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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
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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 9, 1998 was $697,802,316 based upon the closing sale
price on March 9, 1998.
The number of shares of the registrant's common stock outstanding as of March 9,
1998 was 30,257,011.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934 is incorporated into Part III hereof.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 28, 1997
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............................................. 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 29
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 30
Item 11. Executive Compensation.................................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 30
Item 13. Certain Relationships and Related Transactions.......................................... 30
PART IV
Item 14. Exhibits and Reports on Form 8-K........................................................ 31
Signatures.............................................................................................. 32
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 28, 1997, there were 960 Applebee's restaurants, of which 770
were operated by franchisees and 190 were owned or operated by the Company. The
restaurants were located in 48 states, Canada, Europe, and the Caribbean. During
1997, 145 new restaurants were opened, including 113 franchise restaurants and
32 Company restaurants.
The Company acquired the Rio Bravo Cantina chain of Mexican casual dining
restaurants in March 1995 and began franchise expansion in 1996. As of December
28, 1997, there were 55 Rio Bravo Cantina restaurants located in 18 states, of
which 24 were operated by franchisees and 31 were owned by the Company. During
1997, 26 new restaurants were opened, including 16 franchise restaurants and 10
Company restaurants. 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 28, December 29, December 31,
1997 1996 1995
----------------- ---------------- -----------------
Number of restaurants:
Applebee's:
Company(1):
Beginning of year............................ 148 128 97
Restaurant openings.......................... 32 29 27
Restaurant closings.......................... (1) (3) (1)
Restaurants acquired from (by) franchisees... 11 (6) 5
----------------- ---------------- -----------------
End of year.................................. 190 148 128
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 671 538 408
Restaurant openings.......................... 113 134 135
Restaurant closings.......................... (3) (7) --
Restaurants acquired by (from) franchisees... (11) 6 (5)
----------------- ---------------- -----------------
End of year.................................. 770 671 538
----------------- ---------------- -----------------
Total Applebee's:
Beginning of year............................ 819 666 505
Restaurant openings.......................... 145 163 162
Restaurant closings.......................... (4) (10) (1)
----------------- ---------------- -----------------
End of year.................................. 960 819 666
================= ================ =================
Rio Bravo Cantinas:
Company:
Beginning of year............................ 21 16 12
Restaurant openings.......................... 10 5 4
----------------- ---------------- -----------------
End of year.................................. 31 21 16
----------------- ---------------- -----------------
Franchise:
Beginning of year............................ 9 -- --
Restaurant openings.......................... 16 9 --
Restaurant closings.......................... (1) -- --
----------------- ---------------- -----------------
End of year.................................. 24 9 --
----------------- ---------------- -----------------
Total Rio Bravo Cantinas:
Beginning of year............................ 30 16 12
Restaurant openings.......................... 26 14 4
Restaurant closings.......................... (1) -- --
----------------- ---------------- -----------------
End of year.................................. 55 30 16
================= ================ =================
Specialty Restaurants................................ 4 4 4
================= ================ =================
Total number of restaurants:
Beginning of year............................ 853 686 521
Restaurant openings.......................... 171 177 166
Restaurant closings.......................... (5) (10) (1)
----------------- ---------------- -----------------
End of year.................................. 1,019 853 686
================= ================ =================
4
Fiscal Year Ended
-----------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
----------------- ---------------- -----------------
Weighted average weekly sales per restaurant:
Applebee's:
Company(1).................................. $ 41,176 $ 40,366 $ 39,977
Franchise................................... $ 39,513 $ 39,870 $ 40,922
Total Applebee's............................ $ 39,826 $ 39,961 $ 40,737
Rio Bravo Cantinas:
Company(2).................................. $ 60,946 $ 66,743 $ 66,158
Franchise................................... $ 49,288 $ 67,371 $ --
Total Rio Bravo Cantinas.................... $ 56,206 $ 66,741 $ 66,158
Change in comparable restaurant sales:(3) Applebee's:
Company(1).................................. 0.1 % 1.1 % 0.3%
Franchise................................... 0.6 % (1.2)% 0.5%
Total Applebee's............................ 0.5 % (0.8)% 0.5%
Rio Bravo Cantinas (Company).................... (1.6)% 3.9 % 0.9%
Total system sales (in thousands):
Applebee's...................................... $ 1,818,503 $ 1,539,277 $ 1,248,383
Rio Bravo Cantinas.............................. 128,196 66,663 48,135
Specialty restaurants........................... 14,435 14,374 14,339
----------------- ---------------- -----------------
Total system sales.......................... $ 1,961,134 $ 1,620,314 $ 1,310,857
================= ================ =================
- --------
(1)Includes certain Texas restaurants operated by the Company under a
management agreement since July 1990 (two at the end of 1995 and one at
the end of 1996 and 1997).
(2)Excludes one restaurant which is open for dinner only.
(3)When computing comparable restaurant sales, restaurants open for at
east 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,
which were introduced during 1997, are approximately 4,700 and 5,000 square feet
and seat approximately 165 and 200 patrons, respectively. Each Applebee's
restaurant has a centrally located bar and many restaurants offer patio seating.
The decor of each restaurant incorporates artifacts and memorabilia such as old
movie posters, musical instruments and sports equipment along with photographs
and magazine and newspaper articles highlighting local history and
personalities, giving each restaurant an individual, neighborhood identity. Each
Applebee's restaurant is required to be remodeled every six years to embody the
design elements of the current prototype.
Menu. Each Applebee's restaurant offers a diverse menu of high quality,
moderately priced food and beverage items consisting of traditional favorites
and innovative dishes. The restaurants feature a broad selection of entrees,
including beef, chicken, seafood and pasta items prepared in a variety of
cuisines, as well as appetizers, salads, sandwiches, specialty drinks and
desserts. Substantially all restaurants offer beer, wine, liquor and premium
specialty drinks. During 1997, alcoholic beverages accounted for 15.2% 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. The Company launched a major
new food and menu initiative in 1997 for all Applebee's restaurants which was
designed to enhance both food quality and presentation. The initiative included
enhanced food offerings and upgraded food specifications, new plateware,
additional menu item selections and side dish alternatives. The rollout of this
initiative was completed for most Applebee's restaurants in the system by the
end of November 1997.
Restaurant Operations. All restaurants are operated in accordance with uniform
operating standards and specifications relating to the quality and preparation
of menu items, selection of menu items, maintenance and cleanliness of premises,
and employee conduct. All standards and specifications are developed by the
Company, with input from franchisees, and 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 new restaurants 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 1997, the Company
conducted 110 Applebee University sessions consisting of one day 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.
6
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 added
two optional promotions in 1997 and will add an additional food promotion in
1998. The Company advertises on a national, regional and local basis, utilizing
primarily television, radio and print media. In 1997, approximately 4.0% of
sales for Company Applebee's restaurants was spent on advertising, including
1.5% contributed to the national advertising pool which develops and funds the
specific national promotions. 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 190 as of December 28, 1997 through the opening of 125 new
restaurants and the acquisition of 48 franchise restaurants over the last five
years, including 11 franchise restaurants in the St. Louis metropolitan area
that were acquired during 1997.
On December 23, 1997, the Company entered into an agreement with Apple South,
Inc. ("Apple South"), its largest franchisee, to acquire 31 Applebee's
restaurants plus one restaurant under construction in the Virginia markets of
Norfolk, Richmond, Roanoke and Charlottesville for approximately $93,400,000,
subject to certain closing adjustments, referred to herein as the "Virginia
Acquisition." The Virginia Acquisition is anticipated to close in late March
1998, subject to obtaining financing, operating licenses and third-party
consents.
7
In addition to the pending acquisition of the Virginia restaurants, the Company
anticipates opening approximately 32 new Applebee's restaurants in 1998,
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 1997 are set forth
in the following table.
Company
Company Restaurants
Restaurants as of
Opened in December 28,
Area 1997 1997
------------------------------------------------------------ -------------------- --------------------
New England (includes Massachusetts, Vermont,
New Hampshire, Rhode Island and Maine).................... 9 33
Detroit/Southern Michigan................................... 6 29
Minneapolis/St. Paul, Minnesota............................. 3 28
North/Central Texas......................................... 1 21
Kansas City, Missouri/Kansas................................ 2 20
St. Louis, Missouri/Illinois................................ 3 14
Las Vegas/Reno, Nevada...................................... 1 10
Philadelphia, Pennsylvania.................................. 2 8
San Diego/Southern California............................... 1 8
Atlanta, Georgia............................................ -- 7
Albuquerque, New Mexico..................................... 2 6
Long Island, New York....................................... 2 6
------------------- -------------------
32 190
==================== ==================
In February 1998, the Company entered into an agreement to sell its six
restaurants located in the Long Island, New York area for approximately
$10,000,000 in cash. The operations of the restaurants and future restaurant
development in the market area will be assumed by an existing Applebee's
franchisee. The Company expects the sale to close in the second quarter of 1998
with minimal effect, if any, on its consolidated net earnings or financial
position.
The Company continues to assess its strategic direction with respect to the
operations of its seven 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, two or three assistant managers and
approximately 75 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 28, 1997, the Company employed
eight regional Directors of Operations and 31 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 nine
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 41 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 28, 1997, there were 770 franchise restaurants. Franchisees
opened 135 restaurants in 1995, 134 restaurants in 1996, and 113 restaurants in
1997. The Company anticipates between 85 to 100 franchise restaurant openings in
1998.
As part of the agreement with Apple South relating to the Virginia Acquisition,
Apple South has also agreed to use its best efforts to sell its other Applebee's
restaurants as soon as practical, resulting in its exit as an Applebee's
franchisee. The reduction in expected franchise restaurant openings in 1998 is a
result of probable delays in development that will occur during the transition
of restaurants and territories from Apple South to new franchisees. To the
extent any restaurants are not divested by Apple South by December 31, 1999, the
Company has an option to purchase the remaining restaurants at a predetermined
formula. The Company and Apple South have committed to work together to identify
and approve qualified franchise groups to acquire the remaining Apple South
restaurants and to effect an efficient transition of ownership.
