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 31, 2006
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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:
Title of Each Class
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Common Stock, par value $.01 per share
Name of Each Exchange on Which Registered
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The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
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
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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
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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
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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. |_|
1
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
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
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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 25, 2006 was $1,453,104,313 based on the closing sale
price on June 23, 2006.
The number of shares of the registrant's common stock outstanding as of February
23, 2007 was 74,321,615.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Stockholder's Meeting are
incorporated into Part III hereof.
2
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2006
INDEX
Page
PART I
Item 1. Business................................................................................ 4
Item 1A. Risk Factors............................................................................ 13
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................................................................. 25
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 40
Item 8. Financial Statements and Supplementary Data............................................. 40
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................ 40
Item 9A. Controls and Procedures................................................................. 40
Item 9B. Other Information....................................................................... 43
PART III
Item 10. Directors, Executive Officers and Corporate Governance.................................. 44
Item 11. Executive Compensation.................................................................. 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters....................................................... 44
Item 13. Certain Relationships and Related Transactions, and Director Independence............... 44
Item 14. Principal Accounting Fees and Services.................................................. 45
PART IV
Item 15. Exhibits, Financial Statement Schedules................................................. 46
Signatures.............................................................................................. 47
3
PART I
Introductory Note
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.
On February 13, 2007, we announced that our Board of Directors has formed a
committee of independent directors to explore strategic alternatives for
enhancing shareholder value, including a possible recapitalization or sale of
the company. There is no assurance that the process will result in any specific
transaction. However, the implementation of certain strategic alternatives could
affect our current plans and strategies, and any forward-looking statements in
this document are qualified by reference to the committee's ongoing analysis.
Item 1. Business
General
We develop, franchise and operate restaurants in the bar and grill segment of
the casual dining industry under the name "Applebee's Neighborhood Grill &
Bar(R)." With over 1,900 system-wide restaurants as of December 31, 2006,
Applebee's Neighborhood Grill & Bar is the largest casual dining concept in the
world, in terms of number of restaurants and market share(1). 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,
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 10 franchisees, including us,
operating 41 franchise restaurants.
As of December 31, 2006, there were 1,930 Applebee's restaurants. Franchisees
operated 1,409 of these restaurants and 521 restaurants were company-owned. The
restaurants were located in 49 states, 16 countries outside of the United States
and one U.S. territory. During 2006, 143 new restaurants were opened, including
108 franchise restaurants and 35 company restaurants.
We continue to expect that the Applebee's system will ultimately encompass at
least 3,000 restaurants in the United States as well as the potential for at
least 1,000 restaurants internationally.
Our current operating strategy is to focus on increasing comparable sales and
average unit volumes in existing restaurants by improving the fundamentals of
the Applebee's concept and placing less emphasis on new restaurant development
for company-owned markets than in the past. As part of this strategy, we are
concentrating on leveraging our value position and broadening our appeal to
guests through an improved menu and consumer messaging.
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 26, 2006.
4
Fiscal 2006 contained 53 weeks. Fiscal 2005 and 2004 each contained 52 weeks.
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 31, December 25, December 26,
2006 2005 2004
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Number of restaurants:
Company:
Beginning of year............................ 486 424 383
Restaurant openings.......................... 35 52 32
Restaurant closings.......................... (4) (1) (1)
Restaurants acquired from franchisees........ 4 11 10
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End of year.................................. 521 486 424
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Franchise:
Beginning of year............................ 1,318 1,247 1,202
Restaurant openings.......................... 108 92 77
Restaurant closings.......................... (13) (10) (22)
Restaurants acquired by franchisor........... (4) (11) (10)
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End of year.................................. 1,409 1,318 1,247
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Total:
Beginning of year............................ 1,804 1,671 1,585
Restaurant openings.......................... 143 144 109
Restaurant closings.......................... (17) (11) (23)
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End of year.................................. 1,930 1,804 1,671
================= ================ =================
Weighted average weekly sales per restaurant:
Company..................................... $ 44,637 $ 45,552 $ 46,536
Domestic franchise.......................... $ 49,521 $ 49,564 $ 48,143
Domestic total.............................. $ 48,134 $ 48,462 $ 47,737
Change in comparable restaurant sales(1):
Company..................................... (1.0)% (0.9)% 3.8%
Domestic franchise.......................... (0.5)% 2.6 % 5.0%
Domestic total.............................. (0.6)% 1.7 % 4.7%
Total operating revenues (in thousands):
Company restaurant sales(2)................. $ 1,196,258 $ 1,082,641 $ 976,798
Franchise royalties and fees(3)............. 139,855 128,813 121,221
Other franchise income(4)................... 1,808 5,196 13,615
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Total....................................... $ 1,337,921 $ 1,216,650 $ 1,111,634
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(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
(2) Our 2006 fiscal year included 53 weeks while fiscal years 2005 and 2004 each
included 52 weeks. The 53rd week in 2006 contributed $24,312, in thousands, to
company restaurant sales.
(3) Franchise royalties are generally 4% of each franchise restaurant's reported
monthly gross sales. Reported unaudited franchise sales, in thousands, were
$3,498,967, $3,223,505 and $3,001,287 in 2006, 2005 and 2004, respectively. The
53rd week in 2006 contributed approximately $73,500, in thousands, to reported
franchise sales and approximately $2,900, in thousands, to franchise royalties.
Franchise fees typically are $35,000 for each restaurant opened.
(4) Other franchise income includes insurance premiums from franchisee
participation in our captive insurance program in 2005 and 2004 and revenue from
information technology products and services provided to certain franchisees in
all periods.
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
children.
Since 2002, we have offered our customers the convenience of carry-out service
featuring our Carside To Go program. This program, offered at both company-owned
and franchise restaurants, focuses on convenience by allowing the customer to
place their order by telephone, park in designated spots at our restaurants and
have servers deliver the order to their vehicle. During 2006, Carside To Go
accounted for 9.7% of company-owned restaurant sales.
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, which frequently
highlights local history and personalities, gives each restaurant a unique,
neighborhood identity, which is an important aspect of the Applebee's brand. In
addition, we generally require that each restaurant be remodeled every six to
seven years to embody the design elements of the current prototype. We are
continually evaluating our restaurant design to ensure that we keep our brand
fresh and appealing to our guests.
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 2006,
alcoholic beverages accounted for 12.5% of company-owned restaurant sales.
In 2006, we began implementation of new initiatives to broaden the appeal of our
brand. These initiatives included advertising that targets both the frequent
casual dining guest and those seeking value, beverage and late-night programs,
as well as the introduction of 20 new or improved menu items, including several
which were developed in partnership with celebrity chef Tyler Florence.
During 2004, we entered into a five-year exclusive strategic alliance with
Weight Watchers International, Inc. to offer Weight Watchers(R) branded menu
alternatives to our guests. As part of our exclusive arrangement with Weight
Watchers, we and our franchisees pay a percentage royalty on the total domestic
sales of Weight Watchers menu items.
Restaurant Operations. We stipulate operating standards and specifications for
our company-owned and franchise restaurants. These standards pertain to the
quality, preparation and selection of menu items, maintenance and handling of
food, maintenance and cleanliness of premises and service procedures.
Training. We have comprehensive training programs for restaurant associates and
managers. Restaurant associates and managers complete a training and orientation
process by certified training personnel upon hire. In addition, associates and
managers receive ongoing training to further develop their job skills and
knowledge.
Franchise and company restaurant managers also have access to the Lloyd Hill
Applebee's Leadership Institute which offers learning and development
opportunities. Programs and services include training, leadership assessments
and life coaching.
6
Marketing. We have historically concentrated our advertising and marketing
efforts primarily on food-specific promotions, Weight Watchers(R), Carside To Go
and Applebee's branded messaging. Our marketing includes national, regional and
local expenditures, utilizing primarily television, radio, direct mail and print
media, as well as alternative channels such as the Internet, product placement
and the use of third-party retailers to market our gift cards. In 2006,
approximately 4.1% 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 and Carside To Go. We focus the remainder of our marketing expenditures
on local marketing in areas with company-owned restaurants.
Information Technology. We believe technology can assist us in achieving our
operational goals. Our restaurant 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, system-wide consistency and
availability is the central focus of our supply chain program. We establish
quality standards for products used in the restaurants, and we maintain a 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. Due to cultural and
regulatory differences, we may have different requirements for restaurants
opened outside of the United States.
Food Safety and 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. Our strategy is to cluster restaurants in targeted
markets to increase 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.
We believe our effectiveness as a franchisor is enhanced by owning company
restaurants. Operating company restaurants allows us to develop, implement and
optimize restaurant initiatives and standards before introducing them to the
entire system. We continually evaluate the mix of company restaurants to
franchise restaurants and when it is consistent with our long-term strategies,
we will re-franchise or acquire restaurants.
7
We opened 35 new company restaurants in 2006. The following table shows the
areas where our company restaurants were located as of December 31, 2006:
Area
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New England (includes Maine, Massachusetts, New Hampshire,
New York, Rhode Island and Vermont).................................. 77
Minneapolis/St. Paul, Minnesota........................................ 67
Detroit/Southern Michigan.............................................. 67
Texas ................................................................ 60
Virginia............................................................... 59
St. Louis, Missouri/Illinois........................................... 58
Kansas City, Missouri/Kansas........................................... 34
Washington, D.C. (Maryland, Virginia).................................. 31
San Diego/Southern California.......................................... 24
Las Vegas/Reno, Nevada................................................. 16
Central Missouri/Kansas/Arkansas....................................... 12
Albuquerque, New Mexico................................................ 8
Memphis, Tennessee..................................................... 8
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521
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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. Generally, managers of company-owned restaurants receive a
salary and may receive a performance bonus based on financial performance, guest
satisfaction and associate retention measures. As of December 31, 2006, we
employed three Regional Vice Presidents of Operations, 15 Directors of
Operations and 85 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. We also have
corporate personnel that support operations with functions such as accounting,
human resources, information technology, marketing and training.
The Applebee's Franchise System
Franchise Territory and Restaurant Openings. We currently have 75 franchise
groups, including 31 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, 16 countries outside of the United States and one U.S.
territory. 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 31, 2006, there were 1,409 franchise restaurants. Franchisees
opened 77 restaurants in 2004, 92 restaurants in 2005, and 108 restaurants in
2006.
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 may 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.
8
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 development 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 franchisee enters into a separate franchise agreement for the operation of
each restaurant. Our standard franchise agreement has a term of 20 years and
permits renewal for up to an additional 20 years upon payment of an additional
franchise fee. For each restaurant developed, our standard franchise arrangement
requires an initial franchisee fee of $35,000 and a royalty fee equal to 4% of
the restaurant's monthly net sales. We have executed agreements with a majority
of our franchisees for restaurants opened before January 1, 2000, which maintain
the existing royalty rate of 4% and extend the initial term of the franchise
agreements until 2020. The terms, royalties and advertising fees under a limited
number of franchise agreements and the remaining 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% of
their gross sales on local marketing and promotional activities. Under our
current franchise agreements, we have the ability to increase the amount of the
required combined contribution to the national marketing pool 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 31, 2006) and our Directors of Franchise Operations (five as of
December 31, 2006). 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 2006, 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 31, 2006, the Franchise Business Council
consisted of seven franchisee representatives and two members of our senior
management team. One franchisee representative is a permanent member.
Franchisees elect the franchisee representatives annually. The Franchise
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 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 31, 2006, there
were loans outstanding to five franchisees for approximately $65,800,000 under
this program.
9
International Development
International Franchise Arrangements. We continue to pursue franchising of the
Applebee's concept as the primary method of international expansion. This
strategy includes seeking qualified franchisees with the resources to open
multiple restaurants in each territory and those familiar with the specific
local business environment. We currently are focusing on international
franchising primarily in Canada, Central and South America, the
Mediterranean/Middle East and Mexico. We currently have 31 international
franchisees. These franchisees operated 89 restaurants as of December 31, 2006.
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. Our franchisees must comply with
the regulatory requirements of the local jurisdictions.
We work closely with our international franchisees to develop and implement the
Applebee's system outside the United States, recognizing commercial, cultural
and dietary diversity. These local issues involve the need to be flexible and
pragmatic on all elements of the system, including menu, restaurant design,
restaurant operations, training, marketing, purchasing and financing.
Employees
As of December 31, 2006, we employed approximately 32,600 full and part-time
associates. Of those, approximately 680 were corporate personnel, 2,120 were
restaurant managers or managers in training and 29,800 were employed in
non-management full and part-time restaurant positions. Of the 680 corporate
associates, approximately 240 were in management positions and 440 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
strive to 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.
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 when necessary.
10
Executive and Other Senior Officers of the Registrant
Our executive and other senior officers as of February 23, 2007 are shown below.
Name Age Position
---- --- --------
David L. Goebel.................. 56 Chief Executive Officer and President, and Member of the Board of
Directors
Steven K. Lumpkin................ 52 Executive Vice President, Chief Financial Officer and Treasurer, and
Member of the Board of Directors
Carin L. Stutz................... 50 Executive Vice President of Operations
Stanley M. Sword................. 45 Executive Vice President and Chief People Officer
George S. Williams............... 54 Executive Vice President and Chief Marketing Officer
Rohan St. George................. 47 President of International Division
Philip R. Crimmins............... 55 Senior Vice President of Development
Michael Czinege.................. 53 Senior Vice President and Chief Information Officer
Kurt Hankins..................... 47 Senior Vice President of Menu Development and Innovation
David R. Parsley................. 60 Senior Vice President of Supply Chain Management
Carol A. DiRaimo................. 45 Vice President of Investor Relations
Beverly O. Elving................ 53 Vice President and Controller
Rebecca R. Tilden................ 51 Vice President, General Counsel and Secretary
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. In
September 2006, Mr. Goebel was named Chief 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.
