
----------------- ------------------
248,742 197,454
Less accumulated depreciation and capitalized
lease amortization............................................ 51,792 37,622
----------------- ------------------
$ 196,950 $ 159,832
================= ==================
Property under capitalized leases in the amount of $2,610,000 and $3,034,000 at
December 29, 1996 and December 31, 1995, respectively, is included in buildings
and leasehold improvements. Accumulated amortization of such property amounted
to $225,000 and $105,000 at December 29, 1996 and December 31, 1995,
respectively. Capitalized leases relate to the buildings on certain restaurant
properties. The land portions of the restaurant property leases are accounted
for as operating leases.
Depreciation and capitalized lease amortization expense relating to property and
equipment totaled $15,652,000, $11,964,000 and $8,997,000 for 1996, 1995 and
1994, respectively. Of these amounts, $145,000 and $105,000 related to
capitalized lease amortization during 1996 and 1995, respectively.
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):
1996 1995 1994
------------------ ------------------ -----------------
Minimum rent................................. $ 8,138 $ 7,300 $ 5,797
Contingent rent.............................. 1,451 1,520 1,532
------------------ ------------------ -----------------
$ 9,589 $ 8,820 $ 7,329
================== ================== =================
F-13
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 1997) as of December 29, 1996 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ -----------------
1997............................................................. $ 238 $ 9,957
1998............................................................. 238 10,537
1999............................................................. 238 10,267
2000............................................................. 273 9,875
2001............................................................. 290 9,683
Thereafter....................................................... 4,774 81,688
------------------ ------------------
Total minimum lease payments..................................... 6,051 $ 132,007
==================
Less amounts representing interest............................... 3,428
------------------
Present value of minimum lease payments.......................... $ 2,623
==================
In February 1997, the Company exercised its option to purchase the buildings
underlying three capital leases and the related land under three operating
leases for a total of $3,650,000. As a result, $2,140,000 of the capitalized
lease obligations recorded as of December 29, 1996 were retired, and future
minimum lease payments under the three operating leases of $2,937,000 as of
December 29, 1996 were eliminated.
8. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 29, December 31,
1996 1995
------------------ -----------------
Unsecured notes payable; 7.70% interest per annum, with
principal payments beginning in 1998; due May 2004........... $ 20,000 $ 20,000
Secured bank note; 6.69% interest per annum; due in
quarterly installments of principal and interest through
October 1998................................................. 1,200 1,800
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................................................ 1,544 1,874
Capitalized lease obligations.................................... 2,623 3,042
Other............................................................ 36 51
------------------ -----------------
Total long-term debt............................................. 25,403 26,767
Less current portion of long-term debt........................... 968 935
------------------ -----------------
Long-term debt - less current portion............................ $ 24,435 $ 25,832
================== =================
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 29, 1996, no amounts were outstanding under the
facility. Standby letters of credit issued under the facility totaling
$1,324,000 and $213,000 were outstanding as of December 29, 1996 and December
31, 1995, respectively.
F-14
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 29, 1996,
retained earnings were not restricted for the payment of cash dividends. The
Company is currently in compliance with the covenants of all of its debt
agreements.
Maturities of long-term debt, including capitalized lease obligations, for each
of the five fiscal years subsequent to December 29, 1996, ending during the
years indicated, are as follows (in thousands):
1997.................................................. $ 968
1998.................................................. 3,859
1999.................................................. 3,241
2000.................................................. 3,302
2001.................................................. 2,903
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 29, December 31,
1996 1995
------------------ -----------------
Compensation and related taxes.................................... $ 9,828 $ 8,962
Gift certificates................................................. 3,826 2,382
Sales and use taxes............................................... 2,006 2,521
Insurance......................................................... 1,596 1,866
Rent.............................................................. 2,477 1,761
Other............................................................. 5,864 5,143
------------------ -----------------
$ 25,597 $ 22,635
================== =================
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 had an option to purchase the remaining 50% interest for
$1,275,000, which was exercised in February 1997.