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.
9
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.
Quality Control. The Company continuously monitors franchisee operations and
inspects restaurants, principally through its full-time franchise consultants
(24 at December 28, 1997) 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 28, 1997, 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. Although Apple South operates more than
10% of the total number of system restaurants, in connection with the Virginia
Acquisition, it relinquished its seat on the Franchise Business Council as of
December 23, 1997. 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, the United Kingdom, Australia,
continental Europe and the Mediterranean region. In this regard, the Company
currently has development agreements with nine international franchisees. Seven
restaurants were opened during 1997 - two each in Canada and the Netherlands,
and one each in Germany, Greece and Sweden. 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.
10
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. To assist in the
transition of the Apple South restaurants to other franchisees, the Company has
agreed to provide the availability of guarantees up to 10% of the borrowings of
qualified franchise groups, up to a maximum of $10,000,000 in the aggregate. See
Notes to Consolidated Financial Statements of the Company included elsewhere
herein. On infrequent occasions, when the Company believes it is necessary to
support franchise development in a strategic territory, the Company has made
secured loans to franchisees, agreed to defer collection of royalties, or
guaranteed equipment leases.
Rio Bravo Cantina Restaurants
General. In March 1995, a wholly-owned subsidiary of the Company merged with and
into Innovative Restaurant Concepts, Inc. ("IRC"), referred to herein as the
"IRC Merger," through which the Company acquired the Rio Bravo Cantina chain of
Mexican casual dining restaurants. As a result of the IRC Merger, IRC became a
wholly-owned subsidiary of the Company. At the time of the IRC Merger, IRC
operated 17 restaurants, including 13 Rio Bravo Cantina restaurants, and four
other specialty restaurants.
Expansion. As of December 28, 1997, the Company operated 31 Rio Bravo Cantina
restaurants and franchisees operated 24 Rio Bravo Cantina restaurants in 18
states. During 1997, the Rio Bravo Cantina concept was expanded into seven new
states. The Company opened ten Rio Bravo Cantina restaurants in 1997, and
expects to open 11 Rio Bravo Cantina restaurants in 1998. In addition, the
Company has identified 17 Rio Bravo Cantina franchisees, all of whom are
experienced Applebee's franchisees. The development territories of the 17
franchisees encompass all or parts of 28 states. The Company expects between 8
to 10 franchise Rio Bravo Cantina restaurants to open in 1998.
Concept. Rio Bravo Cantina restaurants offer generous portions of 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,
strip shopping centers, or shopping malls. Existing locations, many of which are
conversions of other restaurants, range in size from 5,600 to 10,300 square feet
and seat between 210 and 450 customers. Most of the restaurants have a patio
area providing additional seating during much of the year. The current
free-standing prototype, which was introduced during 1997, 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 menu offers lunch entrees priced from $4.79 to $7.79 and
dinner entrees priced from $5.99 to $12.99. During 1997, alcoholic beverages
accounted for approximately 29% of total Company restaurant sales.
11
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
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 28, 1997, the Rio Bravo
Roundtable consisted of five franchisee representatives and two members of the
Company's senior management. Franchisee representatives are 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
Competition in the casual dining segment of the restaurant industry is expected
to remain intense with respect to price, service, location, concept, and the
type and quality of food. There is also intense competition for real estate
sites, qualified management personnel, and hourly restaurant staff. The
Company's competitors include national, regional and local chains, as well as
local owner-operated restaurants. There are a number of well-established
competitors, some of which have been in existence for a longer period than the
Company and may be better established in the markets where the Company's
restaurants are or may be located. The Company has begun to experience increased
competition in attracting and retaining qualified management level operating
personnel.
Service Marks
The Company owns the rights to the "Applebee's Neighborhood Grill & Bar(R)" and
"Rio Bravo Cantina(R)" 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 28, 1997, the Company employed approximately 18,150 full and
part-time employees, of whom approximately 370 were corporate personnel, 1,130
were restaurant managers or managers in training and 16,650 were employed in
non-management full and part-time restaurant positions. Of the 370 corporate
employees, 100 were in management positions and 270 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 28, 1997 are shown below.
Name Age Position
Abe J. Gustin, Jr................63 Chairman of the Board of Directors and Co-Chief Executive Officer
(Chairman effective January 1, 1998)
Lloyd L. Hill....................53 Co-Chief Executive Officer (Chief Executive Officer effective
January 1, 1998), President, Chief Operating Officer and Member
of the Board of Directors
George D. Shadid.................43 Executive Vice President, Chief Financial Officer and Treasurer
Robert A. Martin.................67 Executive Vice President of Marketing and Member of the Board of
Directors
Louis A. Kaucic..................46 Senior Vice President of Human Resources
Steven K. Lumpkin................43 Senior Vice President of Strategic Development
Ronald J. Marks..................42 Senior Vice President of Research & Development (resigned in March
1998)
Stuart F. Waggoner...............52 President and Chief Executive 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. In January 1998, Mr. Gustin retained his position as the Chairman of the
Board and Mr. Hill assumed the full duties of Chief Executive Officer. From 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. In January 1998,
Mr. Gustin retained his position as the Chairman of the Board and Mr. Hill
assumed the full duties of Chief Executive Officer. From 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.
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. From 1976 until 1985, Mr.Shadid was employed
by Deloitte & Touche LLP.
14
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 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.
Louis A. Kaucic was employed by the Company in November 1997 as Senior Vice
President of Human Resources. From July 1992 until November 1997, Mr. Kaucic was
Vice President of Human Resources and later promoted to Senior Vice President of
Human Resources with DAKA International which operates several restaurant
concepts. From 1982 to 1992, he was employed by Pizza Hut in a variety of
positions, including Director of Employee Relations. From 1978 to 1982, Mr.
Kaucic was employed by Kellogg's as an Industrial Relations Manager.
Steven K. Lumpkin was employed by the Company in May 1995 as Vice President of
Administration. In January 1996, he was promoted to Senior Vice President of
Administration. In November 1997, he assumed the position of Senior Vice
President of Strategic Development. 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. Mr. Marks resigned as an officer
and employee of the Company in March 1998.
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, with
overall responsibility for franchise and Company owned Applebee's restaurant
operations. In October 1997, Mr. Waggoner was appointed President and Chief
Executive Officer of Rio Bravo International, Inc., a wholly-owned subsidiary of
Applebee's International, Inc. 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.
15
Item 2. Properties
At December 28, 1997, the Company owned or operated 225 restaurants, of which it
leased the land and building for 70 sites, owned the building and leased the
land for 78 sites, and owned the land and building for 77 sites. In addition, as
of December 28, 1997, the Company owned 13 sites for future development of
restaurants and had entered into 24 lease agreements for restaurant sites the
Company plans to open during 1998. The Company's leases generally have an
initial term of 15 to 20 years, with renewal terms of 5 to 20 years, and provide
for a fixed rental plus, in certain instances, percentage rentals based on gross
sales.
The Company owns an 80,000 square foot office building in which its corporate
offices are headquartered in Overland Park, Kansas, located in the metropolitan
Kansas City area. The Company also leases office space in certain of the regions
in which it operates restaurants.
Under its franchise agreements, the Company has certain rights to gain control
of a restaurant site in the event of default under the lease or the franchise
agreement.
The following table sets forth the 48 states and the six 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 28, 1997:
16
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 1 -- -- 15 1
Arizona................ 17 -- -- -- 17 --
Arkansas............... 6 1 -- -- 6 1
California............. 48 -- 8 -- 56 --
Colorado............... 22 -- -- -- 22 --
Connecticut............ 1 -- -- -- 1 --
Delaware............... 3 -- -- -- 3 --
Florida................ 62 1 -- 10 62 11
Georgia................ 37 4 7 8 44 12
Idaho.................. 3 -- -- -- 3 --
Illinois............... 39 1 3 -- 42 1
Indiana................ 36 2 -- -- 36 2
Iowa................... 17 -- -- -- 17 --
Kansas................. 8 2 9 2 17 4
Kentucky............... 21 1 -- -- 21 1
Louisiana.............. 15 -- -- -- 15 --
Maine.................. -- -- 2 -- 2 --
Maryland............... 14 -- -- -- 14 --
Massachusetts.......... -- -- 16 -- 16 --
Michigan............... 6 -- 29 4 35 4
Minnesota.............. -- -- 28 2 28 2
Mississippi............ 10 -- -- -- 10 --
Missouri............... 7 1 22 1 29 2
Montana................ 5 -- -- -- 5 --
Nebraska............... 8 -- -- -- 8 --
Nevada................. -- -- 10 -- 10 --
New Hampshire.......... -- -- 9 -- 9 --
New Jersey............. 12 -- -- -- 12 --
New Mexico............. 4 -- 6 -- 10 --
New York............... 27 2 6 -- 33 2
North Carolina......... 34 2 -- -- 34 2
North Dakota........... 5 1 -- -- 5 1
Ohio................... 50 3 -- -- 50 3
Oklahoma............... 9 -- -- -- 9 --
Oregon................. 7 -- -- -- 7 --
Pennsylvania........... 17 -- 8 -- 25 --
Rhode Island........... -- -- 4 -- 4 --
South Carolina......... 35 1 -- -- 35 1
South Dakota........... 2 -- -- -- 2 --
Tennessee.............. 40 -- -- 4 40 4
Texas.................. 20 -- 21 -- 41 --
Utah................... 6 -- -- -- 6 --
Vermont................ -- -- 2 -- 2 --
Virginia............... 41 1 -- -- 41 1
Washington............. 11 -- -- -- 11 --
West Virginia.......... 9 -- -- -- 9 --
Wisconsin.............. 23 -- -- -- 23 --
Wyoming................ 2 -- -- -- 2 --
International:
Canada................. 6 -- -- -- 6 --
Germany................ 3 -- -- -- 3 --
Greece................. 1 -- -- -- 1
The Netherlands........ 4 -- -- -- 4 --
Sweden................. 1 -- -- -- 1
Curacao................ 1 -- -- -- 1 --
-------------- -------------- ------------- -------------- --------------- --------------
770 24 190 31 960 55
============== ============== ============== ============== ============== ==============
17
Item 3. Legal Proceedings
As of December 28, 1997, 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. In November 1992, the lender was declared insolvent by the FDIC and has
since been liquidated. The Company closed one of the three restaurants in 1994
and one of the two remaining restaurants in February 1996. In the fourth quarter
of 1996, the Company received information indicating that the franchisee's
indebtedness to the FDIC had been acquired by a third party. In June 1997, the
third party filed a lawsuit against the Company seeking approximately
$3,800,000. The lawsuit remains in the discovery phase. The Company believes it
has meritorious defenses and will vigorously defend this lawsuit. 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 sale prices of the Company's common stock, as
reported on The Nasdaq Stock Market.