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.
11
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 10 years with Andersen Consulting, a division of Arthur Andersen & Co., in
a variety of roles within their systems integration practice.
George S. Williams was employed by Applebee's in February 2007 as Executive Vice
President and Chief Marketing Officer. From 2002 until joining Applebee's, Mr.
Williams was an independent marketing consultant and founder of Williams
Enterprises. From 1997 to 2002, Mr. Williams was Senior Vice President of U.S.
Marketing for Blockbuster, Inc. Mr. Williams spent seven years in corporate
brand marketing positions with Pearle Vision, Inc., where he was Vice President
of Field Marketing and Sales, Long John Silver's, where he was Vice President of
Advertising and Promotions, and Days Inns of America Inc., where he was Vice
President of Marketing. Mr. Williams also has 12 years of advertising agency
experience with Marc U.S.A.
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.
Michael 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.
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.
12
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.
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.
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, generating positive operating cash flows and generating acceptable
returns on invested capital.
Our financial success depends on our ability and the ability of our franchisees
to operate restaurants profitably, to generate positive cash flows and to
generate acceptable returns on invested capital. The returns and profitability
of our restaurants may be negatively impacted by a number of factors. The most
significant are:
o Declines in comparable store sales growth rates due to:
o failing to consistently provide high quality products and innovate new
products to retain the existing customer base and attract new
customers;
o competitive intrusion in a market;
o opening new restaurants that may cannibalize the sales of existing
restaurants; and
o less than effective national and local marketing.
o Negative trends in operating expenses such as:
o increases in food costs including rising commodity costs;
o increases in labor costs including increases in minimum wage and other
employment laws, immigration reform, increases due to tight labor
market conditions, health care and workers compensation costs; and
o increases in other operating costs including utilities, lease-related
expenses and credit card processing fees.
13
o Our inability to open new restaurants at acceptable sales volumes.
o Our inability to increase menu pricing to offset increased operating
expenses.
o Negative trends in other expenses such as interest rates and the cost of
construction materials that will affect our ability to maintain and
refurbish existing stores.
o Our ability to manage a large number of restaurants that may be impacted
by unanticipated changes in executive management, and availability of
qualified restaurant management, staff and other personnel.
o Our ability to operate effectively in new and/or highly competitive
geographic regions or local markets in which we have limited operating
experience.
o Our ability to manage a large number of restaurants in many geographic
areas with a standardized operational and marketing approach.
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 near our
restaurants. 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.
Our profitability depends upon maintaining and growing the value of the
Applebee's brand.
Our business is dependent upon guest perceptions of the Applebee's brand.
Management believes it must preserve and grow the value of the Applebee's brand
to be successful in the future. Brand value is based upon actual guest
experiences as well as consumer perceptions regarding a variety of subjective
qualities, and can be damaged by isolated business incidents that erode consumer
trust, particularly if the incidents receive considerable publicity or result in
litigation.
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.
Our future leverage could have an effect on our operations.
Our Board of Directors is reviewing various strategic alternatives to enhance
shareholder value. While no decision as to any particular course of action has
been made, some of the alternatives under review could lead us to increase our
debt. Increased leverage and debt service obligations could have the following
consequences:
o We may be more vulnerable in the event of deterioration in our business,
in the restaurant industry or in the economy generally. In addition, we
may be limited in our flexibility in planning for, or reacting to, changes
in our business and the industry in which we operate.
14
o We may be required to dedicate a substantial portion of our cash flow to
the payment of interest or principal on our indebtedness, which could
reduce the amount of funds available for operations and thus place us at a
competitive disadvantage as compared with competitors that are less highly
leveraged.
o From time to time, we may engage in various capital markets, bank credit
and other financing activities to meet our cash requirements. We may have
difficulty obtaining additional financing at economically acceptable
interest rates.
o Our new revolving credit facility contains, and any future debt
obligations may contain, certain negative covenants including limitations
on liens, consolidations and mergers, indebtedness, capital expenditures,
asset dispositions, sale-leaseback transactions, dividends and stock
repurchases.
We and our franchisees may not be successful in opening additional restaurants.
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
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 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
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.
15
Further penetrating existing mature markets could impact the sales and
profitability of our existing restaurants in those markets.
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.
The impact of government regulation may cause us to incur additional costs or
liabilities.
Our restaurants are subject to various foreign, 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 additional 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 foreign, federal and state laws that regulate the offer
and sale of franchises and the relationship with our franchisees. 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.
A significant increase in litigation could have a material adverse effect on our
results of operations, financial condition and business prospects.
We are subject to 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.
16
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 based on, among other things,
discrimination, harassment or wrongful termination may divert our financial and
management resources and adversely affect our operations.
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 subjects us to the risk that shortages or interruption
in supply, caused by adverse weather or other conditions, could negatively
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. There can be no assurance that we will be able to
anticipate, invest in and effectively manage the information technology and
logistical resources necessary to support the growth of our business.
Our future growth may depend, in part, on our acquisition of Applebee's
restaurants from our franchisees.
We may acquire Applebee's restaurants from our franchisees. There is no
assurance that we will be able to acquire franchise restaurants at favorable
prices. In addition, if we complete acquisitions in the future, the acquisitions
may involve the following risks:
o increases in our debt and contingent liabilities;
o entry into 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;
o diversion of cash flows;
o acquisition integration issues, such as business process and system
incompatibilities;
o potential loss of key personnel of acquired franchise restaurants; and
o potential loss of customer relationships and related revenues.
17
Item 1B. Unresolved Staff Comments
Not applicable.
18
Item 2. Properties
As of December 31, 2006, we operated 521 company restaurants. Of these, we
leased the building for 86 sites, owned the building and leased the land for 230
sites, and owned the land and building for 205 sites. In addition, as of
December 31, 2006, we owned five sites for future development of restaurants and
had entered into 11 lease agreements for restaurant sites we plan to open during
2007. 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. Our company-owned restaurants have an average
of 4,940 square feet and seat an average of 168 guests.
Under our franchise agreements, we have certain rights to gain control of a
restaurant site in the event of default under 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. In
September 2006, we began to actively market our existing 80,000 square foot
headquarters under a plan approved by management. We also lease office space in
certain regions in which we operate restaurants.
In January 2006, we purchased land for a new corporate headquarters in Lenexa,
Kansas, located in the Kansas City metropolitan area. We anticipate relocating
to our new corporate headquarters in the fourth quarter of 2007.
19
The following table sets forth the 49 states, 16 countries outside of the United
States and one U.S. territory in which Applebee's are located and the number of
restaurants operating in each state or country as of December 31, 2006:
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
Domestic:
Alabama........................ -- 28 28
Alaska......................... -- 2 2
Arizona........................ -- 32 32
Arkansas....................... 2 9 11
California..................... 25 87 112
Colorado....................... -- 31 31
Connecticut.................... -- 11 11
Delaware....................... 3 8 11
Florida........................ -- 106 106
Georgia........................ -- 71 71
Idaho.......................... -- 10 10
Illinois....................... 13 54 67
Indiana........................ 7 58 65
Iowa........................... -- 25 25
Kansas......................... 16 19 35
Kentucky....................... 5 31 36
Louisiana...................... -- 16 16
Maine.......................... 11 -- 11
Maryland....................... 12 14 26
Massachusetts.................. 38 -- 38
Michigan....................... 67 21 88
Minnesota...................... 63 2 65
Mississippi.................... 3 13 16
Missouri....................... 61 2 63
Montana........................ -- 7 7
Nebraska....................... -- 19 19
Nevada......................... 15 -- 15
New Hampshire.................. 16 -- 16
New Jersey..................... -- 50 50
New Mexico..................... 8 10 18
New York....................... 1 94 95
North Carolina................. 2 53 55
North Dakota................... -- 10 10
Ohio........................... -- 92 92
Oklahoma....................... -- 19 19
Oregon......................... -- 17 17
Pennsylvania................... 1 63 64
Rhode Island................... 8 -- 8
South Carolina................. -- 41 41
South Dakota................... -- 7 7
Tennessee...................... 5 39 44
Texas.......................... 60 34 94
Utah........................... -- 15 15
Vermont........................ 3 -- 3
Virginia....................... 70 2 72
Washington..................... -- 36 36
West Virginia.................. 2 14 16
Wisconsin...................... 4 43 47
Wyoming........................ -- 5 5
-------------- -------------- --------------
Total Domestic............... 521 1,320 1,841
-------------- -------------- --------------
20
Number of Restaurants
-----------------------------------------------------
State or Country Company Franchise Total System
---------------------------------- -------------- -------------- --------------
International:
Bahrain........................ -- 1 1
Brazil......................... -- 4 4
Canada......................... -- 23 23
Chile.......................... -- 1 1
Ecuador........................ -- 1 1
Egypt.......................... -- 1 1
Greece......................... -- 8 8
Guatemala...................... -- 1 1
Honduras....................... -- 4 4
Jordan......................... -- 1 1
Kuwait......................... -- 3 3
Lebanon........................ -- 1 1
Mexico......................... -- 32 32
Qatar.......................... -- 2 2
Saudi Arabia................... -- 4 4
United Arab Emirates........... -- 1 1
U.S. Territories............... -- 1 1
-------------- -------------- --------------
Total International......... -- 89 89
-------------- -------------- --------------
Total System............. 521 1,409 1,930
============== ============== ==============
Item 3. Legal Proceedings
We are subject from time to time to lawsuits, claims and governmental
inspections or audits arising in the ordinary course of business. Some of these
lawsuits purport to be class actions and/or seek substantial damages. In the
opinion of management, these matters are adequately covered by insurance, or if
not so covered, are without merit or are of such a nature or involve amounts
that would not have a material adverse impact on 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 Global Select Market 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
Global Select Market.
2006 2005
-------------------------------- -------------------------------
High Low High Low
--------------- ---------------- --------------- ---------------
First Quarter $ 26.47 $ 21.62 $ 29.19 $ 24.69
Second Quarter $ 25.04 $ 19.43 $ 28.65 $ 24.25
Third Quarter $ 23.07 $ 17.29 $ 26.79 $ 19.95
Fourth Quarter $ 25.47 $ 20.77 $ 23.98 $ 19.73
2. Number of stockholders of record at February 23, 2007: 1,279
3. We declared an annual dividend of $0.22 per common share on December 7,
2006 for stockholders of record on December 22, 2006, and the dividend was
paid on January 22, 2007. 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 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 2007 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 2006, we repurchased 1,760,506 shares of our common stock at an
average price of $21.88 for an aggregate cost of approximately $38,522,000. The
table below sets forth purchases of our common stock during the fourth quarter
of fiscal 2006:
-----------------------------------------------------------------------------------------------------------------------------------
Purchases of Equity Securities(1)
-----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
Total Number of Shares Maximum Dollar Value of Shares
Total Number of Average Purchased as Part of that May Yet Be Purchased Under
Shares Purchased Price Paid Publicly Announced Plans the Plans or Programs
Period Per Share or Programs (in thousands)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
September 25, 2006 through
October 22, 2006 4,200 $20.96 4,200 $101,351
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
October 23, 2006 through
November 19, 2006 20,800 $23.97 20,800 $250,852
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
November 20, 2006 through
December 31, 2006 449,606 $23.15 449,606 $240,445
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
Total 474,606 474,606
=================================== ================== ============= =========================== ==================================
(1) In October 2005, our Board of Directors authorized repurchases of our common
stock of up to $175,000,000 during 2005 and 2006, subject to market conditions.
In November 2006, with approximately $100,000,000 of the previous authorization
remaining, our Board of Directors authorized additional repurchases of our
common stock of up to $150,000,000, subject to market conditions, for a total of
approximately $250,000,000 in authorized repurchases.
23
5. Performance Graph
The following graph compares the annual change in our cumulative total
stockholder return for the five fiscal years ended December 31, 2006 (December
30, 2001 to December 31, 2006) based upon the market price of our common stock,
compared with the cumulative total return on the NASDAQ Market Index and the
Hemscott Group Index assuming $100 was invested and dividends were reinvested.
The NASDAQ Market Index includes both domestic and foreign companies that trade
on the NASD Capital, NASD Global and NASD Global Select Markets. The Hemscott
Group Index includes approximately 80 restaurant companies.
Comparison of five-year cumulative total return among Applebee's International,
Inc., NASDAQ Market Index and Hemscott Group Index
(PERFORMANCE GRAPH)
Source: Hemscott Industry Group
Measurement Period
----------------------------------------------------------------------------------
December 30, December 29, December 28, December 26, December 25, December 31,
Company/Index/Market 2001 2002 2003 2004 2005 2006
------------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Applebee's International, Inc........ $ 100.00 $ 103.72 $ 169.81 $ 167.92 $ 153.78 $ 166.10
Hemscott Group Index................. $ 100.00 $ 79.82 $ 109.90 $ 134.23 $ 142.81 $ 175.65
NASDAQ Market Index.................. $ 100.00 $ 69.75 $ 104.88 $ 113.70 $ 116.19 $ 128.12
24
Item 6. Selected Financial Data
The following table sets forth our selected financial data for the periods and
the dates indicated. Fiscal 2006 contained 53 weeks. Fiscal 2002 through 2005
each contained 52 weeks. The following should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere in this Form 10-K.
