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 25, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-17962
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Applebee's International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-1461763
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, 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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes X No
--- ---
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
--- ---
1
The aggregate market value of the voting and non-voting common stock equity held
by non-affiliates of the registrant as of the last business day of the second
fiscal quarter ended June 26, 2005 was $2,105,448,271 based on the closing sale
price on June 24, 2005.
The number of shares of the registrant's common stock outstanding as of March 6,
2006 was 74,369,249.
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.
2
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 25, 2005
INDEX
Page
PART I
Item 1. Business................................................................................ 4
Item 1A. Risk Factors............................................................................ 14
Item 1B. Unresolved Staff Comments............................................................... 18
Item 2. Properties.............................................................................. 19
Item 3. Legal Proceedings....................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..................................... 21
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................................ 22
Item 6. Selected Financial Data................................................................. 24
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 25
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 38
Item 8. Financial Statements and Supplementary Data............................................. 39
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................... 39
Item 9A. Controls and Procedures................................................................. 39
Item 9B. Other Information....................................................................... 41
PART III
Item 10. Directors and Executive Officers of the Registrant...................................... 42
Item 11. Executive Compensation.................................................................. 42
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.......................................................... 42
Item 13. Certain Relationships and Related Transactions.......................................... 42
Item 14. Principal Accounting Fees and Services.................................................. 42
PART IV
Item 15. Exhibits, Financial Statement Schedules................................................. 44
Signatures.................................................................................................. 45
3
PART I
Item 1. Business
General
References to "Applebee's," "we," "us," and "our" in this document are
references to Applebee's International, Inc. and its subsidiaries and any
predecessor companies of Applebee's International, Inc. We develop, franchise
and operate casual dining restaurants under the name "Applebee's Neighborhood
Grill & Bar." With over 1,800 restaurants as of the fiscal year ended December
25, 2005, Applebee's Neighborhood Grill & Bar is the largest casual dining
concept in the world, in terms of number of restaurants and market share.
Applebee's International, Inc. maintains an Internet website address at
www.applebees.com. We make available free of charge through our website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and all amendments to those reports as soon as they are reasonably
available after these materials are electronically filed with or furnished to
the Securities and Exchange Commission ("SEC").
We opened our first restaurant in 1986. We initially developed and operated six
restaurants as a franchisee of the Applebee's Neighborhood Grill & Bar Division
of an indirect subsidiary of W.R. Grace & Co. In March 1988, we acquired
substantially all the assets of our franchisor. When we acquired the Applebee's
Division, it operated 13 restaurants and had ten franchisees, including us,
operating 41 franchise restaurants.
As of December 25, 2005, there were 1,804 Applebee's restaurants. Franchisees
operated 1,318 of these restaurants and 486 restaurants were company operated.
The restaurants were located in 49 states and 14 countries outside of the United
States. During 2005, 144 new restaurants were opened, including 92 franchise
restaurants and 52 company restaurants.
Our current strategy is to focus solely on the Applebee's concept. We
currently expect that the Applebee's system will encompass at least 3,000
restaurants in the United States as well as the potential for at least 1,000
restaurants internationally.
4
The following table sets forth certain unaudited financial information and other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:
Fiscal Year Ended
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December 25, December 26, December 28,
2005 2004 2003
----------------- ----------------- ----------------
Number of restaurants:
Company:
Beginning of year............................ 424 383 357
Restaurant openings.......................... 52 32 26
Restaurant closings.......................... (1) (1) (2)
Restaurants acquired from franchisees........ 11 10 11
Restaurants acquired by franchisees.......... -- -- (9)
----------------- ----------------- ----------------
End of year.................................. 486 424 383
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Franchise:
Beginning of year............................ 1,247 1,202 1,139
Restaurant openings.......................... 92 77 74
Restaurant closings.......................... (10) (22) (9)
Restaurants acquired from franchisees........ (11) (10) (11)
Restaurants acquired by franchisees.......... -- -- 9
----------------- ----------------- ----------------
End of year.................................. 1,318 1,247 1,202
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Total:
Beginning of year............................ 1,671 1,585 1,496
Restaurant openings.......................... 144 109 100
Restaurant closings.......................... (11) (23) (11)
----------------- ----------------- ----------------
End of year.................................. 1,804 1,671 1,585
================= ================= ================
Weighted average weekly sales per restaurant:
Company..................................... $ 45,552 $ 46,536 $ 45,000
Franchise................................... 48,908 47,613 45,271
Total....................................... 48,019 47,345 45,205
Change in comparable restaurant sales:(1)
Company..................................... (0.9)% 3.8% 5.2%
Franchise................................... 2.7 % 5.2% 3.7%
Total....................................... 1.8 % 4.8% 4.1%
Total operating revenues (in thousands):
Company restaurant sales.................... $ 1,082,641 $ 976,798 $ 867,158
Franchise royalties and fees(2)............. 128,813 121,221 109,604
Other franchise income(3)................... 5,196 13,615 13,147
----------------- ----------------- ----------------
Total....................................... $ 1,216,650 $ 1,111,634 $ 989,909
================= ================= ================
(1) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
(2) Franchise royalties are generally 4% of each franchise restaurant's
reported monthly gross sales. Reported franchise sales, in thousands, were
$3,223,505, $3,001,287 and $2,725,179 in 2005, 2004 and 2003, respectively.
Franchise fees typically range from $30,000 to $35,000 for each restaurant
opened.
(3) Other franchise income includes insurance premiums from franchisee
participation in our captive insurance program and revenue from information
technology products and services provided to certain franchisees.
5
The Applebee's System
Concept. Each Applebee's restaurant is designed as an attractive, friendly,
neighborhood establishment featuring moderately-priced food and beverage items,
table service and a comfortable atmosphere. Our restaurants appeal to a wide
range of customers including young adults, senior citizens and families with
young children.
Applebee's also offers its customers the convenience of carry-out service. In
2002, we initiated a "To Go" program which includes the use of standardized
state-of-the-art packaging, interior and exterior signage and a focused training
program. In addition, the program features the additional convenience of our
Carside To Go(TM) initiative in which customers place their orders by telephone,
park in designated spots at our restaurants and servers deliver their orders to
their vehicles. We completed the implementation of the Carside To Go(TM) service
at all company-owned restaurants where practicable in 2003 and franchisees
completed implementation in substantially all of the franchise restaurants in
early 2005.
We have developed certain specifications for the design of our restaurants. Our
restaurants are primarily located in free-standing buildings, end caps of strip
shopping centers, and shopping center malls. Each of our restaurants generally
has a bar, and many restaurants offer patio seating. The decor of each
restaurant incorporates artifacts and memorabilia such as old movie posters,
musical instruments and sports equipment. Restaurants also frequently display
photographs, magazine and newspaper articles highlighting local history and
personalities. These items give each restaurant a unique, neighborhood identity,
which is an important aspect of the Applebee's brand. In addition, we require
that each restaurant be remodeled every six to seven years to embody the design
elements of the current prototype.
Menu. Each restaurant offers a diverse menu of moderately-priced food and
beverage items consisting of traditional favorites and signature dishes. The
restaurants feature a broad selection of entrees, including beef, chicken, pork,
seafood and pasta items prepared in a variety of cuisines, as well as
appetizers, salads, sandwiches, specialty drinks and desserts. Substantially all
restaurants offer beer, wine, liquor and premium specialty drinks. During 2005,
alcoholic beverages accounted for 12.2% of company-owned restaurant sales.
During 2004, we launched a strategic alliance with Weight Watchers(TM) to offer
Weight Watchers(TM) branded menu alternatives to our guests. We currently have
ten Weight Watchers(TM) items on our menu. As part of our exclusive arrangement
with Weight Watchers(TM), we pay a percentage royalty on the total sales for
Weight Watchers(TM) menu items sold.
Restaurant Operations. We and our franchisees operate restaurants in accordance
with operating standards and specifications. These standards pertain to the
quality, preparation and selection of menu items, maintenance and handling of
food, maintenance and cleanliness of premises and associate conduct. Our quality
assurance department is responsible for establishing and monitoring our food
safety programs. We develop all standards and specifications with input from
franchisees, and they are applied on a system-wide basis.
Training. We have comprehensive training programs for restaurant associates and
managers. The training programs utilize a combination of on-the-job training,
video, computer and print-based materials. Program materials are routinely
revised to reflect the most recent operational procedures and standards.
Restaurant associates are provided with a structured orientation and five-day
training program upon hire. This training is provided by restaurant trainers who
have completed an extensive certification process to become a trainer. In
addition, associates receive ongoing training to further develop their job
skills and knowledge.
Restaurant managers complete a training and orientation process upon hire. The
program is executed at certified training restaurants located throughout the
6
Applebee's system. The training program provides skill and knowledge training
for key operations and management processes. In addition, ongoing training and
development programs are offered for experienced managers in the areas of
leadership and operations management.
Prior to opening a new restaurant, a training program is provided to all new
hourly associates. The training is conducted by certified, experienced trainers
from Applebee's restaurants located throughout the system. Upon the opening of
the restaurant, the training team remains for an additional six days to provide
support and coaching to the new associates.
Marketing. We have historically concentrated our advertising and marketing
efforts primarily on food-specific promotions, Carside To Go(TM) and Applebee's
branded messaging. Our marketing includes national, regional and local
expenditures, utilizing primarily television, radio, direct mail and print
media. In 2005, approximately 4.0% of company restaurant sales was allocated for
marketing purposes. This amount includes contributions to the national marketing
pool which develops and funds the specific national promotions, including Weight
Watchers(TM) and Carside To Go(TM). We focus the remainder of our marketing
expenditures on local marketing in areas with company owned restaurants.
Information Technology. We believe technology can enable us to achieve our
operational goals. Our in-store systems including point-of-sale and food,
kitchen and labor management systems are tightly integrated with our above-store
data warehousing and decision support platforms. This integration provides
management with a timely, accurate, and comprehensive view of our business
performance.
Supply Chain. Maintaining high food quality and system-wide consistency is a
central focus of our supply chain program. We establish quality standards for
products used in the restaurants, and we maintain a limited list of approved
suppliers and distributors from which we and our franchisees must select. We
periodically review the quality of the products served in our domestic
restaurants in an effort to ensure compliance with these standards. We have
negotiated purchasing agreements with most of our approved suppliers which
result in volume discounts for us and our franchisees. Additionally, we purchase
and maintain inventories of certain specialty products to assure sufficient
supplies for the system. Due to cultural and regulatory differences, we have
specific requirements for each country in which our franchisees operate.
Quality Assurance. We are committed to providing our customers with products
that meet or exceed regulatory and industry standards for food safety as well as
our high quality standards. Our quality assurance department establishes and
monitors our food safety programs in domestic restaurants, including restaurant,
supplier and distributor audits, food safety and sanitation monitoring and
product testing.
Company Restaurants
Company Restaurant Openings and Franchise Acquisitions. Our expansion strategy
is to cluster restaurants in targeted markets, thereby increasing consumer
awareness and convenience, and enabling us to take advantage of operational,
distribution and advertising efficiencies. Our development experience indicates
that when we open multiple restaurants within a particular market, our market
share increases.
In order to maximize overall system growth, our expansion strategy through 1992
emphasized franchise arrangements with experienced, successful and financially
capable restaurant operators. We continue to expand the Applebee's system across
the United States through franchise operations, but beginning in 1992, our
growth strategy also included increasing the number of company owned
restaurants. We have tried to achieve this goal in two ways. First, we have
strategically developed certain company territories. Second, when franchises are
available for purchase under acceptable financial terms, we have selectively
acquired existing franchise restaurants. Using this strategy, we have opened 370
new company Applebee's restaurants and acquired 134 franchise restaurants over
7
the last 13 years and have expanded from a total of 31 company owned or operated
restaurants as of December 27, 1992 to a total of 486 as of December 25, 2005.
In addition, as part of our portfolio management strategy, we have sold 35
restaurants to franchisees during this 13-year period.
We opened 52 new company Applebee's restaurants in 2005 and anticipate opening
approximately 40 new company Applebee's restaurants in 2006. The following table
shows the areas where our company restaurants were located as of December 25,
2005:
Area
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New England (includes Maine, Massachusetts, New Hampshire,
New York, Rhode Island and Vermont)................................. 73
Minneapolis/St. Paul, Minnesota........................................ 67
Detroit/Southern Michigan.............................................. 65
St. Louis, Missouri/Illinois........................................... 57
Texas ................................................................ 48
Virginia............................................................... 47
Kansas City, Missouri/Kansas........................................... 33
Washington, D.C. (Maryland, Virginia).................................. 32
San Diego/Southern California.......................................... 21
Las Vegas/Reno, Nevada................................................. 16
Central Missouri/Kansas/Arkansas....................................... 12
Albuquerque, New Mexico................................................ 8
Memphis, Tennessee..................................................... 7
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486
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Restaurant Operations. The staff for a typical restaurant consists of one
general manager, one kitchen manager, two or three managers and approximately 60
hourly associates. All managers of company owned restaurants receive a salary
and may receive a performance bonus based on financial performance, guest and
associate retention measures. As of December 25, 2005, we employed three
Regional Vice Presidents of Operations, 13 Directors of Operations and 80 Area
Directors. The Area Directors' duties include regular restaurant visits and
inspections which ensure the ongoing maintenance of our standards of quality,
service, cleanliness, value, and courtesy. In addition to providing a
significant contribution to revenues and operating earnings, we use company
owned restaurants for many purposes which are integral to the development of the
entire system, including testing of new menu items and training of franchise
restaurant managers and operating personnel.
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. We currently have exclusive
territory franchise arrangements with 76 franchise groups, including 29
international franchisees. We have generally selected franchisees that are
experienced multi-unit restaurant operators who have operated other restaurant
concepts. Our franchisees operate Applebee's restaurants in 43 states and 14
countries outside of the United States. We have assigned development rights to
the vast majority of domestic territories in all states except Hawaii or have
designated them for company development.
As of December 25, 2005, there were 1,318 franchise restaurants. Franchisees
opened 74 restaurants in 2003, 77 restaurants in 2004, and 92 restaurants in
2005. We anticipate approximately 80 franchise restaurant openings in 2006.
Franchisees may open more or fewer restaurants depending upon the availability
of appropriate new sites.
8
Development of Restaurants. We make available to franchisees the design
specifications for a typical restaurant, and we retain the right to prohibit or
modify the use of any set of plans. Each franchisee is responsible for selecting
the site for each restaurant within their territory. We assist franchisees in
selecting appropriate sites, and any selection made by a franchisee is subject
to our approval. We also conduct a physical inspection, review any proposed
lease or purchase agreement and make available demographic and other studies.
Domestic Franchise Arrangements. Generally, franchise arrangements consist of a
development agreement and separate franchise agreements. Development agreements
grant the exclusive right to develop a number of restaurants in a designated
geographical area. The term of a domestic development agreement is generally 20
years. The franchisee enters into a separate franchise agreement for the
operation of each restaurant. Each agreement has a term of 20 years and permits
renewal for up to an additional 20 years in accordance with the terms contained
in the then current franchise agreement (including the then current royalty
rates and advertising fees) and upon payment of an additional franchise fee.
For each restaurant developed, our standard franchise arrangement requires an
initial franchisee fee (which typically ranges from $30,000 to $35,000) and a
royalty fee equal to 4% of the restaurant's monthly gross sales. We have
executed agreements with a majority of our franchisees which maintain the
existing royalty rate of 4% and extend the current franchise and development
agreements until January 1, 2020. These revised agreements contain provisions
which allow for the continued development of the Applebee's concept and support
our long-term expectation of at least 3,000 restaurants in the United States.
The terms, royalties and advertising fees under a limited number of franchise
agreements and the franchise fees under older development agreements vary from
the currently offered arrangements.
Marketing. We currently require domestic franchisees to contribute 2.75% of
their gross sales to the national marketing pool and to spend at least 1.0% of
their gross sales on local marketing and promotional activities. Franchisees
also promote the opening of each restaurant and we reimburse the franchisee for
50% of the out-of-pocket opening advertising expenditures, subject to certain
conditions. The maximum amount we will reimburse for these expenditures is
$2,500. Under our franchise agreements, we have the ability to increase the
combined amount of the advertising fee and the amount required to be spent on
local marketing and promotional activities to a maximum of 5% of gross sales.
Training and Support. We provide ongoing advice and assistance to franchisees in
connection with the operation and management of each restaurant through training
sessions, meetings, seminars, on-premises visits and by written or other
material. We also assist franchisees on request with business planning,
restaurant development, technology and human resource efforts.
Operations Quality Control. We continuously monitor franchise restaurant
operations, principally through our full-time franchise Area Directors (30 as of
December 25, 2005) and our Directors of Franchise Operations (5 as of December
25, 2005). Company and third-party representatives make both scheduled and
unannounced inspections of restaurants to ensure that only approved products are
in use and that our prescribed operations practices and procedures are being
followed. During 2005, these representatives made an average of two visits to
each of our franchise restaurants during which they conducted an inspection and
consultation in the restaurant. We have the right to terminate a franchise
agreement if a franchisee does not operate and maintain a restaurant in
accordance with our requirements.
Franchise Business Council. We maintain a Franchise Business Council which
provides us with input about operations, marketing, product development and
other aspects of restaurant operations for the purpose of improving the
franchise system. As of December 25, 2005, the Franchise Business Council
consisted of eight franchisee representatives and three members of our senior
management team. One franchisee representative is a permanent member.
Franchisees elect the franchisee representatives annually. The Franchise
9
Business Council is also responsible for the appointment of members to advisory
committees related to marketing, supply chain, information technology and food
development.
Franchise Financing. Although financing is the sole responsibility of the
franchisee, we make available to franchisees information about financial
institutions interested in financing the costs of restaurant development for
qualified franchisees. None of these financial institutions is our affiliate or
agent, and we have no control over the terms or conditions of any financing
arrangement offered by these financial institutions.
In 2003, we arranged for a third-party lease financing company to provide
capital to qualified franchisees for investments in certain sales and technology
initiatives over a three-year period ending in September 2006 under standard
leasing terms and conditions. Under the terms of the arrangement, we do not
guarantee any portion of the financing.
In 2003, we arranged for a third-party financing company to provide up to
$75,000,000 to qualified franchisees for short-term loans to fund remodel
investments, subject to our approval. Under the terms of this financing program,
we provided a limited guarantee pool for the loans advanced during the
three-year period ending December 2006. In the fourth quarter of 2005, this
program was terminated and we were released from the guarantees that we had
previously provided under this program.
In 2004, we arranged for a third-party financing company to provide up to
$250,000,000 to qualified franchisees for loans to fund development of new
restaurants through October 2007, subject to our approval. We will provide a
limited guarantee of 10% of certain loans advanced under this program. We will
be released from our guarantee if certain operating results are met after the
restaurant has been open for at least two years. As of December 25, 2005, there
were loans outstanding to six franchisees for approximately $50,400,000 under
this program.
Service Marks
We own the rights to the "Applebee's Neighborhood Grill & Bar(R)" service mark
and certain variations thereof and to other service marks used in our system in
the United States and in various foreign countries. We are aware of names and
marks similar to our service marks used by third parties in certain limited
geographical areas. We intend to protect our service marks by appropriate legal
action where and when necessary.
International Franchising
International Franchise Arrangements. We continue to pursue international
franchising of the Applebee's concept under a long-term strategy of controlled
expansion. This strategy includes seeking qualified franchisees with the
resources to open multiple restaurants in each territory and those with
familiarity with the specific local business environment. We currently are
focusing on international franchising in Canada, Central and South America, the
Mediterranean/Middle East and Mexico. In this regard, we currently have
development agreements with 29 international franchisees. These franchisees
operated 72 international restaurants as of December 25, 2005. The success of
further international expansion will depend on, among other things, local
acceptance of the Applebee's concept and our ability to attract qualified
franchisees and operating personnel. We also must comply with the regulatory
requirements of the local jurisdictions, and supervise international franchisee
operations effectively.
We work closely with our international franchisees to develop and implement the
Applebee's system outside the United States, recognizing commercial, cultural
10
and dietary diversity. These local issues involve the need to be flexible and
pragmatic on all elements of the system, including menu, restaurant operations,
training, marketing, purchasing and financing. Our strategy of controlled
expansion allows us to address these issues in a deliberate and systematic
manner.
Employees
As of December 25, 2005, we employed approximately 32,260 full and part-time
associates. Of those, approximately 640 were corporate personnel, 2,050 were
restaurant managers or managers in training and 29,570 were employed in
non-management full and part-time restaurant positions. Of the 640 corporate
associates, approximately 220 were in management positions and 420 were general
office associates, including part-time associates.
We consider our associate relations to be good. Most associates, other than
restaurant management and corporate personnel, are paid on an hourly basis. We
believe that we provide working conditions and wages that compare favorably with
those of our competition. We have never experienced a work stoppage due to labor
difficulty, and our associates are not covered by a collective bargaining
agreement.
Executive and Other Senior Officers of the Registrant
Our executive and other senior officers as of December 25, 2005 are shown below.