1997 1996
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 31.13 $ 23.88 $ 25.75 $ 17.75
Second Quarter $ 27.50 $ 20.13 $ 32.50 $ 25.00
Third Quarter $ 30.38 $ 24.00 $ 34.25 $ 25.00
Fourth Quarter $ 25.44 $ 18.00 $ 30.00 $ 23.12
2. Number of stockholders of record at December 28, 1997: 1,282
3. 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. An annual dividend of $0.08
per common share was declared on December 10, 1997 for stockholders of
record on December 22, 1997, and the dividend was payable on January
26, 1998.
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 1998 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 28, December 29, December 31, December 25, December 26,
1997 1996 1995 1994 1993
--------------- --------------- --------------- ---------------- ---------------
(in thousands, except per share amounts)
STATEMENT OF
EARNINGS DATA:
Company restaurant sales.............. $ 452,173 $ 358,990 $ 299,824 $ 222,445 $ 159,482
Franchise income...................... 63,647 54,141 43,739 31,419 21,324
--------------- --------------- --------------- ---------------- ---------------
Total operating revenues......... $ 515,820 $ 413,131 $ 343,563 $ 253,864 $ 180,806
=============== =============== =============== ================ ===============
Operating earnings.................... $ 71,283 $ 58,833 $ 45,712 $ 29,311 $ 19,677
Net earnings.......................... $ 45,091 $ 38,014 $ 27,420 $ 17,823 $ 12,551
Basic net earnings per common
share.............................. $ 1.44 $ 1.22 $ 0.94 $ 0.64 $ 0.46
Diluted net earnings per common
share.............................. $ 1.43 $ 1.21 $ 0.92 $ 0.63 $ 0.45
Dividends per share................... $ 0.08 $ 0.07 $ 0.06 $ 0.05 $ 0.04
Basic weighted average shares
outstanding........................ 31,401 31,188 29,319 27,970 27,543
Diluted weighted average shares
outstanding........................ 31,640 31,533 29,860 28,472 27,932
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets.......................... $ 377,474 $ 314,111 $ 270,680 $ 180,014 $ 138,680
Long-term obligations, including
current portion..................... $ 29,105 $ 25,843 $ 27,427 $ 38,697 $ 19,845
Stockholders' equity.................. $ 290,443 $ 244,764 $ 203,993 $ 108,788 $ 92,680
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 28, 1997 and December 29,
1996 contained 52 weeks, and the fiscal year ended December 31, 1995 contained
53 weeks, and are referred to hereafter as 1997, 1996 and 1995, respectively.
Acquisitions
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.
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 the earnings of IRC's limited partnerships at statutory
rates.
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.
On April 14, 1997, the Company acquired the operations and assets of 11
franchise restaurants in the St. Louis metropolitan area, referred to herein as
the "St. Louis Acquisition." The St. Louis Acquisition was accounted for as a
purchase and, accordingly, the results of operations of such restaurants have
been reflected in the consolidated financial statements subsequent to the date
of acquisition.
21
On December 23, 1997, the Company entered into an agreement with Apple South,
Inc. ("Apple South"), its largest franchisee, to acquire 31 Applebee's
restaurants plus one restaurant under construction in the Virginia markets of
Norfolk, Richmond, Roanoke and Charlottesville for approximately $93,400,000,
subject to certain closing adjustments, referred to herein as the "Virginia
Acquisition." The Virginia Acquisition is anticipated to close in late March
1998, subject to obtaining financing, operating licenses and third-party
consents, and will be accounted for as a purchase.
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 28, December 29, December 31,
1997 1996 1995
--------------- --------------- ---------------
Revenues:
Company restaurant sales......................... 87.7% 86.9% 87.3%
Franchise income................................. 12.3 13.1 12.7
--------------- --------------- ---------------
Total operating revenues...................... 100.0% 100.0% 100.0%
=============== =============== ===============
Cost of sales (as a percentage of Company restaurant sales):
Food and beverage................................ 27.5% 28.0% 28.3%
Labor............................................ 32.1 31.5 31.7
Direct and occupancy............................. 25.3 24.4 24.1
Pre-opening expense.............................. 0.8 1.0 0.8
--------------- --------------- ---------------
Total cost of sales........................... 85.7% 84.9% 84.8%
=============== =============== ===============
General and administrative expenses................... 10.2% 10.6% 11.3%
Merger costs.......................................... -- -- 0.5
Amortization of intangible assets..................... 0.6 0.6 0.7
Loss on disposition of restaurants and equipment...... 0.2 0.8 0.2
--------------- --------------- ---------------
Operating earnings.................................... 13.8 14.2 13.3
--------------- --------------- ---------------
Other income (expense):
Investment income................................ 0.4 0.7 0.5
Interest expense................................. (0.3) (0.4) (0.7)
Other income..................................... 0.1 0.1 0.1
--------------- --------------- ---------------
Total other income (expense).................. 0.1 0.5 (0.1)
--------------- --------------- ---------------
Earnings before income taxes.......................... 13.9 14.7 13.2
Income taxes (including pro forma provision for
income taxes).................................... 5.2 5.5 5.2
--------------- --------------- ---------------
Net earnings.......................................... 8.7% 9.2% 8.0%
=============== =============== ===============
22
Fiscal Year Ended December 28, 1997 Compared With Fiscal Year Ended December 29,
1996
Company Restaurant Sales. Overall Company restaurant sales increased $93,183,000
(26%) from $358,990,000 in 1996 to $452,173,000 in 1997. Sales for Company
Applebee's restaurants increased $69,350,000 (24%) from $285,093,000 in 1996 to
$354,443,000 in 1997, due primarily to Company restaurant openings and sales
from the 11 St. Louis restaurants acquired in April 1997. Sales for Company Rio
Bravo Cantina restaurants were $59,523,000 and $83,295,000 in 1996 and 1997,
respectively, and sales for the specialty restaurants were $14,374,000 and
$14,435,000 in 1996 and 1997, respectively. The increase in sales for the Rio
Bravo Cantina restaurants resulted primarily from Company restaurant openings.
Comparable restaurant sales at Company Applebee's restaurants increased by 0.1%
in 1997. Weighted average weekly sales at Company Applebee's restaurants
increased 2.0% from $40,366 in 1996 to $41,176 in 1997. Comparable restaurant
sales and weighted average weekly sales at Company Applebee's restaurants in
1997 were positively affected by menu price increases. In addition, weighted
average weekly sales in 1997 increased as a result of the sale of six lower than
average volume restaurants in southern California in October 1996 and the
purchase of 11 higher than average volume restaurants in St. Louis in April
1997. Excluding these restaurants, weighted average weekly sales decreased 0.2%
in 1997.
Price increases were implemented during the fourth quarter of 1996 and the
fourth quarter of 1997 for certain menu items. The Company does not expect
significant comparable restaurant sales increases and may experience comparable
restaurant sales decreases for the 1998 fiscal year for Company Applebee's
restaurants, as many of its restaurants operate near sales capacity and various
markets continue to experience competitive pressures. 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 Rio Bravo Cantina restaurants decreased
by 1.6% in 1997 due primarily to increased competition in the Atlanta market.
Weighted average weekly sales (excluding one restaurant that is open for dinner
only) decreased from $66,743 in 1996 to $60,946 in 1997. Weighted average weekly
sales in 1997 were impacted by new restaurant openings in new markets, as well
as the addition of a new smaller prototype restaurant. When entering new markets
where the Company has not yet established a market presence, sales levels are
expected to be lower than in the Georgia and Florida markets where the Company
has a concentration of Rio Bravo Cantina restaurants and high customer
awareness.
Franchise Income. Overall franchise income increased $9,506,000 (18%) from
$54,141,000 in 1996 to $63,647,000 in 1997. This increase was due primarily to
the increased number of franchise Applebee's and Rio Bravo Cantina restaurants
operating during 1997 as compared to 1996. In addition, comparable restaurant
sales for franchise Applebee's restaurants increased 0.6% in 1997. Such
increases were partially offset by a decrease in weighted average weekly sales
for franchise Applebee's restaurants of 0.9% in 1997.
23
Cost of Company Restaurant Sales. Food and beverage costs decreased from 28.0%
in 1996 to 27.5% in 1997 due primarily to operational improvements, purchasing
efficiencies resulting from the Company's rapid growth, and menu price
increases. Such decreases were partially offset by an increase in food costs
during the implementation of the Company's food and menu initiative. Beverage
sales, as a percentage of Company restaurant sales, declined from 18.3% in 1996
to 17.8% in 1997 which had a negative impact on overall food and beverage costs,
as a percentage of Company restaurant sales. Management believes that the
reduction in beverage sales is due in part to the continuation of the overall
trend toward increased awareness of responsible alcohol consumption.