Fiscal Year Ended
-------------------------------------------------------------------------------
December 31, December 25, December 26, December 28, December 29,
2006(1) 2005 2004 2003 2002
--------------- --------------- --------------- --------------- ----------------
(in thousands, except per share amounts)
STATEMENT OF EARNINGS DATA:
Company restaurant sales................. $ 1,196,258 $ 1,082,641 $ 976,798 $ 867,158 $ 724,616
Franchise royalties and fees............. 139,855 128,813 121,221 109,604 102,180
Other franchise income................... 1,808 5,196 13,615 13,147 2,688
--------------- --------------- --------------- -------------------------------
Total operating revenues............ $ 1,337,921 $ 1,216,650 $ 1,111,634 $ 989,909 $ 829,484
=============== =============== =============== ===============================
Operating earnings....................... $ 130,784 $ 157,637 $ 165,280 $ 152,677 $ 126,590
Net earnings............................. $ 80,906 $ 101,802 $ 110,865 $ 94,349 $ 80,527
Basic net earnings per share............. $ 1.09 $ 1.29 $ 1.36 $ 1.14 $ 0.97
Diluted net earnings per share........... $ 1.08 $ 1.27 $ 1.33 $ 1.10 $ 0.94
Dividends declared per share............. $ 0.22 $ 0.20 $ 0.06 $ 0.05 $ 0.04
Basic weighted average shares
outstanding........................... 74,001 78,650 81,528 82,944 83,407
Diluted weighted average shares
outstanding........................... 74,936 80,010 83,600 85,409 85,382
BALANCE SHEET DATA
(AT END OF FISCAL YEAR):
Total assets............................. $ 935,456 $ 878,588 $ 754,431 $ 651,078 $ 573,647
Long-term debt, including
current portion, and notes payable..... $ 175,185 $ 188,367 $ 35,694 $ 20,862 $ 52,563
Stockholders' equity..................... $ 486,654 $ 412,610 $ 496,727 $ 453,143 $ 385,201
(1) Beginning in 2006, we began recording stock-based compensation expense in
accordance with Statement of Financial Accounting Standards No. 123(R),
"Stock-Based Compensation".
25
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, revenue growth, restaurant margins, 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 and generate positive operating cash
flows and return on invested capital, the impact of economic and demographic
factors on consumer spending, maintaining and growing the value of the
Applebee's brand, the impact of intense competition in the casual dining segment
of the restaurant industry, the impact of future leverage on our operations, the
failure to open the restaurants anticipated, the impact of increases in capital
expenditure costs on future development, our ability to attract and retain
qualified franchisees, and the impact of further penetration of restaurants in
existing markets. 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
------------------ -------------------------- -----------------
2004 December 26, 2004 52
2005 December 25, 2005 52
2006 December 31, 2006 53
2007 December 30, 2007 52
Our operating 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 are $35,000 for each restaurant opened.
Other franchise income includes revenue from information technology products and
services provided to certain franchisees. In 2005, other franchise income also
included insurance premiums for the current year and premium audit adjustments
for prior years from franchisee participation in our captive insurance program.
In 2006, we discontinued writing insurance coverage for new or existing
participants.
26
Certain expenses relate only to company-owned 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 costs related to information technology
products and services provided to certain franchisees. In 2005, cost of other
franchise income included the costs related to franchisee participation in our
captive insurance program. In 2006, we discontinued writing insurance coverage
for new or existing participants. Cost of other franchise income includes costs
related to the resolution of claims arising from franchisee participation in our
captive insurance program.
Other expenses, such as general and administrative and amortization expenses,
relate to both company-owned 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(R)," which is the largest casual dining concept in the world with over
1,900 system-wide restaurants open as of December 31, 2006(1). 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. 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 ultimately encompass at least 3,000 restaurants in
the United States, as well as the potential for at least 1,000 restaurants
internationally. In 2006, we and our franchisees opened 35 and 108
restaurants, respectively. Together, we have opened at least 100
restaurants system-wide each year for the past 14 fiscal years.
o Comparable restaurant sales - a year-over-year comparison of sales for
restaurants open at least 18 months. Changes in comparable restaurant
sales are driven by changes in the average guest check and/or changes in
guest traffic. Average guest check changes result from menu price changes
and/or changes in menu mix. During 2006, the impact of menu price
increases on company restaurants was approximately 2.2%. Although we may
have changes 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 improving
operations and enhancing our menu with new food and beverage offerings. In
2006, we began implementation of a plan to substantially improve the
quality and flavor profile of our food and beverage offerings as a result
of comprehensive consumer research we completed in 2005. In 2006, company
comparable sales decreased 1.0%, while domestic franchise and domestic
system-wide comparable sales decreased 0.5% and 0.6%, respectively. We
believe our sales and traffic have been negatively impacted by multiple
factors. Lower income households, which represent a significant portion of
our guests, have been impacted by higher energy costs and interest rates.
The bar and grill category of the restaurant industry has been negatively
impacted by increased trade-down to quick-service restaurants. In
addition, the supply growth of units opened in the category in 2006 and
2005 has outpaced demand contributing to weaker sales trends.
(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 26, 2006.
27
o Company restaurant margins - 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 are susceptible to fluctuations in commodity costs,
labor costs and other operating costs such as utilities. Company
restaurant margins were 12.1%, 13.4% and 15.6% in 2006, 2005 and 2004,
respectively.
o General and administrative expenses - general and administrative expenses
expressed as a percentage of total operating revenues. General and
administrative expenses were 10.5%, 9.0% and 9.4% in 2006, 2005 and 2004,
respectively. Stock-based compensation included in general and
administrative expenses was 1.5%, 0.2%, and 0.1% in 2006, 2005 and 2004,
respectively.
o Return on invested capital - net earnings expressed as a percent of
average invested capital. We believe this is an important indicator as it
allows us to evaluate our ability to create value for our shareholders.
Application of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and notes thereto. Actual results may differ from these estimates,
and such differences may be material to our consolidated financial statements.
We believe that the following 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 may periodically purchase and maintain inventories of certain specialty
products to ensure sufficient supplies to the system, to ensure continuity of
supply, or 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 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.
Stock-based compensation: Beginning in 2006, we account for stock-based
compensation in accordance with Statement of Financial Accounting Standards
("SFAS") No. 123(R), "Share-Based Payment". As required by SFAS No. 123(R),
stock-based compensation is estimated for equity awards at fair value at the
grant date. We determine the fair value of equity awards using a binomial model.
The binomial model requires various highly judgmental assumptions including the
expected life, stock price volatility and the forfeiture rate. If any of the
assumptions used in the model change significantly, stock-based compensation
expense may differ materially in the future from that recorded in the current
period.
28
Impairment and other restaurant closure costs: 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 SFAS 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.
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 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.
29
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.
In January 2006, we completed the acquisition of four Applebee's restaurants in
the Houston market for approximately $8,100,000 in cash. The purchase price was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately $500,000, reacquired franchise rights of approximately $100,000,
and other net assets of approximately $100,000.
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. The pro forma company restaurant sales for 2006 include sales related to
the January 2006 acquisition discussed above as if the acquisition had occurred
as of the beginning of 2006. The pro forma company restaurant sales for 2005
includes sales related to the January 2006 acquisition and the May 2005
acquisition discussed above as if the acquisitions had occurred as of the
beginning of 2005. The pro forma company restaurant sales for 2004 includes
sales related to the May 2005 acquisition and the April 2004 acquisition
discussed above as if the acquisition had occurred as of the beginning of 2004.
2006 2005 2004
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 6,400 $ 17,000 $ 17,600
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 7,100 $ 32,800 $ 52,600
=============== =============== ===============
In April 2005, we completed the acquisition of eight Applebee's restaurants in
the Memphis market, which 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. We have
remodeled and opened seven restaurants and the remaining restaurant was sold to
a third-party.
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. In 2005, we reduced the types of insurance coverage plans offered
which resulted in fewer franchisee participants in our captive insurance
program. Through 2005, Applebee's International, Inc. and covered franchisees
made 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 were established based
upon third-party actuarial estimates of settlement costs for incurred and
anticipated claims and administrative fees. Franchisee premiums were included in
other franchise income ratably over the policy year and the related offsetting
expenses were included in cost of other franchise income. In 2006, we
discontinued writing insurance coverage for new or existing participants. Cost
of other franchise income includes costs related to the resolution of claims
arising from franchisee participation in our captive insurance program. We do
not expect franchisee participation in the captive insurance company to have a
material impact on our net earnings. Our consolidated balance sheets include the
following balances related to the captive insurance subsidiary:
30
o Franchise premium receivables of approximately $400,000 and $1,700,000 as
of December 31, 2006 and December 25, 2005, 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 $12,600,000 and $18,600,000 as of December 31,
2006 and December 25, 2005, respectively, included in restricted assets
related to captive insurance subsidiary.
o Loss reserve related to captive insurance subsidiary of approximately
$12,600,000 and $20,700,000 as of December 31, 2006 and December 25, 2005,
respectively. Approximately $6,500,000 and $10,500,000 for December 31,
2006 and December 25, 2005, respectively, is included in other non-current
liabilities.
31
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 31, December 25, December 26,
2006 2005 2004
--------------- --------------- ----------------
Operating revenues:
Company restaurant sales......................... 89.4% 89.0% 87.9%
Franchise royalties and fees..................... 10.5 10.6 10.9
Other franchise income........................... 0.1 0.4 1.2
--------------- --------------- ----------------
Total operating revenues...................... 100.0% 100.0% 100.0%
=============== ================ ===============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage................................ 26.7% 26.5% 26.5%
Labor............................................ 33.7 33.1 32.5
Direct and occupancy............................. 27.1 26.6 25.1
Pre-opening expense.............................. 0.4 0.4 0.3
--------------- --------------- ----------------
Total cost of sales........................... 87.9% 86.6% 84.4%
=============== =============== ================
Cost of other franchise income (as a percentage of
other franchise income)............................ 149.3% 94.1% 105.8%
General and administrative expenses................... 10.5 9.0 9.4
Amortization of intangible assets..................... 0.1 0.1 0.1
Impairment and other restaurant closure costs......... 0.7 0.3 --
Loss on disposition of property and equipment......... 0.2 0.2 0.2
--------------- --------------- ----------------
Operating earnings.................................... 9.8 13.0 14.9
--------------- --------------- ----------------
Other income (expense):
Investment income................................ 0.2 0.1 0.1
Interest expense................................. (0.9) (0.4) (0.1)
Other income..................................... -- 0.1 0.3
--------------- --------------- ----------------
Total other income (expense).................. (0.6) (0.1) 0.3
--------------- --------------- ----------------
Earnings before income taxes and cumulative effect of
change in accounting principle................... 9.1 12.9 15.2
Income taxes.......................................... 3.1 4.5 5.2
--------------- --------------- ----------------
Earnings before cumulative effect of change in
accounting principle............................. 6.0 8.4 10.0
Cumulative effect of change in accounting principle,
net of tax....................................... -- -- --
--------------- --------------- ----------------
Net earnings.......................................... 6.0% 8.4% 10.0%
=============== =============== ================
32
Fiscal Year Ended December 31, 2006 Compared With Fiscal Year Ended December 25,
2005
Company Restaurant Sales. Total company restaurant sales increased $113,617,000
(10.5%) from $1,082,641,000 in 2005 to $1,196,258,000 in 2006. The percentage
increase in total company restaurant sales was due to an increase in the number
of restaurant weeks open of approximately 13%. The 53rd week contributed
$24,312,000 to company restaurant sales. Excluding the 53rd week, company
restaurant sales increased by 8.3%. This increase was partially offset by a
decline in average weekly sales of 2.0%.
Comparable restaurant sales at company restaurants decreased by 1.0% in 2006.
Weighted average weekly sales at company restaurants decreased 2.0% from $45,552
in 2005 to $44,637 in 2006. Excluding the 53rd week in 2006, company average
weekly sales decreased 2.3%. The decrease in average weekly sales was due to a
decline in guest traffic of approximately 3.5% in 2006, as well as the
underperformance of restaurants open less than 18 months. In 2006, we
experienced more significant guest count declines in New England and Virginia,
where approximately 25% of our company restaurants are located. These decreases
were partially offset by an increase in the average guest check resulting from
menu price increases of approximately 2.2% in 2006. We took a price increase of
approximately 1.4% in January 2007.
Franchise Royalties and Fees. Franchise royalties and fees increased $11,042,000
(8.6%) from $128,813,000 in 2005 to $139,855,000 in 2006 due primarily to the
increased number of franchise restaurants operating during 2006 as compared to
2005 and the impact of the 53rd week in 2006 which contributed approximately
$2,900,000 to franchise royalties. Excluding the 53rd week in 2006, franchise
royalties and fees increased 6.3%. Domestic franchise weighted average weekly
sales and franchise comparable restaurant sales decreased by 0.1% and 0.5%,
respectively, in 2006. Excluding the 53rd week, domestic franchise weighted
average weekly sales decreased 0.5% in 2006.
Other Franchise Income. Other franchise income decreased $3,388,000 (65%) from
$5,196,000 in 2005 to $1,808,000 in 2006 due primarily to the decision to
discontinue writing new coverage in our captive insurance program.
Cost of Company Restaurant Sales. Food and beverage costs increased from 26.5%
in 2005 to 26.7% in 2006. Food and beverage costs were negatively impacted by
improved menu offerings which had higher food costs as a percentage of sales, an
enhanced bar menu, and higher alcoholic beverage costs as a percentage of sales,
partially related to our late-night value strategy. These increases were
partially offset by menu price increases of approximately 2.2% in 2006. We
currently expect net commodity costs to increase by approximately 1% in 2007.