Name Age Position
Lloyd L. Hill.................... 61 Chairman of the Board of Directors and Chief Executive Officer
David L. Goebel.................. 55 President and Chief Operating Officer (Member of the Board of
Directors effective January 2006)
Steven K, Lumpkin................ 51 Executive Vice President, Chief Financial Officer and Treasurer, and
Member of the Board of Directors
John C. Cywinski................. 43 Executive Vice President and Chief Marketing Officer
Carin L. Stutz................... 49 Executive Vice President of Operations
Stanley M. Sword................. 44 Executive Vice President and Chief People Officer
Rohan St. George................. 46 President of International Division
Philip R. Crimmins............... 54 Senior Vice President of Development
Michael Czinege.................. 52 Senior Vice President and Chief Information Officer
Miguel Fernandez................. 51 Senior Vice President of Company Operations
Kurt Hankins..................... 45 Senior Vice President of Menu Development and Innovation
David R. Parsley................. 59 Senior Vice President of Supply Chain Management
Carol A. DiRaimo................. 44 Vice President of Investor Relations
Beverly O. Elving................ 52 Vice President and Controller
Rebecca R. Tilden................ 50 Vice President, General Counsel and Secretary
Lloyd L. Hill was elected a director in August 1989. Mr. Hill was appointed
Executive Vice President and Chief Operating Officer in January 1994. In
December 1994, he assumed the role of President in addition to his role as Chief
Operating Officer. Effective January 1, 1997, Mr. Hill assumed the role of
Co-Chief Executive Officer. In January 1998, he assumed the full duties of Chief
Executive Officer. In May 2000, Mr. Hill was elected Chairman of the Board of
Directors. As part of Applebee's succession plan, Mr. Goebel was named President
effective January 1, 2005. In January 2006, the Board of Directors announced
plans to separate the Chairman and Chief Executive Officer positions, and
implement Applebee's leadership succession plan. In the summer of 2006, Mr. Hill
anticipates recommending to the Board that Mr. Goebel become the next Chief
Executive Officer. Following the role separation, Mr. Hill will continue to
serve as Chairman of the Board. Prior to joining Applebee's, Mr. Hill served as
President of Kimberly Quality Care, a home health care and nurse personnel
11
staffing company from December 1989 to December 1993, where he also served as a
director from 1988 to 1993, having joined that organization in 1980.
David L. Goebel was employed by Applebee's in February 2001 as Senior Vice
President of Franchise Operations and was promoted to Executive Vice President
of Operations in December 2002. In January 2004, Mr. Goebel was promoted to
Chief Operating Officer. In January 2005, he was also named President. In
January 2006, Mr. Goebel was named to the Board of Directors and he assumed
additional responsibilities including serving as principal executive officer.
Prior to joining Applebee's, Mr. Goebel headed a management company that
provided consulting and strategic planning services to various businesses from
April 1998 to February 2001. Prior to 1998, he was a franchise principal with an
early developer group of the Boston Market concept. Mr. Goebel's business
experience also includes positions as Vice President of Business Development for
Rent-a-Center (a subsidiary of Thorn, EMI) and Vice President of Operations for
Ground Round restaurants.
Steven K. Lumpkin was employed by Applebee's in May 1995 as Vice President of
Administration. In January 1996, he was promoted to Senior Vice President of
Administration. In November 1997, he assumed the position of Senior Vice
President of Strategic Development and in January 1998 was promoted to Executive
Vice President of Strategic Development. He was named Chief Development Officer
in March 2001. In March 2002, Mr. Lumpkin assumed the position of Chief
Financial Officer and Treasurer. In January 2004, he was appointed to the Board
of Directors. Prior to joining Applebee's, Mr. Lumpkin was a Senior Vice
President of a division of the Olsten Corporation, Kimberly Quality Care, from
July 1993 until January 1995. From June 1990 until July 1993, Mr. Lumpkin was an
Executive Vice President and a member of the board of directors of Kimberly
Quality Care. From January 1978 until June 1990, Mr. Lumpkin was employed by
Price Waterhouse LLP, where he served as a management consulting partner and
certified public accountant.
John C. Cywinski was employed by Applebee's in July 2001 as Senior Vice
President and Chief Marketing Officer and he was promoted to Executive Vice
President in January 2004. Prior to joining Applebee's, Mr. Cywinski was
employed as Vice President of Brand Strategy for McDonald's Corporation from
April 1999 to July 2001. From October 1996 to April 1999, he was President of
Buena Vista Pictures Marketing, the motion picture division of The Walt Disney
Company. Prior to The Walt Disney Company, Mr. Cywinski was Vice President of
U.S. Marketing for Burger King Corporation, where he held various positions of
increasing responsibility from 1989 to 1996. He started his career with the Leo
Burnett Advertising Agency in 1984.
Carin L. Stutz was employed by Applebee's in November 1999 as Senior Vice
President of Company Operations. In January 2005, she was promoted to Executive
Vice President of Operations. Prior to joining Applebee's, Ms. Stutz was
Division Vice President with Wendy's International from July 1994 to November
1999. From 1993 to 1994, she was Regional Operations Vice President for Sodexho,
USA. From 1990 to 1993, Ms. Stutz was employed by Nutri/System, Inc. as Vice
President of Corporate Operations. Prior to 1990, Ms. Stutz was employed for 12
years with Wendy's International.
Stanley M. Sword was employed by Applebee's in August 2005 as Executive Vice
President and Chief People Officer. Prior to joining Applebee's, Mr. Sword was
employed for seven years as an executive with Cerner Corporation. He was hired
in August 1998 as Senior Vice President and Chief People Officer and became
President of Cerner's Great Lakes region in August 2003. Prior to Cerner, Mr.
Sword spent five years with AT&T including three years as the Vice President of
Organization Development of NCR Corporation and two years as a client partner in
the outsourcing practice of AT&T Solutions. Prior to joining AT&T, Mr. Sword
spent ten years with Accenture Consulting in a variety of roles within their
systems integration practice.
12
Rohan M. St. George was employed by Applebee's in November 2004 as President of
the International Division. Prior to joining Applebee's, Mr. St. George was a
managing director for Yum! Restaurants International which included
responsibility for Puerto Rico, the U.S Virgin Islands and Venezuela. From 1998
to 2003, he was Vice President of Global Operations for KFC, Pizza Hut and Taco
Bell. Prior to 1998, Mr. St. George had 14 years operations experience with
Pizza Hut and KFC in various management positions.
Philip R. Crimmins was employed by Applebee's in August 2002 as Vice President
of Operations Excellence. In September 2003, Mr. Crimmins was promoted to Senior
Vice President of Development. Prior to joining Applebee's, he was employed by
Pizza Hut, Inc. for 27 years, most recently as Vice President of Service
Strategies. While at Pizza Hut, Inc., Mr. Crimmins held several other positions
of increasing responsibility, including senior leadership positions in research
and development, concept development, customer satisfaction, field training, and
restaurant operations.
Mike Czinege was employed by Applebee's in April 2004 as Senior Vice President
and Chief Information Officer. Prior to joining Applebee's, Mr. Czinege was
Executive Vice President of North American operations for Celerant Consulting.
From 1996 to 2004, he was a partner and later Vice President of Cap Gemini Ernst
& Young, one of the world's leading providers of consulting, technology and
outsourcing services. Mr. Czinege has nearly three decades of industry and
consulting experience in manufacturing and supply chain management operations,
business planning, sales and marketing, and information systems.
Miguel Fernandez was employed by Applebee's in January 1995 as Area Director in
California before becoming Director of Operations in 1996 for Pacific Gold,
Inc., an Applebee's franchisee. He rejoined Applebee's in September 1998 as
Regional Vice President of Company Operations. In January 2005, he was appointed
Senior Vice President of Company Operations. Prior to joining Applebee's, Mr.
Fernandez served as Vice President of Operations for Ninfa's Mexican
Restaurants, Regional Director of Operations for Acapulco Restaurants and Vice
President of Operations for Casa Vallarta Mexican Restaurants.
Kurt Hankins was employed by Applebee's in August 2001 as Vice President of
Research and Development. In December 2003, Mr. Hankins was promoted to Senior
Vice President of Menu Development and Innovation. Prior to joining Applebee's,
he served as Vice President of Food and Beverage for Darden Restaurants, Inc.
from July 1999 through July 2001. From August 1994 to July 1999, he served as
Director of Food Research and Development for Darden Restaurants, Inc. Prior to
his employment with Darden Restaurants, Inc., he held various positions in food
and beverage research and development within the restaurant industry.
David R. Parsley was employed by Applebee's in April 2000 as Senior Vice
President of Purchasing and Distribution. In January 2003, Mr. Parsley was named
Senior Vice President of Supply Chain Management. Prior to joining Applebee's,
Mr. Parsley held several positions with Prandium, Inc., operator of El Torito,
Chi-Chi's and Koo Koo Roo, from November 1996 to April 2000, most recently as
Senior Vice President of Quality and Supply Chain Management. He has also held
purchasing positions with The Panda Management Company, Carl Karcher
Enterprises, Proficient Food Company, Inc., and Baxter Healthcare Corporation.
Carol A. DiRaimo was employed by Applebee's in November 1993 as Associate
Director of Financial Planning and Reporting and was promoted to Director in
1995. She was named Director of Treasury and Corporate Analysis in 1998 and
Director of Investor Relations and Corporate Analysis in April 2000. She was
promoted to Executive Director of Investor Relations in January 2003 and Vice
President of Investor Relations in February 2004. Prior to joining Applebee's,
she was employed by Gilbert/Robinson, Inc. from May 1989 to November 1993. Ms.
DiRaimo, a certified public accountant, was also employed by Deloitte Haskins &
Sells for six years.
13
Beverly O. Elving was employed by Applebee's in June 1998 as Director of
Corporate Accounting. In September 2002, Ms. Elving was promoted to Vice
President of Accounting. In February 2005, she was named Vice President and
Controller. Prior to joining Applebee's, she was Chief Financial Officer from
1996 to 1998 for Integrated Medical Resources, a publicly-held management
services company. From 1990 to 1996, Ms. Elving was employed by the Federal
Deposit Insurance Corporation as Director of Financial Operations and was later
promoted to Vice President of Financial Operations & Accounting. Ms. Elving, a
certified public accountant, was also employed by Arthur Andersen & Co. for five
years.
Rebecca R. Tilden was employed by Applebee's in November 2003 and became Vice
President and General Counsel in January 2004. Prior to joining Applebee's, Ms.
Tilden was an independent consultant specializing in corporate compliance and
ethics issues. From 1987 to 2000, Ms. Tilden was employed by Aventis
Pharmaceuticals, Inc., in various positions of increasing responsibility and
served most recently as Vice President, Assistant General Counsel and Secretary.
Item 1A. Risk Factors
Our business and operations are subject to a number of risks and uncertainties.
The factors listed below are important factors that could cause actual results
to differ materially from our historical results and from those projected in
forward-looking statements contained in this report or in other filings with the
SEC.
We and our franchisees may not be successful in operating restaurants
profitably.
Our financial success depends on our ability and the ability of our franchisees
to operate restaurants profitably. The profitability of our restaurants is
dependent on a number of factors. The most significant factors are:
o the availability of management, restaurant staff and other personnel;
o acceptable leasing or financial terms;
o the availability of capital to finance growth;
o effective national campaigns and local marketing;
o effective menu pricing;
o appealing menu items;
o increases in minimum wage and the impact of other employment laws;
o increases in food, labor and other operating costs related to new menu
initiatives;
o the ability to manage a large number of restaurants in many geographic
areas with a standardized operational and marketing approach; and
o the extent of competitive intrusion in the market.
In the course of expanding, we and our franchisees may enter new or more highly
competitive geographic regions or local markets in which we may have limited
operating experience. There can be no assurance of the level of success of our
restaurants in these regions or particular local markets. Newly opened
restaurants typically operate with below normal profitability and incur certain
additional costs in the process of achieving operational efficiencies during the
first several months of operation.
We and our franchisees may not be successful in opening the number of
restaurants anticipated.
Our continued growth depends, in part, on our ability and the ability of our
franchisees to open additional restaurants. The opening of new restaurants, both
14
by us and our franchisees, depends on a number of factors, many of which are
beyond our control or the control of our franchisees. The most significant
factors are:
o the cost and availability of suitable restaurant locations;
o acceptable leasing or financial terms;
o the availability of capital to finance growth;
o cost-effective and timely construction of restaurants (construction can
be delayed due to, among other reasons, labor disputes, local zoning
and licensing matters, and weather conditions); and
o securing required governmental permits and licenses.
Substantial increases in capital expenditure costs may adversely impact future
growth.
Our capital expenditures are primarily related to the development or acquisition
of additional restaurants, maintenance and refurbishment of existing
restaurants, and expansion of information technology systems, office space and
other corporate infrastructure. The costs related to restaurant development,
maintenance and refurbishment include purchases and leases of land, buildings,
equipment and repairs and maintenance. The labor and material costs expended
vary by geographical location and are subject to general price increases. There
can be no assurance that future capital expenditure costs will not increase. In
addition, capital expenditures will be required to maintain and refurbish
restaurants as they age. There can be no assurance that we will remain
profitable in these restaurants even after maintenance and refurbishment has
been completed.
Our continued growth is, in part, dependent upon our ability to find and retain
qualified franchisees and for those franchisees to operate restaurants
profitably in compliance with our standards, build new restaurants and plan for
succession.
Although we have established criteria to evaluate prospective franchisees, there
can be no assurance that our existing or future franchisees will have the
business abilities or access to financial resources necessary to open the
required number of restaurants or that they will successfully develop or operate
these restaurants in their franchise areas in a manner consistent with our
standards.
We intend to continue our efforts to franchise restaurants in certain
international territories. The ability of franchisees to open and operate
restaurants outside of the United States is subject to the same factors as are
applicable to opening domestic restaurants described above, as well as factors
related to additional legal, regulatory, cultural acceptability and building
design issues involved in international locations. There can be no assurance
that we will be able to attract qualified franchisees or that such franchisees
will be able to open and operate restaurants successfully.
Increased competition for locations, customers and staff could adversely impact
our profitability.
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. Our
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 us and may be
better established in the markets where our restaurants are or may be located.
Further penetrating existing mature markets could impact the sales and
profitability of our existing restaurants in those markets.
15
Part of our restaurant development may occur in more mature markets. Our
restaurants typically attract customers within a limited trade area. Sales and
profitability of existing restaurants may be negatively impacted by the opening
of a restaurant within this trade area.
Our profitability could be adversely impacted by economic, demographic and other
changes that impact guest traffic.
Our business is affected by changes in consumer tastes and by national,
regional, and local economic conditions, demographic trends and traffic
patterns. We can also be adversely affected by publicity resulting from actual
or alleged food quality, illness, injury or other health concerns or operating
issues related to restaurant operations or from food suppliers.
The impact of government regulation may cause us to incur additional costs or
liabilities.
Our restaurants are subject to various international, federal, state and local
government regulations, including those related to the sale of food and
alcoholic beverages and labor laws. Failure to obtain or maintain the necessary
licenses, permits and approvals, including food and liquor licenses, could
adversely affect our operating results or delay or result in our decision to
cancel the opening of new restaurants. Local authorities may suspend or deny
renewal of our food and liquor licenses if they determine that our conduct does
not meet applicable standards or if there are changes in regulations in which we
are unable to comply.
We are subject to "dram shop" statutes in some states. These statutes generally
allow a person injured by an intoxicated person to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. A judgment substantially in excess of our insurance coverage could harm
our financial condition.
Various federal and state labor laws related to employment eligibility, minimum
wage requirements, overtime pay, meal and rest breaks, and other matters have an
effect on our operating costs. Changes in these laws, including additional
government-imposed increases in minimum wages, overtime pay, paid leaves of
absence and mandated health benefits, and increased tax reporting and tax
payment requirements for associates who receive tips, or a reduction in the
number of states that allow tips to be credited toward minimum wage requirements
could harm our operating results.
The federal Americans with Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. Although our
restaurants are designed to be accessible to the disabled, we could be required
to make modifications to our restaurants to provide service to, or make
reasonable accommodations for, disabled persons. We are also subject to various
federal and state environmental regulations that could delay or prevent
development of new restaurants in certain locations.
We are also subject to federal and state laws that regulate the offer and sale
of franchises and the relationship with our franchise partners. These laws and
regulations, together with decisions of several state and federal courts may
limit our ability to enforce certain provisions of, or alter or terminate our
franchise agreements.
Our continued growth may depend, in part, on our acquisition of franchised
Applebee's restaurants.
There is no assurance that we will be able to find franchise restaurants
available for purchase or that we will be able to acquire franchise restaurants
at favorable prices. In addition, if we do successfully identify and complete
acquisitions in the future, the acquisitions may involve the following risks:
16
o increases in our debt and contingent liabilities;
o entering geographic markets in which we have little or no direct prior
experience; and
o unanticipated or undiscovered legal liabilities or other obligations of
acquired franchise restaurants.
Even if we are successful in acquiring franchise operations, there is no
assurance that we will be able to operate the acquired restaurants profitably.
The integration of acquired restaurants into our operations may involve a number
of issues, any of which could materially and adversely affect our operations and
financial performance. These issues include:
o burdens on our management resources and financial controls;
o diversion of corporate resources and acquisition integration issues,
such as business process and system incapabilities;
o potential loss of key personnel of acquired franchise restaurants; and
o potential loss of customer relationships and related revenues.
Our growth and profitability could be impacted by the lack of needed
inventories.
Our profitability depends, in part, on our strategies to control food costs. Our
dependence on commodities subject us to the risk that shortages or interruption
in supply, caused by adverse weather or other conditions, could adversely affect
the availability, quality or cost of ingredients. Changes in the price of
commodities, particularly beef and chicken, could materially impact our
profitability. We may not be able to react to increased food costs by adjusting
our supply chain practices or menu pricing which would negatively impact our
operating results.
Our global supply chain may be subject to interruptions, dislocation or may be
rendered less effective for a variety of reasons such as:
o political unrest;
o animal borne disease or illness;
o contamination of growing fields, water supplies or animal processing
facilities;
o inadequate storage facilities; and
o loss of effective climate controls in storage facilities and processing
plants.
Our continued growth depends on our successful adaptation and implementation of
our operating systems.
System-wide expansion has and will continue to require the implementation of
enhanced operating systems. We regularly evaluate the adequacy of our current
policies, procedures, systems and resources, including financial controls,
information technology systems, field and restaurant management, and vendor
capacities and relations. There can be no assurance that we will adequately
address all of the changing demands that our planned expansion will impose on
such systems, controls, and resources.
We may acquire one or more additional restaurant concepts.
Operating more than one restaurant concept presents many significant risks that
could, individually or together, have a material adverse effect on our business
and financial results. Our success in acquiring or investing in new concepts is
subject to the following risks:
17
o the attention of our management team may be diverted from the
Applebee's system and operations may suffer as a result;
o we may be unable to identify suitable opportunities;
o we may pay too much for a new concept in relation to its long-term
potential and actual economic return to us; and
o we may be required to borrow the funds needed to make an acquisition,
thereby increasing our interest expense and debt level.
In addition, our ability to expand another concept, through our own development
or through franchising, will be subject to risks such as:
o we may not be able to find suitable locations at appropriate purchase
prices or lease terms;
o we may not be able to attract franchisees;
o we may experience construction delays or cost overruns caused by
numerous factors, such as shortages of materials and skilled labor,
labor disputes, weather interference, environmental problems, and
construction or zoning problems;
o we may not be able to hire and train experienced and dedicated
operating personnel;
o we may face competition from other restaurants, including other
Applebee's; and
o the new concept may not be profitable.
A significant increase in litigation could have a material adverse effect on our
results of operations, financial condition and business prospects.
We are sometimes the subject of complaints or litigation from guests alleging
illness, injury or other food quality, health or operational concerns. Adverse
publicity resulting from these allegations could harm the operation and
profitability of our restaurants, regardless of whether the allegations are
valid, whether we are liable or whether the claim involves our restaurants or
one of our franchisees.
Failure to comply with the various federal and state labor laws pertaining to
minimum wage, overtime pay, meal and rest breaks, unemployment tax rates,
workers' compensation rates, citizenship or residency requirements, child labor
requirements and sales taxes, may have a material adverse effect on our business
or operations. Further, employee claims against us based on, among other things,
discrimination, harassment or wrongful termination may divert our financial and
management resources and adversely affect our operations.
Item 1B. Unresolved Staff Comments
Not applicable.
18
Item 2. Properties
As of December 25, 2005, we operated 486 company restaurants. Of these, we
leased the building for 86 sites, owned the building and leased the land for 213
sites, and owned the land and building for 187 sites. In addition, as of
December 25, 2005, we owned 12 sites for future development of restaurants and
had entered into 17 lease agreements for restaurant sites we plan to open during
2006. Our leases generally have an initial term of 10 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. In addition, our leases in
many instances include escalation of rent payments during the initial term
and/or during the renewal terms.
Under our franchise agreements, we have certain rights to gain control of a
restaurant site in the event of default under the lease or the franchise
agreement.
We own an 80,000 square foot office building and lease a 23,000 square foot
office building in Overland Park, Kansas, located in the Kansas City
metropolitan area, in which our corporate offices are headquartered. We also
lease office space in certain regions in which we operate restaurants.