Labor costs increased from 31.5% in 1996 to 32.1% in 1997. Such increases were
due primarily to the adverse impact on restaurant labor costs during, and for a
number of months following, the implementation of the Company's food and menu
enhancement initiative in its Applebee's restaurants. The Company expects labor
costs, as a percentage of sales, to continue to be impacted during the first
half of the 1998 fiscal year as a result of this implementation. Increases in
the minimum wage as well as the highly competitive nature of the restaurant
industry continue to exert pressure on both hourly labor and management costs.
An increase in the Federal minimum wage went into effect on October 1, 1996, and
a second increase became effective on September 1, 1997. In addition, the 1997
fiscal year was negatively impacted by an increase in group medical insurance
costs.
Direct and occupancy costs increased from 24.4% in 1996 to 25.3% in 1997. Such
increases were due, in part, to the new plateware costs relating to the
Company's food and menu enhancement initiative in its Applebee's restaurants. In
addition, such increases were partially due to an increase in repairs and
maintenance expense relating to maintenance contracts on restaurant
point-of-sale systems as well as the aging of the Company's restaurants, higher
depreciation expense associated with new restaurants, and increases in utility
costs and property taxes.
General and Administrative Expenses. General and administrative expenses
decreased from 10.6% in 1996 to 10.2% in 1997 due primarily to the absorption of
general and administrative expenses over a larger revenue base as well as the
additional leverage resulting from the St. Louis Acquisition. A portion of the
decrease in 1997 was due to a decrease in executive bonuses. General and
administrative expenses increased by $8,692,000 during 1997 compared to 1996 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.
Loss on Disposition of Restaurants and Equipment. Loss on disposition of
restaurants and equipment decreased from $3,318,000 in 1996 to $1,209,000 in
1997. 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.
Investment Income. Investment income decreased in 1997 compared to 1996
primarily as a result of decreases in cash and cash equivalents and short-term
investments due to capital expenditures and acquisitions.
Interest Expense. Interest expense increased in 1997 compared to 1996 primarily
as a result of interest on capitalized leases associated with the St. Louis
Acquisition.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 37.2% in 1997 compared to 37.4% in 1996. The decrease in the
Company's overall effective tax rate in 1997 was due primarily to a reduction in
state income taxes and an increase in credits resulting from FICA taxes on tips.
24
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
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 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. 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.
25
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.
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 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.
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.
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.
26
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 $65,672,000 in 1996 and $128,155,000 in 1997 (which
includes $36,150,000 related to the St. Louis Acquisition and $1,525,000 related
to the purchase of the remaining 50% interest in a joint venture arrangement
with the Company's franchisee in Nevada). The Company currently expects to open
32 Applebee's restaurants and 11 Rio Bravo Cantina restaurants in 1998. Capital
expenditures in fiscal 1998 are expected to be between $85,000,000 and
$90,000,000 (excluding $93,400,000 relating to the Virginia Acquisition),
primarily for the development of new restaurants, refurbishments of and capital
replacements for existing restaurants, and enhancements to information systems
for the Company's restaurants and corporate office. The 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 limit additional indebtedness in excess of specified amounts. The debt
agreements also restrict the amount of retained earnings available for the
payment of cash dividends. At December 28, 1997, 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.
As of December 28, 1997, the Company held liquid assets totaling $19,814,000,
consisting of cash and cash equivalents ($8,908,000) and short-term investments
($10,906,000). No amounts were outstanding under the revolving credit facility;
however, standby letters of credit issued under the facility totaling $1,887,000
were outstanding as of December 28, 1997.
On January 22, 1998, the Company entered into a loan commitment with Merrill
Lynch Capital Corporation to provide $225,000,000 in senior secured credit
facilities, consisting of an eight-year senior secured term loan of $125,000,000
and a five-year secured revolving credit facility of $100,000,000.
27
The Company anticipates that it will use the proceeds of the facilities
approximately as follows:
(i) $105,000,000 to fund the Virginia Acquisition (including
related transaction fees and expenses);
(ii) $20,000,000 to refinance certain existing indebtedness
currently bearing interest at 7.70%; and
(iii) $100,000,000 for ongoing working capital needs and general
corporate purposes (including stock repurchases as described
below).
Up to $50,000,000 of the facilities will be available to fund repurchases of the
Company's common stock. Since December 28, 1997 and through March 9, 1998, the
Company has repurchased 1,270,000 shares of its common stock at an aggregate
value of $25,000,000, pursuant to plans approved by the Company's Board of
Directors. The Company contemplates further purchases of up to $25,000,000
subject to the completion of the financing discussed above.
The senior term loan is expected to bear interest at LIBOR plus 2.25% and
require semi-annual principal payments aggregating $1,250,000 per year for each
of the first seven years, with the remaining $116,250,000 due during the eighth
year. The revolving credit facility is expected to bear interest at LIBOR plus
1.375%.
Both the senior term loan and the revolving credit facility will be subject to
standard other terms, conditions, covenants, and fees and will be secured by the
stock of each of the Company's present and future subsidiaries and all
intercompany debt of the Company and such subsidiaries. The loan commitment is
anticipated to close concurrently with the Virginia Acquisition.
The Company believes that its liquid assets and cash generated from operations,
combined with borrowings available under its new $225,000,000 senior secured
credit facilities, will provide sufficient funds for its capital requirements
for the foreseeable future.
Inflation
Substantial increases in costs and expenses, particularly food, supplies, labor
and operating expenses, could have a significant impact on the Company's
operating results to the extent that such increases cannot be passed along to
customers. The Company does not believe that inflation has materially affected
its operating results during the past three years.
A majority of the Company's employees are paid hourly rates related to federal
and state minimum wage laws and various laws that allow for credits to that
wage. An increase in the Federal minimum wage went into effect on October 1,
1996, and a second increase became effective on September 1, 1997. In addition,
increases in the minimum wage are 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.
28
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement is
effective for fiscal years beginning after December 15, 1997. The Company does
not believe the reporting and display of comprehensive income will materially
impact the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be presented. This statement
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
Forward-Looking Statements
The statements contained herein regarding future sales, operating costs,
restaurant development and capital expenditures are forward-looking and based on
current expectations. There are several risks and uncertainties that could cause
actual results to differ materially from those described. For a discussion of
the principal factors that could cause actual results to be materially
different, refer to the Company's current report on Form 8-K filed with the
Securities and Exchange Commission on February 9, 1998.
Impact of the Year 2000
The Year 2000 will have a broad impact on the business environment in which the
Company operates due to the possibility that many computer systems across all
industries will be unable to process information containing dates beginning in
the Year 2000. The Company has conducted a preliminary assessment of the impact
of the Year 2000 on its accounting, finance, and other systems, as well as the
impact on its external business partners, in order to identify and address
potential business issues relating to the Year 2000. Based on this preliminary
assessment, the Company believes that its significant systems are Year 2000
compliant, and the costs associated with such compliance have not had, and will
not have, a material impact on the Company's results of operations.
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
29
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 6, 1998, 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 6, 1998, 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 6, 1998, 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 6,
1998, is incorporated herein by reference.
30
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 October 7, 1997 in accordance
with the Private Securities Litigation Reform Act of 1995 listing
factors that could cause actual results to differ materially from those
projected in forward-looking statements made by the Company.
The Company filed a report on Form 8-K on December 11, 1997, announcing
the declaration of a dividend on its common stock to stockholders of
record as of December 22, 1997, payable on January 26, 1998.
31
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 17, 1998 By: /s/ Lloyd L. Hill
----------------- -----------------------------------
Lloyd L. Hill
Chief Executive Officer
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lloyd L. Hill and Robert T. Steinkamp, and each
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any amendments to this Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Lloyd L. Hill Date: March 17, 1998
---------------------------- -----------------
Lloyd L. Hill
Director and Chief Executive Officer
(principal executive officer)
By: /s/ George D. Shadid Date: March 17, 1998
---------------------------- -----------------
George D. Shadid
Executive Vice President and Chief Financial Officer
(principal financial officer)
By: /s/ Mark A. Peterson Date: March 13, 1998
---------------------------- -----------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
By: /s/ Abe J. Gustin, Jr. Date: March 17, 1998
---------------------------- -----------------
Abe J. Gustin, Jr.