11. Loss on Disposition of Restaurants and Equipment
In October 1996, the Company completed the sale of six of its eight Company
owned Applebee's restaurants located in the San Bernardino and Riverside
counties of southern California. The operations of the six restaurants and
future restaurant development in the market area were assumed by an existing
Applebee's franchisee. The sales price was $8,500,000 and a loss on the
disposition of the properties of $75,000 was recorded in the third quarter of
1996. During the fourth quarter of 1996, the Company recognized a loss of
$2,500,000 primarily relating to the intended disposition of the two remaining
restaurants in the territory. In March 1997, the Company entered into a lease
termination agreement for one of these restaurants.
During 1995, the Company recognized a loss of $615,000 relating to the
disposition of two restaurants in 1996, including $275,000 relating to one
restaurant managed under a purchase rights agreement. The Company continues to
operate one restaurant under this agreement.
F-15
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.
12. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return.
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):
1996 1995 1994
--------------- --------------- ----------------
Current provision:
Federal............................................ $ 18,783 $ 15,163 $ 7,934
State.............................................. 3,800 2,849 1,419
Deferred provision (benefit)........................... 128 (179) 100
Pro forma provision for income taxes
of pooled companies................................ -- 73 1,324
--------------- --------------- ----------------
Income taxes........................................... $ 22,711 $ 17,906 $ 10,777
=============== =============== ================
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
1996 1995 1994
--------------- --------------- ----------------
Franchise deposits..................................... $ 77 $ 85 $ (36)
Depreciation........................................... 617 13 109
Allowance for bad debts................................ 345 (72) (163)
Accrued expenses....................................... 203 (125) (99)
Property and equipment writedown....................... (935) -- --
Other.................................................. (179) (80) 289
--------------- --------------- ----------------
Deferred income tax provision (benefit)................ 128 (179) 100
Adjustment to tax basis of pooled companies............ -- (1,350) --
Deferred income taxes related to change in
unrealized gain (loss) on investments.............. (3) 173 (57)
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ 125 $ (1,356) $ 43
=============== =============== ================
F-16
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):
1996 1995 1994
--------------- --------------- ----------------
Federal income tax at statutory rates.................. $ 21,254 $ 15,864 $ 9,916
Increase (decrease) to income tax expense:
Amortization of goodwill .......................... 276 281 267
State income taxes, net of federal benefit......... 2,470 1,852 1,039
Merger costs....................................... -- 625 271
Tax exempt investment income....................... (338) (169) (207)
Meals and entertainment disallowance............... 317 258 186
FICA tip tax credit................................ (1,136) (985) (641)
Other.............................................. (132) 180 (54)
--------------- --------------- ----------------
Income taxes........................................... $ 22,711 $ 17,906 $ 10,777
=============== =============== ================
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 29, December 31,
1996 1995
----------------- ------------------
Classified as current:
Allowance for bad debts..................................... $ 15 $ 361
Accrued expenses............................................ 245 510
Other, net.................................................. (495) (334)
----------------- ------------------
Net deferred tax asset (liability).......................... $ (235) $ 537
================= ==================
Classified as non-current:
Depreciation differences.................................... $ 484 $ 166
Franchise deposits.......................................... 366 444
Other, net.................................................. 516 109
----------------- ------------------
Net deferred tax asset...................................... $ 1,366 $ 719
================= ==================
13. Commitments and Contingencies
Litigation, claims and disputes: As of December 29, 1996, the Company was using
assets owned by a former franchisee in the operation of one restaurant 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
declined 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 fourth quarter of
1996, the Company received information indicating that the franchisee's
indebtedness to the FDIC had been acquired by a third party. The Company has not
been contacted by the third party. In the event that the Company were to pay an
F-17
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 29, 1996, approximately
$48,000,000 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 29, 1996,
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 $4,400,000 if such officers had been terminated as of December 29,
1996.