In 2005, we entered into an agreement to purchase land for a new corporate
headquarters in Lenexa, Kansas, located in the Kansas City metropolitan area. In
January 2006, we completed the purchase of the land and anticipate relocating to
our new corporate headquarters in the latter half of 2007.
19
The following table sets forth the 49 states and the 14 countries outside of the
United States in which Applebee's are located and the number of restaurants
operating in each state or country as of December 25, 2005:
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
Domestic:
Alabama........................ -- 26 26
Alaska......................... -- 2 2
Arizona........................ -- 30 30
Arkansas....................... 1 7 8
California..................... 22 80 102
Colorado....................... -- 32 32
Connecticut.................... -- 11 11
Delaware....................... 2 8 10
Florida........................ -- 96 96
Georgia........................ -- 69 69
Idaho.......................... -- 10 10
Illinois....................... 12 48 60
Indiana........................ 7 58 65
Iowa........................... -- 23 23
Kansas......................... 16 19 35
Kentucky....................... 5 30 35
Louisiana...................... -- 16 16
Maine.......................... 10 -- 10
Maryland....................... 11 13 24
Massachusetts.................. 37 -- 37
Michigan....................... 65 18 83
Minnesota...................... 63 2 65
Mississippi.................... 3 12 15
Missouri....................... 60 2 62
Montana........................ -- 7 7
Nebraska....................... -- 18 18
Nevada......................... 15 -- 15
New Hampshire.................. 15 -- 15
New Jersey..................... -- 43 43
New Mexico..................... 8 10 18
New York....................... 1 91 92
North Carolina................. 2 54 56
North Dakota................... -- 9 9
Ohio........................... -- 86 86
Oklahoma....................... -- 17 17
Oregon......................... -- 17 17
Pennsylvania................... 1 58 59
Rhode Island................... 7 -- 7
South Carolina................. -- 41 41
South Dakota................... -- 6 6
Tennessee...................... 5 37 42
Texas.......................... 48 37 85
Utah........................... -- 12 12
Vermont........................ 3 -- 3
Virginia....................... 62 1 63
Washington..................... -- 33 33
West Virginia.................. 1 13 14
Wisconsin...................... 4 39 43
Wyoming........................ -- 5 5
-------------- -------------- --------------
Total Domestic............... 486 1,246 1,732
-------------- -------------- --------------
20
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
Other countries:
Bahrain........................ -- 1 1
Brazil......................... -- 3 3
Canada......................... -- 21 21
Chile.......................... -- 1 1
Ecuador........................ -- 1 1
Egypt.......................... -- 1 1
Greece......................... -- 6 6
Honduras....................... -- 4 4
Jordan......................... -- 1 1
Kuwait......................... -- 2 2
Mexico......................... -- 25 25
Qatar.......................... -- 2 2
Saudi Arabia................... -- 3 3
United Arab Emirates........... -- 1 1
-------------- -------------- --------------
Total International...... -- 72 72
-------------- -------------- --------------
Total System............. 486 1,318 1,804
============== ============== ==============
Item 3. Legal Proceedings
We are involved in various legal actions which include, without limitation,
employment law, wage and hour, dram shop claims, personal injury claims and
other such restaurant operational matters. In each instance, we believe that we
have meritorious defenses to the allegations made and we are vigorously
defending these claims.
We believe that the ultimate disposition of these matters will not, individually
or in the aggregate, have a material adverse effect upon our business or
consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
21
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
1. Our common stock trades on The Nasdaq Stock Market(R) under the symbol
APPB.
The table below sets forth for the fiscal quarters indicated the reported high
and low sale prices of our common stock, as reported on The Nasdaq Stock
Market(R).
2005 2004
------------------------------- -------------------------------
High Low High Low
--------------- --------------- --------------- ---------------
First Quarter $ 29.19 $ 24.69 $ 28.04(1) $ 23.80(1)
Second Quarter $ 28.65 $ 24.25 $ 28.55(1) $ 23.30
Third Quarter $ 26.79 $ 19.95 $ 26.72 $ 22.50
Fourth Quarter $ 23.98 $ 19.73 $ 26.68 $ 22.26
(1)The sales prices have been adjusted to reflect a three-for-two stock split
effected as a 50% stock dividend paid on June 15, 2004.
2. Number of stockholders of record at December 25, 2005: 1,341
3. We declared an annual dividend of $0.20 per common share in October 2005
for stockholders of record on December 23, 2005, and the dividend was paid
on January 23, 2006. We declared an annual dividend of $0.06 per common
share on December 9, 2004 for stockholders of record on December 24, 2004,
and the dividend was paid on January 21, 2005.
We presently anticipate continuing the payment of cash dividends which will
be dependent upon future earnings and cash flows, capital requirements, our
financial condition, returns to shareholders and certain other factors.
There can be no assurance in 2006 or future years as to the amount that
will be available for the declaration of dividends, if any.
4. For information on our equity compensation plans, refer to Item 12,
"Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters."
22
5. Issuer Purchases of Equity Securities
During fiscal year 2005, we repurchased 8,288,093 shares of our common stock at
an average price of $23.66 for an aggregate cost of approximately $196,100,000.
The table below sets forth purchases of our common stock during the fourth
quarter of fiscal 2005:
-----------------------------------------------------------------------------------------------------------------------------------
Purchases of Equity Securities(1)
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
Total Number of Average Total Number of Shares Maximum Dollar Value of Shares
Shares Purchased Price Paid Purchased as Part of that May Yet Be Purchased Under
Per Share Publicly Announced Plans the Plans or Programs
Period or Programs (in thousands)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
September 26, 2005 through
October 23, 2005 1,056,150 $21.19 1,056,150 $181,792
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
October 24, 2005 through November
20, 2005 1,146,243 $22.49 1,146,243 $156,018
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
November 21, 2005 through
December 25, 2005 1,168,100 $23.16 1,168,100 $128,967
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
Total 3,370,493 3,370,493
=================================== ================== ============= =========================== ==================================
(1) In October 2004, our Board of Directors authorized additional repurchases
of our common stock of up to $150,000,000 beginning in 2005. The
authorization limit was met in October 2005. In October 2005, our Board of
Directors authorized additional repurchases of our common stock of up to
$175,000,000, subject to market conditions.
23
Item 6. Selected Financial Data
The following table sets forth for the periods and the dates indicated our
selected financial data. All 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 25, December 26, December 28, December 29, December 30,
2005 2004 2003 2002 2001(1)
--------------- --------------- --------------- --------------- ----------------
(in thousands, except per share amounts)
STATEMENT OF EARNINGS DATA:
Company restaurant sales................. $ 1,082,641 $ 976,798 $ 867,158 $ 724,616 $ 651,119
Franchise royalties and fees............. 128,813 121,221 109,604 102,180 93,225
Other franchise income................... 5,196 13,615 13,147 2,688 --
--------------- --------------- --------------- --------------- ----------------
Total operating revenues............ $ 1,216,650 $1,111,634 $ 989,909 $ 829,484 $ 744,344
=============== =============== =============== =============== ================
Operating earnings....................... $ 157,637 $ 165,280 $ 152,677 $ 126,590 $ 110,681
Net earnings............................. $ 101,802 $ 110,865 $ 94,349 $ 80,527 $ 63,298
Basic net earnings per share............. $ 1.29 $ 1.36 $ 1.14 $ 0.97 $ 0.76
Diluted net earnings per share........... $ 1.27 $ 1.33 $ 1.10 $ 0.94 $ 0.74
Dividends declared per share............. $ 0.20 $ 0.06 $ 0.05 $ 0.04 $ 0.04
Basic weighted average shares
outstanding........................... 78,650 81,528 82,944 83,407 83,268
Diluted weighted average shares
outstanding........................... 80,010 83,600 85,409 85,382 85,316
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets............................. $ 878,588 $ 754,431 $ 651,078 $ 573,647 $ 506,036
Long-term debt, including
current portion, and notes payable..... $ 188,367 $ 35,694 $ 20,862 $ 52,563 $ 74,568
Stockholders' equity..................... $ 412,610 $ 496,727 $ 453,143 $ 385,201 $ 320,303
(1) Beginning in 2002, we ceased amortization of goodwill in accordance with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangibles".
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development, comparable sales, Carside To Go(TM), revenue growth, restaurant
margin, commodity costs, general and administrative expenses, capital
expenditures, return on equity and financial commitments are forward-looking and
based on current expectations. There are several risks and uncertainties that
could cause actual results to differ materially from those described. These
risks include but are not limited to our ability and the ability of our
franchisees to open and operate additional restaurants profitably, the ability
of our franchisees to obtain financing, the continued growth of our franchisees,
our ability to attract and retain qualified franchisees, the impact of intense
competition in the casual dining segment of the restaurant industry, the impact
of economic factors on consumer spending, and our ability to control restaurant
operating costs which are impacted by market changes, minimum wage and other
employment laws, food costs and inflation. For a more detailed discussion of the
principal factors that could cause actual results to be materially different,
you should read our risk factors in Item 1A of this Form 10-K. We disclaim any
obligation to update forward-looking statements.
General
We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal years are as follows:
Fiscal Year Number
Fiscal Year Ending of Weeks
------------------ -------------------------- -----------------
2003 December 28, 2003 52
2004 December 26, 2004 52
2005 December 25, 2005 52
2006 December 31, 2006 53
Our revenues are generated from three primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise royalties and fees
o Other franchise income
Beverage sales consist of sales of alcoholic beverages, while non-alcoholic
beverages are included in food sales. Franchise royalties are generally 4% of
each franchise restaurant's monthly gross sales. Franchise fees typically range
from $30,000 to $35,000 for each restaurant opened. Other franchise income
includes insurance premiums for the current year and premium audit adjustments
for prior years from franchisee participation in our captive insurance program
and revenue from information technology products and services provided to
certain franchisees. In 2005, we reduced the types of insurance coverage plans
offered which resulted in fewer franchisee participants in our captive insurance
program. This reduction resulted in a total decrease in franchise premiums
recognized throughout 2005 in other franchise income of approximately
$8,600,000. In the fourth quarter of 2005, we decided to discontinue writing any
new coverage. We will still operate the captive insurance subsidiary to resolve
any claims that were incurred under this program from 2002 through 2005.
25
Certain expenses relate only to company operated restaurants. These include:
o Food and beverage costs
o Labor costs
o Direct and occupancy costs
o Pre-opening expenses
Cost of other franchise income includes the costs related to franchisee
participation in our captive insurance program and costs related to information
technology products and services provided to certain franchisees. In 2005, we
reduced the types of insurance coverage plans offered which resulted in fewer
franchisee participants in our captive insurance program. This reduction
resulted in a total decrease in expense recognized throughout 2005 in cost of
other franchise income of approximately $8,100,000. In the fourth quarter of
2005, we decided to discontinue writing any new coverage. We will still operate
the captive insurance subsidiary to resolve any claims that were incurred under
this program from 2002 through 2005.
Other expenses, such as general and administrative and amortization expenses,
relate to both company operated restaurants and franchise operations.
Overview
Applebee's International, Inc. and our subsidiaries develop, franchise and
operate casual dining restaurants under the name "Applebee's Neighborhood Grill
& Bar," which is the largest casual dining concept in the world with over 1,800
system-wide restaurants open as of December 25, 2005. The casual dining segment
of the restaurant industry is highly competitive and there are many factors that
affect our profitability. Our industry is susceptible to changes in economic
conditions, trends in lifestyles, fluctuating costs, government regulation,
availability of resources and consumer perceptions. When evaluating and
assessing our financial performance, we believe there are five key factors:
o Development - the number of new company and franchise restaurants
opened during the period. As the largest casual dining concept in the
world, Applebee's has a unique opportunity to leverage our brand,
system size and scale to optimize our future growth. Our expansion
strategy has been to cluster restaurants in targeted markets, thereby
increasing consumer awareness and convenience, and enabling us to take
advantage of operational, distribution and advertising efficiencies. We
currently expect that the Applebee's system will encompass at least
3,000 restaurants in the United States, as well as the potential for at
least 1,000 restaurants internationally. In 2005, we and our
franchisees opened 52 and 92 restaurants, respectively. Together, we
have opened at least 100 restaurants system-wide each year for the past
13 fiscal years. In 2006, we currently expect to open approximately 120
restaurants system-wide, comprised of approximately 40 company and 80
franchise restaurants. Development costs increased approximately 10% in
2005 as compared to 2004. Further increases are expected in 2006 as a
result of increased demand for material and labor due to recent
catastrophic hurricanes. We are evaluating the impact of rising
development costs on the pipeline of future openings.
o Comparable restaurant sales - a year-over-year comparison of sales for
restaurants open at least 18 months. Our revenues are generated
primarily from company restaurant sales, franchise royalties and fees
and other franchise income. Increases in company and franchise
comparable restaurant sales will result in increases in company
restaurant sales and franchise fees and royalties. In 2005, company
comparable sales decreased 0.9% while franchise and system-wide
comparable sales increased 2.7% and 1.8%, respectively. We have had 30
consecutive quarters of positive system-wide comparable sales growth.
We currently expect system-wide comparable sales for 2006 to increase
by 2.0% to 3.0%. Comparable restaurant sales increases are driven by
increases in the average guest check and/or increases in guest traffic.
26
Average guest check increases result from menu price increases and/or a
change in menu mix. Although we may have increases in our average guest
check from period to period, our main focus has been increasing guest
traffic as we view this component to be more indicative of the
long-term health of the Applebee's brand. We are constantly seeking to
increase guest traffic by focusing on operations and improving our menu
with new food offerings and the implementation of programs such as
Carside to Go(TM) and Weight Watchers(TM). In 2005, we conducted
comprehensive consumer research which resulted in a plan to
substantially improve the quality and flavor profile of our food
offerings over the next two years. These menu improvements will impact
all sections of our menu.
o Company restaurant margin - company restaurant sales, less food and
beverage, labor, direct and occupancy restaurant costs and pre-opening
expenses, expressed as a percentage of company restaurant sales.
Company restaurant margins were 13.4%, 15.6% and 16.0% in 2005, 2004
and 2003, respectively. We currently expect 2006 company restaurant
margins, which will be dependent on comparable sales performance at
company restaurants, to be similar to 2005 results. Company restaurant
margins are susceptible to fluctuations in commodity costs, labor costs
and other operating costs such as utilities. We attempt to negotiate
contracts for the majority of our food products in order to mitigate
the impact of rising commodity costs. In 2006, we currently expect net
commodity costs to decrease by approximately 2.0%, including the
negative impact of fuel surcharges. In addition, we are uncertain what
impact the improved menu offerings will have on our food costs, and we
may take additional menu price increases to offset this impact. We
expect labor costs to continue to be negatively impacted by health
insurance costs and the impact of wage rate increases. In addition,
higher energy costs, including utilities, fuel surcharges and packaging
costs, will have a negative impact on company restaurant margins,
particularly in the first quarter of 2006.
o General and administrative expenses - general and administrative
expense expressed as a percentage of total operating revenues. General
and administrative expenses were 9.0%, 9.4% and 9.6% in 2005, 2004 and
2003, respectively. In 2006, general and administrative expenses as a
percent of total revenues are currently expected to be in the high 8%
range, excluding the impact of stock-based compensation expense.
o Return on equity - net earnings expressed as a percent of average
stockholders' equity. We believe this is an important indicator as it
allows us to evaluate our ability to create value for our shareholders.
We have exceeded our stated goal of at least 20% return on equity for
the past seven years and we are a leader in the casual dining industry
in this category.
Application of Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and notes thereto. Actual results may differ from these estimates,
and such differences may be material to our consolidated financial statements.
We believe that the following significant accounting policies involve a
significant degree of judgment or complexity.
Inventory valuation: We state inventories at the lower of cost, using the
first-in, first-out method, or market. Market is determined based upon our
estimates of the net realizable value.
We purchase and maintain inventories of certain specialty products to ensure
sufficient supplies to the system, to ensure continuity of supply and to control
food costs. We review and make quality control inspections of our inventories to
determine obsolescence on an ongoing basis. These reviews require management to
27
make certain estimates and judgments regarding projected usage which may change
in the future and may require us to record an inventory impairment.
Property and equipment: We report property and equipment at historical cost less
accumulated depreciation. Depreciation is provided on the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful life of the
related asset. The useful lives of the assets are based upon management's
expectations. We periodically review the assets for changes in circumstances
which may impact their useful lives. If there are changes in circumstances that
revise an asset's useful life, we will adjust the depreciation expense
accordingly for that asset in future periods.
Impairment of long-lived assets: We periodically review restaurant property and
equipment for impairment on a restaurant-by-restaurant basis using certain
market and restaurant operating indicators including historical cash flows as
well as current estimates of future cash flows and/or appraisals. We review
other long-lived assets at least annually and when events or circumstances
indicate that the carrying value of the asset may not be recoverable. The
recoverability is assessed in most instances by comparing the carrying value to
its undiscounted cash flows. This assessment process requires the use of
estimates and assumptions regarding future cash flows and estimated useful lives
which are subject to a significant degree of judgment. If these assumptions
change in the future, we may be required to record impairment charges for these
assets.
Income taxes: We record valuation allowances against our deferred tax assets,
when necessary, in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Realization of deferred tax assets is
dependent on future taxable earnings and is therefore uncertain. We assess the
likelihood that our deferred tax assets in each of the jurisdictions in which we
operate will be recovered from future taxable income. Deferred tax assets do not
include future tax benefits that we deem likely not to be realized.
We are periodically audited by foreign and domestic tax authorities for both
income and sales and use taxes. We record accruals when we determine it is
probable that we have an exposure in a matter relating to an audit. The accruals
may change in the future due to new developments in each matter.
Legal and insurance reserves: We are periodically involved in various legal
actions. We are required to assess the probability of any adverse judgments as
well as the potential range of loss. We determine the required accruals after a
review of the facts of each legal action.
We use estimates in the determination of the appropriate liabilities for general
liability, workers' compensation and health insurance. The estimated liability
is established based upon historical claims data and third-party actuarial
estimates of settlement costs for incurred claims. Unanticipated changes in
these factors may require us to revise our estimates.
We periodically reassess our assumptions and judgments and make adjustments when
significant facts and circumstances dictate. A change in any of the above
estimates could impact our consolidated statements of earnings and the related
asset or liability recorded in our consolidated balance sheets would be adjusted
accordingly. Historically, actual results have not been materially different
than the estimates that are described above.
28
Acquisitions
All of our acquisitions discussed below have been accounted for using the
purchase method of accounting and, accordingly, our consolidated financial
statements reflect the results of operations for each acquisition subsequent to
the date of acquisition. The assets acquired and liabilities assumed are
recorded at estimates of fair value as determined by management based upon
information available. We finalize the allocation of purchase price to the fair
value of assets acquired and liabilities assumed when we obtain information
sufficient to complete the allocation, but in each case, no longer than one year
after the acquisition date.
In March 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt. The total cash payment included
$20,800,000 paid at closing, approximately $200,000 paid as a deposit in 2002
and approximately $800,000 paid in the second quarter of 2003.
In April 2004, we completed the acquisition of the operations and assets of 10
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash. The purchase price was allocated to the fair value of
property and equipment of $2,500,000, goodwill of $10,800,000 and other net
assets of approximately $500,000.
In May 2005, we completed the acquisition of 12 Applebee's restaurants in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for approximately $39,500,000 in cash. The purchase price was allocated to the
fair value of property and equipment of $17,500,000, goodwill of $21,500,000,
reacquired franchise rights of approximately $300,000 and other net assets of
approximately $200,000.
The following table is comprised of actual company restaurant sales for the
three restaurant acquisitions above which are included in our consolidated
financial statements for each period presented and pro forma company restaurant
sales assuming the acquisitions occurred at the beginning of the preceding
fiscal year for each acquisition (in thousands):
2005 2004 2003
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 17,000 $ 17,600 $ 19,000
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 28,500 $ 52,600 $ 47,000
=============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants in
the Memphis market that were closed in 2004 by a former franchisee for
approximately $8,800,000 payable in cash. In connection with this acquisition,
we paid approximately $800,000 in 2004 and $8,000,000 in 2005. The purchase
price of $8,800,000 was allocated to the fair value of property and equipment of
approximately $8,200,000 and goodwill of approximately $600,000. As of December
25, 2005, we have remodeled and opened seven restaurants and the remaining
restaurant was sold to a third party.
Disposition
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for
$8,000,000. In connection with the sale of these restaurants, we closed one
restaurant in the Atlanta market in June 2003. This transaction did not have a
significant impact on our net earnings for 2003. Actual company restaurant sales
included in our consolidated financial statements for the nine restaurants were
approximately $10,300,000 for 2003.