Director, Chairman of the Board
32
By: /s/ D. Patrick Curran Date: March 11, 1998
---------------------------- -----------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 15, 1998
---------------------------- -----------------
Eric L. Hansen
Director
By: /s/ Jack P. Helms Date: March 17, 1998
---------------------------- -----------------
Jack P. Helms
Director
By: /s/ Kenneth D. Hill Date: March 11, 1998
---------------------------- -----------------
Kenneth D. Hill
Director
By: /s/ Robert A. Martin Date: March 13, 1998
---------------------------- -----------------
Robert A. Martin
Director
By: /s/ Burton M. Sack Date: March 11, 1998
---------------------------- -----------------
Burton M. Sack
Director
33
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of December 28, 1997 and
December 29, 1996 .................................................................................. F-3
Consolidated Statements of Earnings for the Fiscal Years Ended
December 28, 1997, December 29, 1996 and December 31, 1995.......................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years
Ended December 28, 1997, December 29, 1996 and December 31, 1995..................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
December 28, 1997, December 29, 1996 and December 31, 1995........................................... F-6
Notes to Consolidated Financial Statements............................................................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
Applebee's International, Inc.:
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 28, 1997 and
December 29, 1996, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 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 28, 1997 and
December 29, 1996, and the consolidated results of their operations and cash
flows for each of the three fiscal years in the period ended December 28, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 13, 1998
(March 9, 1998 as to the
third paragraph of Note 16)
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
December 28, December 29,
1997 1996
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 8,908 $ 17,346
Short-term investments, at market value..................................... 10,906 40,064
Receivables, net of allowance............................................... 16,390 19,245
Inventories................................................................. 4,788 4,557
Prepaid and other current assets............................................ 2,962 2,780
------------- --------------
Total current assets..................................................... 43,954 83,992
Property and equipment, net...................................................... 276,082 196,950
Goodwill, net.................................................................... 48,065 22,607
Franchise interest and rights, net............................................... 4,667 5,236
Deferred income taxes............................................................ -- 1,366
Other assets..................................................................... 4,706 3,960
------------- --------------
$ 377,474 $ 314,111
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 6,306 $ 968
Current portion of obligations under noncompetition and consulting agreement 220 220
Accounts payable............................................................ 19,731 11,949
Accrued expenses and other current liabilities.............................. 28,547 25,597
Accrued dividends........................................................... 2,518 2,191
Accrued income taxes........................................................ 5,166 918
------------- --------------
Total current liabilities................................................ 62,488 41,843
------------- --------------
Non-current liabilities:
Long-term debt - less current portion....................................... 22,579 24,435
Franchise deposits.......................................................... 1,532 1,793
Obligations under noncompetition and consulting agreement - less current
portion.................................................................. -- 220
Deferred income taxes....................................................... 432 --
------------- --------------
Total non-current liabilities............................................ 24,543 26,448
------------- --------------
Total liabilities........................................................ 87,031 68,291
Minority interest in joint venture............................................... -- 1,056
Commitments and contingencies (Notes 7, 8 and 12)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued......................................................... -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued - 31,744,009 shares in 1997 and 31,580,955 shares in 1996......... 317 316
Additional paid-in capital.................................................. 156,165 153,028
Retained earnings........................................................... 134,654 92,081
Unrealized gain on short-term investments, net of income taxes.............. 95 188
------------- --------------
291,231 245,613
Treasury stock - 261,629 shares in 1997 and 281,772 shares in 1996, at cost. (788) (849)
------------- --------------
Total stockholders' equity............................................... 290,443 244,764
------------- --------------
$ 377,474 $ 314,111
============= ==============
See notes to consolidated financial statements.
F-3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share amounts)
Fiscal Year Ended
--------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------- ------------- -------------
Revenues:
Company restaurant sales................................ $ 452,173 $ 358,990 $ 299,824
Franchise income........................................ 63,647 54,141 43,739
------------- ------------- -------------
Total operating revenues............................. 515,820 413,131 343,563
------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage....................................... 124,469 100,534 84,776
Labor................................................... 145,165 112,969 94,935
Direct and occupancy.................................... 114,196 87,740 72,228
Pre-opening expense..................................... 3,661 3,557 2,234
------------- ------------- -------------
Total cost of Company restaurant sales............... 387,491 304,800 254,173
------------- ------------- -------------
General and administrative expenses.......................... 52,579 43,887 38,753
Merger costs................................................. -- -- 1,770
Amortization of intangible assets............................ 3,258 2,293 2,305
Loss on disposition of restaurants and equipment............. 1,209 3,318 850
------------- ------------- -------------
Operating earnings........................................... 71,283 58,833 45,712
------------- ------------- -------------
Other income (expense):
Investment income....................................... 1,834 2,863 1,764
Interest expense........................................ (1,705) (1,571) (2,507)
Other income............................................ 389 600 357
------------- ------------- -------------
Total other income (expense)......................... 518 1,892 (386)
------------- ------------- -------------
Earnings before income taxes................................. 71,801 60,725 45,326
Income taxes................................................. 26,710 22,711 17,906
------------- ------------- -------------
Net earnings................................................. $ 45,091 $ 38,014 $ 27,420
============= ============= ==============
Basic net earnings per common share.......................... $ 1.44 $ 1.22 $ 0.94
============= ============= =============
Diluted net earnings per common share........................ $ 1.43 $ 1.21 $ 0.92
============= ============= =============
Basic weighted average shares outstanding.................... 31,401 31,188 29,319
============= ============= =============
Diluted weighted average shares outstanding.................. 31,640 31,533 29,860
============= ============= =============
See notes to consolidated financial statements.
F-4
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 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
income taxes.................. -- -- -- -- (2) -- (2)
Net earnings.................... -- -- -- 38,014 -- -- 38,014
-------------- ---------- ------------ ----------- ---------- -------------------------
Balance, December 29, 1996......... 31,580,955 316 153,028 92,081 188 (849) 244,764
Dividends on common stock,
$0.08 per share............... -- -- -- (2,518) -- -- (2,518)
Stock options exercised......... 163,054 1 2,193 -- -- -- 2,194
Shares sold under employee
stock purchase plan........... -- -- 396 -- -- 61 457
Income tax benefit upon exercise
of stock options.............. -- -- 548 -- -- -- 548
Change in unrealized gain on
short-term investments, net of
income taxes.................. -- -- -- -- (93) -- (93)
Net earnings.................... -- -- -- 45,091 -- -- 45,091
-------------- ---------- ------------ ----------- ---------- ----------- -------------
Balance, December 28, 1997......... 31,744,009 $ 317 $ 156,165 $134,654 $ 95 $ (788) $ 290,443
============== ========== ============ =========== ========== =========== =============
See notes to consolidated financial statements.
F-5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Fiscal Year Ended
----------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................. $ 45,091 $ 38,014 $ 27,420
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization.............................. 20,877 15,652 11,964
Amortization of intangible assets.......................... 3,258 2,293 2,305
Loss (gain) on sale of investments......................... 20 27 (67)
Deferred income tax provision (benefit).................... 1,001 128 (179)
Loss on disposition of restaurants and equipment........... 1,209 3,318 850
Pro forma provision for income taxes of pooled company..... -- -- 73
Changes in assets and liabilities (exclusive of effects of
acquisitions other than pooled company):
Receivables................................................ 2,451 (2,702) (2,447)
Inventories................................................ (66) 5,479 (4,877)
Prepaid and other current assets........................... 671 (898) 155
Accounts payable........................................... 7,782 766 433
Accrued expenses and other current liabilities............. 2,400 2,806 5,307
Accrued income taxes....................................... 4,248 (723) (328)
Franchise deposits......................................... (261) 625 (187)
Other...................................................... (1,302) (139) 356
--------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 87,379 64,646 40,778
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........................... (19,150) (49,487) (16,809)
Maturities and sales of short-term investments................ 48,117 31,149 4,392
Purchases of property and equipment........................... (90,480) (65,672) (51,899)
Acquisitions of restaurants................................... (33,650) -- (9,682)
Acquisition of minority interest in joint venture............. (1,525) -- --
Proceeds from sale of restaurants and equipment............... 988 4,314 104
--------------- --------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES...................... (95,700) (79,696) (73,894)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........................ -- -- 60,434
Dividends paid................................................ (2,191) (1,861) (1,269)
Issuance of common stock upon exercise of stock options....... 2,194 3,801 5,988
Income tax benefit upon exercise of stock options............. 548 1,149 2,615
Shares sold under employee stock purchase plan................ 457 -- --
Proceeds from issuance of long-term debt...................... -- -- 8,087
Payments on long-term debt.................................... (974) (945) (22,179)
Payments under noncompetition and consulting agreement........ (220) (220) (220)
Minority interest in net earnings of joint venture............ 69 284 214
--------------- --------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES........... (117) 2,208 53,670
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (8,438) (12,842) 20,554
CASH AND CASH EQUIVALENTS, beginning of period..................... 17,346 30,188 9,634
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 8,908 $ 17,346 $ 30,188
=============== =============== ===============
See notes to consolidated financial statements.
F-6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(dollars in thousands)
Fiscal Year Ended
-----------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................... $ 20,613 $ 22,437 $ 15,537
================= ================= =================
Interest........................................ $ 2,573 $ 1,061 $ 3,060
================= ================= =================
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 (see Note 4). 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 10), which was paid in full in January
1997.
Capitalized leases of $4,055,000 were recorded in April 1997 when the Company
acquired the operations and assets of 11 franchise restaurants. In connection
with this acquisition, the Company issued $2,500,000 of promissory notes (see
Note 4).
DISCLOSURE OF ACCOUNTING POLICY:
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
See notes to consolidated financial statements.
F-7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Applebee's International, Inc. and its subsidiaries (the "Company") develops,
franchises and operates casual dining restaurants principally under the names
"Applebee's Neighborhood Grill & Bar" and "Rio Bravo Cantina." As of December
28, 1997, there were 960 Applebee's restaurants, of which 770 were operated by
franchisees and 190 were operated by the Company, and 55 Rio Bravo Cantina
restaurants, of which 24 were operated by franchisees and 31 were operated by
the Company. The Company also operated four other specialty restaurants. Such
restaurants were located in 48 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 and its wholly-owned subsidiaries. All material
intercompany profits, transactions and balances have been eliminated.
Fiscal year: The Company's fiscal year ends on the last Sunday of the calendar
year. The fiscal years ended December 28, 1997 and December 29, 1996 contained
52 weeks, and the fiscal year ended December 31, 1995 contained 53 weeks, and
are referred to hereafter as 1997, 1996 and 1995, 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 28, 1997, 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.
Pre-opening expense: The Company expenses direct training and other costs
related to opening new or relocated restaurants in the month of opening.
Property and equipment: Property and equipment are stated at cost. Depreciation
is provided primarily on a straight-line method over the estimated useful lives
of the assets. Leasehold improvements are amortized over the lesser of the lease
term, including renewal options, or the estimated useful life of the related
asset. The general ranges of original depreciable lives are as follows:
Years
Buildings.................................................... 20
Leasehold improvements....................................... 15-20
Furniture and equipment...................................... 3-7
Interest has been capitalized in connection with the development of new
restaurants and is amortized over the estimated useful life of the related
asset. Interest costs of $755,000, $618,000 and $624,000 were capitalized during
1997, 1996 and 1995, respectively.