Labor costs increased from 33.1% in 2005 to 33.7% in 2006. The increase in 2006
was due primarily to higher management and hourly wage rates including the
impact of state minimum wage rate increases and payroll taxes, which were
partially offset by lower health insurance and workers' compensation expenses.
We currently expect labor costs to be negatively impacted by recently enacted
state hourly minimum wage increases in 2007.
Direct and occupancy costs increased from 26.6% in 2005 to 27.1% in 2006 due
primarily to higher utility costs and unfavorable year-over-year comparisons for
depreciation, as a percentage of sales, due to its relatively fixed nature.
These increases were partially offset by the favorable impact of a change in
accounting convention for smallwares that was implemented in the second quarter
of fiscal 2006.
Cost of Other Franchise Income. Cost of other franchise income decreased
$2,193,000 (45%) from $4,892,000 in 2005 to $2,699,000 in 2006. This decrease
was due to the decision to discontinue writing new coverage in our captive
insurance program, which was partially offset by $1,500,000 recorded in 2006 for
estimated insurance losses from franchise participants.
33
General and Administrative Expenses. General and administrative expenses
increased from 9.0% in 2005 to 10.5% in 2006 due primarily to the recognition of
stock-based compensation related to adoption of SFAS No. 123(R), higher
compensation expense due to staffing levels and expenses incurred related to the
development of international markets which increased our general and
administrative expenses by 0.4%, as a percentage of total revenues. Stock-based
compensation included in general and administrative expenses was 1.5% and 0.2%
in 2006 and 2005, respectively.
Impairment and Other Restaurant Closure Costs. Impairment and other restaurant
closure costs increased $4,900,000 from $3,900,000 in 2005 to $8,800,000 in
2006. In 2006, we recorded the following costs:
o $5,500,000 to decrease the carrying amounts of property, equipment and
lease acquisition costs of restaurants for which the original carrying
value was not deemed recoverable
o $1,500,000 to decrease the carrying amount of an investment of which the
original carrying value was deemed to be greater than the fair market
value
o $900,000 to record lease obligations for restaurants closed during the
year
o $900,000 to decrease the carrying amount of a corporate aircraft of which
the original carrying value was deemed to be greater than fair market
value
In 2005, we recorded the following impairment and restaurant closure costs:
o $2,600,000 to decrease the original carrying amounts of property and
equipment of restaurants for which the carrying value was not deemed
recoverable
o $1,300,000 to decrease the original carrying amount of a long-lived asset
that was abandoned
Interest Expense. Interest expense increased $7,056,000 from $4,365,000 in 2005
to $11,421,000 in 2006 due primarily to higher interest rates and increased
borrowings under our credit facility used to fund capital expenditures and
repurchases of our common stock.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 34.9% in 2005 to 33.8% in 2006 due to higher
employment tax credits and the resolution of state tax matters.
Net earnings. Net earnings decreased $20,896,000 (21%) from $101,802,000 in 2005
to $80,906,000 in 2006 due primarily to the recognition of stock-based
compensation related to adoption of SFAS No. 123(R) and lower restaurant margins
due to a decrease in average weekly sales which resulted in an increase in labor
and direct and occupancy costs, which were partially offset by the impact of the
53rd week in 2006.
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 of approximately 3.0% in 2005 as compared to 2004 due to the
launch of our Weight Watchers(R) 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 initiative. Carside To Go sales mix increased from 9.3% of company
restaurant sales in 2004 to 10.0% of company restaurant sales in 2005.
34
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 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
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 and Other Restaurant Closure Costs. 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 (Note 6 of the consolidated
financial statements).
35
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.
Net earnings. Net earnings decreased $9,063,000 (8%) from $110,865,000 in 2004
to $101,802,000 in 2005 due primarily to lower restaurant margins due to a
decrease in average weekly sales which resulted in an increase in labor and
direct and occupancy costs.
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
resulted from the construction and acquisition of restaurants, refurbishment and
capital replacement for existing restaurants, the repurchase of our common stock
and investment in information technology systems. We obtain capital through our
ongoing operations and debt financing.
Cash flows from our operating activities primarily include the net cash
generated from company and franchise operations and management of credit from
trade suppliers. Cash flows used by investing activities include capital
expenditures for restaurant construction, refurbishment, information technology,
acquisitions of franchise restaurants, sale-leaseback transactions and asset
sales. Cash flows used by financing activities include borrowings and repayments
of debt, repurchases of our common stock, dividends to shareholders and the cash
received from the exercise of employee stock options. The following table
presents a summary of our cash flows for 2006, 2005 and 2004 (in thousands):
2006 2005 2004
---------------- ---------------- ----------------
Net cash provided by operating activities.......... $ 174,594 $ 221,203 $ 190,605
Net cash used by investing activities.............. (121,672) (187,718) (134,055)
Net cash used by financing activities.............. (43,653) (31,087) (63,775)
---------------- ---------------- ----------------
Net increase (decrease) in cash
and cash equivalents............................ $ 9,269 $ 2,398 $ (7,225)
================ ================ ================
Capital expenditures, excluding franchise acquisitions, were $122,896,000 in
2006, $139,396,000 in 2005 and $104,620,000 in 2004.
Excluding costs related to the construction of our new corporate headquarters,
capital expenditures are expected to be between $70,000,000 and $80,000,000 in
2007 and will primarily be for the development of new restaurants, refurbishment
and capital replacement for existing restaurants and the enhancement of
information systems. Costs for the new corporate headquarters are expected to be
approximately $30,000,000 in 2007. We intend to enter into a sale-leaseback
transaction with respect to the new headquarters upon its completion or
thereafter, depending upon market conditions. We currently expect to open
between 10 and 15 company restaurants in 2007. 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.
36
In January 2006, we completed the acquisition of four Applebee's restaurants in
the Houston area for approximately $8,100,000 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 completed the acquisition of eight Applebee's restaurants in
the Memphis market, which 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 December 2006, we entered into a new five-year revolving credit facility. The
terms of the bank credit agreement provide for $400,000,000 in unsecured
revolving credit as well as an additional $200,000,000 of revolving credit upon
satisfaction of the conditions set forth in the credit facility. The facility is
subject to various covenants and restrictions which, among other things, require
the maintenance of stipulated fixed charge and leverage ratios, as defined.
There is no limit on cash dividends or repurchases of our common stock provided
the declaration and payment of such dividend or repurchase of stock 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. As of
December 31, 2006, we were in compliance with the covenants contained in our
credit agreement. We had borrowings of $170,000,000, standby letters of credit
of approximately $15,600,000 outstanding and approximately $214,400,000
available under our revolving credit facility.
In October 2005, our Board of Directors approved a $175,000,000 authorization to
repurchase our common stock, subject to market conditions. In November 2006,
with approximately $100,000,000 of the previous authorization remaining, our
Board of Directors authorized additional repurchases of our common stock of up
to $150,000,000, subject to market conditions, for a total of approximately
$250,000,000 in authorized repurchases. During 2006, we repurchased 1,760,506
shares of our common stock at an average price of $21.88 for an aggregate cost
of approximately $38,522,000. As of December 31, 2006, we had approximately
$240,400,000 remaining under our repurchase authorizations.
In October 2006, we entered into a sale-leaseback arrangement with a third-party
finance company involving five restaurant properties. As a result of this
transaction, we received approximately $3,100,000 in cash.
In December 2006, the Board of Directors declared an annual dividend of $0.22
per share payable to shareholders of record on December 22, 2006. We paid
approximately $16,300,000 in January 2007 related to this dividend.
As of December 31, 2006, our liquid assets totaled $22,602,000. These assets
consisted of cash and cash equivalents in the amount of $22,309,000 and
short-term investments in the amount of $293,000. The working capital deficit
decreased from $107,400,000 as of December 25, 2005 to $81,626,000 as of
December 31, 2006. This decrease resulted primarily from a combination of
factors which included decreases in accounts payable and inventories, an
increase in receivables and accrued income taxes, a reclassification of property
and equipment to assets held for sale, and higher sales of gift cards as
compared to the redemption of gift cards.
37
We believe that our liquid assets and cash generated from operations, combined
with available borrowings, will provide sufficient funds for operating
activities, capital expenditures, currently approved repurchases of our common
stock and the payment of dividends for at least the next 12 months and
thereafter for the foreseeable future.
The following table shows our debt amortization schedule, future capital lease
commitments (including principal and interest payments), future operating lease
commitments (operating leases in Note 12 to the consolidated financial
statements) and future purchase obligations as of December 31, 2006 (in
thousands):
Payments due by period
----------------------------------------------------------------------
Certain Less than 1-3 3-5 More than 5
Contractual Obligations Total 1 year Years Years years
------------------------------------------- -------------- ------------ ------------- ------------- -------------
Long-term Debt (excluding capital
lease obligations) and Notes
Payable(1)............................... $ 171,269 $ 77 $ 90 $ 170,108 $ 994
Capital Lease Obligations.................. 7,522 822 1,731 1,792 3,177
Operating Leases (2)....................... 402,019 29,307 58,211 56,842 257,659
Purchase Obligations - Company(3).......... 206,395 49,145 127,903 29,347 --
Purchase Obligations - Franchise(4)........ 475,126 52,776 342,983 79,367 --
(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 food
items, energy, supplies, severance and employment agreements, our new corporate
headquarters, and other miscellaneous commitments.
(4) The amounts for franchise purchase obligations include commitments for food
items and supplies made by us for our franchisees. We contract with certain
suppliers to ensure competitive pricing. These amounts will only be payable by
us 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 31, 2006, we have outstanding lease guarantees of
approximately $15,300,000. 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
$12,300,000. These leases expire at various times with the final lease agreement
expiring in 2018. We did not record a liability related to these contingent
lease liabilities as of December 31, 2006 or December 25, 2005.
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 31, 2006, there
were loans outstanding to five franchisees for approximately $65,800,000 under
this program. The fair value of our guarantees under this financing program is
approximately $130,000 and is recorded in non-current liabilities in our
consolidated balance sheet as of December 31, 2006.
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 not related to a change in control, some of which require payments to
be made only if we enforce certain terms in the agreements. If the severance
payments had been due as of December 31, 2006, we would have been required to
make payments totaling approximately $10,600,000. In addition, we have severance
and employment agreements with certain officers which contain severance
provisions related to a change in control. The agreements define the
circumstances which will constitute a change in control. Those provisions would
have required additional aggregate payments of approximately $5,300,000 if such
officers had been terminated as of December 31, 2006.
38
New Accounting Pronouncements
In March 2006, the Emerging Issues Task Force ("EITF") issued EITF Issue 06-3,
"How Taxes Collected from Customers and Remitted to Governmental Authorities
Should Be Presented in the Income Statement (That Is, Gross versus Net
Presentation)." A consensus was reached that entities may adopt a policy of
presenting sales taxes in the income statement on either a gross or net basis.
If taxes are significant, an entity should disclose its policy of presenting
taxes and the amounts of taxes. The guidance is effective for periods beginning
after December 15, 2006. We present company sales net of sales taxes. The impact
of this adoption did not change our method for recording sales taxes in our
consolidated financial statements.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes,"
which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 is effective for fiscal years beginning after December 15, 2006.
The impact of this adoption will not be material to our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies whenever other statements require or permit
assets or liabilities to be measured at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. The impact of this adoption
will not be material to our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." This statement requires
companies to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined
benefit pension and other postretirement benefit plans. The statement requires
prospective application, and the recognition and disclosure requirements are
effective for companies with fiscal years ending after December 15, 2006.
Additionally, SFAS No. 158 requires companies to measure plan assets and
obligations at their year-end balance sheet date. This requirement is effective
for fiscal years ending after December 15, 2008. The impact of this adoption was
not material to our consolidated financial statements and we are in compliance
with the measurement date provisions of this statement as of December 31, 2006.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance regarding the consideration given to prior year misstatements when
determining materiality in current year financial statements. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The impact of this
adoption was not material to our consolidated financial statements.
39
In October 2006, the FASB issued FASB Staff Position ("FSP") FAS 123 (R)-5,
"Amendment to FSP FAS 123 (R)-1." FSP FAS 123(R)-5 addresses whether a
modification of an instrument in connection with an equity restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. This FSP
states that no change in the recognition or the measurement (due to a change in
classification as a result of a modification solely to reflect an equity
restructuring that occurs when the holders are no longer employees) of the
instruments will result if two conditions are met: (1) there is no increase in
fair value of the award or the antidilution provision is not added to the terms
of the award in contemplation of an equity restructuring and (2) all holders of
the same class of equity instruments are treated in the same manner. The
effective date of FSP FAS 123(R)-5 is the first reporting period beginning after
October 10, 2006. The impact of this adoption was not material to our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities." This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. If the
fair value option is elected, unrealized gains and losses will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating the impact
of this adoption on our consolidated financial statements.
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 currently bears interest at
either the bank's prime rate or LIBOR plus 0.50%, at our option. As of December
31, 2006, the total amount of debt subject to interest rate fluctuations was
$170,000,000, 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 approximately $1,700,000 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.
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 31, 2006, we have evaluated the effectiveness of the design and
operation of our disclosure controls and procedures, under the supervision and
with the participation of the Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"). Based on this evaluation, our management, including
the CEO and CFO, concluded that our disclosure controls and procedures are
effective.
During the fourth 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.
40
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 CEO and CFO, we assessed the effectiveness of the company's internal control
over financial reporting as of December 31, 2006. 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 31, 2006, 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 February 28, 2007 on our
assessment and on the effectiveness of the company's internal control over
financial reporting, which is included herein.