29
Captive Insurance Subsidiary
In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a
wholly-owned captive insurance subsidiary to provide Applebee's International,
Inc. and qualified franchisees with workers' compensation and general liability
insurance. Applebee's International, Inc. and covered franchisees make premium
payments to the captive insurance company which pays administrative fees and
insurance claims, subject to individual and aggregate maximum claim limits under
the captive insurance company's reinsurance policies. Franchisee premium amounts
billed by the captive insurance company are established based upon third-party
actuarial estimates of settlement costs for incurred and anticipated claims and
administrative fees. The franchisee premiums are included in other franchise
income ratably over the policy year. The related offsetting expenses are
included in cost of other franchise income. We do not expect franchisee
participation in the captive insurance company to have a material impact on our
net earnings. In 2005, we reduced the types of insurance coverage plans offered
which resulted in fewer franchisee participants in our captive insurance
program. In the fourth quarter of 2005, we decided to discontinue writing any
new coverage. We will still operate the captive insurance subsidiary to resolve
any claims that were incurred under this program from 2002 through 2005. Our
consolidated balance sheets include the following balances related to the
captive insurance subsidiary:
o Franchise premium receivables of approximately $1,700,000 and
$1,900,000 as of December 25, 2005 and December 26, 2004, respectively,
included in receivables related to captive insurance subsidiary.
o Cash equivalent and other long-term investments restricted for the
payment of claims of approximately $18,600,000 and $16,700,000 as of
December 25, 2005 and December 26, 2004, respectively, included in
restricted assets related to captive insurance subsidiary.
o Loss reserve and unearned premiums related to captive insurance
subsidiary of approximately $20,700,000 and $19,600,000 as of December
25, 2005 and December 26, 2004, respectively. Approximately $10,500,000
and $7,500,000 as of December 25, 2005 and December 26, 2004,
respectively, is included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $400,000 and
$1,000,000 as of December 25, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
30
Results of Operations
The following table contains information derived from our consolidated
statements of earnings expressed as a percentage of total operating revenues,
except where otherwise noted. Percentages may not add due to rounding.
Fiscal Year Ended
-----------------------------------------------
December 25, December 26, December 28,
2005 2004 2003
---------------- --------------- --------------
Revenues:
Company restaurant sales......................... 89.0% 87.9% 87.6%
Franchise royalties and fees..................... 10.6 10.9 11.1
Other franchise income........................... 0.4 1.2 1.3
---------------- --------------- --------------
Total operating revenues...................... 100.0% 100.0% 100.0%
================ =============== ==============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage................................ 26.5% 26.5% 26.0%
Labor............................................ 33.1 32.5 32.7
Direct and occupancy............................. 26.6 25.1 25.1
Pre-opening expense.............................. 0.4 0.3 0.2
---------------- --------------- --------------
Total cost of sales........................... 86.6% 84.4% 84.0%
================ =============== ==============
Cost of other franchise income (as a percentage of
other franchise income)............................ 94.1% 105.8% 96.6%
General and administrative expenses................... 9.0 9.4 9.6
Amortization of intangible assets..................... 0.1 0.1 --
Impairment of long-lived assets....................... 0.3 -- --
Loss on disposition of restaurants and equipment...... 0.2 0.2 0.1
---------------- --------------- --------------
Operating earnings.................................... 13.0 14.9 15.4
---------------- --------------- --------------
Other income (expense):
Investment income................................ 0.1 0.1 0.2
Interest expense................................. (0.4) (0.1) (0.2)
Impairment of Chevys note receivable............. -- -- (0.9)
Other income..................................... 0.1 0.3 0.4
---------------- --------------- --------------
Total other income (expense).................. (0.1) 0.3 (0.5)
---------------- --------------- --------------
Earnings before income taxes and cumulative effect of
change in accounting principle................... 12.9 15.2 14.9
Income taxes.......................................... 4.5 5.2 5.4
---------------- --------------- --------------
Earnings before cumulative effect of change in
accounting principle............................. 8.4 10.0 9.5
Cumulative effect of change in accounting principle,
net of tax....................................... -- -- --
---------------- --------------- --------------
Net earnings.......................................... 8.4% 10.0% 9.5%
================ =============== ==============
31
Fiscal Year Ended December 25, 2005 Compared With Fiscal Year Ended December 26,
2004
Company Restaurant Sales. Total company restaurant sales increased $105,843,000
(11%) from $976,798,000 in 2004 to $1,082,641,000 in 2005. The percentage
increase in total company restaurant sales was due to an increase in the number
of restaurant weeks open of approximately 13% which was partially offset by a
decline in average weekly sales of 2.1%.
Comparable restaurant sales at company restaurants decreased by 0.9% in 2005.
Weighted average weekly sales at company restaurants decreased 2.1% from $46,536
in 2004 to $45,552 in 2005. These decreases were due, in part, to a reduction in
guest traffic in 2005 as compared to 2004 due to the launch of our Weight
Watchers(TM) menu system-wide in May 2004. In addition, we experienced more
significant guest count declines in Kansas City, Minnesota and New England where
approximately 40% of our company restaurants are located, which was consistent
with industry trends in these markets. Weighted average weekly sales declined
more than comparable sales due to weaker new restaurant opening volumes in
Kansas City, Minnesota, New England, St. Louis and Virginia. These decreases
were partially offset by an increase in the average guest check resulting from
menu price increases of approximately 2.5% in 2005 and our Carside To Go(TM)
initiative. Carside To Go(TM) sales mix increased from 9.3% of company
restaurant sales in 2004 to 10.0% of company restaurant sales in 2005.
Franchise Royalties and Fees. Franchise royalties and fees increased $7,592,000
(6%) from $121,221,000 in 2004 to $128,813,000 in 2005 due primarily to the
increased number of franchise restaurants operating during 2005 as compared to
2004 and increases in comparable franchise restaurant sales. Weighted average
weekly sales and franchise comparable restaurant sales each increased by 2.7% in
2005. These increases were due primarily to the implementation of the Carside To
Go(TM) program which was completed in early 2005.
Other Franchise Income. Other franchise income decreased $8,419,000 (62%) from
$13,615,000 in 2004 to $5,196,000 in 2005 due primarily to fewer franchisee
participants in our captive insurance program resulting from the reduction of
the types of insurance coverage plans offered. Franchise premiums are included
in other franchise income ratably over the policy year.
Cost of Company Restaurant Sales. Food and beverage costs were 26.5% in both
2004 and 2005. Food and beverage costs were favorably impacted by menu price
increases of 2.5% in 2005, which were offset by higher commodity costs and lower
order incidences of both alcoholic and non-alcoholic beverages, which have a
lower cost of sales. In addition, 2004 was unfavorably impacted by the company
portion of the June 2004 impairment of approximately $500,000 for excess riblet
inventories which no longer met our quality standards.
Labor costs increased from 32.5% in 2004 to 33.1% in 2005. The increase in 2005
was due primarily to higher management and hourly costs due to lower sales
volumes, higher wage rates, payroll taxes and group insurance costs which were
partially offset by lower management incentive compensation and workers'
compensation expense.
Direct and occupancy costs increased from 25.1% in 2004 to 26.6% in 2005. Direct
and occupancy costs were unfavorably impacted due primarily to lower sales
volumes at company restaurants which resulted in unfavorable year over year
comparisons for depreciation, rent and property tax expenses as a percentage of
sales, due to their relatively fixed nature, as well as higher utilities and
packaging costs.
Cost of Other Franchise Income. Cost of other franchise income decreased
$9,509,000 (66%) from $14,401,000 in 2004 to $4,892,000 in 2005. This decrease
was due primarily to fewer franchisee participants in our captive insurance
32
program resulting from the reduction of the types of insurance coverage plans
offered and the franchisee portion of the June 2004 impairment of approximately
$1,600,000 for excess riblet inventories which no longer met our quality
standards.
General and Administrative Expenses. General and administrative expenses
decreased from 9.4% in 2004 to 9.0% in 2005 as a result of the absorption of
general and administrative expenses over a larger revenue base, lower incentive
compensation expense and a reduction in costs associated with compliance with
Section 404 of the Sarbanes-Oxley Act. These decreases were partially offset by
higher compensation expense due to higher management training costs and
increased regional operations management staffing relating to the increased
number of company restaurant openings as compared to 2004.
Impairment of Long-lived Assets. In 2005, we recorded an asset impairment charge
of $3,900,000 consisting of a $2,600,000 write-down of the carrying value of the
property and equipment of four restaurants and a $1,300,000 write-down of one
other long-lived asset (see Note 7 of the consolidated financial statements).
Interest Expense. Interest expense increased from $1,626,000 in 2004 to
$4,365,000 in 2005 due primarily to increased borrowings under our credit
facility used to acquire 12 restaurants in May 2005 and to fund capital
expenditures and repurchases of our common stock.
Other Income. Other income decreased $1,795,000 from $3,557,000 in 2004 to
$1,762,000 in 2005. In 2004, we recorded several significant items which
resulted in higher other income for that year. These items consisted of income
of $1,600,000 for the resolution of certain previously disclosed long-running
international franchise disputes and $600,000 of income for final consideration
related to the sale of 12 restaurants in Philadelphia in 1999.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, increased from 34.2% in 2004 to 34.9% in 2005 due to an increase
in state and local income taxes.
Fiscal Year Ended December 26, 2004 Compared With Fiscal Year Ended December 28,
2003
Company Restaurant Sales. Total company restaurant sales increased $109,640,000
(13%) from $867,158,000 in 2003 to $976,798,000 in 2004. Company restaurant
openings and increases in weighted average weekly sales contributed
approximately 8% and 3%, respectively, of the increase in total company
restaurant sales in 2004. The acquisitions of 10 restaurants in Southern
California in April 2004 and 11 restaurants in Illinois, Indiana, Kentucky, and
Missouri in late March 2003 contributed approximately 3% of the increase in
company restaurant sales. These increases were offset by 1% due to the sale of
eight restaurants in the Atlanta, Georgia market in July 2003.
Comparable restaurant sales at company restaurants increased by 3.8% in 2004.
Weighted average weekly sales at company restaurants increased 3.4% from $45,000
in 2003 to $46,536 in 2004. These increases were due primarily to increases in
guest traffic and in the average guest check resulting from menu price increases
of approximately 1.7% in 2004. In addition, a portion of the increase resulted
from the implementation of our Carside To Go(TM) initiative. Carside To Go(TM)
sales mix increased from 7.1% in 2003 to 9.3% in 2004.
Franchise Royalties and Fees. Franchise royalties and fees increased $11,617,000
(11%) from $109,604,000 in 2003 to $121,221,000 in 2004 due primarily to the
increased number of franchise restaurants operating during 2004 as compared to
2003 and increases in comparable franchise restaurant sales. Weighted average
weekly sales and franchise comparable restaurant sales each increased by 5.2% in
2004.
33
Other Franchise Income. Other franchise income increased $468,000 (4%) from
$13,147,000 in 2003 to $13,615,000 in 2004 due primarily to revenues recognized
for information technology products and services provided to certain
franchisees.
Cost of Company Restaurant Sales. Food and beverage costs increased from 26.0%
in 2003 to 26.5% in 2004. This increase was due to higher commodity costs which
impacted our cost of company restaurant sales by approximately 0.9% and higher
food costs related to our menu promotions. This increase was partially offset by
the impact of menu price increases, operational improvements resulting from our
supply chain management initiatives and better food cost control.
Labor costs decreased from 32.7% in 2003 to 32.5% in 2004. In 2004, labor costs
were unfavorably impacted by higher management and hourly labor wage rates,
higher workers' compensation and group insurance costs and higher costs related
to the addition of dedicated Carside To Go(TM) hourly labor at most of our
restaurants beginning in the second half of 2003. These increases were offset by
lower management incentive compensation and higher sales volumes which favorably
impacted management costs.
Direct and occupancy costs were 25.1% in both 2003 and 2004. Direct and
occupancy costs were favorably impacted by higher sales volumes at company
restaurants which were offset by higher packaging costs as a result of increased
To Go(TM) sales volumes and higher credit card usage fees.
Cost of Other Franchise Income. Cost of other franchise income increased
$1,704,000 (13%) from $12,697,000 in 2003 to $14,401,000 in 2004 due primarily
to the franchisee portion of the inventory impairment of approximately
$1,600,000 (see Note 6 to the consolidated financial statements).
General and Administrative Expenses. General and administrative expenses
decreased from 9.6% in 2003 to 9.4% in 2004 as a result of the absorption of
general and administrative expenses over a larger revenue base and lower
incentive compensation. This decrease was partially offset by higher
depreciation expense related to our new information systems, higher compensation
expense due to staffing levels and costs associated with compliance with Section
404 of the Sarbanes-Oxley Act.
Other Income. Other income decreased $165,000 from $3,722,000 in 2003 to
$3,557,000 in 2004. Significant items causing fluctuations between 2004 and 2003
are as follows: In 2004, we recorded $1,600,000 in resolution of certain
previously disclosed long-running international franchise disputes. In addition,
we recorded $600,000 of income for final consideration related to the sale of 12
restaurants in Philadelphia in 1999. In 2003, we recognized $1,600,000 of income
related to collection from a previous financing agreement. In addition, we
recorded $1,200,000 of income for additional consideration related to the sale
of 12 restaurants in Philadelphia in 1999.
Impairment of Chevys Note Receivable. In June 2003, Chevys announced the sale of
the majority of its restaurants. Subsequent to the announcement, we received
Chevys' audited financial statements for the fiscal year ended December 31,
2002. During 2003, we fully impaired the principal and accrued interest of
approximately $8,800,000. In October 2003, Chevys Inc. filed a voluntary
petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. In December
2004, the U.S. Bankruptcy Court approved Chevys' reorganization plan.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.0% in 2003 to 34.2% in 2004 due to a reduction
in state and local income taxes.
Liquidity and Capital Resources
Our primary sources of liquidity are cash provided by operations and borrowings
under our credit facility. Our need for capital resources historically has
34
resulted from the construction and acquisition of restaurants, the repurchase of
our common stock and investment in information technology systems. In the past,
we have obtained capital through our ongoing operations and debt financing. Cash
flows from our ongoing operations primarily include cash generated from company
and franchise operations, management of credit from trade suppliers, decisions
to enter into restaurant operating leases and cash received from the exercise of
employee stock options. In addition, we have assumed debt or issued new debt in
connection with certain mergers and acquisitions. The following table presents a
summary of our cash flows for the last three fiscal years (in thousands):
2005 2004 2003
---------------- ---------------- ----------------
Net cash provided by operating activities.......... $ 221,203 $ 190,605 $ 175,889
Net cash used by investing activities.............. (187,718) (134,055) (105,174)
Net cash used by financing activities.............. (31,087) (63,775) (68,017)
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents............................ $ 2,398 $ (7,225) $ 2,698
================ ================ ================
Capital expenditures, excluding franchise acquisitions, were $139,396,000 in
2005, $104,620,000 in 2004 and $82,562,000 in 2003. In 2006, we currently expect
to open approximately 40 company restaurants, and capital expenditures,
excluding franchise acquisitions, are expected to be between $140,000,000 and
$150,000,000.
Future capital expenditures will primarily be for the development of new
restaurants, refurbishment and capital replacement for existing restaurants and
the enhancement of information systems. Because we expect to continue to
purchase a portion of our restaurant sites, the amount of actual capital
expenditures will be dependent upon, among other things, the proportion of
leased versus owned properties. If we construct more or fewer restaurants than
we currently anticipate or acquire additional restaurants, our capital
requirements will increase or decrease accordingly. In addition, we expect to
incur costs associated with the purchase of land and other construction costs
for our new corporate headquarters in 2006.
We completed the acquisition of four franchise restaurants in the Houston area
in January 2006 for approximately $8,200,000 in cash.
In May 2005, we completed the acquisition of 12 Applebee's restaurants in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for approximately $39,500,000 in cash.
In April 2005, we finalized the acquisition of eight Applebee's restaurants in
the Memphis market that were closed in 2004 by a former franchisee for
approximately $8,800,000 payable in cash. In connection with this acquisition,
we paid approximately $800,000 in 2004 and $8,000,000 in 2005.
In April 2004, we completed the acquisition of the operations and assets of 10
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash.
In July 2003, we completed the sale of eight company restaurants in the Atlanta,
Georgia market to an affiliate of an existing franchisee for $8,000,000. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003.
In March 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee.
35
In December 2004, we completed the refinancing of our $150,000,000 unsecured
revolving credit facility. The new bank credit agreement provided for a
$150,000,000 five-year unsecured revolving credit facility, of which $40,000,000
may be used for the issuance of letters of credit. The facility is subject to
various covenants and restrictions which, among other things, require the
maintenance of stipulated fixed charge, leverage and indebtedness to
capitalization ratios, as defined. There is no limit on cash dividends provided
that the declaration and payment of such dividend does not cause a default of
any other covenant contained in the agreement. The facility is subject to other
standard terms, conditions, covenants, and fees. In September 2005, we entered
into an amendment to our credit facility which increased the revolving credit
commitment available from $150,000,000 to $200,000,000. In October 2005, we
entered into a second amendment to our credit facility which increased the
revolving credit commitment available from $200,000,000 to $250,000,000 and
provided for an additional $75,000,000 of revolving credit upon satisfaction of
the conditions set forth in the credit facility. As of December 25, 2005, we
were in compliance with the covenants contained in our credit agreement. As of
December 25, 2005, we had borrowings of $182,900,000, standby letters of credit
of $9,400,000 outstanding and approximately $57,700,000 available under our
revolving credit facility. During 2006, we expect to fund operations, capital
expansion, any repurchases of common stock and the payment of dividends from
cash flows from operations and borrowings under our revolving credit facility.
In October 2004, our Board of Directors authorized additional repurchases of our
common stock of up to $150,000,000 beginning in 2005 which was completed in
October 2005. In October 2005, our Board of Directors approved an additional
$175,000,000 authorization to repurchase our common stock, subject to market
conditions. During 2005, we repurchased 8,288,093 shares of our common stock at
an average price of $23.66 for an aggregate cost of approximately $196,100,000.
As of December 25, 2005, we had $128,967,000 remaining under our October 2005
repurchase authorization.
In October 2005, the Board of Directors declared an annual dividend of $0.20 per
share payable to shareholders of record on December 23, 2005. We paid
approximately $14,800,000 in January 2006 related to this dividend.
As of December 25, 2005, our liquid assets totaled $13,326,000. These assets
consisted of cash and cash equivalents in the amount of $13,040,000 and
short-term investments in the amount of $286,000. The working capital deficit
increased from $51,041,000 as of December 26, 2004 to $107,400,000 as of
December 25, 2005. This increase was due primarily to checks written in excess
of a bank balance which subsequently was funded through our credit facility,
increases in accrued dividends and gift cards sold and decreases in inventories
and cash and cash equivalents due to repurchases of our common stock,
acquisition of restaurants and capital expenditures in 2005.
We believe that our liquid assets and cash generated from operations, combined
with borrowings available under our credit facility, will provide sufficient
funds for capital expenditures, repurchases of our common stock, the payment of
dividends and other such operating activities for the foreseeable future.
36
The following table shows our debt amortization schedule, future capital lease
commitments (including principal and interest payments), future operating lease
commitments (see operating leases in Note 12 to the consolidated financial
statements) and future purchase obligations as of December 25, 2005 (in
thousands):
Payments due by period
---------------------------------------------------------------------
Certain Less than 1 1-3 3-5 More than 5
Contractual Obligations Total year Years Years years
------------------------------------------------- ------------- ------------- ------------- ------------ -------------
Long-term Debt (excluding capital lease
obligations) and Notes Payable(1)........... $ 184,313 $ 8,021 $ 120 $ 175,099 $ 1,073
Capital Lease Obligations....................... 8,331 794 1,673 1,791 4,073
Operating Leases (2)............................ 377,607 26,684 53,868 53,033 244,022
Purchase Obligations - Company(3)............... 150,011 125,106 16,718 8,187 --
Purchase Obligations - Franchise(4)............. 269,044 220,486 26,356 22,202 --
(1) The amounts for long-term debt are primarily borrowings under our revolving
credit facility and exclude interest payments which are variable in nature.
(2) The amounts for operating leases include option periods where failure to
exercise such options would result in an economic penalty such that the renewal
appears reasonably assured.
(3) The amounts for company purchase obligations include commitments for land
for a new corporate headquarters, food items, energy, supplies, severance and
employment agreements, and other miscellaneous commitments.
(4) The amounts for franchise purchase obligations include commitments for food
items and supplies made by Applebee's International, Inc. for our franchisees.
Applebee's International, Inc. contracts with certain suppliers to ensure
competitive pricing. These amounts will only be payable by Applebee's
International, Inc. if our franchisees do not meet certain minimum contractual
requirements.
Other Contractual Obligations
In connection with the sale of restaurants to franchisees and other parties, we
have, in certain cases, remained contingently liable for the remaining lease
payments. As of December 25, 2005, we have outstanding lease guarantees of
approximately $17,200,000. These leases expire at various times with the final
lease agreement expiring in 2018. In addition, we or our subsidiaries are
contingently liable for various leases that we have assigned in connection with
the sale of restaurants to franchisees and other parties, in the potential
amount of $14,100,000. We have not recorded a liability related to these
contingent lease liabilities as of December 25, 2005 or December 26, 2004.
We have severance and employment agreements with certain officers providing for
severance payments to be made in the event the associate resigns or is
terminated related to a change in control. The agreements define the
circumstances which will constitute a change in control. If the severance
payments had been due as of December 25, 2005, we would have been required to
make payments totaling approximately $13,300,000. In addition, we have severance
and employment agreements with certain officers which contain severance
provisions not related to a change in control. Those provisions would have
required aggregate payments of approximately $6,200,000 if such officers had
been terminated as of December 25, 2005.