Goodwill: Goodwill represents the excess of cost over fair market value of net
assets acquired by the Company. Goodwill is being amortized over periods ranging
from 15 to 20 years on a straight-line basis. Accumulated amortization at
December 28, 1997 and December 29, 1996 was $7,595,000 and $5,155,000,
respectively.
F-8
Impairment of long-lived assets: Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable.
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 28, 1997 and December
29, 1996 was $6,263,000 and $5,695,000, respectively.
Franchise revenues: Franchise revenues are deferred until substantial
performance of franchisor obligations is complete. Initial franchise fees,
included in franchise income in the consolidated statements of earnings, totaled
$4,263,000, $4,615,000 and $4,162,000 for 1997, 1996 and 1995, 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 $20,752,000, $16,470,000 and $12,749,000 for 1997,
1996 and 1995, respectively.
Stock-based compensation: The Company has adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." The Statement encourages rather than requires
companies to adopt a method that accounts for stock compensation awards based on
their estimated fair value at the date they are granted. Companies are
permitted, however, to account for stock compensation awards under Accounting
Principles Board ("APB") Opinion No. 25 which requires compensation cost to be
recognized based on the excess, if any, between the quoted market price of the
stock at the date of grant and the amount an employee must pay to acquire the
stock. The Company has elected to continue to apply APB Opinion No. 25 and has
disclosed the pro forma net earnings and earnings per share, determined as if
the fair value method had been applied, in Note 14.
Earnings per share: The Company adopted SFAS No. 128, "Earnings Per Share,"
during 1997. SFAS No. 128 requires presentation of basic and diluted earnings
per share. Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. All prior period weighted average
and per share information has been restated in accordance with SFAS No. 128.
Outstanding stock options issued by the Company represent the only dilutive
effect on weighted average shares. A reconciliation between basic and diluted
weighted average shares outstanding and the related earnings per share
calculation is presented below (in thousands, except per share amounts):
1997 1996 1995
--------------- ---------------- -----------------
Net earnings....................................... $ 45,091 $ 38,014 $ 27,420
================ ================ ================
Basic weighted average shares outstanding.......... 31,401 31,188 29,319
Dilutive effect of stock options................... 239 345 541
---------------- ---------------- ----------------
Diluted weighted average shares outstanding........ 31,640 31,533 29,860
================ ================ ================
Basic net earnings per common share................ $ 1.44 $ 1.22 $ 0.94
================ ================ ================
Diluted net earnings per common share.............. $ 1.43 $ 1.21 $ 0.92
================ ================ ================
F-9
Stock options with exercise prices greater than the average market price of the
Company's common stock for the applicable periods are excluded from the
computation of diluted weighted average shares outstanding. Such options totaled
approximately 1,625,000, 1,368,000 and 374,000 for 1997, 1996 and 1995,
respectively.
Pervasiveness of estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New accounting pronouncements: In June 1997, the Financial Accounting Standards
Board issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement is effective for fiscal
years beginning after December 15, 1997. The Company does not believe the
reporting and display of comprehensive income will materially impact the
financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be presented. This statement
need not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
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
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 28, 1997 December 29, 1996
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- ----------------
Short-term investments................. $ 10,906 $ 10,906 $ 40,064 $ 40,064
Long-term debt, excluding
capitalized lease obligations........ $ 24,306 $ 24,941 $ 22,780 $ 23,099
F-10
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 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.
Other restaurant acquisitions: On April 3, 1995, the Company acquired the
operations of five franchise restaurants and the related furniture and fixtures,
certain land and leasehold improvements, and rights to future development of
restaurants for a total purchase price of $9,682,000. The acquisition was
accounted for as a purchase, and accordingly, the purchase price has been
allocated to the fair value of net assets acquired and resulted in an allocation
to goodwill of $6,432,000. In connection with this acquisition, the Company also
recorded capitalized leases of $2,610,000. The 1995 financial statements reflect
the results of operations of such restaurants subsequent to the date of
acquisition. Results of operations of such restaurants prior to acquisition were
not material in relation to the Company's operating results for the periods
shown.
In 1997, the Company exercised its option to purchase the remaining 50% interest
in a joint venture arrangement with its franchisee in Nevada for $1,525,000.
On April 14, 1997, the Company acquired the operations of 11 franchise
Applebee's restaurants located in the St. Louis metropolitan area and the
related furniture and fixtures, certain land and leasehold improvements, and
rights to future development of restaurants for a total purchase price of
$36,150,000. The purchase price was paid in a combination of $33,650,000 in cash
and $2,500,000 of promissory notes, of which $1,500,000 was payable in January
1998 and $1,000,000 is payable in December 1998. One of the principals of the
franchisee was related to a person who was a director of the Company until May
1997. The acquisition was accounted for as a purchase, and accordingly, the
purchase price has been allocated to the fair value of net assets acquired and
resulted in an allocation to goodwill of approximately $27,000,000 which is
being amortized on a straight-line basis over 20 years. In connection with this
acquisition, the Company also recorded capitalized leases of $4,055,000. The
results of operations of such restaurants have been reflected in the
consolidated financial statements subsequent to the date of acquisition. Results
of operations of such restaurants prior to acquisition were not material in
relation to the Company's operating results for the periods shown.
On December 23, 1997, the Company entered into an agreement with Apple South,
Inc. ("Apple South"), its largest franchisee, to acquire 31 Applebee's
restaurants plus one restaurant under construction in the Virginia markets of
Norfolk, Richmond, Roanoke and Charlottesville for approximately $93,400,000,
subject to certain closing adjustments, referred to herein as the "Virginia
Acquisition." The Virginia Acquisition is anticipated to close in late March
1998, subject to obtaining financing, operating licenses and third-party
consents, and will be accounted for as a purchase. See Note 12 for additional
commitments and contingencies relating to the agreement with Apple South.
F-11
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 28, 1997 December 29, 1996
------------------------------------------ ------------------------------------------
Amortized Unrealized Market Amortized Unrealized Market
Cost Gain Value Cost Gain Value
-------------- ------------- ------------- ------------- ------------- --------------
Certificates of deposit........ $ 19 $ -- $ 19 $ 19 $ -- $ 19
Preferred stocks............... 402 56 458 1,374 52 1,426
U.S. government and
agency securities........... 4,496 -- 4,496 19,829 150 19,979
State and local
municipal securities........ 5,837 96 5,933 18,541 99 18,640
-------------- ------------- ------------- ------------- ------------- --------------
$ 10,754 $ 152 $ 10,906 $ 39,763 $ 301 $ 40,064
============== ============= ============= ============= ============= ==============
The amortized cost and estimated market value of debt securities as of December
28, 1997, 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...................................... $ 2,911 $ 2,911
Due after one year through five years............................ 7,422 7,518
------------------ -----------------
$ 10,333 $ 10,429
================== =================
6. Receivables
Receivables are comprised of the following (in thousands):
December 28, December 29,
1997 1996
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 12,406 $ 9,801
Notes receivable................................................. 1,150 6,305
Credit card receivables.......................................... 2,272 1,636
Interest and dividends receivable................................ 288 833
Franchise fee receivables........................................ 743 425
Other............................................................ 368 515
----------------- -----------------
17,227 19,515
Less allowance for bad debts..................................... 837 270
----------------- -----------------
$ 16,390 $ 19,245
================= =================
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 10), which was paid in full in January
1997.
The provision for bad debts totaled $635,000 for 1997 and $250,000 for 1995. No
provision for bad debts was recorded during 1996. Write-offs against the
allowance for bad debts totaled $68,000, $453,000 and $267,000 during 1997, 1996
and 1995, respectively.
F-12
7. Property and Equipment
Property and equipment, net is comprised of the following (in thousands):
December 28, December 29,
1997 1996
----------------- ------------------
Land............................................................. $ 52,638 $ 38,340
Buildings and leasehold improvements............................. 176,517 125,486
Furniture and equipment.......................................... 106,125 77,034
Construction in progress......................................... 10,238 7,882
----------------- ------------------
345,518 248,742
Less accumulated depreciation and capitalized
lease amortization............................................ 69,436 51,792
----------------- ------------------
$ 276,082 $ 196,950
================= ==================
Property under capitalized leases in the amount of $4,540,000 and $2,610,000 at
December 28, 1997 and December 29, 1996, respectively, is included in buildings
and leasehold improvements. Accumulated amortization of such property amounted
to $235,000 and $225,000 at December 28, 1997 and December 29, 1996,
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 $20,877,000, $15,652,000 and $11,964,000 for 1997, 1996 and
1995, respectively. Of these amounts, $210,000, $145,000 and $105,000 related to
capitalized lease amortization during 1997, 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
comprised of the following (in thousands):
1997 1996 1995
------------------ ------------------ -----------------
Minimum rent................................. $ 10,452 $ 8,138 $ 7,300
Contingent rent.............................. 1,298 1,451 1,520
------------------ ------------------ -----------------
$ 11,750 $ 9,589 $ 8,820
================== ================== =================
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 1998) as of December 28, 1997 are as follows (in
thousands):
Capitalized Operating
Leases Leases
------------------ -----------------
1998............................................................. $ 642 $ 12,483
1999............................................................. 664 12,754
2000............................................................. 691 12,159
2001............................................................. 717 11,900
2002............................................................. 741 11,764
Thereafter....................................................... 11,308 103,691
------------------ ------------------
Total minimum lease payments..................................... 14,763 $ 164,751
==================
Less amounts representing interest............................... 10,184
------------------
Present value of minimum lease payments.......................... $ 4,579
==================
F-13
8. Long-Term Debt
Long-term debt, including capitalized lease obligations, is comprised of the
following (in thousands):
December 28, December 29,
1997 1996
------------------ ------------------
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................................................. 600 1,200
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................................................ 1,187 1,544
Unsecured promissory notes issued in connection with the
acquisition of restaurants; 8.00% interest per annum; due
in two installments of principal and interest in January
and December 1998............................................ 2,500 --
Capitalized lease obligations.................................... 4,579 2,623
Other............................................................ 19 36
------------------ ------------------
Total long-term debt............................................. 28,885 25,403
Less current portion of long-term debt........................... 6,306 968
------------------ ------------------
Long-term debt - less current portion............................ $ 22,579 $ 24,435
================== ==================
During 1995, the Company obtained a $20,000,000 unsecured bank revolving credit
facility that was to expire on December 31, 1997. In September 1997, the terms
of the facility were amended to extend the expiration date to December 31, 1998.