41
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 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 31, 2006,
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
accounting principles generally accepted in the United States of America
("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 31, 2006, 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
reporting as of December 31, 2006, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
42
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 31, 2006, of the Company and
our report dated February 28, 2007 expressed an unqualified opinion on those
financial statements and included an explanatory paragraph regarding a change in
accounting for stock-based compensation upon adoption of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment."
DELOITTE & TOUCHE LLP
Kansas City, Missouri
February 28, 2007
Item 9B. Other Information
Not applicable.
43
PART III
Item 10. Directors, Executive Officers and Corporate Governance
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 definitive proxy statement for the 2007 Annual Meeting of
Stockholders (the "Proxy Statement"). 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 407(d)(5) of Regulation S-K.
Item 11. Executive Compensation
If you would like information about our director and 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 - Director Compensation and - Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement. 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 captions "Stock Ownership of Officers
and Directors" and "Stock Ownership of Major Stockholders" and "Executive
Compensation - Equity Compensation Plan Information" in the Proxy Statement for
the Annual Meeting of Stockholders. We incorporate that information in this
document by reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
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 "Related Party Transactions" in the Proxy
Statement. For information on director independence you should read the
information under the caption "Information About the Board of Directors and
Executive and Other Senior Officers - Corporate Governance" in the Proxy
Statement. We incorporate that information in this document by reference.
44
Item 14. Principal Accounting Fees and Services
If you would like information about fees paid to our auditors, you should read
the information under the caption "Fees and Services of Deloitte & Touche LLP"
in the Proxy Statement. We incorporate that information in this document by
reference.
45
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.
46
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: February 28, 2007 By: /s/ David L. Goebel
------------------ ------------------------
David L. Goebel
Director, Chief Executive Officer and
President
(principal executive officer)
POWER OF ATTORNEY
KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David L. Goebel 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: February 28, 2007
---------------------------------------- ------------------
David L. Goebel
Director, Chief Executive Officer and President
(principal executive officer)
By: /s/ Steven K. Lumpkin Date: February 28, 2007
---------------------------------------- ------------------
Steven K. Lumpkin
Director, Executive Vice President, Chief
Financial Officer and Treasurer
(principal financial officer)
By: /s/ Beverly O. Elving Date: February 28, 2007
---------------------------------------- ------------------
Beverly O. Elving
Vice President and Controller
(principal accounting officer)
By: /s/ Lloyd L. Hill Date: February 28, 2007
---------------------------------------- ------------------
Lloyd L. Hill
Director, Chairman of the Board
47
By: /s/ Erline Belton Date: February 28, 2007
---------------------------------------- ------------------
Erline Belton
Director
By: /s/ Gina Boswell Date: February 28, 2007
---------------------------------------- ------------------
Gina Boswell
Director
By: /s/ Douglas R. Conant Date: February 28, 2007
---------------------------------------- ------------------
Douglas R. Conant
Director
By: /s/ D. Patrick Curran Date: February 28, 2007
---------------------------------------- ------------------
D. Patrick Curran
Director
By: /s/ Eric L. Hansen Date: February 28, 2007
---------------------------------------- ------------------
Eric L. Hansen
Director
By: /s/ Jack P. Helms Date: February 28, 2007
---------------------------------------- ------------------
Jack P. Helms
Director
By: /s/ Rogelio Rebolledo Date: February 28, 2007
---------------------------------------- ------------------
Rogelio Rebolledo
Director
By: /s/ Burton M. Sack Date: February 28, 2007
---------------------------------------- ------------------
Burton M. Sack
Director
By: /s/ Michael A. Volkema Date: February 28, 2007
--------------------------------------- ------------------
Michael A. Volkema
Director
48
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 31, 2006 and
December 25, 2005 .................................................................................. F-3
Consolidated Statements of Earnings for the Fiscal Years Ended December 31, 2006,
December 25, 2005 and December 26, 2004.............................................................. F-4
Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
December 31, 2006, December 25, 2005 and December 26, 2004........................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2006,
December 25, 2005 and December 26, 2004.............................................................. 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 31, 2006 and
December 25, 2005, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2006. 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 31, 2006
and December 25, 2005, and the results of its operations and its cash flows for
each of the three fiscal years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for stock-based compensation upon adoption of
Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment."
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 31, 2006, 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 February 28, 2007, 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
February 28, 2007
F-2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, December 25,
2006 2005
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 22,309 $ 13,040
Short-term investments, at market value....................................... 293 286
Receivables, net of allowance................................................. 47,771 37,857
Receivables related to captive insurance subsidiary........................... 453 1,712
Inventories................................................................... 11,524 20,373
Prepaid income taxes.......................................................... 55 3,488
Prepaid and other current assets.............................................. 15,255 13,518
Assets held for sale.......................................................... 7,633 --
-------------- -------------
Total current assets....................................................... 105,293 90,274
Property and equipment, net........................................................ 636,031 590,593
Goodwill........................................................................... 138,950 138,443
Restricted assets related to captive insurance subsidiary.......................... 13,356 19,329
Other intangible assets, net....................................................... 6,408 8,050
Other assets, net.................................................................. 35,418 31,899
-------------- -------------
$ 935,456 $ 878,588
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................. $ 265 $ 259
Notes payable................................................................. -- 7,900
Accounts payable.............................................................. 43,235 63,445
Accrued expenses and other current liabilities................................ 113,641 100,995
Loss reserve related to captive insurance subsidiary.......................... 6,094 10,235
Accrued dividends............................................................. 16,299 14,840
Accrued income taxes.......................................................... 7,385 --
-------------- -------------
Total current liabilities.................................................. 186,919 197,674
-------------- -------------
Non-current liabilities:
Long-term debt, less current portion.......................................... 174,920 180,208
Deferred income taxes......................................................... 25,126 37,722
Other non-current liabilities................................................. 61,837 50,374
-------------- -------------
Total non-current liabilities.............................................. 261,883 268,304
-------------- -------------
Total liabilities.......................................................... 448,802 465,978
-------------- -------------
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.................................................... 265,122 234,988
Unearned compensation......................................................... -- (2,614)
Retained earnings............................................................. 774,884 710,277
-------------- -------------
1,041,091 943,736
Treasury stock - 34,393,331 shares in 2006 and 34,304,693 shares in 2005,
at cost.................................................................... (554,437) (531,126)
-------------- -------------
Total stockholders' equity................................................. 486,654 412,610
-------------- -------------
$ 935,456 $ 878,588
============== =============
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 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
Operating revenues:
Company restaurant sales................................ $ 1,196,258 $ 1,082,641 $ 976,798
Franchise royalties and fees............................ 139,855 128,813 121,221
Other franchise income.................................. 1,808 5,196 13,615
-------------- -------------- --------------
Total operating revenues............................. 1,337,921 1,216,650 1,111,634
-------------- -------------- --------------
Cost of company restaurant sales:
Food and beverage....................................... 319,813 286,522 259,134
Labor................................................... 403,516 358,563 317,659
Direct and occupancy.................................... 323,843 287,656 244,707
Pre-opening expense..................................... 4,348 4,767 3,025
-------------- -------------- --------------
Total cost of company restaurant sales............... 1,051,520 937,508 824,525
-------------- -------------- --------------
Cost of other franchise income............................... 2,699 4,892 14,401
General and administrative expenses.......................... 140,824 109,768 104,810
Amortization of intangible assets............................ 721 878 663
Impairment and other restaurant closure costs................ 8,800 3,900 --
Loss on disposition of property and equipment................ 2,573 2,067 1,955
-------------- -------------- --------------
Operating earnings........................................... 130,784 157,637 165,280
-------------- -------------- --------------
Other income (expense):
Investment income....................................... 2,768 1,695 1,284
Interest expense........................................ (11,421) (4,365) (1,626)
Other income............................................ 16 1,762 3,557
-------------- -------------- --------------
Total other income (expense)......................... (8,637) (908) 3,215
-------------- -------------- --------------
Earnings before income taxes and cumulative effect of change
in accounting principle................................. 122,147 156,729 168,495
Income taxes................................................. 41,241 54,702 57,630
-------------- -------------- --------------
Earnings before cumulative effect of change in accounting 80,906 102,027 110,865
principle...............................................
Cumulative effect of change in accounting principle,
net of tax.............................................. -- (225) --
-------------- -------------- --------------
Net earnings................................................. $ 80,906 $ 101,802 $ 110,865
============== ============== ==============
Basic net earnings per common share:
Basic earnings before cumulative effect of change in
accounting principle................................. $ 1.09 $ 1.30 $ 1.36
Cumulative effect of change in accounting principle,
net of tax........................................... -- -- --
-------------- -------------- --------------
Basic net earnings per common share.......................... $ 1.09 $ 1.29 $ 1.36
============== ============== ==============
Diluted net earnings per common share:
Diluted earnings before cumulative effect of change in
accounting principle................................. $ 1.08 $ 1.28 $ 1.33
Cumulative effect of change in accounting principle,
net of tax........................................... -- -- --
-------------- -------------- --------------
Diluted net earnings per common share........................ $ 1.08 $ 1.27 $ 1.33
============== ============== ==============
Basic weighted average shares outstanding.................... 74,001 78,650 81,528
============== ============== ==============
Diluted weighted average shares outstanding.................. 74,936 80,010 83,600
============== ============== ==============
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)
Common Stock Additional Total
----------------- Paid-In Unearned Retained Treasury Stockholders'
Shares Amount Capital Compensation Earnings Stock Equity
-------- -------- ------------ ------------ ---------- ---------- -------------
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
Nonvested shares awarded under equity
incentive plans, net of forfeitures....... -- -- 1,443 (1,969) -- 526 --
Amortization of unearned compensation
relating to nonvested 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 -- -- 9,274 -- -- 9,080 18,354
benefit...................................
Shares issued under employee benefit plans -- -- 2,586 -- -- 1,816 4,402
Nonvested shares awarded under equity
incentive plans, net of forfeitures....... -- -- 2,231 (2,921) -- 690 --
Amortization of unearned compensation
relating to nonvested shares.............. -- -- -- 2,231 -- -- 2,231
-------- -------- ------------ ------------ ---------- ---------- -------------
Balance, December 25, 2005..................... 108,503 1,085 234,988 (2,614) 710,277 (531,126) 412,610
Net earnings................................ -- -- -- -- 80,906 -- 80,906
Purchases of treasury stock................. -- -- -- -- -- (38,522) (38,522)
Dividends declared on common stock, $0.22
per share................................. -- -- -- -- (16,299) -- (16,299)
Reclassification of unearned compensation
related to the adoption of Statement of
Financial Accounting Standards No.
123(R) (Note 3)........................... -- -- (2,614) 2,614 -- -- --
Stock options exercised and related tax -- -- 10,017 -- -- 11,981 21,998
benefit...................................
Shares issued under employee benefit plans -- -- 1,935 -- -- 2,232 4,167
Nonvested shares awarded under equity
incentive plans........................... -- -- (998) -- -- 998 --
Stock-based compensation expense related to
employee-based equity awards.............. -- -- 21,794 -- -- -- 21,794
-------- -------- ------------ ------------ ---------- ---------- -------------
Balance, December 31, 2006..................... 108,503 $1,085 $ 265,122 $ -- $ 774,884 $(554,437) $ 486,654
======== ======== ============ ============ ========== ========== =============
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 31, December 25, December 26,
2006 2005 2004
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 80,906 $ 101,802 $ 110,865
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Cumulative effect of change in accounting principle, net of
net of tax.................................................. -- 225 --
Depreciation and amortization.................................. 64,738 54,580 46,051
Amortization of intangible assets.............................. 721 878 663
Stock-based compensation....................................... 21,794 2,231 1,422
Other amortization............................................. 366 246 309
Deferred income tax provision (benefit)........................ (12,083) 9,871 25,313
Inventory impairment........................................... -- -- 2,000
Impairment and other restaurant closure costs.................. 8,800 3,900 --
Loss on disposition of property and equipment.................. 2,573 2,067 1,955
Income tax benefit from stock-based compensation............... 2,757 5,370 10,459
Changes in assets and liabilities, exclusive of effects of
acquisitions:
Receivables.................................................... (9,202) 1,371 (7,218)
Receivables related to captive insurance subsidiary............ 1,259 154 (2,116)
Inventories.................................................... 8,907 15,753 (16,925)
Prepaid and other current assets............................... (2,246) (2,583) (665)
Accounts payable............................................... (16,194) 18,757 5,197
Accrued expenses and other current liabilities................. 13,694 11,842 (3,542)
Loss reserve and unearned premiums related to
captive insurance subsidiary................................ (8,143) (1,202) 6,880
Income taxes................................................... 10,818 (5,941) 8,378
Other non-current liabilities.................................. 7,070 4,866 2,702
Other.......................................................... (1,941) (2,984) (1,123)
-------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 174,594 221,203 190,605
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (122,896) (139,396) (104,620)
Change in restricted assets related to captive insurance
subsidiary..................................................... 5,973 (1,943) (6,623)
Acquisition of restaurants........................................ (8,120) (47,616) (13,817)
Lease acquisition costs........................................... -- -- (4,875)
Acquisition of other intangible asset............................. -- -- (2,809)
Proceeds from sale of property and equipment...................... 281 1,237 66
Proceeds from sale-leaseback transaction.......................... 3,090 -- --
Maturities and sales of short-term investments.................... -- -- (253)
Other investing activities........................................ -- -- (1,124)
-------------- -------------- --------------
NET CASH USED BY INVESTING ACTIVITIES.......................... (121,672) (187,718) (134,055)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock....................................... (38,522) (196,066) (99,723)
Dividends paid.................................................... (14,840) (4,867) (3,911)
Issuance of common stock upon exercise of stock options........... 17,072 12,984 19,497
Shares issued under employee benefit plans........................ 4,167 4,402 5,979
Excess tax benefits from stock-based compensation................. 2,169 -- --
Net debt proceeds (payments)...................................... (13,182) 152,673 14,832
Deferred financing costs relating to issuance of long-term debt... (517) (213) (449)
-------------- -------------- --------------
NET CASH USED BY FINANCING ACTIVITIES.......................... (43,653) (31,087) (63,775)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... 9,269 2,398 (7,225)
CASH AND CASH EQUIVALENTS, beginning of period......................... 13,040 10,642 17,867
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 22,309 $ 13,040 $ 10,642
============== ============== ==============
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 31, December 25, December 26,
2006 2005 2004
----------------- ----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................................... $ 37,580 $ 45,402 $ 12,428
================= ================= =================
Interest........................................................ $ 11,575 $ 3,340 $ 1,056
================= ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued nonvested shares (referred to as restricted stock prior to fiscal
2006) with grant date fair values of $4,500,000 in 2006, $2,921,000 in 2005 and
$1,945,000 in 2004.