In 2003, we arranged for a third-party financing company to provide up to
$75,000,000 to qualified franchisees for short-term loans to fund remodel
investments, subject to our approval. Under the terms of this financing program,
we provided a limited guarantee pool for the loans advanced during the
three-year period ending December 2006. In the fourth quarter of 2005, this
program was terminated and we were released from the guarantees that we had
previously provided under this program.
In 2004, we arranged for a third-party financing company to provide up to
$250,000,000 to qualified franchisees for loans to fund development of new
restaurants through October 2007, subject to our approval. We will provide a
limited guarantee of 10% of certain loans advanced under this program. We will
be released from our guarantee if certain operating results are met after the
restaurant has been open for at least two years. As of December 25, 2005, there
were loans outstanding to six franchisees for approximately $50,400,000 under
this program. The fair value of our guarantees under this financing program is
approximately $100,000 and is recorded in non-current liabilities in our
consolidated balance sheet as of December 25, 2005.
37
New Accounting Pronouncements
In October 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position ("FSP") 13-1, "Accounting for Rental Costs Incurred during a
Construction Period." The guidance requires the rental costs recognized for
ground or building operating leases during the construction period be recognized
as rental expense. The guidance permits either retroactive or prospective
treatment for periods beginning after December 15, 2005. We will prospectively
change our policy from capitalization to expensing beginning in 2006. The
adoption of this FSP will result in an expected increase of approximately
$25,000 in preopening expenses recognized for every new restaurant opened but
will not have a material effect on our consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 154, "Accounting Changes and Error Corrections - Replacement of APB
Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS No. 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies the term
"conditional" as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Interpretation refers to a legal obligation to perform an
asset retirement activity even if the timing and/or settlement is conditional on
a future event that may or may not be within the control of an entity.
Accordingly, the entity must record a liability for the conditional asset
retirement obligation if the fair value of the obligation can be reasonably
estimated. FIN 47 is effective for fiscal years ending after December 15, 2005.
We have entered into certain leases which may require us to return the property
to the landlord in its original condition. We recorded an expense for these
leases of $400,000 in our 2005 consolidated financial statements, including
$50,000 in direct and occupancy costs related to 2005 and $350,000 ($225,000,
net of income taxes) for years prior to 2005 as a cumulative effect of a change
in accounting principle as required by FIN 47.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based
Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the fair value on the grant date of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service for that award, resulting in a
decrease in our net earnings. We will adopt the provisions of this Statement, as
amended, using the modified prospective method beginning in 2006. We expect that
the adoption of this Standard will decrease our 2006 diluted net earnings per
common share by approximately $0.17.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in
commodity prices. Our revolving credit facility bears interest at either the
bank's prime rate or LIBOR plus 0.625%, at our option. As of December 25, 2005,
the total amount of debt subject to interest rate fluctuations was $182,900,000
which was outstanding on our revolving credit facility. A 1% change in interest
rates would result in an increase or decrease in interest expense of $1,829,000
per year. We may from time to time enter into interest rate swap agreements to
manage the impact of interest rate changes on our earnings. A substantial
portion of the food products and utilities we purchase are subject to price
volatility due to factors that are outside of our control such as weather,
seasonality and fuel costs. As part of our strategy to moderate this volatility,
we have entered into fixed price purchase commitments.
38
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements on Page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
As of December 25, 2005, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, under the supervision and
with the participation of the principal executive officer and Chief Financial
Officer ("CFO"). Based on this evaluation, our management, including the
principal executive officer and CFO, concluded that our disclosure controls and
procedures are effective.
During our most recent fiscal quarter, there have been no changes in our
internal control over financial reporting that occurred that have materially
affected or are reasonably likely to materially affect our internal control over
financial reporting.
Management's Report on Internal Control over Financial Reporting
The management of Applebee's International, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting, as defined
in Exchange Act Rule 13a-15(f). Our internal control system was designed to
provide reasonable assurance to the company's management and board of directors
regarding the preparation and fair presentation of published financial
statements in accordance with generally accepted accounting principles.
Management recognizes that there are inherent limitations in the effectiveness
of any system of internal control, and accordingly, even effective internal
control can provide only reasonable assurance with respect to financial
statement preparation and fair presentation. Further, because of changes in
conditions, the effectiveness of internal control may vary over time.
Under the supervision and with the participation of our management, including
our principal executive officer and CFO, we assessed the effectiveness of the
company's internal control over financial reporting as of December 25, 2005. In
making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control--Integrated Framework. Based upon our assessment, we conclude that, as
of December 25, 2005, the Company's internal control over financial reporting is
effective, in all material respects, based upon those criteria.
Our independent registered public accounting firm, Deloitte & Touche LLP, issued
an attestation report dated March 8, 2006 on our assessment and on the
effectiveness of the company's internal control over financial reporting, which
is included herein.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Applebee's International, Inc. and Subsidiaries
Overland Park, KS
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Applebee's International, Inc. and subsidiaries (the "Company") maintained
effective internal control over financial reporting as of December 25, 2005,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 25, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
40
reporting as of December 25, 2005, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 25, 2005 of the Company and our
report dated March 8, 2006 expressed an unqualified opinion on those financial
statements.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 8, 2006
Item 9B. Other Information
Not applicable.
41
PART III
Item 10. Directors and Executive Officers of the Registrant
If you would like information about our executive officers, you should read the
section entitled "Executive and Other Senior Officers of the Registrant" in Part
I of this report. You should read the information under the caption "Information
About the Board of Directors and Executive and Other Senior Officers" for
information on our Board of Directors and audit committee of the Board of
Directors and the caption "Section 16(a) Beneficial Ownership Reporting
Compliance" for information regarding our Section 16(a) reporting compliance
located in the Proxy Statement for the Annual Meeting of Stockholders to be held
on or about May 11, 2006. We incorporate that information in this document by
reference.
Our Board of Directors has adopted a Code of Conduct for all associates and
directors. A copy of this document is available on our website at
www.applebees.com, free of charge under the Investors section. We will satisfy
any disclosure requirements under Item 5.05 on Form 8-K regarding an amendment
to, or waiver from, any provision of the Code with respect to our principal
executive officer, principal financial officer, principal accounting officer and
persons performing similar functions by disclosing the nature of such amendment
or waiver on our website or in a report on Form 8-K.
Our Board of Directors has determined that Mr. Eric L. Hansen, a member of the
audit committee and an independent director, is an audit committee financial
expert, as defined under 401(h) of Regulation S-K.
Item 11. Executive Compensation
If you would like information about our executive compensation, you should read
the information under the caption "Executive Compensation" and "Information
About the Board of Directors and Executive and Other Senior Officers" in the
Proxy Statement for the Annual Meeting of Stockholders to be held on or about
May 11, 2006. We incorporate that information in this document by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
If you would like information about the stock owned by our management and
certain large stockholders and information about our equity compensation plans,
you should read the information under the caption "Stock Ownership of Officers,
Directors and Major Stockholders" and "Equity Compensation Plan Information" in
the Proxy Statement for the Annual Meeting of Stockholders to be held on or
about May 11, 2006. We incorporate that information in this document by
reference.
Item 13. Certain Relationships and Related Transactions
If you would like information about certain transactions which we have completed
or certain relationships which we have entered into, you should read the
information under the caption "Certain Transactions" in the Proxy Statement for
the Annual Meeting of Stockholders to be held on or about May 11, 2006. We
incorporate that information in this document by reference.
Item 14. Principal Accounting Fees and Services
If you would like information about fees paid to our auditors, you should read
the information under the caption "Fees and Services of Deloitte & Touche LLP"
42
in the Proxy Statement for the Annual Meeting of Stockholders to be held on or
about May 11, 2006. We incorporate that information in this document by
reference.
43
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) List of documents filed as part of this report:
1. Financial Statements:
The financial statements are listed in the accompanying "Index
to Consolidated Financial Statements" on Page F-1.
2. Financial Statement Schedules:
None.
3. Exhibits:
The exhibits filed with or incorporated by reference in this report
are listed on the Exhibit Index beginning on page E-1.
44
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 9, 2006 By: /s/ David L. Goebel
--------------- -----------------------------------
David L. Goebel
Director, President and
Chief Operating Officer
(principal executive officer)
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Lloyd L. Hill and Rebecca R. Tilden, and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any amendments to this Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes, may do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ David L. Goebel Date: March 9, 2006
----------------------------------- --------------------
David L. Goebel
Director, President and
Chief Operating Officer
(principal executive officer)
By: /s/ Steven K. Lumpkin Date: March 9, 2006
----------------------------------- --------------------
Steven K. Lumpkin
Director, Executive Vice President, Chief
Financial Officer and Treasurer
(principal financial officer)
By: /s/ Beverly O. Elving Date: March 9, 2006
----------------------------------- --------------------
Beverly O. Elving
Vice President and Controller
(principal accounting officer)
By: /s/ Lloyd L. Hill Date: March 9, 2006
----------------------------------- --------------------
Lloyd L. Hill
Director, Chairman of the Board and Chief
Executive Officer
45
By: /s/ Erline Belton Date: March 9, 2006
----------------------------------- --------------------
Erline Belton
Director
By: /s/ Gina Boswell Date: March 9, 2006
----------------------------------- --------------------
Gina Boswell
Director
By: /s/ Douglas R. Conant Date: March 9, 2006
----------------------------------- --------------------
Douglas R. Conant
Director
By: /s/ D. Patrick Curran Date: March 9, 2006
----------------------------------- --------------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: March 9, 2006
----------------------------------- --------------------
Eric L. Hansen
Director
By: /s/ Jack P. Helms Date: March 9, 2006
----------------------------------- --------------------
Jack P. Helms
Director
By: /s/ Burton M. Sack Date: March 9, 2006
----------------------------------- --------------------
Burton M. Sack
Director
By: /s/ Michael A. Volkema Date: March 9, 2006
----------------------------------- --------------------
Michael A. Volkema
Director
46
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm..................................................... F-2
Consolidated Balance Sheets as of December 25, 2005 and December 26, 2004 .................................. F-3
Consolidated Statements of Earnings for the Fiscal Years Ended December 25, 2005,
December 26, 2004 and December 28, 2003..................................................................... F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended December 25, 2005,
December 26, 2004 and December 28, 2003..................................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 25, 2005,
December 26, 2004 and December 28, 2003..................................................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Applebee's International, Inc. and Subsidiaries
Overland Park, Kansas
We have audited the accompanying consolidated balance sheets of Applebee's
International, Inc. and subsidiaries (the "Company") as of December 25, 2005 and
December 26, 2004, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three fiscal years in the
period ended December 25, 2005. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 25, 2005
and December 26, 2004, and the results of its operations and its cash flows for
each of the three fiscal years in the period ended December 25, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 25, 2005, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 8, 2006 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
March 8, 2006
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 25, December 26,
2005 2004
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 13,040 $ 10,642
Short-term investments, at market value..................................... 286 282
Receivables, net of allowance............................................... 37,857 39,152
Receivables related to captive insurance subsidiary......................... 1,712 2,566
Inventories................................................................. 20,373 35,936
Prepaid income taxes........................................................ 3,488 --
Prepaid and other current assets............................................ 13,518 12,079
-------------- -------------
Total current assets..................................................... 90,274 100,657
Property and equipment, net...................................................... 590,593 486,548
Goodwill......................................................................... 138,443 116,344
Restricted assets related to captive insurance subsidiary........................ 19,329 17,386
Other intangible assets, net..................................................... 8,050 8,524
Other assets, net................................................................ 31,899 24,972
-------------- -------------
$ 878,588 $ 754,431
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 259 $ 222
Notes payable............................................................... 7,900 --
Accounts payable............................................................ 63,445 42,830
Accrued expenses and other current liabilities.............................. 100,995 89,064
Loss reserve and unearned premiums related to captive insurance subsidiary.. 10,235 12,137
Accrued dividends........................................................... 14,840 4,867
Accrued income taxes........................................................ -- 2,578
-------------- -------------
Total current liabilities................................................ 197,674 151,698
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion....................................... 180,208 35,472
Deferred income taxes....................................................... 37,722 28,995
Other non-current liabilities............................................... 50,374 41,539
-------------- -------------
Total non-current liabilities............................................ 268,304 106,006
-------------- -------------
Total liabilities........................................................ 465,978 257,704
-------------- -------------
Commitments and contingencies (Notes 12, 13 and 18)
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 - 108,503,243 shares.............................................. 1,085 1,085
Additional paid-in capital.................................................. 234,988 220,897
Unearned compensation....................................................... (2,614) (1,924)
Retained earnings........................................................... 710,277 623,315
-------------- -------------
943,736 843,373
Treasury stock - 34,304,693 shares in 2005 and 27,375,044 shares in 2004,
at cost.................................................................. (531,126) (346,646)
-------------- -------------
Total stockholders' equity............................................... 412,610 496,727
-------------- -------------
$ 878,588 $ 754,431
============== =============
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 25, December 26, December 28,
2005 2004 2003
-------------- ------------- -------------
Revenues:
Company restaurant sales................................ $ 1,082,641 $ 976,798 $ 867,158
Franchise royalties and fees............................ 128,813 121,221 109,604
Other franchise income.................................. 5,196 13,615 13,147
-------------- ------------- -------------
Total operating revenues............................. 1,216,650 1,111,634 989,909
-------------- ------------- -------------
Cost of company restaurant sales:
Food and beverage....................................... 286,522 259,134 225,346
Labor................................................... 358,563 317,659 283,762
Direct and occupancy.................................... 287,656 244,707 217,393
Pre-opening expense..................................... 4,767 3,025 2,020
-------------- ------------- -------------
Total cost of company restaurant sales............... 937,508 824,525 728,521
-------------- ------------- -------------
Cost of other franchise income............................... 4,892 14,401 12,697
General and administrative expenses.......................... 109,768 104,810 94,951
Amortization of intangible assets............................ 878 663 364
Impairment of long-lived assets.............................. 3,900 -- --
Loss on disposition of restaurants and equipment............. 2,067 1,955 699
-------------- ------------- -------------
Operating earnings........................................... 157,637 165,280 152,677
-------------- ------------- -------------
Other income (expense):
Investment income....................................... 1,695 1,284 1,554
Interest expense........................................ (4,365) (1,626) (1,733)
Impairment of Chevys note receivable (Note 5)........... -- -- (8,803)
Other income............................................ 1,762 3,557 3,722
-------------- ------------- -------------
Total other income (expense)......................... (908) 3,215 (5,260)
-------------- ------------- -------------
Earnings before income taxes and cumulative effect of
change in accounting principle............................ 156,729 168,495 147,417
Income taxes................................................. 54,702 57,630 53,068
-------------- ------------- -------------
Earnings before cumulative effect of change in accounting
principle................................................. 102,027 110,865 94,349
Cumulative effect of change in accounting principle,
net of tax................................................ (225) -- --
-------------- ------------- -------------
Net earnings................................................. $ 101,802 $ 110,865 $ 94,349
============== ============= =============
Basic net earnings per common share..........................
Basic earnings before cumulative effect of change in
accounting principle................................. $ 1.30 $ 1.36 $ 1.14
Cumulative effect of change in accounting principle, net
of tax............................................... -- -- --
-------------- ------------- -------------
Basic net earnings per common share.......................... $ 1.29 $ 1.36 $ 1.14
============== ============= =============
Diluted net earnings per common share........................
Diluted earnings before cumulative effect of change in
accounting principle................................. $ 1.28 $ 1.33 $ 1.10
Cumulative effect of change in accounting principle, net
of tax............................................... -- -- --
-------------- ------------- -------------
Diluted net earnings per common share........................ $ 1.27 $ 1.33 $ 1.10
============== ============= =============
Basic weighted average shares outstanding.................... 78,650 81,528 82,944
============== ============= =============
Diluted weighted average shares outstanding.................. 80,010 83,600 85,409
============== ============= =============
See notes to consolidated financial statements.
F-4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share amounts)
Accumulated
Common Stock Additional Other Total
-------------- Paid-In Unearned Retained Comprehensive Treasury Stockholders'
Shares Amount Capital Compensation Earnings Income Stock Equity
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Balance, December 29, 2002.................... 108,503 $1,085 $ 188,122 $ (599) $ 426,879 $ 16 $(230,302) $ 385,201
Comprehensive income:
Net earnings............................... -- -- -- -- 94,349 -- -- 94,349
Change in unrealized gain on short-term
investments, net of income taxes......... -- -- -- -- -- (16) -- (16)
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Total comprehensive income.................... -- -- -- -- 94,349 (16) -- 94,333
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Purchases of treasury stock................ -- -- -- -- -- -- (49,757) (49,757)
Dividends declared on common stock, $0.05
per share................................ -- -- -- -- (3,863) -- -- (3,863)
Stock options exercised and related tax
benefit................................. -- -- 9,884 -- -- -- 11,898 21,782
Shares issued under employee benefit plans. -- -- 2,554 -- -- -- 1,732 4,286
Restricted shares awarded under equity
incentive plan, net of forfeitures...... -- -- 1,292 (1,789) -- -- 548 51
Amortization of unearned compensation
relating to restricted shares........... -- -- -- 1,011 -- -- -- 1,011
Net repayments of notes receivable from
officers for stock sales................ -- -- 99 -- -- -- -- 99
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Balance, December 28, 2003................. 108,503 1,085 201,951 (1,377) 517,365 -- (265,881) 453,143
Net earnings............................... -- -- -- -- 110,865 -- -- 110,865
Purchases of treasury stock................ -- -- -- -- -- -- (99,723) (99,723)
Dividends declared on common stock, $0.06
per share............................... -- -- -- -- (4,867) -- -- (4,867)
Stock options exercised and related tax
benefit................................. -- -- 13,756 -- -- -- 16,200 29,956
Shares issued under employee benefit plans. -- -- 3,747 -- -- -- 2,232 5,979
Restricted shares awarded under equity
incentive plans, net of forfeitures...... -- -- 1,443 (1,969) -- -- 526 --
Amortization of unearned compensation
relating to restricted shares........... -- -- -- 1,422 -- -- -- 1,422
Dividends paid for fractional shares....... -- -- -- -- (48) -- -- (48)
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Balance, December 26, 2004.................... 108,503 1,085 220,897 (1,924) 623,315 -- (346,646) 496,727
Net earnings............................... -- -- -- -- 101,802 -- -- 101,802
Purchases of treasury stock................ -- -- -- -- -- -- (196,066) (196,066)
Dividends declared on common stock, $0.20
per share................................ -- -- -- -- (14,840) -- -- (14,840)
Stock options exercised and related tax
benefit................................. -- -- 9,274 -- -- -- 9,080 18,354
Shares issued under employee benefit plans. -- -- 2,586 -- -- -- 1,816 4,402
Restricted shares awarded under equity
incentive plans, net of forfeitures..... -- -- 2,231 (2,921) -- -- 690 --
Amortization of unearned compensation
relating to restricted shares........... -- -- -- 2,231 -- -- -- 2,231
------- ------ --------- ------------ ---------- ----------- ---------- -------------
Balance, December 25, 2005.................... 108,503 $1,085 $ 234,988 $ (2,614) $ 710,277 $ -- $(531,126) $ 412,610
======= ====== ========= ============ ========== =========== ========== =============
See notes to consolidated financial statements.
F-5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Fiscal Year Ended
----------------------------------------------
December 25, December 26, December 28,
2005 2004 2003
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................. $ 101,802 $ 110,865 $ 94,349
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of
tax..................................................... 225 -- --
Depreciation and amortization.............................. 54,580 46,051 41,082
Amortization of intangible assets.......................... 878 663 364
Amortization of unearned compensation...................... 2,231 1,422 1,011
Other amortization......................................... 246 309 195
Inventory impairment....................................... -- 2,000 --
Deferred income tax provision.............................. 9,871 25,313 2,436
Impairment of long-lived assets............................ 3,900 -- --
Gain on sale of investments................................ -- -- (24)
Loss on disposition of restaurants and equipment........... 2,067 1,955 699
Impairment of Chevys note receivable....................... -- -- 8,803
Income tax benefit from exercise of stock options.......... 5,370 10,459 7,606
Changes in assets and liabilities (exclusive of effects of
acquisitions or dispositions):
Receivables................................................ 1,371 (7,218) (5,733)
Receivables related to captive insurance subsidiary........ 154 (2,116) 1,353
Inventories................................................ 15,753 (16,925) (9,139)
Income taxes............................................... (5,941) 8,378 (798)
Prepaid and other current assets........................... (2,583) (665) 1,063
Accounts payable........................................... 18,757 5,197 10,233
Accrued expenses and other current liabilities............. 11,842 (3,542) 14,057
Loss reserve and unearned premiums related to captive
insurance subsidiary.................................... (1,202) 6,880 3,454
Other non-current liabilities.............................. 4,866 2,702 4,965
Other...................................................... (2,984) (1,123) (87)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. 221,203 190,605 175,889
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................... (139,396) (104,620) (82,562)
Restricted assets related to captive insurance subsidiary..... (1,943) (6,623) (10,763)
Acquisition of restaurants.................................... (47,616) (13,817) (21,557)
Lease acquisition costs....................................... -- (4,875) --
Acquisition of other intangible asset......................... -- (2,809) --
Proceeds from sale of restaurants and equipment............... 1,237 66 9,228
Maturities and sales of short-term investments................ -- (253) 480
Other investing activities.................................... -- (1,124) --
-------------- -------------- --------------
NET CASH USED BY INVESTING ACTIVITIES...................... (187,718) (134,055) (105,174)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock................................... (196,066) (99,723) (49,757)
Dividends paid................................................ (4,867) (3,911) (3,323)
Issuance of common stock upon exercise of stock options....... 12,984 19,497 14,176
Shares issued under employee benefit plans.................... 4,402 5,979 4,286
Net debt proceeds (payments).................................. 152,673 14,832 (33,399)
Deferred financing costs relating to
issuance of long-term debt................................. (213) (449) --
-------------- -------------- --------------
NET CASH USED BY FINANCING ACTIVITIES...................... (31,087) (63,775) (68,017)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... 2,398 (7,225) 2,698
CASH AND CASH EQUIVALENTS, beginning of period..................... 10,642 17,867 15,169
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period........................... $ 13,040 $ 10,642 $ 17,867
============== ============== ==============
See notes to consolidated financial statements.