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 28, 1997, no amounts
were outstanding under the facility. Standby letters of credit issued under the
facility totaling $1,887,000 and $1,324,000 were outstanding as of December 28,
1997 and December 29, 1996, respectively.
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 28, 1997,
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 28, 1997, ending during the
years indicated, are as follows (in thousands):
1998.................................................. $ 6,306
1999.................................................. 3,199
2000.................................................. 3,249
2001.................................................. 2,853
2002.................................................. 2,874
F-14
The Company entered into a financing commitment in January 1998 (see Note 16).
As a result of this commitment, the Company expects to refinance the $20,000,000
unsecured notes payable due in 2004, and to cancel the $20,000,000 unsecured
bank revolving credit facility.
9. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 28, December 29,
1997 1996
------------------ -----------------
Compensation and related taxes.................................... $ 9,060 $ 9,828
Gift certificates................................................. 4,129 3,826
Sales and use taxes............................................... 2,790 2,006
Insurance......................................................... 4,473 1,596
Rent.............................................................. 2,782 2,477
Other............................................................. 5,313 5,864
------------------ ------------------
$ 28,547 $ 25,597
================== =================
10. 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.
11. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax return.
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 the earnings of IRC's limited partnerships
for periods prior to the IRC Merger at a statutory rate of 39%.
The income tax provision consists of the following (in thousands):
1997 1996 1995
--------------- --------------- ----------------
Current provision:
Federal............................................ $ 22,016 $ 18,783 $ 15,163
State.............................................. 3,693 3,800 2,849
Deferred provision (benefit)........................... 1,001 128 (179)
Pro forma provision for income taxes
of pooled company.................................. -- -- 73
-------------- --------------- ----------------
Income taxes........................................... $ 26,710 $ 22,711 $ 17,906
=============== =============== ================
F-15
The deferred income tax provision is comprised of the following (in thousands):
1997 1996 1995
--------------- --------------- ----------------
Depreciation........................................... $ 2,270 $ 617 $ 13
Franchise deposits..................................... (534) 77 85
Allowance for bad debts................................ (111) 345 (72)
Accrued expenses....................................... (758) 203 (125)
Property and equipment writedown....................... 671 (935) --
Other.................................................. (537) (179) (80)
--------------- --------------- ----------------
Deferred income tax provision (benefit)................ 1,001 128 (179)
Adjustment to tax basis of pooled company.............. -- -- (1,350)
Deferred income taxes related to change in
unrealized gain (loss) on investments.............. 57 (3) 173
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ 1,058 $ 125 $ (1,356)
=============== =============== ================
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):
1997 1996 1995
--------------- --------------- ----------------
Federal income tax at statutory rates.................. $ 25,130 $ 21,254 $ 15,864
Increase (decrease) to income tax expense:
Amortization of goodwill .......................... 280 276 281
State income taxes, net of federal benefit......... 2,625 2,470 1,852
Merger costs....................................... -- -- 625
Tax exempt investment income....................... (310) (338) (169)
Meals and entertainment disallowance............... 278 317 258
FICA tip tax credit................................ (1,598) (1,136) (985)
Other.............................................. 305 (132) 180
--------------- --------------- ----------------
Income taxes........................................... $ 26,710 $ 22,711 $ 17,906
=============== =============== ================
The net current deferred income tax asset amounts are included in "prepaid and
other current assets" in the accompanying consolidated balance sheets. The
significant components of deferred income tax assets and liabilities and the
related balance sheet classifications are as follows (in thousands):
December 28, December 29,
1997 1996
----------------- ------------------
Classified as current:
Allowance for bad debts..................................... $ 126 $ 15
Accrued expenses............................................ 1,003 245
Other, net.................................................. (624) (495)
----------------- ------------------
Net deferred income tax asset (liability)................... $ 505 $ (235)
================= ==================
Classified as non-current:
Depreciation................................................ $ (1,786) $ 484
Franchise deposits.......................................... 900 366
Other, net.................................................. 454 516
----------------- ------------------
Net deferred income tax asset (liability)................... $ (432) $ 1,366
================= ==================
F-16
12. Commitments and Contingencies
Litigation, claims and disputes: As of December 28, 1997, 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. In November 1992, the lender was
declared insolvent by the FDIC and has since been liquidated. The Company closed
one of the three restaurants in 1994 and one of the two remaining restaurants in
February 1996. In the fourth quarter of 1996, the Company received information
indicating that the franchisee's indebtedness to the FDIC had been acquired by a
third party. In June 1997, the third party filed a lawsuit against the Company
seeking approximately $3,800,000. The lawsuit remains in the discovery phase.
The Company believes it has meritorious defenses and will vigorously defend this
lawsuit. In the event that the Company were to pay an amount determined to be in
excess of the fair market value of the assets, the Company will recognize a loss
at the time of such payment.
In addition, the Company is involved in various legal actions arising in the
normal course of business. While the resolution of any of such actions or the
matter described above may have an impact on the financial results for the
period in which it is resolved, the Company believes that the ultimate
disposition of these matters will not, in the aggregate, have a material adverse
effect upon its business or consolidated financial position.
Franchise financing: The Company entered into an agreement in 1992 with a
financing source to provide up to $75,000,000 of financing to Company
franchisees to fund development of new franchise restaurants. The Company
provided a limited guaranty of loans made under the agreement. The Company's
maximum recourse obligation of 10% of the amount funded is reduced beginning in
the second year of each long-term loan and thereafter decreases ratably to zero
after the seventh year of each loan. At December 28, 1997, approximately
$48,000,000 had been funded through this financing source, of which
approximately $19,000,000 was outstanding. 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 28, 1997,
the Company would have been required to make payments aggregating approximately
$4,900,000. In addition, the Company has severance and employment agreements
with certain officers which contain severance provisions not related to a change
in control, and such provisions would have required aggregate payments of
approximately $3,900,000 if such officers had been terminated as of December 28,
1997.
Apple South divestiture plan: As part of the agreement with Apple South relating
to the Virginia Acquisition (see Note 4), Apple South has also agreed to use its
best efforts to sell its other Applebee's restaurants as soon as practical,
resulting in its exit as an Applebee's franchisee. To the extent any restaurants
are not divested by Apple South by December 31, 1999, the Company has an option
to purchase the remaining restaurants at a predetermined formula. The Company
and Apple South have committed to work together to identify and approve
qualified franchise groups to acquire the remaining Apple South restaurants and
to effect an efficient transition of ownership. To assist in this transition,
the Company has agreed to provide the availability of guarantees up to 10% of
the borrowings of qualified franchise groups, up to a maximum of $10,000,000 in
the aggregate.
F-17
13. Stockholders' Equity
On July 28, 1995, the Company completed a public offering of its common stock
consisting of 2,100,000 shares sold by the Company and 300,000 shares sold by
certain stockholders of the Company. In addition, the Company and the selling
stockholders granted the underwriters an option to purchase 315,000 and 45,000
shares, respectively, to cover over-allotments, which was exercised on August 9,
1995. Net proceeds of $60,434,000, after expenses, were received from the
offering. A portion of the net proceeds of the offering was used to retire
approximately $12,500,000 of secured debt assumed in certain 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.
14. Employee Benefit Plans
Employee stock option plan: During 1989, the Company's Board of Directors
approved the 1989 Employee Stock Option Plan (the "1989 Plan") which provided
for the grant of both qualified and nonqualified options as determined by a
committee appointed by the Board of Directors. At the 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 2,300,000. 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 and 1997 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.
F-18
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value as prescribed by SFAS No. 123 (see Note 2),
the Company's net earnings and net earnings per common share would have been
reduced to the pro forma amounts indicated below (in thousands, except per share
amounts):
1997 1996 1995
--------------- --------------- --------------
Net earnings, as reported................................ $ 45,091 $ 38,014 $ 27,420
Net earnings, pro forma.................................. $ 41,119 $ 32,863 $ 25,613
Basic net earnings per common share, as reported......... $ 1.44 $ 1.22 $ 0.94
Basic net earnings per common share, pro forma........... $ 1.31 $ 1.05 $ 0.87
Diluted net earnings per common share, as reported....... $ 1.43 $ 1.21 $ 0.92
Diluted net earnings per common share, pro forma......... $ 1.30 $ 1.04 $ 0.86
The weighted average fair value at date of grant for options granted during
1997, 1996 and 1995 was $12.76, $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 1997, 1996 and
1995: dividend yield of 0.3% for all years; expected volatility of 56.0%, 58.1%
and 63.4%, respectively; risk-free interest rate of 5.7%, 6.2% and 6.4%,
respectively; and expected lives of 4.6, 4.9 and 4.0 years, respectively.