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 $3,357,000, $3,940,000 and
$3,881,000 in 2006, 2005 and 2004, 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. In 2005, we began matching contributions in
cash.
We had property and equipment purchases accrued in accounts payable of
approximately $10,400,000 and $11,100,000 as of December 31, 2006 and December
25, 2005, respectively.
We declared cash dividends of $16,299,000, $14,840,000 and $4,867,000 in 2006,
2005 and 2004 which were subsequently paid in the following year.
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 31, 2006, there were 1,930 Applebee's restaurants.
Franchisees operated 1,409 of these restaurants and 521 restaurants were
company-owned. These restaurants were located in 49 states, 16 countries outside
of the United States and one U.S. territory.
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. In 2006, we discontinued writing insurance coverage
for new or existing participants (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 year ended December 31, 2006 contained 53 weeks. The fiscal years ended
December 25, 2005 and December 26, 2004 each contained 52 weeks. These fiscal
years will be referred to hereafter as 2006, 2005 and 2004, 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 required to be presented as a current liability. As of
December 25, 2005, we had checks written in excess of a bank balance of
$13,430,000 which were included in accounts payable in the consolidated balance
sheets. This balance was subsequently funded through our credit facility in
2006.
Financial instruments: Our financial instruments as of December 31, 2006 and
December 25, 2005 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.
F-8
Property and equipment: We report property and equipment at historical cost less
accumulated depreciation. Depreciation is recorded on a straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
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 $959,000 in interest costs during 2006, $462,000 during 2005 and
$189,000 during 2004.
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 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. If an impairment is indicated, 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.
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.
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 consideration of the probability of adverse judgment and 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 $24,168,000 in 2006, $27,557,000 in 2005 and $25,116,000 in 2004
related to these types of insurance in our consolidated financial statements.
Unanticipated changes in these factors may require us to revise our estimates.
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.
F-9
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.
Revenue Recognition: We recognize company restaurant sales when food and
beverage items are sold. Company restaurant sales are reported net of sales tax
collected from our guests and are remitted to the appropriate taxing
authorities.
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.
We recognize royalties on a franchisee's sales in the period in which the sales
are reported to have occurred. 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
$3,957,000 for 2006, $3,358,000 for 2005 and $3,096,000 for 2004.
Other franchise income includes insurance premiums from franchisee participation
in our captive insurance program in 2005 and 2004 and revenue from information
technology products and services provided to certain franchisees in all periods.
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 $56,731,000
for 2006, $51,969,000 for 2005 and $46,324,000 for 2004.
Operating leases: We account for our restaurant and office space leases in
accordance with Statement of Financial Accounting Standards ("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. Prior to 2006, 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 as required by
FASB Staff Position ("FSP") 13-1, "Accounting for Rental Costs Incurred during a
Construction Period." The impact of FSP 13-1 was not material to our
consolidated financial statements. 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.
F-10
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.
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.
Asset Retirement Obligations: In 2005, we adopted FASB Interpretation No. 47
"Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). We have
entered into certain leases which may require us to return the property to the
landlord in its original condition. Beginning in 2005, we recorded expenses for
these leases in our consolidated financial statements in direct and occupancy
costs. We recorded an expense of $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.
Pre-opening expense: We expense direct training, food and beverage costs 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.
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, stock appreciation rights
and other 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.
2006 2005 2004
---------------- ---------------- ----------------
Net earnings....................................... $ 80,906 $ 101,802 $ 110,865
================ ================ ================
Basic weighted average shares outstanding.......... 74,001 78,650 81,528
Dilutive effect of stock options and
equity-based compensation...................... 935 1,360 2,072
---------------- ---------------- ----------------
Diluted weighted average shares outstanding........ 74,936 80,010 83,600
================ ================ ================
Basic net earnings per common share................ $ 1.09 $ 1.29 $ 1.36
================ ================ ================
Diluted net earnings per common share.............. $ 1.08 $ 1.27 $ 1.33
================ ================ ================
We excluded stock options and stock appreciation rights ("SARs") 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
5,400,000, 2,800,000 and 1,500,000 of these options and SARs from our diluted
weighted average share computation for 2006, 2005 and 2004, respectively.
F-11
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 March 2006, the Emerging Issues Task Force
("EITF") issued EITF Issue 06-3, "How Taxes Collected from Customers and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." A consensus was reached that entities
may adopt a policy of presenting sales taxes in the income statement on either a
gross or net basis. If taxes are significant, an entity should disclose its
policy of presenting taxes and the amounts of taxes. The guidance is effective
for periods beginning after December 15, 2006. We present company sales net of
sales taxes in our consolidated financial statements. The impact of this
adoption did not change our method for recording sales taxes in our consolidated
financial statements.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes,"
which clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS No. 109, "Accounting for Income
Taxes." FIN 48 is effective for fiscal years beginning after December 15, 2006.
The impact of this adoption will not be material to our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement defines fair value, establishes a framework for using fair value to
measure assets and liabilities, and expands disclosures about fair value
measurements. The statement applies whenever other statements require or permit
assets or liabilities to be measured at fair value. SFAS No. 157 is effective
for fiscal years beginning after November 15, 2007. The impact of this adoption
will not be material to our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." This statement requires
companies to recognize a net liability or asset and an offsetting adjustment to
accumulated other comprehensive income to report the funded status of defined
benefit pension and other postretirement benefit plans. The statement requires
prospective application, and the recognition and disclosure requirements are
effective for companies with fiscal years ending after December 15, 2006.
Additionally, SFAS No. 158 requires companies to measure plan assets and
obligations at their year-end balance sheet date. This requirement is effective
for fiscal years ending after December 15, 2008. The impact of this adoption was
not material to our consolidated financial statements and we are in compliance
with the measurement date provisions of this statement as of December 31, 2006.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance regarding the consideration given to prior year misstatements when
determining materiality in current year financial statements. SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The impact of this
adoption was not material to our consolidated financial statements.
In October 2006, the FASB issued FASB Staff Position ("FSP") FAS 123 (R)-5,
"Amendment to FSP FAS 123 (R)-1." FSP FAS 123(R)-5 addresses whether a
modification of an instrument in connection with an equity restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. This FSP
states that no change in the recognition or the measurement (due to a change in
classification as a result of a modification solely to reflect an equity
restructuring that occurs when the holders are no longer employees) of the
instruments will result if two conditions are met: (1) there is no increase in
fair value of the award or the antidilution provision is not added to the terms
of the award in contemplation of an equity restructuring and (2) all holders of
the same class of equity instruments are treated in the same manner. The
effective date of FSP FAS 123(R)-5 is the first reporting period beginning after
October 10, 2006. The impact of this adoption was not material to our
consolidated financial statements.
F-12
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Liabilities." This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. If the
fair value option is elected, unrealized gains and losses will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are currently evaluating the impact
of this adoption on our consolidated financial statements.
3. Stock-Based Compensation
Our Board of Directors has approved the Amended and Restated 1995 Equity
Incentive Plan ("1995 Plan") and the 1999 Employee Incentive Plan ("1999 Plan")
which allow for the granting of stock options, SARs, nonvested shares,
performance units and performance shares to eligible participants. Grants of
stock options may be either incentive or nonqualified. There are 19,900,000 and
2,473,875 shares authorized under the 1995 Plan and the 1999 Plan, respectively.
As of December 31, 2006, we estimate there are 3,382,155 shares available for
grant under the 1995 Plan. This estimate is based upon the total number of SARs
that would be exercised using the market price of our stock as of December 29,
2006. We will not make additional grants under the 1999 Plan. Only shares
actually issued upon exercise of a SAR are counted against the shares authorized
under the 1995 Plan. We issue shares out of our treasury for stock option
exercises, SAR exercises and nonvested share issuances.
In 2002, our Board of Directors approved performance share plans with a
three-year performance period. Performance shares represent rights to receive
our common stock, cash or any combination thereof, based upon certain
performance criteria. 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. We no longer grant performance
shares.
Prior to 2006, we accounted for these stock-based compensation equity awards
under the intrinsic method of Accounting Principles Board ("APB") Opinion No.
25. APB Opinion No. 25 required 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 both of our plans were granted with an exercise price equal to the
fair market value on the date of the grant and, accordingly, no compensation
expense was recognized for stock option awards. In addition, we 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 required 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.
F-13
Under APB Opinion No. 25, pro forma expense for stock-based compensation was
calculated using a graded vesting schedule over the explicit vesting period. 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" for 2005 and 2004
(in thousands, except for per share amounts).
2005 2004
---------------- ----------------
Net earnings, as reported............................. $ 101,802 $ 110,865
Add: Stock-based compensation expense
included in net earnings, net of related taxes 1,409 638
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all equity awards,
net of related taxes (1)......................... 8,536 8,555
---------------- ----------------
Pro forma net earnings................................ $ 94,675 $ 102,948
================ ================
Basic net earnings per common share,
as reported....................................... $ 1.29 $ 1.36
================ ================
Basic net earnings per common share,
as adjusted....................................... $ 1.20 $ 1.26
================ ================
Diluted net earnings per common share,
as reported....................................... $ 1.27 $ 1.33
================ ================
Diluted net earnings per common share,
as adjusted....................................... $ 1.18 $ 1.23
================ ================
(1) SFAS No. 123 (revised 2004) requires compensation expense to be recognized
over the requisite service period which is generally from the grant date to the
earlier of a) the explicit vesting date or b) the date on which the employee
becomes retirement eligible. If pro forma expense for 2005 and 2004 had been
derived using this approach, additional stock-based compensation would have been
$2,731 and $2,013, net of tax, respectively, and pro forma net income would have
been $91,944 and $100,935, respectively. Additionally, basic and diluted pro
forma earnings per share would have been $1.17 and $1.15, respectively, for 2005
and $1.24 and $1.21, respectively, for 2004.
We adopted the fair value recognition provisions of SFAS No. 123(R),
"Share-Based Payment" ("SFAS 123(R)") at the beginning of 2006. SFAS No. 123(R)
requires all stock-based compensation, including grants of employee stock
options, to be recognized in the statement of earnings based on fair value. With
limited exceptions, the amount of compensation cost is measured based on the
fair value on the grant date of the equity or liability instruments issued.
Compensation cost is recognized over the period that an employee provides
service for that award. We adopted this accounting treatment using the modified
prospective transition method; therefore, results for prior periods have not
been restated.
Beginning in 2006, we changed our method of determining the fair value of
stock-based equity awards from the Black-Scholes model to a binomial model. The
binomial model considers a range of assumptions relative to volatility,
risk-free interest rates and employee exercise behavior, which models actual
employee behaviors. We believe the binomial model provides a fair value that is
more representative of actual and future experience as compared to the
Black-Scholes model.
F-14
Compensation costs for 2006 have been recognized for all new equity awards
granted in 2006 and those equity awards granted prior to 2006 that have yet to
reach the end of their service period. As required by SFAS No. 123(R), we began
recognizing expense for employee stock-based compensation over the shorter of
the vesting period or the period from the date of the grant until the date the
employee becomes eligible for retirement. We recognize expense for stock-based
compensation over the graded vesting period. We recognized stock-based
compensation in the consolidated financial statements as follows:
2006 2005 2004
--------------- --------------- ---------------
Labor................................................ $ 930 $ -- $ --
General and administrative expenses.................. 20,864 2,231 975
Income taxes......................................... (7,410) (822) (337)
--------------- --------------- ---------------
Stock-based compensation expense included
in net earnings, net of related tax............... $ 14,384 $ 1,409 $ 638
=============== =============== ===============
As of December 31, 2006, we had unrecognized compensation expense for stock
options and SARs of $16,300,000 to be recognized over a weighted average period
of 1.8 years.
As required by SFAS No. 123(R), unearned compensation of $2,614,000, which was
previously reflected as a reduction to stockholders' equity as of December 25,
2005, was reclassified as a reduction to additional paid-in capital upon our
adoption of this statement.
Stock Options
Prior to 2005, we granted substantially all of our equity awards through stock
options once per year. These stock options generally vest over three years and
expire ten years from the date of the grant.