F-6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Fiscal Year Ended
------------------------------------------------------
December 25, December 26, December 28,
2005 2004 2003
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................... $ 45,402 $ 12,428 $ 45,557
================= ================= =================
Interest........................................ $ 3,340 $ 1,056 $ 1,079
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued restricted common stock, net of forfeitures, of $2,921,000 in 2005,
$1,945,000 in 2004, and $1,842,000 in 2003.
In 2002, we entered into a rabbi trust agreement to protect the assets of the
nonqualified deferred compensation plan for certain of our associates. The plan
investments are included in other assets and the offsetting obligation is
included in other non-current liabilities in our consolidated balance sheets. We
had non-cash increases in these balances of $3,940,000, $3,881,000, and
$3,448,000 in 2005, 2004 and 2003, respectively.
We made matching contributions in shares of our common stock to a profit sharing
plan and trust established in accordance with Section 401(k) of the Internal
Revenue Code of $1,308,000 in 2004 and $1,044,000 in 2003. In 2005, we began
matching contributions in cash.
On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection
with the acquisition of 11 restaurants.
We had property and equipment purchases accrued in accounts payable of
approximately $11,100,000 as of December 25, 2005.
See notes to consolidated financial statements.
F-7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Applebee's International, Inc. and our subsidiaries develop, franchise and
operate casual dining restaurants under the name "Applebee's Neighborhood Grill
& Bar." As of December 25, 2005, there were 1,804 Applebee's restaurants.
Franchisees operated 1,318 of these restaurants and 486 restaurants were company
operated. These restaurants were located in 49 states and 14 countries outside
of the United States.
On September 20, 2002, we formed Neighborhood Insurance, Inc., a regulated
Vermont corporation and a wholly-owned subsidiary, as a captive insurance
company. Neighborhood Insurance, Inc. was established to provide Applebee's
International, Inc. and qualified franchisees with workers' compensation and
general liability insurance (see Note 14).
2. Summary of Significant Accounting Policies
Principles of consolidation: The consolidated financial statements include our
accounts and the accounts of our wholly-owned subsidiaries. We have eliminated
all intercompany profits, transactions and balances.
Fiscal year: Our fiscal year ends on the last Sunday of the calendar year. The
fiscal years ended December 25, 2005, December 26, 2004, and December 28, 2003
each contained 52 weeks. These fiscal years will be referred to hereafter as
2005, 2004 and 2003, respectively.
Cash and cash equivalents: We consider all money market investment instruments
to be cash and cash equivalents. Periodically, we have outstanding checks that
are written in excess of the cash balances at our bank which create a book
overdraft and are recorded as a liability. As of December 25, 2005, we had
checks written in excess of a bank balance of $13,430,000 which was included in
accounts payable in the accompanying consolidated balance sheets. This balance
was subsequently funded through our credit facility in 2006.
Financial instruments: Our financial instruments as of December 25, 2005 and
December 26, 2004 consist of cash equivalents, short-term investments, accounts
receivable, notes payable and long-term debt, excluding capitalized lease
obligations. The carrying amount of cash equivalents and accounts receivable
(including receivables related to the captive insurance subsidiary) approximates
fair value because of the short maturity of those instruments. We based the
carrying amount of short-term investments on quoted market prices. We based the
fair value of our long-term debt, excluding capitalized lease obligations, on
quotations made on similar issues. The fair value of these financial instruments
approximates the carrying amounts reported in the consolidated balance sheets.
Investments: We have certificates of deposit that are included in short-term
investments and auction rate securities that are included in restricted assets
related to the captive insurance subsidiary in our consolidated balance sheets.
We have classified all investments as available-for-sale. Due to the short time
period between reset dates of the interest rates, there are no unrealized gains
or losses associated with the auction rate securities. The contractual
maturities of the auction rate securities range from 2030 to 2033.
Inventories: We state inventories at the lower of cost, using the first-in,
first-out method, or market. When necessary, we record inventory reserves for
obsolescence and shrinkage based upon inventory turnover trends, historical
experience and the specific identification method.
Property and equipment: We report property and equipment at historical cost less
accumulated depreciation. Depreciation is provided on a straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
F-8
amortized over the lesser of the lease term, as defined in operating leases
below, or the estimated useful life of the related asset. The general ranges of
original depreciable lives are as follows:
o Buildings 20 years
o Leasehold improvements 15-20 years
o Furniture and equipment 2-7 years
We record capitalized interest in connection with the development of new
restaurants and amortize it over the estimated useful life of the related asset.
We capitalized $462,000 in interest costs during 2005, $189,000 during 2004 and
$264,000 during 2003.
Software costs: Costs incurred in connection with the development of
internal-use software are capitalized and amortized over the expected useful
life of the asset.
Goodwill: Goodwill represents the excess of cost over fair market value of net
assets we have acquired. Goodwill is not subject to amortization but is tested
for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," requires a
two-step process for testing impairment of goodwill. First, the fair value of
the reporting unit is compared to its carrying value to determine whether an
indication of impairment exists. If an impairment is indicated, then the fair
value of the reporting unit's goodwill is determined by allocating the unit's
fair value to its assets and liabilities (including any unrecognized intangible
assets) as if the reporting unit had been acquired in a business combination.
The amount of impairment for goodwill is measured as the excess of its carrying
value over its implied fair value. We define the reporting unit as all company
restaurants.
Impairment of long-lived assets: We review our restaurant property and equipment
for impairment quarterly on a restaurant-by-restaurant basis using historical
cash flows as well as current estimates of future cash flows and/or appraisals.
We review other non-amortizing long-lived assets annually and when events or
circumstances indicate that the carrying value of the asset may not be
recoverable. The recoverability is assessed in most instances by comparing the
carrying value to its undiscounted cash flows.
Gift cards: We record a liability in the period in which a gift card is issued
and proceeds are received. As gift cards are redeemed, this liability is reduced
and revenue is recognized. We recognize gift card slippage income when the
likelihood of the redemption of the card becomes remote.
Use of estimates: The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates, which
are frequently made in consultation with certain third-party advisors, include,
but are not limited to, estimates for legal actions and general liability,
workers' compensation and health insurance, long-term incentives, and the
collectibility of receivables.
We are periodically involved in various legal actions arising in the normal
course of business. We are required to assess the probability of any adverse
judgments as well as the potential range of loss. We determine the required
accruals after a review of the facts of each legal action.
The estimated liability for general liability, workers' compensation and health
insurance is established based upon historical claims data and third-party
actuarial estimates of settlement costs for incurred claims. We recognized
expense of $27,557,000 in 2005, $25,116,000 in 2004 and $20,136,000 in 2003
related to these types of insurance in our consolidated financial statements.
Unanticipated changes in these factors may require us to revise our estimates.
F-9
We have various long-term associate incentive compensation plans which require
us to make estimates to determine our liability based upon projected performance
of plan criteria. If actual performance against the criteria differs from our
estimates in the future, we will be required to adjust our liability
accordingly.
We continually assess the collectibility of our franchise receivables. We
establish our allowance for bad debts based on several factors, including
historical collection experience, the current economic environment and other
specific information available to us at the time. The allowance for bad debts
may change in the future due to changes in the factors above or other new
developments.
Estimates and assumptions used by management affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Franchise royalties and fees: We recognize royalties on a franchisee's sales in
the period in which the sales are reported to have occurred. We also receive a
franchise fee for each restaurant that a franchisee opens. The recognition of
franchise fees is deferred until we have performed substantially all of our
related obligations as franchisor, typically when the restaurant opens.
Franchise fees, included in franchise royalties and fees in the consolidated
statements of earnings, totaled $3,358,000 for 2005, $3,096,000 for 2004 and
$2,769,000 for 2003.
Other franchise income: Other franchise income includes insurance premiums from
franchisee participation in our captive insurance program and revenue from
information technology products and services provided to certain franchisees.
Income from franchisee premiums and information technology services is
recognized ratably over the related contract period. Income from information
technology products is recognized when the products are installed at the
restaurant.
Advertising costs: We recognize company-owned restaurant contributions to the
national marketing pool in the period the contribution accrues. We expense most
local advertising costs for company-owned restaurants as we incur them, but we
expense the production costs of advertising the first time the advertising takes
place. Advertising expense related to company-owned restaurants was $51,969,000
for 2005, $46,324,000 for 2004 and $41,597,000 for 2003.
Operating leases: We account for our restaurant and office space leases in
accordance with SFAS No.13, "Accounting for Leases" and other authoritative
guidance. We recognize rent expense for our operating leases, which have
escalating rentals over the term of the lease, on a straight-line basis over the
initial term and those option periods where failure to exercise such options
would result in an economic penalty such that the renewal appears reasonably
assured. In addition, the lease term is deemed to commence on the date we become
legally obligated for rent payments. In 2005, we capitalized the straight-line
rent amounts during the construction period of leased properties. In 2006, we
changed our policy to expense the straight-line rent during the construction
period (see new accounting pronouncements below). Straight-line rent subsequent
to the construction period and prior to the restaurant opening is recognized as
expense. We use a consistent lease term when calculating depreciation of
leasehold improvements, determining straight-line rent expense and determining
classification of our leases as either operating or capital. Contingent rents
are generally amounts due as a result of sales in excess of amounts stipulated
in certain restaurant leases and are included in rent expense as they accrue.
Certain of our lease agreements contain tenant improvement allowances, rent
holidays, lease premiums, rent escalation clauses and/or contingent rent
provisions. For purposes of recognizing incentives, premiums, rent holidays and
minimum rental expenses on a straight-line basis over the terms of the leases,
we use the date of initial possession to begin amortization, which is generally
when we enter the property and begin to make improvements in preparation of its
intended use.
F-10
For tenant improvement allowances, we record a deferred rent liability in either
other current liabilities or other non-current liabilities on the consolidated
balance sheet and amortize the deferred rent over the term of the lease as a
reduction to direct and occupancy costs in the consolidated statements of
earnings.
Pre-opening expense: We expense direct training and other costs, including rent
expense subsequent to the construction period but prior to restaurant opening,
related to opening new or relocated restaurants as they are incurred, which is
typically in the month of opening.
Income taxes: We use the asset and liability method to determine deferred income
taxes. Deferred tax assets and liabilities are computed based upon future tax
consequences associated with differences between the financial statement
carrying amount and the tax bases of assets and liabilities.
Stock-based compensation: We have adopted the disclosure provisions of SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." The Statement requires prominent
disclosures in financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. We account for stock-based compensation awards under the intrinsic
method of Accounting Principles Board ("APB") Opinion No. 25. Opinion No. 25
requires compensation cost to be recognized based on the excess, if any, between
the quoted market price of the stock at the date of grant and the amount an
employee must pay to acquire the stock. All options awarded under all of our
plans are granted with an exercise price equal to the fair market value on the
date of the grant. The following table presents the effect on our net earnings
and earnings per share had we adopted the fair value method of accounting for
stock-based compensation under SFAS No. 123, "Accounting for Stock-Based
Compensation" (in thousands, except for per share amounts).
2005 2004 2003
---------------- ---------------- ----------------
Net earnings, as reported.......................... $ 101,802 $ 110,865 $ 94,349
Add: Stock-based compensation expense
included in net earnings,
net of related taxes........................... 1,409 638 2,354
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes........................... 8,536 8,555 9,752
---------------- ---------------- ----------------
Pro forma net earnings............................. $ 94,675 $ 102,948 $ 86,951
================ ================ ================
Basic net earnings per common share,
as reported.................................... $ 1.29 $ 1.36 $ 1.14
================ ================ ================
Basic net earnings per common share,
pro forma...................................... $ 1.20 $ 1.26 $ 1.05
================ ================ ================
Diluted net earnings per common share,
as reported.................................... $ 1.27 $ 1.33 $ 1.10
================ ================ ================
Diluted net earnings per common share,
pro forma...................................... $ 1.18 $ 1.23 $ 1.02
================ ================ ================
The weighted average fair value at date of grant for options granted during
2005, 2004 and 2003 was $8.43, $9.84 and $7.11 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 model to value our option
grants. We calculated the following weighted average assumptions for grants in
2005, 2004 and 2003: dividend yield of 0.7%, 0.3% and 0.3%, respectively;
F-11
expected volatility of 32.3%, 41.6% and 44.9%, respectively; risk-free interest
rate of 3.9%, 2.7% and 2.8%, respectively; and expected lives of 5.1, 4.8 and
4.9 years, respectively.
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123 (revised 2004), "Share-based Payment," which replaces SFAS No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004) requires
compensation costs related to share-based payment transactions to be recognized
in the financial statements. With limited exceptions, the amount of compensation
cost will be measured based on the fair value on the grant date of the equity or
liability instruments issued. Compensation cost will be recognized over the
period that an employee provides service for that award, resulting in a decrease
in our net earnings. We will adopt the provisions of this Statement, as amended,
using the modified prospective method in 2006. Compensation cost will be
recognized for all awards that have been granted prior to 2006 but have yet to
reach the end of their service period and all new awards granted beginning in
2006. The amount of expense to be recognized over the remaining service period
as of December 25, 2005 is $28,120,000. As required by the SFAS 123 (revised
2004), we will begin expensing employee stock-based compensation over the
shorter of the vesting period or the period from the date of grant up until the
date the employee becomes eligible for retirement.
Net earnings per share: We compute basic net earnings per common share by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the reporting period. Diluted net earnings per
common share reflects the potential dilution that could occur if holders of
options or other contracts to issue common stock exercised or converted their
holdings into common stock. Outstanding stock options and equity-based
compensation represent the only dilutive effects on weighted average shares. The
chart below presents a reconciliation between basic and diluted weighted average
shares outstanding and the related net earnings per share. All amounts in the
chart, except per share amounts, are expressed in thousands.
2005 2004 2003
---------------- ---------------- ----------------
Net earnings....................................... $ 101,802 $ 110,865 $ 94,349
================ ================ ================
Basic weighted average shares outstanding.......... 78,650 81,528 82,944
Dilutive effect of stock options and
equity-based compensation...................... 1,360 2,072 2,465
---------------- ---------------- ----------------
Diluted weighted average shares outstanding........ 80,010 83,600 85,409
================ ================ ================
Basic net earnings per common share................ $ 1.29 $ 1.36 $ 1.14
================ ================ ================
Diluted net earnings per common share.............. $ 1.27 $ 1.33 $ 1.10
================ ================ ================
We excluded stock options with exercise prices greater than the average market
price of our common stock for the applicable periods from the computation of
diluted weighted average shares outstanding as the effect would be
anti-dilutive. We excluded approximately 2,796,000, 1,459,000 and 56,000 of
these options from our diluted weighted average share computation for 2005, 2004
and 2003, respectively.
Cash flows: For purposes of the consolidated statements of cash flows, we
consider all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
New accounting pronouncements: In October 2005, the FASB issued FASB Staff
Position ("FSP") 13-1, "Accounting for Rental Costs Incurred during a
Construction Period." The guidance requires the rental costs recognized for
ground or building operating leases during the construction period be recognized
as rental expense. The guidance permits either retroactive or prospective
treatment for periods beginning after December 15, 2005. We will prospectively
change our policy from capitalization to expensing beginning in fiscal 2006. The
adoption of this FSP will result in an expected increase of approximately
F-12
$25,000 in preopening expenses recognized for every new restaurant opened but
will not have a material effect on our consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections- A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No. 154 requires retrospective application to prior periods' financial
statements for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies the term
"conditional" as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Interpretation refers to a legal obligation to perform an
asset retirement activity even if the timing and/or settlement is conditional on
a future event that may or may not be within the control of an entity.
Accordingly, the entity must record a liability for the conditional asset
retirement obligation if the fair value of the obligation can be reasonably
estimated. FIN 47 is effective for fiscal years ending after December 15, 2005.
We have entered into certain leases which may require us to return the property
to the landlord in its original condition. We recorded an expense for these
leases of $400,000 in our 2005 consolidated financial statements, including
$50,000 in direct and occupancy costs related to 2005 and $350,000 ($225,000,
net of income taxes) for years prior to 2005 as a cumulative effect of a change
in accounting principle as required by FIN 47.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based
Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123 (revised 2004) requires compensation costs related
to share-based payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost will be
measured based on the fair value on the grant date of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service for that award, resulting in a decrease in our net
earnings. We will adopt the provisions of this Statement, as amended, using the
modified prospective method in 2006. Compensation cost will be recognized for
all awards that have been granted prior to 2006 but have yet to reach the end of
their service period and all new awards granted beginning in 2006. The amount of
expense to be recognized over the remaining service period as of December 25,
2005 is $28,120,000. As required by the SFAS 123 (revised 2004), we will begin
expensing employee stock-based compensation over the shorter of the vesting
period or the period from the date of grant up until the date the employee
becomes eligible for retirement. We expect that the adoption of this Standard
will decrease our 2006 diluted net earnings per common share by approximately
$0.17.
3. Acquisitions
All of our acquisitions discussed below have been accounted for using the
purchase method of accounting and, accordingly, our consolidated financial
statements reflect the results of operations for each acquisition subsequent to
the date of acquisition. The assets acquired and liabilities assumed are
recorded at estimates of fair value as determined by management based upon
information available. We finalize the allocation of purchase price to the fair
value of assets acquired and liabilities assumed when we obtain information
sufficient to complete the allocation, but in each case, no longer than one year
after the acquisition date.
In March 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt. The total cash payment included
$20,800,000 paid at closing, approximately $200,000 paid as a deposit in 2002
and approximately $800,000 paid in the second quarter of 2003.
In April 2004, we completed our acquisition of the operations and assets of 10
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash. The purchase price was allocated to the fair value of
property and equipment of $2,500,000, goodwill of $10,800,000 and other net
assets of approximately $500,000.
F-13
In May 2005, we completed the acquisition of 12 Applebee's restaurants in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for approximately $39,500,000 in cash. The purchase price was allocated to the
fair value of property and equipment of $17,500,000, goodwill of $21,500,000,
reacquired franchise rights of approximately $300,000 and other net assets of
approximately $200,000.
The following table is comprised of actual company restaurant sales for the
three restaurant acquisitions above which are included in our consolidated
financial statements for each period presented and pro forma company restaurant
sales assuming the acquisitions occurred at the beginning of the preceding
fiscal year for each acquisition (in thousands):
2005 2004 2003
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 17,000 $ 17,600 $ 19,000
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 28,500 $ 52,600 $ 47,000
=============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants in
the Memphis market that were closed in 2004 by a former franchisee for
approximately $8,800,000 payable in cash. In connection with this acquisition,
we paid approximately $800,000 in 2004 and $8,000,000 in 2005. The purchase
price of $8,800,000 was allocated to the fair value of property and equipment of
approximately $8,200,000 and goodwill of approximately $600,000. As of December
25, 2005, we have remodeled and opened seven restaurants and the remaining
restaurant was sold to a third party.
4. Disposition
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for
$8,000,000. In connection with the sale of these restaurants, we closed one
restaurant in the Atlanta market in June 2003. This transaction did not have a
significant impact on our net earnings for 2003. Actual company restaurant sales
included in our consolidated financial statements for the nine restaurants were
approximately $10,300,000 for 2003.
5. Impairment of Chevys Note Receivable
In 1999, we received a $6,000,000, 8% subordinated note in connection with the
sale of the Rio Bravo concept to Chevys Holdings, Inc. ("Chevys") due in 2009.
In June 2003, Chevys announced the sale of the majority of its restaurants.
Subsequent to the announcement, we received Chevys' audited financial statements
for the fiscal year ended December 31, 2002. During 2003, we fully impaired the
principal and interest of approximately $8,800,000. A charge for the impairment
of this note is included in our consolidated statements of earnings for 2003. In
October 2003, Chevys Inc. filed a voluntary petition to reorganize under Chapter
11 of the U.S. Bankruptcy Code. In December 2004, the U.S. Bankruptcy Court
approved Chevys' reorganization plan.
6. Inventory Impairment
In 2004, we determined that we had excess inventories of riblets that no longer
met our quality standards. Accordingly, we recorded an inventory impairment of
$2,000,000 ($1,300,000, net of income taxes) in our consolidated statements of
earnings for 2004. The portion of the riblet inventory impairment related to the
company's historical usage of approximately $400,000 was recorded in food and
beverage cost and the portion related to the franchisee's historical usage of
approximately $1,600,000 was recorded in cost of other franchise income in the
consolidated statements of earnings.