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 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
Granted.................. 142,825 $ 24.98 -- --
Exercised................. (2,167) $ 25.88 (160,887) $ 13.29
Canceled.................. (228,902) $ 28.03 (10,804) $ 20.52
------------------ -----------------
Options outstanding at
December 28, 1997............ 1,741,099 $ 27.72 640,012 $ 14.17
================== =================
Options exercisable at
December 28, 1997............ 214,000 $ 26.23 640,012 $ 14.17
================== =================
Options available for grant at
December 28, 1997............ 556,734 --
================== =================
F-19
The following table summarizes information relating to fixed-priced stock
options outstanding for both plans at December 28, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
-------------------------- --------------- --------------- -------------- --------------- ---------------
1989 Plan:
$ 3.02 to $ 7.63 28,562 3.9 years $ 4.62 28,562 $ 4.62
$ 11.83 to $ 14.69 521,950 3.7 years $ 13.74 521,950 $ 13.74
$ 19.25 to $ 21.88 89,500 2.6 years $ 19.78 89,500 $ 19.78
--------------- ---------------
$ 3.02 to $ 21.88 640,012 3.5 years $ 14.17 640,012 $ 14.17
=============== ===============
1995 Plan:
$ 22.75 to $ 25.75 258,358 6.0 years $ 24.98 130,000 $ 24.97
$ 28.00 to $ 29.25 1,482,741 8.1 years $ 28.19 84,000 $ 28.18
--------------- ---------------
$ 22.75 to $ 29.25 1,741,099 7.8 years $ 27.72 214,000 $ 26.23
=============== ===============
Employee retirement plans: During 1992, the Company established a profit sharing
plan and trust in accordance with Section 401(k) of the Internal Revenue Code.
Prior to 1997, the Company matched 25% of employee contributions, not to exceed
2% of the employee's total annual compensation, with the Company contributions
vesting at the rate of 20% each year beginning after the employee's second year
of service. The Company adopted amendments to the 401(k) plan which were
effective beginning in 1997. The Company's matching contributions were increased
to 35% and 50% of employee contributions in 1997 and 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 vest at the rate of 60% after the employee's third year of
service, 80% after four years of service and 100% after five years of service.
The number of common shares authorized pursuant to the 401(k) plan is 50,000.
During 1994, the Company established a non-qualified defined contribution
retirement plan for key employees. The Company's contributions under both plans
in 1997, 1996 and 1995 were $702,000, $570,000 and $312,000, respectively.
Employee stock purchase plan: During 1996, the Company established an employee
stock purchase plan in accordance with Section 423 of the Internal Revenue Code,
and the plan was approved at the 1997 Annual Meeting of Stockholders. The plan
allows employees to purchase shares of the Company's common stock at a 10%
discount through payroll deductions. The number of common shares authorized
pursuant to the plan is 200,000. During 1997, employees purchased 20,143 shares
under this plan.
Employee stock ownership plan: The Company's Board of Directors approved an
employee stock ownership plan in January 1997. The Company's contributions to
this plan are completely discretionary and will be made in shares of the
Company's common stock. The Company's contribution to the plan was $500,000 for
1997.
15. Related Party Transactions
The Company and certain franchisees have obtained restaurant equipment from a
company owned by an individual who is related to a person who was a director of
the Company until May 1997. During 1997, 1996 and 1995, the Company paid
$264,000, $426,000 and $3,128,000, respectively, for equipment and services
purchased from this company.
F-20
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 $166,000, $185,000 and $186,000 for 1997, 1996 and 1995,
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 person who was a director of the Company until May
1997, 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 $128,000 for
1997 and $113,000 for both 1996 and 1995, 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 person, who was a director of the Company until August
1997 and who remains a significant stockholder of the Company, holds a 37.5%
interest. The lease expires in December 1998 and is renewable for one-year terms
at the Company's option. Rents incurred under the lease were $120,000, $104,000,
and $84,000 for 1997, 1996 and 1995, respectively, and are included in general
and administrative expenses in the consolidated statements of earnings.
16. Subsequent Events
On January 22, 1998, the Company entered into a loan commitment with Merrill
Lynch Capital Corporation to provide $225,000,000 in senior secured credit
facilities, consisting of an eight-year senior secured term loan of $125,000,000
and a five-year secured revolving credit facility of $100,000,000.
The Company anticipates that it will use the proceeds of the facilities
approximately as follows:
(i) $105,000,000 to fund the Virginia Acquisition (including
related transaction fees and expenses);
(ii) $20,000,000 to refinance certain existing indebtedness
currently bearing interest at 7.70% (see Note 8); and
(iii) $100,000,000 for ongoing working capital needs and general
corporate purposes (including stock repurchases as described
below).
Up to $50,000,000 of the facilities will be available to fund repurchases of the
Company's common stock. Since December 28, 1997 and through March 9, 1998, the
Company has repurchased 1,270,000 shares of its common stock at an aggregate
value of $25,000,000, pursuant to plans approved by the Company's Board of
Directors. The Company contemplates additional purchases of up to $25,000,000
subject to the completion of the financing discussed above.
The senior term loan is expected to bear interest at LIBOR plus 2.25% and
require semi-annual principal payments aggregating $1,250,000 per year for each
of the first seven years, with the remaining $116,250,000 due during the eighth
year. The revolving credit facility is expected to bear interest at LIBOR plus
1.375%.
Both the senior term loan and the revolving credit facility will be subject to
standard other terms, conditions, covenants, and fees and will be secured by the
common stock of each of the Company's present and future subsidiaries and all
intercompany debt of the Company and such subsidiaries. The loan commitment is
anticipated to close concurrently with the Virginia Acquisition (see Note 4).
F-21
In February 1998, the Company entered into an agreement to sell its six
restaurants located in the Long Island, New York area for approximately
$10,000,000 in cash. The operations of the restaurants and future restaurant
development in the market area will be assumed by an existing Applebee's
franchisee. The Company expects the sale to close in the second quarter of 1998
with minimal effect, if any, on its consolidated net earnings or financial
position.
17. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 1997 and 1996 (in thousands, except per share amounts).
1997
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 30, June 29, September 28, December 28,
1997 1997 1997 1997
------------- -------------- ------------- -------------
Revenues:
Company restaurant sales....................... $100,843 $ 114,775 $117,607 $118,948
Franchise income............................... 15,409 15,917 16,260 16,061
------------- -------------- ------------- -------------
Total operating revenues.................... 116,252 130,692 133,867 135,009
------------- -------------- ------------- -------------
Cost of Company restaurant sales:
Food and beverage.............................. 27,721 31,661 32,228 32,859
Labor.......................................... 32,101 36,025 37,914 39,125
Direct and occupancy........................... 26,022 28,419 28,884 30,871
Pre-opening expense............................ 510 902 864 1,385
------------- -------------- ------------- -------------
Total cost of Company restaurant sales...... 86,354 97,007 99,890 104,240
------------- -------------- ------------- -------------
General and administrative expenses................. 12,446 13,109 13,060 13,964
Amortization of intangible assets................... 568 857 913 920
Loss on disposition of restaurants and equipment.... 233 251 262 463
------------- -------------- ------------- -------------
Operating earnings.................................. 16,651 19,468 19,742 15,422
------------- -------------- ------------- -------------
Other income (expense):
Investment income.............................. 933 446 180 275
Interest expense............................... (359) (473) (407) (466)
Other income................................... 148 90 58 93
------------- -------------- ------------- -------------
Total other income (expense)................ 722 63 (169) (98)
------------- -------------- ------------- -------------
Earnings before income taxes........................ 17,373 19,531 19,573 15,324
Income taxes........................................ 6,497 7,305 7,320 5,588
------------- -------------- ------------- -------------
Net earnings........................................ $ 10,876 $ 12,226 $ 12,253 $ 9,736
============= ============== ============= =============
Basic net earnings per common share................. $ 0.35 $ 0.39 $ 0.39 $ 0.31
============= ============== ============= =============
Diluted net earnings per common share............... $ 0.34 $ 0.39 $ 0.39 $ 0.31
============= ============== ============= =============
Basic weighted average shares outstanding........... 31,310 31,370 31,444 31,478
============= ============== ============= =============
Diluted weighted average shares outstanding......... 31,606 31,611 31,692 31,654
============= ============== ============= =============
F-22
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
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
============= ============== ============= =============
Basic net earnings per common share................. $ 0.27 $ 0.31 $ 0.35 $ 0.29
============= ============== ============= =============
Diluted net earnings per common share............... $ 0.27 $ 0.30 $ 0.35 $ 0.29
============= ============== ============= =============
Basic weighted average shares outstanding........... 31,033 31,148 31,277 31,295
============= ============== ============= =============
Diluted weighted average shares outstanding......... 31,338 31,553 31,680 31,600
============= ============== ============= =============
-------------------------
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 (incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1996).
4.1 Shareholder Rights Plan contained in Rights Agreement dated as
of September 7, 1994, between Applebee's International, Inc.
and Chemical Bank, as Rights Agent (incorporated by reference
to Exhibit 4.1 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 25, 1994).
4.2 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 28, 1997.
10.7 Form of Rio Bravo Cantina Development Agreement (incorporated
by reference to Exhibit 10.7 of the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 29, 1996).
10.8 Form of Rio Bravo Cantina Franchise Agreement (incorporated by
reference to Exhibit 10.8 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 1996).
10.9 Schedule of Rio Bravo Cantina Development and Franchise
Agreements as of December 28, 1997.
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).
10.12 Asset Purchase Agreement dated December 23, 1997 by and among
Applebee's International, Inc. and Apple South, Inc.
(incorporated by reference to the Registrant's Current Report
on Form 8-K dated December 23, 1997).
Management Contracts and Compensatory Plans or Arrangements
10.13 1995 Equity Incentive Plan, as amended.
10.14 Employee Stock Purchase Plan.
10.15 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).
10.16 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).
10.17 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).
E-2
Exhibit
Number Description of Exhibit
- --------------- ---------------------------------------------------------------
10.18 Employment Agreement, dated March 1, 1995, with George D.
Shadid (incorporated by reference to Exhibit 10.3 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 26, 1995).
10.19 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 30, 1997).
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.
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.
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney (see page 32 of the Form 10-K).
27 Financial Data Schedule.
E-3