14. 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 acquisitions and to
repay the outstanding balance of the Company's revolving credit facility of
$5,000,000.
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.
F-18
15. 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 1995 Annual Meeting of
Stockholders, the 1989 Employee Stock Option Plan was terminated, and the 1995
Equity Incentive Plan (the "1995 Plan") was approved. Stock options outstanding
under the existing 1989 Stock Option Plan were not affected by the termination
of that plan.
Options under the 1989 Plan were granted for a term of three to ten years and
were generally exercisable one year from date of grant. The 1995 Plan allows the
granting of stock options, stock appreciation rights, restricted stock awards,
performance unit awards and performance share awards (collectively, "Awards") to
eligible participants. The number of shares authorized to be issued pursuant to
the 1995 Plan is 2,000,000. Options granted under the 1995 Plan during 1995 have
a term of five to ten years and are generally exercisable three years from date
of grant. Options granted under the 1995 Plan during 1996 have a term of ten
years and are generally 50% exercisable three years from date of grant, 25%
exercisable four years from date of grant, and 25% exercisable five years from
date of grant. Subject to the terms of the 1995 Plan, the Committee has the sole
discretion to determine the employees who shall be granted Awards, the size and
types of such Awards, and the terms and conditions of such Awards. 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.
The Company accounts for both plans in accordance with APB Opinion No. 25 which
requires compensation cost to be recognized based on the excess, if any, between
the quoted market price of the stock at the date of grant and the amount an
employee must pay to acquire the stock. Under this method, no compensation cost
has been recognized for stock option awards.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value as prescribed by SFAS 123 (see Note 1), the
Company's net earnings and net earnings per common share would have been reduced
to the pro forma amounts indicated below:
1996 1995
-------------- --------------
Net earnings, as reported.................................. $ 38,014 $ 27,420
============== ==============
Net earnings, pro forma.................................... $ 32,863 $ 25,613
============== ==============
Net earnings per common share, as reported................. $ 1.22 $ 0.94
============== ==============
Net earnings per common share, pro forma................... $ 1.05 $ 0.87
============== ==============
The weighted average fair value at date of grant for options granted during 1996
and 1995 was $15.14 and $14.77 per share, respectively, which, for the purposes
of this disclosure, is assumed to be amortized over the respective vesting
period of the grants. The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1996 and 1995: dividend yield of
0.26% for both years; expected volatility of 58% and 63%, respectively;
risk-free interest rate of 6.2% and 6.4%, respectively; and expected lives of
4.9 and 4.0 years, respectively.
F-19
Transactions relative to both plans are as follows:
1995 Plan 1989 Plan
------------------------------------- -------------------------------------
Weighted Weighted
Number of Average Number of Average
Options Exercise Price Options Exercise Price
------------------ ----------------- ----------------- ------------------
Options outstanding at
December 26, 1993............ -- -- 1,149,388 $ 9.44
Granted.................. -- -- 603,500 $ 13.97
Exercised................. -- -- (109,759) $ 6.02
Canceled.................. -- -- (48,450) $ 13.19
------------------ -----------------
Options outstanding at
December 25, 1994............ -- -- 1,594,679 $ 11.29
Granted.................. 891,300 $ 28.01 163,000 $ 18.80
Exercised................. -- -- (588,038) $ 7.92
Canceled.................. (15,000) $ 28.50 (71,100) $ 15.59
------------------ -----------------
Options outstanding at
December 31, 1995............ 876,300 $ 28.00 1,098,541 $ 13.92
Granted.................. 1,073,701 $ 27.99 -- --
Exercised................. -- -- (282,438) $ 27.46
Canceled.................. (120,658) $ 28.39 (4,400) $ 13.73
------------------ -----------------
Options outstanding at
December 29, 1996............ 1,829,343 $ 27.97 811,703 $ 14.09
================== =================
Options exercisable at