In 2005, we granted substantially all of our equity awards through quarterly
stock option grants. Grants issued in the first quarter of each year vest three
years from the date of the grant. Grants issued in subsequent quarters vest on
the same date as the first quarterly stock option grant of that year. In 2005
and 2006, we also granted to certain employees stock options with 25% of the
grant vesting four years from the grant date and the remaining 75% of the grant
vesting five years from the grant date. The 2005 option grants expire six to
seven years from the date of the grant. In the first quarter of 2006, we issued
grants to certain employees and members of the Board of Directors which vest
either one or three years from the date of the grant. As part of their
compensation package, the outside members of the board of directors receive a
grant of options in the first quarter of every year which expire ten years from
the grant date.
F-15
Transactions for stock options relative to both plans for 2004 to 2006 were as
follows:
1995 Plan
---------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Exercise Contractual Aggregate
Number of Options Price Life Intrinsic Value
------------------ -------------- ---------------- -------------------
(in thousands)
Options outstanding at
December 28, 2003............ 5,487,048 $ 12.84 7.4 years
Granted................... 1,596,944 $ 25.82
Exercised................. (1,445,331) $ 10.09 $ 22,138
Forfeited................. (570,853) $ 14.91
------------------
Options outstanding at
December 26, 2004............ 5,067,808 $ 17.48 7.3 years
Granted................... 3,277,725 $ 25.69
Exercised................. (638,163) $ 11.89 $ 9,188
Forfeited................. (341,437) $ 23.80
------------------
Options outstanding at
December 25, 2005............ 7,365,933 $ 21.33 6.5 years
Granted................... 453,943 $ 22.16
Exercised................. (1,058,021) $ 13.45 $ 10,838
Expired................... (120) $ 8.30
Forfeited................. (586,486) $ 25.62
------------------
Options outstanding at
December 31, 2006............ 6,175,249 $ 22.33 5.8 years $ 20,139
==================
Options vested and expected to
vest at December 31, 2006.... 5,667,470 $ 22.07 1.1 years $ 19,786
==================
Options exercisable at
December 31, 2006............ 1,985,145 $ 16.02 5.4 years $ 17,473
==================
F-16
1999 Plan
---------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Exercise Contractual Aggregate
Number of Options Price Life Intrinsic Value
------------------ -------------- ---------------- ------------------
(in thousands)
Options outstanding at
December 28, 2003............ 1,775,097 $ 12.77 7.7 years
Granted................... -- --
Exercised................. (572,048) $ 10.46 $ 8,744
Forfeited................. (73,439) $ 14.81
------------------
Options outstanding at
December 26, 2004............ 1,129,610 $ 13.80 7.0 years
Granted................... -- --
Exercised................. (418,813) $ 13.67 $ 5,325
Forfeited................. (46,141) $ 16.02
------------------
Options outstanding at
December 25, 2005............ 664,656 $ 13.73 6.0 years
Granted................... -- --
Exercised................. (213,758) $ 13.74 $ 2,090
Expired................... -- --
Forfeited................. (505) $ 13.22
------------------
Options outstanding at
December 31, 2006............ 450,393 $ 13.72 4.9 years $ 4,933
==================
Options vested and expected to
vest at December 31, 2006.... 450,315 $ 13.72 4.9 years $ 4,932
==================
Options exercisable at
December 31, 2006............ 445,893 $ 13.69 4.9 years $ 4,895
==================
The aggregate intrinsic value was calculated using the difference between the
current market price and the grant price for only those equity awards that have
a grant price that is less than the current market price.
F-17
The following table summarizes information relating to our fixed-priced stock
options outstanding for both plans at December 31, 2006.
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
---------------------------- -------------- --------------- --------------- --------------- ---------------
1995 Plan:
$ 6.18 to $ 14.72 849,089 4.0 years $ 11.40 849,089 $ 11.40
$ 16.12 to $ 21.00 820,438 6.0 years $ 17.09 709,677 $ 16.54
$ 21.01 to $ 23.22 1,136,137 6.0 years $ 22.39 136,330 $ 21.47
$ 23.35 to $ 25.72 262,273 6.4 years $ 24.87 50,999 $ 24.80
$ 25.79 to $ 25.79 940,453 7.0 years $ 25.79 131,220 $ 25.79
$ 25.85 to $ 26.29 111,705 7.8 years $ 25.98 96,580 $ 26.00
$ 26.30 to $ 26.30 1,429,000 5.6 years $ 26.30 -- --
$ 26.31 to $ 28.91 626,154 5.6 years $ 27.95 11,250 $ 26.87
-------------- ---------------
$ 6.18 to $ 28.91 6,175,249 5.8 years $ 22.33 1,985,145 $ 16.02
============== ===============
1999 Plan:
$ 7.24 to $ 13.22 161,969 4.0 years $ 10.27 161,969 $ 10.27
$ 13.60 to $ 16.13 156,496 5.1 years $ 15.12 151,996 $ 15.09
$ 16.15 to $ 17.60 131,928 5.9 years $ 16.29 131,928 $ 16.29
-------------- ---------------
$ 7.24 to $ 17.60 450,393 4.9 years $ 13.72 445,893 $ 13.69
============== ===============
The number of options exercisable for each plan are summarized below:
1995 Plan 1999 Plan
------------------------------ ----------------------------
Weighted Weighted
Average Average
Options Exercise Options Exercise
Exercisable Price Exercisable Price
--------------- -------------- ---------------- -----------
December 26, 2004........... 1,572,468 $ 10.70 403,863 $10.95
December 25, 2005........... 1,919,347 $ 13.33 556,656 $13.24
December 31, 2006........... 1,985,145 $ 16.02 445,893 $13.69
We derived the following weighted-average assumptions using the binomial model
in 2006 and the Black-Scholes model for 2005 and 2004 for stock options:
2006 2005 2004
-------------- ---------------- ---------------
(Binomial) (Black-Scholes) (Black-Scholes)
Expected term in years.................... 4.8 5.1 4.8
Expected stock price volatility........... 31.5% 32.3% 41.6%
Expected dividend yield................... 0.9% 0.7% 0.3%
Risk-free interest rate................... 4.6% 3.9% 2.7%
Fair value of options granted............. $ 6.85 $ 8.43 $ 9.84
F-18
Stock Appreciation Rights
Beginning in 2006, we began granting substantially all of our equity awards
through quarterly nonvested share and SAR grants which are exercisable in shares
of our common stock. Grants issued for the first quarter of each year vest three
years from the date of the grant. Grants issued in subsequent quarters vest on
the same date as the first quarterly grant of that year. The SARs granted in
2006 expire six to seven years from the date of the grant. Transactions for SARs
for 2006 were as follows:
1995 Plan
---------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual Aggregate
SARs Price Life Intrinsic Value
------------------ -------------- ---------------- ------------------
(in thousands)
SARs outstanding at
December 25, 2005............ -- --
Granted(1)................ 1,231,467 $ 21.81
Exercised................. -- --
Expired................... -- --
Forfeited................. (64,600) $ 22.17
------------------
SARs outstanding at
December 31, 2006............ 1,166,867 $ 21.80 6.2 years $ 3.354
==================
SARs vested and expected to
vest at December 31, 2006.... 997,571 $ 21.80 2.2 years $ 2,868
==================
SARs exercisable at
December 31, 2006............ --
==================
(1) Upon exercise of SARs, employees will receive the number of shares of common
stock equal in value to the appreciation in the fair market value based on the
difference between the fair market value on the grant date and the fair market
value on the date of exercise. The number of shares of common stock delivered as
payment of such appreciation will reduce the shares available for issuance under
the 1995 Plan.
The following table summarizes information related to our SARs outstanding at
December 31, 2006.
SARs Outstanding SARs Exercisable
------------------------------------------------ -------------------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
---------------------------- -------------- --------------- --------------- --------------- ---------------
1995 Plan:
$ 19.92 to $ 21.00 598,164 6.2 years $ 20.66 -- --
$ 22.34 to $ 22.34 267,978 6.2 years $ 22.34 -- --
$ 23.57 to $ 23.57 300,725 6.2 years $ 23.57 -- --
-------------- ---------------
$ 19.92 to $ 23.57 1,166,867 6.2 years $ 21.80 -- --
============== ===============
F-19
We derived the following weighted-average assumptions for SARs using the
binomial model:
2006
--------------
Expected term in years 4.2
Expected stock price volatility 31.7%
Expected dividend yield 0.9%
Risk-free interest rate 4.7%
Fair value of SARs granted $ 6.27
Assumptions
We determined our assumptions for stock options and SAR grants based on the
following methodology:
Expected term: We have determined the expected term based upon the assumption
that all outstanding options and SARs will be exercised at the midpoint of the
current holding period and the full contractual term.
Expected volatility: We have determined the expected volatility based on a
weighted average of Applebee's volatility over the expected term, historical
volatility of certain peer group restaurant volatilities and Applebee's implied
volatility.
Expected dividend yield: We have determined the expected dividend yield based
upon our expected dividends as a percentage of our current stock price.
Risk-free interest rate: We have determined the risk-free interest rate using
the U.S. Treasury yield curve in effect at the time of the grant for the
expected term of the equity award.
Nonvested Shares
We grant nonvested shares under our 1995 Plan. Nonvested shares vest either one,
two or three years after the date of the grant. The fair value of nonvested
shares granted is equal to the market price of the stock at the date of grant.
Transactions during 2004 to 2006 were as follows:
Weighted
Number of Average
Awards Fair Value
--------------- --------------
Nonvested share awards outstanding as of December 28, 2003................. 182,602 $16.59
Granted.................................................................... 84,882 25.08
Vested..................................................................... (73,031) 14.99
Forfeited.................................................................. (7,183) 22.26
--------------- --------------
Nonvested share awards outstanding as of December 26, 2004................. 187,270 $20.85
Granted.................................................................... 117,679 27.66
Vested..................................................................... (33,917) 18.53
Forfeited.................................................................. (13,219) 25.30
--------------- -------------
Nonvested share awards outstanding as of December 25, 2005................. 257,813 $24.03
Granted.................................................................... 204,501 21.79
Vested..................................................................... (105,168) 19.29
Forfeited.................................................................. (37,245) 25.85
--------------- --------------
Nonvested share awards outstanding as of December 31, 2006................. 319,901 $23.95
=============== ==============
F-20
As of December 31, 2006, we had unrecognized compensation expense related to
nonvested share awards of approximately $2,200,000, which will be recognized
over a weighted average period of 1.5 years.
Employee stock purchase plan
Our Board of Directors has authorized an employee stock purchase plan that
allows associates to purchase shares of our common stock at a 15% discount
through a payroll deduction. We record compensation for this plan using the
Black-Scholes valuation model in the quarter that the purchase occurs. As of
December 31, 2006, 142,480 shares of the 1,850,000 shares which were authorized
under this plan were available for purchase.
4. 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 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.
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.
In January 2006, we completed the acquisition of four Applebee's restaurants in
the Houston market for approximately $8,100,000 in cash. The purchase price was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately $500,000, reacquired franchise rights of approximately $100,000,
and other net assets of approximately $100,000.
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. The pro forma company restaurant sales for 2006 include sales related to
the January 2006 acquisition discussed above as if the acquisition had occurred
as of the beginning of 2006. The pro forma company restaurant sales for 2005
includes sales related to the January 2006 acquisition and the May 2005
acquisition discussed above as if the acquisitions had occurred as of the
beginning of 2005. The pro forma company restaurant sale for 2004 includes sales
related to the May 2005 acquisition and the April 2004 acquisition discussed
above as if the acquisition had occurred as of the beginning of 2004.
2006 2005 2004
--------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 6,400 $ 17,000 $ 17,600
=============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 7,100 $ 32,800 $ 52,600
=============== =============== ===============
F-21
In April 2005, we completed the acquisition of eight Applebee's restaurants in
the Memphis market, which 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. We have
remodeled and opened seven restaurants and the remaining restaurant was sold to
a third-party.
5. 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.
6. Impairment and Other Restaurant Closure Costs
In 2006, we recorded impairment and other restaurant closure costs of $8,800,000
($5,830,000, net of taxes) consisting of $5,500,000 of property and equipment
and lease acquisition costs, $1,500,000 for a write-down of an investment,
$900,000 for restaurant closure costs and $900,000 for a write-down of a
corporate aircraft. This charge has been included in our consolidated statement
of earnings for 2006.
In 2005, we recorded an impairment 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.
In assessing restaurants for impairment, we use current and historical operating
results to estimate future cash flows on a restaurant by restaurant basis. The
asset impairment charges for 2005 and 2006 were calculated by comparing the
carrying value of the restaurants' assets to the estimated future cash flow
projections. In assessing the above non-restaurant assets for impairment, we
used an estimate of their fair market value.
7. Assets Held for Sale
We classify assets as held for sale when there is a plan for disposal of assets
and those assets meet the held for sale criteria as defined in SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets." During 2006, we
began to actively market our existing corporate headquarters under a plan
approved by management. Consequently, we have classified the building and land
as held for sale as of December 31, 2006. In addition, we began to actively
market a corporate aircraft and other assets with immaterial carrying values. We
ceased amortizing these assets when we classify the assets as held for sale. In
February 2007, the corporate aircraft was sold and we recognized an immaterial
gain.
F-22
8. Receivables
Receivables are comprised of the following (in thousands):
December 31, December 25,
2006 2005
----------------- -----------------
Franchise royalty, advertising and trade receivables............. $ 39,123 $ 27,098
Credit card receivables.......................................... 9,492 8,853
Other............................................................ 73 2,246
----------------- -----------------
48,688 38,197
Less allowance for bad debts..................................... 917 340
----------------- -----------------
$ 47,771 $ 37,857
================= =================
We had a provision for bad debts of $592,000 in 2006. We did not have a
provision for bad debts in 2005 or 2004. We had write-offs against the allowance
for bad debts of $15,000, $77,000 and $627,000 during 2006, 2005 and 2004,
respectively.