F-14
7. Impairment of Long-lived Assets
In 2005, we recorded an asset impairment charge of $3,900,000 ($2,500,000, net
of income taxes) consisting of a $2,600,000 write-down of the carrying value of
the property and equipment of three restaurants that were not performing as
expected and one restaurant that was closed and relocated and a $1,300,000
write-down of one other long-lived asset. This impairment charge has been
included in our consolidated statements of earnings for 2005. The asset
impairment charge was calculated by comparing the carrying value of the assets
to the estimated future cash flow projections. We have since closed one
restaurant in January 2006 and continue to operate the remaining two
restaurants, although we may close one or both of the remaining operating
underperforming restaurants in the future.
8. Receivables
Receivables are comprised of the following (in thousands):
December 25, December 26,
2005 2004
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 26,356 $ 28,924
Credit card receivables.......................................... 8,853 6,509
Franchise fee receivables........................................ 742 252
Other............................................................ 2,246 3,884
----------------- -----------------
38,197 39,569
Less allowance for bad debts..................................... 340 417
----------------- -----------------
$ 37,857 $ 39,152
================= =================
The bad debt provision was $99,000 for 2003. We did not have a provision for bad
debts for 2005 or 2004. We had write-offs against the allowance for bad debts of
$77,000 during 2005, $627,000 during 2004 and $71,000 during 2003.
9. Prepaid and Other Current Assets
Prepaid and other current assets are comprised of the following (in thousands):
December 25, December 26,
2005 2004
----------------- -----------------
Deferred income taxes............................................ $ 6,338 $ 7,482
Other............................................................ 7,180 4,597
----------------- -----------------
$ 13,518 $ 12,079
================= =================
F-15
10. Goodwill and Other Intangible Assets
In 2005 and 2004, we completed the annual goodwill impairment test required
under the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." We
determined that no impairment existed and as a result, no impairment losses were
recorded in 2005 or 2004.
The changes in goodwill are summarized below (in thousands):
December 25, December 26,
2005 2004
----------------- -----------------
Carrying amount, beginning of the year........................... $ 116,344 $ 105,326
Goodwill acquired................................................ 22,099 11,018
----------------- -----------------
Carrying amount, end of the year................................. $ 138,443 $ 116,344
================= =================
Amortizable other intangible assets consist of franchise interest and rights,
lease acquisition costs and a noncompete agreement.
Franchise interest and rights represent the allocation of the purchase price of
our 1988 acquisition of the Applebee's concept to the restaurants we acquired
and the franchise agreements that we assumed based on an independent valuation.
We amortize the allocated costs over the estimated life of the restaurants or
the franchise agreements on a straight-line basis ranging from 7 to 20 years.
Franchise interest and rights are being amortized over the next one to three
years, lease acquisition costs are being amortized over the next 7 to 19 years
and the noncompete agreement is being amortized over the next three years.
We expect annual amortization expense for amortizable other intangible assets
for the next five fiscal years to range from approximately $400,000 to $800,000.
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets," are summarized below (in thousands):
December 25, 2005
-----------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ---------------- -----------------
Amortized intangible assets:
Franchise interest and rights....... $ 6,371 $ 5,896 $ 475
Lease acquisition costs............. 4,939 743 4,196
Noncompete agreement................ 350 109 241
------------------ ---------------- -----------------
Total................................... $ 11,660 $ 6,748 $ 4,912
================== ================ =================
F-16
December 26, 2004
-----------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ---------------- -----------------
Amortized intangible assets:
Franchise interest and rights....... $ 6,371 $ 5,565 $ 806
Lease acquisition costs............. 4,875 294 4,581
Noncompete agreement................ 350 22 328
------------------ ---------------- -----------------
Total................................... $ 11,596 $ 5,881 $ 5,715
================== ================ =================
In connection with our acquisition of 12 Applebee's restaurants from a
franchisee in May 2005, we recorded approximately $300,000 of reacquired
franchise rights. The amount allocated to reacquired franchise rights is based
upon the franchise fees received from this franchisee. This intangible asset has
an indefinite life and accordingly, will not be amortized but tested for
impairment at least annually.
In 2004, we acquired the exclusive right to operate Applebee's restaurants in
the Memphis, Tennessee market from a former franchisee group for approximately
$2,800,000. This intangible asset has an indefinite life and accordingly, will
not be amortized but tested for impairment at least annually. In connection with
this acquisition, we entered into an expanded 4-year noncompete agreement with
the former franchise principals which is being amortized over the life of the
agreement.
In 2004, we acquired six restaurant leases which were formerly Ground Round
restaurants for approximately $4,900,000 in cash.
11. Other Assets
Other assets are comprised of the following (in thousands):
December 25, December 26,
2005 2004
----------------- -----------------
Nonqualified deferred compensation plan
investments (Note 20)......................................... $ 14,493 $ 9,754
Liquor licenses.................................................. 6,541 5,891
Minority investment in unaffiliated company, at cost............. 2,250 2,250
Notes receivable, net............................................ 1,478 1,024
Deferred financing costs, net.................................... 664 577
Other............................................................ 6,473 5,476
----------------- -----------------
$ 31,899 $ 24,972
================= =================
F-17
12. Property and Equipment
Property and equipment, net, is comprised of the following (in thousands):
December 25, December 26,
2005 2004
----------------- ------------------
Land............................................................. $ 97,476 $ 83,399
Buildings and leasehold improvements............................. 482,074 398,323
Furniture and equipment.......................................... 263,526 217,451
Construction in progress......................................... 25,755 24,601
----------------- ------------------
868,831 723,774
Less accumulated depreciation and capitalized
lease amortization............................................ 278,238 237,226
----------------- ------------------
$ 590,593 $ 486,548
================= ==================
We have recorded capitalized leases of $4,055,000 at December 25, 2005 and
December 26, 2004 which are included in buildings and leasehold improvements. We
had accumulated amortization of such property of $2,025,000 at December 25, 2005
and $1,847,000 at December 26, 2004. These capitalized leases relate to the
buildings on certain restaurant properties. The land portion of the restaurant
property leases is accounted for as an operating lease.
We had depreciation and capitalized lease amortization expense relating to
property and equipment of $54,580,000 for 2005, $46,051,000 for 2004, and
$41,082,000 for 2003. Of these amounts, capitalized lease amortization was
$240,000 during 2005 and $239,000 for each of 2004 and 2003.
We lease certain of our restaurants. The leases generally provide for payment of
minimum annual rent, real estate taxes, insurance and maintenance and, in some
cases, contingent rent (calculated as a percentage of sales) in excess of
minimum rent. Total rental expense for all operating leases is comprised of the
following (in thousands):
2005 2004 2003
------------------ ------------------ -----------------
Minimum rent................................. $ 23,929 $ 20,416 $ 17,274
Contingent rent.............................. 1,389 1,254 1,297
------------------ ------------------ -----------------
$ 25,318 $ 21,670 $ 18,571
================== ================== =================
The present value of capitalized lease payments and the future minimum lease
payments under noncancelable operating leases over the lease term as defined in
Note 2 (including leases executed for sites to be developed in 2006) as of
December 25, 2005 are as follows (in thousands):
Capitalized Operating
Leases Leases
------------------ ------------------
2006............................................................. $ 794 $ 26,684
2007............................................................. 822 26,911
2008............................................................. 851 26,957
2009............................................................. 880 26,746
2010............................................................. 911 26,287
Thereafter....................................................... 4,073 244,022
------------------ ------------------
Total minimum lease payments..................................... 8,331 $ 377,607
==================
Less amounts representing interest............................... 4,277
------------------
Present value of minimum lease payments.......................... $ 4,054
==================
F-18
13. Notes Payable and Long-Term Debt
Our debt, which includes both notes payable and long-term debt, including
capitalized lease obligations, is comprised of the following (in thousands):
December 25, December 26,
2005 2004
----------------- -------------------
Notes payable; interest at federal funds rate plus 0.625% at
December 25, 2005............................................ $ 7,900 $ --
Unsecured revolving credit facility; interest at LIBOR
plus 0.625% or prime rate at December 25, 2005,
and LIBOR plus 0.5% or prime rate at
December 26, 2004; due December 2009......................... 175,000 30,000
Capitalized lease obligations (Note 12).......................... 4,054 4,148
Other............................................................ 1,413 1,546
----------------- -------------------
Total notes payable and long-term debt........................... 188,367 35,694
Less notes payable and current portion of long-term debt......... 8,159 222
----------------- -------------------
Long-term debt - less current portion............................ $ 180,208 $ 35,472
================= ===================
In December 2004, we completed the refinancing of our $150,000,000 unsecured
revolving credit facility. The new bank credit agreement provided for a
$150,000,000 five-year unsecured revolving credit facility, of which $40,000,000
may be used for the issuance of letters of credit. The facility is subject to
various covenants and restrictions which, among other things, require the
maintenance of stipulated fixed charge, leverage and indebtedness to
capitalization ratios, as defined. There is no limit on cash dividends provided
that the declaration and payment of such dividend does not cause a default of
any other covenant contained in the agreement. The facility is subject to other
standard terms, conditions, covenants, and fees.
In September 2005, we entered into an amendment to our credit facility which
increased the revolving credit commitment available from $150,000,000 to
$200,000,000. In October 2005, we entered into a second amendment to our credit
facility which increased the revolving credit commitment available from
$200,000,000 to $250,000,000 and provided for an additional $75,000,000 of
revolving credit upon satisfaction of the conditions set forth in the credit
facility.
As of December 25, 2005, we are in compliance with the covenants contained in
our credit agreement. As of December 25, 2005, we had borrowings of
$182,900,000, which includes $7,900,000 in an overnight notes payable, letters
of credit of $9,400,000 outstanding and approximately $57,700,000 available
under our revolving credit facility.
Maturities of notes payable and long-term debt, including capitalized lease
obligations, ending during the years indicated, are as follows (in thousands):
2006................................................................................. $ 8,159
2007................................................................................. 265
2008................................................................................. 292
2009................................................................................. 175,368
2010................................................................................. 459
Thereafter........................................................................... 3,824
----------------
$ 188,367
================
F-19
14. Captive Insurance Subsidiary
In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a
wholly-owned captive insurance subsidiary to provide Applebee's International,
Inc. and qualified franchisees with workers' compensation and general liability
insurance. Applebee's International, Inc. and covered franchisees make premium
payments to the captive insurance company which pays administrative fees and
insurance claims, subject to individual and aggregate maximum claim limits under
the captive insurance company's reinsurance policies. Franchisee premium amounts
billed by the captive insurance company are established based upon third-party
actuarial estimates of settlement costs for incurred and anticipated claims and
administrative fees. The franchisee premiums are included in other franchise
income ratably over the policy year. The related offsetting expenses are
included in cost of other franchise income. We do not expect franchisee
participation in the captive insurance company to have a material impact on our
net earnings. In 2005, we reduced the types of insurance coverage plans offered
which resulted in fewer franchisee participants in our captive insurance
program. In the fourth quarter of 2005, we decided to discontinue writing any
new coverage. We will still operate the captive insurance subsidiary to resolve
any claims that were incurred under this program from 2002 through 2005. Our
consolidated balance sheets include the following balances related to the
captive insurance subsidiary:
o Franchise premium receivables of approximately $1,700,000 and
$1,900,000 as of December 25, 2005 and December 26, 2004, respectively,
included in receivables related to captive insurance subsidiary.
o Cash equivalent and other long-term investments restricted for the
payment of claims of approximately $18,600,000 and $16,700,000 as of
December 25, 2005 and December 26, 2004, respectively, included in
restricted assets related to captive insurance subsidiary.
o Loss reserve and unearned premiums related to captive insurance
subsidiary of approximately $20,700,000 and $19,600,000 as of December
25, 2005 and December 26, 2004, respectively. Approximately $10,500,000
and $7,500,000 as of December 25, 2005 and December 26, 2004,
respectively, is included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $400,000 and
$1,000,000 as of December 25, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
Our activity in the loss and loss adjustment reserve, which includes Applebee's
International, Inc. and participating franchisees, is summarized in the table
below (in thousands):
December 25, December 26,
2005 2004
----------------- -------------------
Total balance, beginning of the year............................. $ 18,801 $ 11,007
Incurred related to:
Current year.................................................. 7,141 8,660
Prior year.................................................... 2,406 6,687
----------------- -------------------
Total....................................................... 9,547 15,347
----------------- -------------------
Paid related to:
Current year.................................................. 1,546 2,296
Prior year.................................................... 6,324 5,257
----------------- -------------------
Total paid.................................................. 7,870 7,553
----------------- -------------------
Total balance, end of the year................................... 20,478 18,801
Less current portion............................................. 9,976 11,378
----------------- -------------------
Long-term portion (Note 16)...................................... $ 10,502 $ 7,423
================= ===================
F-20
Loss reserve estimates are established based upon third-party actuarial
estimates of ultimate settlement costs for incurred claims (which includes
claims incurred but not reported) using data currently available. The reserve
estimates are regularly analyzed and adjusted when necessary. Unanticipated
changes in the data used to determine the reserve may require us to revise our
estimates.
Deferred policy acquisition costs include premium taxes, fronting fees and net
commissions and are deferred and amortized over our fiscal year and,
accordingly, we did not have any deferred policy acquisition costs as of
December 25, 2005 or December 26, 2004. We had acquisition expenses payable of
$259,000 as of December 25, 2005 and $759,000 as of December 26, 2004 that were
included in the current portion of loss reserve and unearned premiums related to
captive insurance subsidiary in the consolidated balance sheets.
15. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of the following
(in thousands):
December 25, December 26,
2005 2004
------------------ -----------------
Compensation and related taxes.................................... $ 35,488 $ 34,061
Gift cards........................................................ 39,162 30,295
Sales and use taxes............................................... 6,798 5,942
Insurance......................................................... 5,327 5,210
Rent.............................................................. 1,571 2,007
Other............................................................. 12,649 11,549
------------------ -----------------
$ 100,995 $ 89,064
================== =================
16. Other Non-Current Liabilities
Other non-current liabilities are comprised of the following (in thousands):
December 25, December 26,
2005 2004
------------------ -----------------
Rent.............................................................. $ 18,655 $ 15,642
Nonqualified deferred compensation plan
liabilities (Note 20).......................................... 14,493 9,754
Loss and loss adjustment reserve related to
captive insurance subsidiary.................................... 10,502 7,423
Compensation...................................................... 3,033 5,013
Other............................................................. 3,691 3,707
------------------ -----------------
$ 50,374 $ 41,539
================== =================
F-21
17. Income Taxes
We, along with our subsidiaries, file a consolidated federal income tax return.
The income tax provision consists of the following (in thousands):
2005 2004 2003
--------------- --------------- ---------------
Current provision:
Federal............................................ $ 40,198 $ 30,171 $ 45,526
State and local.................................... 4,633 2,146 5,106
Deferred provision:
Federal............................................ 9,248 23,625 2,276
State and local.................................... 623 1,688 160
--------------- --------------- ---------------
Income taxes before cumulative effect of change
in accounting principle............................ 54,702 57,630 53,068
Income taxes related to the cumulative effect of
change in accounting principle..................... (125) -- --
--------------- --------------- ---------------
Total income taxes..................................... $ 54,577 $ 57,630 $ 53,068
=============== =============== ===============
The deferred income tax provision is comprised of the following (in thousands):
2005 2004 2003
--------------- --------------- ----------------
Depreciation and amortization.......................... $ 11,627 $ 24,278 $ 5,595
Other.................................................. (1,756) 1,035 (3,159)
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ 9,871 $ 25,313 $ 2,436
=============== =============== ================
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):
2005 2004 2003
--------------- --------------- ----------------
Federal income tax at statutory rates.................. $ 54,851 $ 58,973 $ 51,597
Increase (decrease) to income tax expense:
State and local income taxes, net of
federal benefit................................. 3,764 3,083 3,479
Employment related tax credits, net................ (4,502) (3,894) (3,216)
Other.............................................. 589 (532) 1,208
--------------- --------------- ----------------
Income taxes before cumulative effect of change
in accounting principle............................ 54,702 57,630 53,068
Income taxes related to the cumulative effect of
change in accounting principle..................... (125) -- --
--------------- --------------- ---------------
Total income taxes..................................... $ 54,577 $ 57,630 $ 53,068
=============== =============== ===============
F-22
The net current deferred income tax asset amounts are included in prepaid and
other current assets and the net non-current deferred income tax liability
amounts are included in other non-current liabilities in the accompanying
consolidated balance sheets. The significant components of deferred income tax
assets and liabilities and the related balance sheet classifications are as
follows (in thousands):
December 25, December 26,
2005 2004
----------------- -----------------
Classified as current:
Accrued expenses............................................ $ 3,879 $ 3,694
Allowance for bad debts..................................... 128 156
Other, net.................................................. 2,331 3,632
----------------- -----------------
Net deferred income tax asset............................... $ 6,338 $ 7,482
================= =================
Classified as non-current:
Depreciation and amortization............................... $ (47,067) $ (35,481)
Franchise deposits.......................................... 446 565
Other, net.................................................. 8,899 5,921
----------------- -----------------
Net deferred income tax liability........................... $ (37,722) $ (28,995)
================= =================
In 2004, we implemented new tax planning strategies that accelerated
depreciation on restaurant assets which resulted in an increase in our deferred
income tax liability.
18. Commitments and Contingencies
Litigation, claims and disputes: We are involved in various legal actions which
include, without limitation, employment law, wage and hour, dram shop claims,
personal injury claims and other such restaurant operational matters. In each
instance, we believe that we have meritorious defenses to the allegations made
and we are vigorously defending these claims.
We believe that the ultimate disposition of these matters will not, individually
or in the aggregate, have a material adverse effect upon our business or
consolidated financial position.
Lease guarantees and contingencies: In connection with the sale of restaurants
to franchisees and other parties, we have, in certain cases, remained
contingently liable for the remaining lease payments. As of December 25, 2005,
we have outstanding lease guarantees of approximately $17,200,000. These leases
expire at various times with the final lease agreement expiring in 2018. In
addition, we or our subsidiaries are contingently liable for various leases that
we have assigned in connection with the sale of restaurants to franchisees and
other parties, in the potential amount of $14,100,000. We have not recorded a
liability related to these contingent lease liabilities as of December 25, 2005
or December 26, 2004.
Franchisee guarantees: In 2003, we arranged for a third-party financing company
to provide up to $75,000,000 to qualified franchisees for short-term loans to
fund remodel investments, subject to our approval. Under the terms of this
financing program, we provided a limited guarantee pool for the loans advanced
during the three-year period ending December 2006. In the fourth quarter of
2005, this program was terminated and we were released from the guarantees that
we had previously provided under this program.
In 2004, we arranged for a third-party financing company to provide up to
$250,000,000 to qualified franchisees for loans to fund development of new
restaurants through October 2007, subject to our approval. We will provide a
limited guarantee of 10% of certain loans advanced under this program. We will
be released from our guarantee if certain operating results are met after the
F-23
restaurant has been open for at least two years. As of December 25, 2005, there
were loans outstanding to six franchisees for approximately $50,400,000 under
this program. The fair value of our guarantees under this financing program is
approximately $100,000 and is recorded in non-current liabilities in our
consolidated balance sheet as of December 25, 2005.
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the associate
resigns or is terminated related to a change in control. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of December 25, 2005, we would have been required to
make payments totaling approximately $13,300,000. In addition, we have severance
and employment agreements with certain officers which contain severance
provisions not related to a change in control. Those provisions would have
required aggregate payments of approximately $6,200,000 if such officers had
been terminated as of December 25, 2005.
19. Stockholders' Equity
In October 2004, our Board of Directors authorized repurchases of our common
stock of up to $150,000,000 beginning in 2005. In October 2005, our Board of
Directors approved an additional $175,000,000 to repurchase our common stock,
subject to market conditions. During 2005, we repurchased 8,288,093 shares of
our common stock at an average price of $23.66 for an aggregate cost of
approximately $196,100,000. As of December 25, 2005, we had completed the 2004
stock repurchase authorization and had approximately $129,000,000 remaining
under the 2005 repurchase authorization.