December 29, 1996............ 156,000 $ 25.67 811,703 $ 14.09
================== =================
Options available for grant at
December 29, 1996............ 170,657 --
The following table summarizes information relating to fixed-priced stock
options outstanding for both plans at December 29, 1996:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
-------------------------- --------------- --------------- -------------- --------------- ---------------
1989 Plan:
$ 3.02 to $ 7.63 59,194 5.3 years $ 5.19 59,194 $ 5.19
$ 11.83 to $ 14.69 622,509 4.5 years $ 13.73 622,509 $ 13.73
$ 19.25 to $ 21.88 130,000 4.1 years $ 19.84 130,000 $ 19.84
--------------- ---------------
$ 3.02 to $ 21.88 811,703 4.5 years $ 14.09 811,703 $ 14.09
=============== ===============
1995 Plan:
$ 24.00 to $ 25.00 130,000 3.4 years $ 24.97 126,000 $ 25.00
$ 28.00 to $ 29.25 1,699,343 9.1 years $ 28.20 30,000 $ 28.50
--------------- ---------------
$ 24.00 to $ 29.25 1,829,343 8.7 years $ 27.97 156,000 $ 25.67
=============== ===============
F-20
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.
During 1994, the Company established a non-qualified defined contribution
retirement plan for key employees. The Company's contributions under both plans
in 1996, 1995 and 1994 were $570,000, $312,000 and $127,000, respectively.
The Company adopted amendments to the 401(k) plan in 1996 which will become
effective beginning in 1997. The Company's matching contributions will be
increased to 35% and 50% of employee contributions in 1997 and 1998,
respectively, not to exceed 2.8% and 4.0%, respectively, of the employee's total
annual compensation, and will be made in shares of the Company's common stock.
The Company's contributions will vest at the rate of 60% after the employee's
third year of service, 80% after four years of service and 100% after five years
of service. The number of common shares authorized pursuant to the 401(k) plan
is 50,000.
Employee stock purchase plan: During 1996, the Company established an employee
stock purchase plan in accordance with Section 423 of the Internal Revenue Code.
Beginning in 1997, the plan will allow employees to purchase shares of the
Company's common stock at a 10% discount. The plan is subject to approval at the
1997 Annual Meeting of Stockholders. The number of common shares authorized
pursuant to the plan is 200,000.
Employee stock ownership plan: The Company's Board of Directors approved an
employee stock ownership plan in January 1997 which is effective beginning in
1997. The Company's contributions to this plan are completely discretionary and
will be made in shares of the Company's common stock.
16. 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 and a stockholder of
the Company. During 1996, 1995 and 1994, the Company paid $426,000, $3,128,000
and $3,869,000, respectively, for equipment and services purchased from this
company.
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 $185,000, $186,000 and $173,000 for 1996, 1995 and 1994,
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 and a 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
1996, 1995 and 1994, 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 December 1997; however, the Company has the option to terminate the
lease with 30 days notice. Rents incurred under the lease were $104,000, $84,000
and $74,000 for 1996, 1995 and 1994, respectively, and are included in general
and administrative expenses in the consolidated statements of earnings.
F-21
17. Subsequent Events
In February 1997, the Company entered into an agreement to purchase the assets
of 11 operating Applebee's franchise restaurants located in the St. Louis
metropolitan area for approximately $36,100,000, subject to adjustment. The
purchase price will be paid in a combination of cash and $2,500,000 of
promissory notes, and the transaction will be accounted for as a purchase. Final
closing is subject to obtaining licenses and third party consents and is
expected to occur early in the second quarter of 1997. One of the principals of
the franchisee is related to a director and a stockholder of the Company.
18. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 1996 and 1995 (in thousands, except per share amounts). During
the fourth quarter of 1996, the Company recognized a loss of $2,500,000
primarily relating to the intended disposition of two restaurants in southern
California. Merger costs of $1,770,000 related to the IRC Merger were expensed
in the first quarter of 1995.
1996
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 31, June 30, September 29, December 29,
1996 1996 1996 1996
------------- -------------- ------------- -------------
Revenues:
Company restaurant sales....................... $ 82,640 $ 91,116 $ 92,969 $ 92,265
Franchise income............................... 12,401 13,469 14,105 14,166
------------- -------------- ------------- -------------
Total operating revenues.................... 95,041 104,585 107,074 106,431
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 23,351 25,549 26,172 25,462
Labor.......................................... 26,859 28,292 29,027 28,791
Direct and occupancy........................... 20,463 22,865 22,049 22,363
Pre-opening expense............................ 249 925 865 1,518
------------- -------------- ------------- -------------
Total cost of Company restaurant sales...... 70,922 77,631 78,113 78,134
------------- -------------- ------------- -------------
General and administrative expenses................. 10,385 11,109 11,152 11,241
Merger costs........................................ -- -- -- --
Amortization of intangible assets................... 588 570 570 565
Loss on disposition of restaurants and equipment.... 115 424 183 2,596
------------- -------------- ------------- -------------
Operating earnings.................................. 13,031 14,851 17,056 13,895
------------- -------------- ------------- -------------
Other income (expense):
Investment income.............................. 801 597 694 771
Interest expense............................... (446) (434) (363) (328)
Other income................................... 105 200 205 90
------------- -------------- ------------- -------------
Total other income (expense)................ 460 363 536 533
------------- -------------- ------------- -------------
Earnings before income taxes........................ 13,491 15,214 17,592 14,428
Income taxes........................................ 5,126 5,639 6,598 5,348
------------- -------------- ------------- -------------
Net earnings........................................ $ 8,365 $ 9,575 $ 10,994 $ 9,080
============= ============== ============= =============
Net earnings per common share....................... $ 0.27 $ 0.31 $ 0.35 $ 0.29
============= ============== ============= =============
Weighted average shares outstanding................. 31,033 31,148 31,277 31,295
F-22
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........................................ 3,684 4,193 5,050 4,979
------------- -------------- ------------- -------------
Net earnings........................................ $ 4,253 $ 6,811 $ 8,239 $ 8,117
============= ============== ============= =============
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
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, of Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
3.2 Restated and Amended By-laws of the Registrant.
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 Applebee's Development Agreement (incorporated by
reference to Exhibit 10.4 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
E-1
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.5 Form of Applebee's Franchise Agreement (incorporated by
reference to Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.6 Schedule of Applebee's Development and Franchise Agreements as
of December 29, 1996.
10.7 Form of Rio Bravo Cantina Development Agreement.
10.8 Form of Rio Bravo Cantina Franchise Agreement.
10.9 Schedule of Rio Bravo Cantina Development and Franchise
Agreements as of December 29, 1996.
10.10 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).
10.11 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).
Management Contracts and Compensatory Plans or Arrangements
10.12 1995 Equity Incentive Plan, as amended.
10.13 Employment Agreement, dated January 1, 1996, with Abe J.
Gustin, Jr. (incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 1996).
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, 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).
E-2
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.17 Amended Consulting Agreement, dated March 1, 1996, between
Applebee's International, Inc. and Kenneth D. Hill
(incorporated by reference to Exhibit 10.2 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1996).
10.18 Employment Agreement between Applebee's International, Inc. and
Philip J. Hickey (incorporated by reference to Exhibit 10.21 of
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.19 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).
10.20 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).
10.21 Schedule of parties to Indemnification Agreement (incorporated
by reference to Exhibit 10.24 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).
10.22 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).
10.23 Schedule of parties to Severance Agreement (incorporated by
reference to Exhibit 10.26 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Arthur Andersen LLP.
24 Power of Attorney (see page 31 of the Form 10-K).
27 Financial Data Schedule.
E-3