A reconciliation of our treasury shares for the past three fiscal years is
provided below (shares in thousands):
Treasury
Shares
---------------
Balance as of December 29, 2002.............................. 25,423
Purchases of treasury stock.................................. 2,519
Stock options exercised...................................... (1,847)
Shares issued under employee benefit plans................... (276)
Restricted shares awarded under equity incentive plans....... (103)
---------------
Balance as of December 28, 2003.............................. 25,716
Purchases of treasury stock.................................. 3,994
Stock options exercised...................................... (1,982)
Shares issued under employee benefit plans................... (275)
Restricted shares awarded under equity incentive plans....... (78)
---------------
Balance as of December 26, 2004.............................. 27,375
Purchases of treasury stock.................................. 8,288
Stock options exercised...................................... (1,045)
Shares issued under employee benefit plans................... (209)
Restricted shares awarded under equity incentive plans....... (104)
---------------
Balance as of December 25, 2005.............................. 34,305
===============
20. Employee Benefit Plans
Employee stock option plans: At the 1995 Annual Meeting of Stockholders, the
1995 Equity Incentive Plan (the "1995 Plan") was approved. The 1995 Plan was
re-approved at the 2005 Annual Meeting of Stockholders. The 1995 Plan allows the
committee to grant stock options, stock appreciation rights, restricted stock
awards, performance unit awards and performance share awards (collectively,
"Awards") to eligible participants. The 1995 Plan authorizes the committee to
issue up to 19,900,000 shares. Options granted under the 1995 Plan during 1995
F-24
have a term of five to ten years and are generally exercisable three years from
date of grant. Options granted under the 1995 Plan during 1996 through 1998 have
a term of ten years and are generally 50% exercisable three years from date of
grant, 25% exercisable four years from date of grant, and 25% exercisable five
years from date of grant. Options granted under the 1995 Plan during 1999
through 2004 have a term of ten years and are generally exercisable at either
one, two, three or five years from the date of grant. Options granted under the
1995 Plan during 2005 have a term of seven years and are generally exercisable
between two and five years from the date of grant. Subject to the terms of the
1995 Plan, the committee has the sole discretion to determine the associates to
whom it grants Awards, the size and types of the Awards and the terms and
conditions of the Awards.
During 1999, our Board of Directors approved the 1999 Employee Incentive Plan
(the "1999 Plan") which allows the committee to grant nonqualified stock
options, stock appreciation rights, restricted stock, performance units and
performance shares to eligible participants. The 1999 Plan authorizes the
committee to issue up to 2,473,875 shares. Options granted under the 1999 Plan
have a term of ten years and are generally exercisable one, two or three years
from the date of grant. In 2003, we ceased granting options under this plan.
Under both plans, the option price for both qualified and nonqualified options
cannot be less than the fair market value of our common stock on the date the
committee grants the options.
Both plans permit the committee to grant performance shares. Performance shares
represent rights to receive our common stock, cash or any combination thereof,
based upon certain performance criteria. In 2002, the committee approved
performance share plans with a three-year performance period. We recorded
compensation expense of $2,667,000 in 2003 related to these grants. In 2004, we
reversed $447,000 of compensation expense previously recognized due to the 2004
performance versus our three-year performance criteria. We recorded compensation
expense of $65,000 in 2005 related to these grants. These amounts were based on
the market price of our common stock at the end of each fiscal year. Performance
shares are no longer used by the committee.
We account for both plans in accordance with APB Opinion No. 25 which requires
us to recognize compensation cost based on the excess, if any, between the
quoted market price of the stock at the date of grant and the amount an employee
must pay to acquire the stock. Under this method, we have recognized no
compensation cost for stock option awards, except for performance shares as
described above.
F-25
Transactions relative to both plans are as follows:
1999 Plan 1995 Plan
----------------------------- -----------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
-------------- -------------- ---------------- ------------
Options outstanding at
December 29, 2002............ 2,144,978 $11.93 5,587,272 $10.41
Granted................... 134,250 $16.25 1,446,765 $17.36
Exercised................. (306,151) $ 8.51 (1,507,872) $ 8.11
Canceled.................. (197,980) $12.69 (39,117) $15.33
-------------- ----------------
Options outstanding at
December 28, 2003............ 1,775,097 $12.77 5,487,048 $12.84
Granted................... -- -- 1,596,944 $25.82
Exercised................. (572,048) $10.46 (1,445,331) $10.09
Canceled.................. (73,439) $14.81 (570,853) $14.91
-------------- ----------------
Options outstanding at
December 26, 2004............ 1,129,610 $13.80 5,067,808 $17.48
Granted................... -- 3,277,725 $25.69
Exercised................. (418,813) $13.67 (638,163) $11.89
Canceled.................. (46,141) $16.02 (341,437) $23.80
-------------- ----------------
Options outstanding at
December 25, 2005............ 664,656 $13.73 7,365,933 $21.33
============== ================
Options available for grant at
December 25, 2005............ 363,238 3,552,836
============== ================
The number of options exercisable for each plan are summarized below:
1999 Plan 1995 Plan
----------------------------- -----------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
Exercisable Price Exercisable Price
-------------- -------------- ---------------- ------------
December 28, 2003........... 146,829 $ 8.56 1,590,897 $ 9.36
December 26, 2004........... 403,863 $10.95 1,572,468 $10.70
December 25, 2005........... 556,656 $13.24 1,919,347 $13.33
F-26
The following table summarizes information relating to fixed-priced stock
options outstanding for both plans at December 25, 2005:
Options Outstanding Options Exercisable
------------------------------------------------ --------------------------------
Weighted
Average Weighted
Remaining Average Weighted
Number Contractual Exercise Number Average
Range of Exercise Prices Outstanding Life Price Exercisable Exercise Price
--------------------------- --------------- --------------- -------------- --------------- ---------------
1995 Plan:
$ 6.18 to $ 6.19 13,197 2.5 years $ 6.19 13,197 $ 6.19
$ 7.42 to $ 7.45 81,515 2.0 years $ 7.43 81,515 $ 7.43
$ 8.20 to $ 8.97 435,605 2.7 years $ 8.46 435,605 $ 8.46
$ 9.81 to $ 9.94 249,187 5.1 years $ 9.83 249,187 $ 9.83
$ 13.46 to $ 14.72 764,914 5.9 years $ 14.54 764,914 $ 14.54
$ 15.60 to $ 16.35 960,065 7.0 years $ 16.25 201,644 $ 16.23
$ 16.97 to $ 21.94 592,759 6.8 years $ 20.99 11,625 $ 18.44
$ 22.79 to $ 28.40 3,996,264 7.1 years $ 25.83 161,660 $ 25.69
$ 28.91 to $ 28.91 272,427 6.2 years $ 28.91 -- --
--------------- ---------------
$ 6.18 to $ 28.91 7,365,933 6.5 years $ 21.33 1,919,347 $ 13.33
=============== ===============
1999 Plan:
$ 7.24 to $ 8.45 46,011 4.0 years $ 8.12 46,011 $ 8.12
$ 9.81 to $ 10.65 145,225 5.2 years $ 9.86 145,225 $ 9.86
$ 12.82 to $ 17.60 473,420 6.4 years $ 15.46 365,420 $ 15.22
--------------- ---------------
$ 7.24 to $ 17.60 664,656 6.0 years $ 13.73 556,656 $ 13.24
=============== ===============
1989 Plan: During 1989, our Board of Directors approved the 1989 Employee Stock
Option Plan (the "1989 Plan"). The 1989 Plan was terminated and replaced with
the 1995 Plan at the 1995 Annual Meeting of Stockholders. We had exercises of
6,262 and 78,900 in 2004 and 2003, respectively, related to the 1989 Plan. There
are no options outstanding as of December 25, 2005 under the 1989 Plan.
Restricted stock awards: During 2005, 2004, and 2003, the committee granted
restricted stock awards to certain officers and key associates. These awards
vest over a one to three-year period. We recorded unearned compensation for the
market value of the stock at the date of grant, and we have presented this as a
reduction to stockholders' equity in the accompanying consolidated balance
sheets. We are amortizing unearned compensation ratably to expense over the
vesting period. Accordingly, we recognized compensation expense of $2,231,000,
$1,422,000 and $1,011,000 in 2005, 2004, and 2003, respectively.
Nonqualified deferred compensation plan: In 2002, we entered into a rabbi trust
agreement to protect the assets of the nonqualified deferred compensation plan
for certain of our associates. Each participant's account is comprised of their
contribution, our matching contribution and each participant's share of earnings
or losses in the plan. In accordance with Emerging Issues Task Force No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a
Rabbi Trust and Invested," the accounts of the rabbi trust are reported in our
consolidated financial statements. As of December 25, 2005 and December 26,
2004, our consolidated balance sheets include the investments in other assets
and the offsetting obligation is included in other non-current liabilities. The
deferred compensation plan investments are considered trading securities and are
reported at fair value with the realized and unrealized holding gains and losses
related to these investments recorded in other income and the offsetting
compensation expense recorded in general and administrative expenses.
Employee retirement plans: During 1992, we established a profit sharing plan and
trust in accordance with Section 401(k) of the Internal Revenue Code. We make
matching contributions of 50% of associate contributions not to exceed 4.0% of
F-27
an associate's compensation in any year. Through 2004, we made our contributions
in shares of our common stock. Beginning in 2005, we make our contributions in
cash. Our contributions vest at the rate of 20% after the associate's second
year of service, 60% after three years of service, 80% after four years of
service and 100% after five years of service. Contributions under these plans
were $2,509,000 in 2005, $2,158,000 in 2004 and $1,755,000 in 2003.
Employee stock purchase plan: During 1996, we established an employee stock
purchase plan in accordance with Section 423 of the Internal Revenue Code. The
plan was approved at the 1997 Annual Meeting of Stockholders. The plan allows
associates to purchase shares of our common stock at a 15% discount through
payroll deductions. The Board has authorized 1,350,000 common shares under the
plan. Associates purchased 208,780 shares under this plan during 2005, 196,220
shares during 2004 and 196,576 shares during 2003.
21. Related Party Transactions
As of December 28, 2003, we had a loan outstanding with an interest rate of 5%
to an officer for moving related assistance in the amount of $310,000. The
remaining principal of $210,000, as well as accrued interest, was paid in
September 2004.
22. Subsequent Event
We completed the acquisition of four franchise restaurants in the Houston area
in January 2006 for approximately $8,200,000 in cash.
F-28
23. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 2005 and 2004. All amounts, except per share amounts, are
expressed in thousands.
Fiscal Quarter Ended
------------------------------------------------------
March 27, June 26, September 25, December 25,
2005 2005 2005 2005
----------- ------------ ------------ -------------
Revenues:
Company restaurant sales.................. $270,458 $272,703 $272,673 $ 266,807
Franchise royalties and fees.............. 33,008 32,493 31,589 31,723
Other franchise income.................... 1,065 1,424 1,064 1,643
----------- ------------ ------------ -------------
Total operating revenues............... 304,531 306,620 305,326 300,173
----------- ------------ ------------ -------------
Cost of company restaurant sales:
Food and beverage......................... 71,635 72,565 71,555 70,767
Labor..................................... 88,724 90,115 90,231 89,493
Direct and occupancy...................... 66,367 71,038 74,706 75,545
Pre-opening expense....................... 1,167 1,268 1,089 1,243
----------- ------------ ------------ -------------
Total cost of company
restaurant sales..................... 227,893 234,986 237,581 237,048
----------- ------------ ------------ -------------
Cost of other franchise income................. 819 1,229 790 2,054
General and administrative expenses............ 26,946 27,980 26,329 28,513
Amortization of intangible assets.............. 228 226 204 220
Impairment of long-lived assets................ -- -- 3,900 --
Loss on disposition of restaurants
and equipment............................... 297 564 480 726
----------- ------------ ------------ -------------
Operating earnings............................. 48,348 41,635 36,042 31,612
----------- ------------ ------------ -------------
Other income (expense):
Investment income......................... (41) 449 568 719
Interest expense.......................... (337) (634) (1,232) (2,162)
Other income.............................. 435 584 593 150
----------- ------------ ------------ -------------
Total other income (expense)........... 57 399 (71) (1,293)
----------- ------------ ------------ -------------
Earnings before income taxes and
cumulative effect of change in
accounting principle........................ 48,405 42,034 35,971 30,319
Income taxes................................... 16,748 14,544 13,836 9,574(1)
----------- ------------ ------------ -------------
Earnings before cumulative effect of change in 31,657 27,490 22,135 20,745
accounting principle........................
Cumulative effect of change in accounting
principle................................... -- -- -- (225)
----------- ------------ ------------ -------------
Net earnings................................... $ 31,657 $ 27,490 $ 22,135 $ 20,520
=========== ============ ============ =============
Basic net earnings per common share:
Basic earnings before cumulative effect of
change in accounting principle............ $ 0.39 $ 0.34 $ 0.28 $ 0.27
Cumulative effect of change in accounting
principle, net of tax ...................... -- -- -- --
----------- ------------ ------------ -------------
Basic net earnings per common share............ $ 0.39 $ 0.34 $ 0.28 $ 0.27
=========== ============ ============ =============
Diluted net earnings per common share:
Diluted earnings before cumulative effect of
change in accounting principle.............. $ 0.38 $ 0.34 $ 0.28 $ 0.27
Cumulative effect of change in accounting
principle, net of tax ...................... -- -- -- --
----------- ------------ ------------ -------------
Diluted net earnings per common share.......... $ 0.38 $ 0.34 $ 0.28 $ 0.27
=========== ============ ============ =============
Basic weighted average shares outstanding...... 80,705 79,897 78,485 75,525
=========== ============ ============ =============
Diluted weighted average shares outstanding.... 82,375 81,360 79,691 76,542
=========== ============ ============ =============
(1) Fourth quarter 2005 net earnings reflect a decrease in income tax expense
of $1.1 million due to the resolution of a state income tax matter.
F-29
Fiscal Quarter Ended
-------------------------------------------------------
March 28, June 27, September 26, December 26,
2004 2004 2004 2004
------------ ------------- -------------- -------------
Revenues:
Company restaurant sales.................. $ 243,560 $ 247,769 $ 247,173 $ 238,296
Franchise royalties and fees.............. 30,715 30,722 30,048 29,736
Other franchise income.................... 3,115 3,399 3,913 3,188
------------ ------------- -------------- ------------
Total operating revenues............... 277,390 281,890 281,134 271,220
------------ ------------- -------------- ------------
Cost of company restaurant sales:
Food and beverage......................... 63,515 66,647 65,115 63,857
Labor..................................... 79,655 80,683 79,195 78,126
Direct and occupancy...................... 59,342 60,513 61,914 62,938
Pre-opening expense....................... 567 425 1,020 1,013
------------ ------------- -------------- ------------
Total cost of company
restaurant sales..................... 203,079 208,268 207,244 205,934
------------ ------------- -------------- ------------
Cost of other franchise income................. 2,937 5,035 3,521 2,908
General and administrative expenses............ 25,422 24,960 26,752 27,676
Amortization of intangible assets.............. 86 158 199 220
Loss on disposition of restaurants and
equipment................................. 495 584 441 435
------------ ------------- -------------- ------------
Operating earnings............................. 45,371 42,885 42,977 34,047
------------ ------------- -------------- ------------
Other income (expense):
Investment income......................... 223 18 325 718
Interest expense.......................... (344) (416) (379) (487)
Other income.............................. 461 562 754 1,780
------------ ------------- -------------- ------------
Total other income..................... 340 164 700 2,011
------------ ------------- -------------- ------------
Earnings before income taxes................... 45,711 43,049 43,677 36,058
Income taxes................................... 15,975 14,919 15,080 11,656
------------ ------------- -------------- ------------
Net earnings................................... $ 29,736 $ 28,130 $ 28,597 $ 24,402
============ ============= ============== ============
Basic net earnings per common share............ $ 0.36 $ 0.34 $ 0.35 $ 0.30
============ ============= ============== ============
Diluted net earnings per common share.......... $ 0.35 $ 0.33 $ 0.34 $ 0.30
============ ============= ============== ============
Basic weighted average shares outstanding...... 81,986 81,781 81,511 80,835
============ ============= ============== ===========
Diluted weighted average shares outstanding.... 84,628 84,098 83,503 82,518
============ ============= ============== ===========
F-30
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
--------------- ---------------------------------------------------------------
3.1 Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit 3.1 of the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
3.2 Restated and Amended By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 2004).
4.1 Certificate of the Voting Powers, Designations, Preferences and
Relative Participating, Optional and Other Special Rights and
Qualifications of Series A Participating Cumulative Preferred
Stock of Applebee's International, Inc. (incorporated by
reference to Exhibit 4.2 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 25, 1994).
10.1 Form of Applebee's Development Agreement.
10.2 Form of Applebee's Franchise Agreement.
10.3 Schedule of Applebee's Development and Franchise Agreements as
of December 25, 2005.
10.4 Revolving Credit Agreement dated as of December 3, 2004,
Amendment No. 1 dated September 14, 2005 and Amendment No. 2
dated October 26, 2005 (incorporated by reference to Exhibit
10.1 of the Registrant's Form 8-K filed on December 7, 2004,
Form 8-K filed on September 15, 2005 and Form 8-K filed on
October 27, 2005).
Management Contracts and Compensatory Plans or Arrangements
10.5 Amended and Restated 1995 Equity Incentive Plan (incorporated
by reference to Exhibit 10.3 of the Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 26,
2005).
10.6 Employee Stock Purchase Plan, as amended (incorporated by
reference to Exhibit 10.4 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 26, 2005.
10.7 1999 Management and Executive Incentive Plan (incorporated by
reference to Exhibit 10.13 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1999).
10.8 Nonqualified Deferred Compensation Plan (incorporated by
reference to Exhibit 10.12 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 29, 2002).
10.9 1999 Employee Incentive Plan, as amended (incorporated by
reference to Exhibit 10.14 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 26, 1999).
E-1
Exhibit
Number Description of Exhibit
--------------- ---------------------------------------------------------------
10.10 2001 Senior Executive Bonus Plan (incorporated by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 30, 2001).
10.11 Employment Agreement, dated January 27, 1994, with Lloyd L.
Hill (incorporated by reference to Exhibit 10.4 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 27, 1994).
10.12 Severance and Noncompetition Agreement, dated January 27, 1994,
with Lloyd L. Hill (incorporated by reference to Exhibit 10.5
of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 27, 1994).
10.13 Employment Agreement dated as of January 9, 2006 by and between
the Company and Steven K. Lumpkin (incorporated by reference to
the Registrant's Form 8-K filed on January 9, 2006).
10.14 Previous Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.23 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 27, 1998) and
schedule of parties thereto.
10.15 Previous Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended July 1, 2001) and
schedule of parties thereto.
10.16 Current Form of Change in Control and Noncompete Agreement
(incorporated by reference to Exhibit 10.4 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 2004) and schedule of parties thereto.
10.17 Form of Officer Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed on December 15, 2004).
10.18 Form of Officer Incentive Stock Option Agreement (incorporated
by reference to Exhibit 10.2 of the Registrant's Form 8-K filed
on December 15, 2004).
10.19 Form of Officer Restricted Stock Award Agreement (incorporated
by reference to Exhibit 10.3 of the Registrant's Form 8-K filed
on December 15, 2004).
10.20 Form of Officer Restricted Stock Award Agreement for shares
subject to the Company's stock ownership guidelines
(incorporated by reference to Exhibit 10.4 of the Registrant's
Form 8-K filed on December 15, 2004).
10.21 Form of Nonqualified Stock Option Agreement for Nonemployee
Directors (incorporated by reference to Exhibit 10.5 of the
Registrant's Form 8-K filed on December 15, 2004).
10.22 Form of Restricted Stock Award for Nonemployee Directors
(incorporated by reference to Exhibit 10.6 of the Registrant's
Form 8-K filed on December 15, 2004).
10.23 Executive Nonqualified Stock Purchase Plan (incorporated by
reference to Exhibit 10.2 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 27, 2004).
E-2
Exhibit
Number Description of Exhibit
--------------- ----------------------------------------------------------------
10.24 Form of Indemnification Agreement with all Officers and
Directors (incorporated by reference to Exhibit 10.3 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 27, 2004) and schedule of parties thereto.
10.25 Executive Retirement Plan, as amended (incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 28, 2004 and
Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 26, 2005).
10.27 Executive Health Plan (incorporated by reference to Exhibit
10.2 of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended March 28, 2004).
10.28 Senior Executive Officer Employment Arrangements.
10.29 Director Compensation Policy.
10.30 Stock Ownership Guidelines (incorporated by reference to
Exhibit 10.2 of the Registrant's Form 8-K filed on January 7,
2005).
10.31 FlexPerx Program (incorporated by reference to Exhibit 10.1 of
the Registrant's Form 8-K filed on January 7, 2005).
10.32 Form of Stock Appreciation Rights Agreement (incorporated by
reference to Form 8-K filed on February 22, 2006).
10.33 CEO Use of the Company Airplane Policy (incorporated by
reference to Exhibit 10.6 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended June 26, 2005).
10.34 Personal Use of Corporate Aircraft for Senior Team
(incorporated by reference to Exhibit 10.7 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
26, 2005).
10.35 Asset Purchase Agreement with The Ozark Apples, Inc. dated
April 8, 2005 (incorporated by reference to Exhibit 10.2 of the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 26, 2005).
10.36 Memorandum of Understanding, dated October 5, 2002 and
Amendment 1 dated July 1, 2005, with Louis A. Kaucic
(incorporated by reference to the Exhibit 10.14 of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 28, 2003 and Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended June
26, 2005).
10.37 Employment Agreement dated as of January 9, 2006 by and between
the Company and David L. Goebel (incorporated by reference to
the Registrant's Form 8-K filed on January 9, 2006).
10.38 Employment Agreement dated as of January 9, 2006 by and between
the Company and Steven K. Lumpkin (incorporated by reference to
the Registrant's Form 8-K filed on January 9, 2006).
E-3
Exhibit
Number Description of Exhibit
--------------- ----------------------------------------------------------------
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney (see page 45 of the Form 10-K).
31.1 Certification of Principal Executive Officer Pursuant to SEC
Rule 13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14(a).
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
E-4