9. Prepaid and Other Current Assets
Prepaid and other current assets are comprised of the following (in thousands):
December 31, December 25,
2006 2005
----------------- -----------------
Deferred income taxes............................................ $ 5,825 $ 6,338
Other............................................................ 9,430 7,180
----------------- -----------------
$ 15,255 $ 13,518
================= =================
10. Goodwill and Other Intangible Assets
We have completed the annual goodwill impairment test required under the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" in the fourth
fiscal quarter for each year reported in our consolidated statements of
earnings. We determined that no impairment existed and as a result, no
impairment losses were recorded in any year.
Goodwill is summarized below (in thousands):
December 31, December 25,
2006 2005
----------------- -----------------
Carrying amount, beginning of the year........................... $ 138,443 $ 116,344
Goodwill acquired during the year................................ 507 22,099
----------------- -----------------
Carrying amount, end of the year................................. $ 138,950 $ 138,443
================= =================
F-23
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets," are summarized below (in thousands):
December 31, 2006
--------------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ------------------ ------------------
Amortized intangible assets:
Franchise interest and rights....... $ 6,371 $ 6,172 $ 199
Lease acquisition costs(1).......... 3,430 650 2,780
Noncompete agreement................ 350 199 151
------------------ ------------------ ------------------
Total................................... $ 10,151 $ 7,021 $ 3,130
================== ================== ==================
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(1).......... 4,939 743 4,196
Noncompete agreement................ 350 109 241
------------------ ------------------ ------------------
Total................................... $ 11,660 $ 6,748 $ 4,912
================== ================== ==================
(1) In connection with the review of long-lived assets during our preparation of
the second quarter of fiscal 2006 condensed consolidated financial statements,
we recorded an asset impairment charge of approximately $1,100,000, net of
accumulated amortization, for lease acquisition costs related to two restaurants
whose carrying amounts were not deemed recoverable (Note 6).
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 which originally ranged from 7
to 20 years.
Franchise interest and rights are being amortized over the next one to two
years, lease acquisition costs are being amortized over the next 5 to 18 years
and the noncompete agreement is being amortized over the next two years.
We expect annual amortization expense for amortizable other intangible assets
for the next five fiscal years to range from approximately $200,000 to $500,000.
Intangible assets not subject to amortization are summarized below (in
thousands):
December 31, December 25,
2006 2005
---------------------- --------------------
Carrying amount, beginning of the year.................. $ 3,138 $ 2,793
Nonamortizable intangible assets acquired
during the year.................................... 140 345
---------------------- --------------------
Nonamortizable intangible assets amount,
end of the year.................................... $ 3,278 $ 3,138
====================== ====================
In connection with our acquisition of four Applebee's restaurants in Houston
from a franchisee in January 2006, we recorded approximately $100,000 of
reacquired franchise rights (Note 4).
F-24
In connection with our acquisition of 12 Applebee's restaurants in Missouri,
Kansas and Arkansas from a franchisee in May 2005, we recorded approximately
$300,000 of reacquired franchise rights (Note 4).
The amount allocated to reacquired franchise rights is based upon the initial
franchise fees received from these franchisees. This intangible asset has an
indefinite life and, accordingly, will not be amortized but tested for
impairment at least annually.
11. Other Assets
Other assets are comprised of the following (in thousands):
December 31, December 25,
2006 2005
----------------- -----------------
Nonqualified deferred compensation plan
investments (Note 20)......................................... $ 18,729 $ 14,493
Liquor licenses.................................................. 6,814 6,541
Notes receivable................................................. 1,305 1,478
Deferred financing costs, net.................................... 1,013 664
Minority investment in unaffiliated company, at net realizable
value.......................................................... 750 2,250
Other............................................................ 6,807 6,473
----------------- -----------------
$ 35,418 $ 31,899
================= =================
12. Property and Equipment
Property and equipment, net, is comprised of the following (in thousands):
December 31, December 25,
2006 2005
----------------- ------------------
Land............................................................. $ 107,193 $ 97,476
Buildings and leasehold improvements............................. 527,049 482,074
Furniture and equipment.......................................... 291,501 263,526
Construction in progress......................................... 28,757 25,755
----------------- ------------------
954,500 868,831
Less accumulated depreciation and capitalized
lease amortization............................................ 318,469 278,238
----------------- ------------------
$ 636,031 $ 590,593
================= ==================
We have recorded capitalized leases of $4,055,000 at both December 31, 2006 and
December 25, 2005, which are included in buildings and leasehold improvements.
We had accumulated amortization of such property of $2,258,000 at December 31,
2006 and $2,025,000 at December 25, 2005. 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 $64,738,000 for 2006, $54,580,000 for 2005 and
$46,051,000 for 2004. Of these amounts, capitalized lease amortization was
$233,000 during 2006, $240,000 during 2005 and $239,000 during 2004.
F-25
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):
2006 2005 2004
------------------ ------------------ -----------------
Minimum rent................................. $ 26,860 $ 23,929 $ 20,416
Contingent rent.............................. 1,453 1,389 1,254
------------------ ------------------ -----------------
$ 28,313 $ 25,318 $ 21,670
================== ================== =================
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 2007) as of
December 31, 2006 are as follows (in thousands):
Capitalized Operating
Leases Leases
------------------ ------------------
2007............................................................. $ 822 $ 29,307
2008............................................................. 851 29,234
2009............................................................. 880 28,977
2010............................................................. 895 28,544
2011............................................................. 896 28,298
Thereafter....................................................... 3,178 257,659
------------------ ------------------
Total minimum lease payments..................................... 7,522 $ 402,019
==================
Less amounts representing interest............................... 3,606
------------------
Present value of minimum lease payments.......................... $ 3,916
==================
In October 2006, we entered into a sale-leaseback arrangement with a third-party
finance company involving five restaurant properties. As a result of this
transaction, we recorded a deferred gain of approximately $3,100,000 which will
be recognized over the 10-year remaining lease term on a straight-line basis.
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 31, December 25,
2006 2005
----------------- ------------------
Notes payable; interest at federal funds rate plus 0.50% at
December 31, 2006, at federal funds rate plus 0.625% at
December 25, 2005............................................ $ -- $ 7,900
Unsecured revolving credit facility; interest at LIBOR plus
0.5% or prime rate at December 31, 2006, due
December 2011 and LIBOR plus 0.625% or prime
rate at December 25, 2005.................................... 170,000 175,000
Capitalized lease obligations (Note 12).......................... 3,916 4,054
Other............................................................ 1,269 1,413
----------------- ------------------
Total notes payable and long-term debt........................... 175,185 188,367
Less notes payable and current portion of long-term debt......... 265 8,159
----------------- ------------------
Long-term debt, less current portion............................. $ 174,920 $ 180,208
================= ==================
In December 2006, we entered into a new five-year revolving credit facility. The
terms of the bank credit agreement provide for $400,000,000 in unsecured
revolving credit and an additional $200,000,000 of revolving credit upon
satisfaction of the conditions set forth in the credit facility. The facility is
subject to various covenants and restrictions which, among other things, require
the maintenance of stipulated fixed charge and leverage 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.
F-26
As of December 31, 2006, we are in compliance with the covenants contained in
our credit agreement. As of December 31, 2006, we had borrowings of
$170,000,000, letters of credit of $15,600,000 outstanding and approximately
$214,400,000 available under our revolving credit facility.
In December 2004, we had a $150,000,000 unsecured revolving credit facility. The
bank credit agreement provided for a $150,000,000 five-year unsecured revolving
credit facility, of which $40,000,000 could be used for the issuance of letters
of credit. The facility was subject to various covenants and restrictions which,
among other things, required the maintenance of stipulated fixed charge,
leverage and indebtedness to capitalization ratios, as defined. There was 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 was 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.
Maturities of notes payable and long-term debt, including capitalized lease
obligations, ending during the years indicated, are as follows (in thousands):
2007............................................................................... $ 265
2008............................................................................... 292
2009............................................................................... 368
2010............................................................................... 458
2011............................................................................... 170,519
Thereafter......................................................................... 3,283
-----------------
$ 175,185
=================
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. In 2005, we reduced the types of insurance coverage plans offered
which resulted in fewer franchisee participants in our captive insurance
program. Through 2005, Applebee's International, Inc. and covered franchisees
made 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 were established based
upon third-party actuarial estimates of settlement costs for incurred and
anticipated claims and administrative fees. Franchisee premiums were included in
other franchise income ratably over the policy year and the related offsetting
expenses were included in cost of other franchise income. In 2006, we
discontinued writing insurance coverage for new or existing participants. Cost
of other franchise income includes costs related to the resolution of claims
arising from franchisee participation in our captive insurance program. We do
not expect franchisee participation in the captive insurance company to have a
material impact on our net earnings. Our consolidated balance sheets include the
following balances related to the captive insurance subsidiary:
o Franchise premium receivables of approximately $400,000 and $1,700,000 as
of December 31, 2006 and December 25, 2005, respectively, included in
receivables related to captive insurance subsidiary.
F-27
o Cash equivalent and other long-term investments restricted for the payment
of claims of approximately $12,600,000 and $18,600,000 as of December 31,
2006 and December 25, 2005, respectively, included in restricted assets
related to captive insurance subsidiary.
o Loss reserve related to captive insurance subsidiary of approximately
$12,600,000 and $20,700,000 as of December 31, 2006 and December 25, 2005,
respectively. Approximately $6,500,000 and $10,500,000 for December 31,
2006 and December 25, 2005, respectively, is included in other non-current
liabilities.
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 31, December 25,
2006 2005
----------------- -----------------
Total balance, beginning of the year............................. $ 20,478 $ 18,801
Incurred related to:
Current year.................................................. -- 7,141
Prior year.................................................... (2,190) 2,406
----------------- -----------------
Total incurred.............................................. (2,190) 9,547
----------------- -----------------
Paid related to:
Current year.................................................. -- 1,546
Prior year.................................................... 5,878 6,324
----------------- -----------------
Total paid.................................................. 5,878 7,870
----------------- -----------------
Total balance, end of the year................................... 12,410 20,478
Less current portion............................................. 5,910 9,976
----------------- -----------------
Long-term portion (Note 16)...................................... $ 6,500 $ 10,502
================= =================
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 31, 2006 or December 25, 2005. We had acquisition expenses payable of
$184,000 as of December 31, 2006 and $259,000 as of December 25, 2005 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 31, December 25,
2006 2005
------------------ -----------------
Gift cards........................................................ $ 48,252 $ 39,162
Compensation and related taxes.................................... 31,701 35,488
Restaurant occupancy costs........................................ 13,821 9,271
Sales and use taxes............................................... 7,914 6,798
Insurance loss reserves........................................... 4,120 5,327
Other............................................................. 7,833 4,949
------------------ -----------------
$ 113,641 $ 100,995
================== =================
F-28
16. Other Non-Current Liabilities
Other non-current liabilities are comprised of the following (in thousands):
December 31, December 25,
2006 2005
------------------ -----------------
Restaurant occupancy costs........................................ $ 22,307 $ 19,969
Nonqualified deferred compensation plan
liabilities (Note 20).......................................... 18,729 14,493
Long-term insurance loss reserves................................. 7,117 --
Loss and loss adjustment reserve related to
captive insurance subsidiary.................................... 6,500 10,502
Deferred gain on sale-leaseback................................... 2,706 --
Compensation...................................................... 2,190 3,033
Other............................................................. 2,288 2,377
------------------ -----------------
$ 61,837 $ 50,374
================== =================
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):
2006 2005 2004
--------------- --------------- ---------------
Current provision:
Federal............................................ $ 42,902 $ 40,198 $ 30,171
State and local.................................... 10,422 4,633 2,146
Deferred provision (benefit):
Federal............................................ (10,559) 9,248 23,625
State and local.................................... (1,524) 623 1,688
--------------- --------------- ---------------
Income taxes before cumulative effect of change
in accounting principle............................ 41,241 54,702 57,630
Income taxes related to the cumulative effect of
change in accounting principle..................... -- (125) --
--------------- --------------- ---------------
Total income taxes..................................... $ 41,241 $ 54,577 $ 57,630
=============== =============== ===============
The deferred income tax provision (benefit) is comprised of the following (in
thousands):
2006 2005 2004
--------------- --------------- ----------------
Depreciation and amortization.......................... $ 2,339 $ 13,090 $ 24,278
Stock-based compensation............................... (6,842) -- --
Impairment and other restaurant closure costs.......... (3,300) (1,463) --
Other.................................................. (4,280) (1,756) 1,035
--------------- --------------- ----------------
Net change in deferred income taxes.................... $ (12,083) $ 9,871 $ 25,313
=============== =============== ================
F-29
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):
2006 2005 2004
--------------- --------------- ----------------
Federal income tax at statutory rates.................. $ 42,751 $ 54,851 $ 58,973
Increase (decrease) to income tax expense:
State and local income taxes, net of
federal benefit................................. 5,200 3,764 3,083
Employment related tax credits, net................ (6,596) (4,502) (3,894)
Other.............................................. (114) 589 (532)
--------------- --------------- ----------------
Income taxes before cumulative effect of change
in accounting principle............................ 41,241 54,702 57,630
Income taxes related to the cumulative effect of
change in accounting principle..................... -- (125) --
--------------- --------------- ----------------
Total income taxes..................................... $ 41,241 $ 54,577 $ 57,630
=============== =============== ================
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 31, December 25,
2006 2005
----------------- -----------------
Classified as current:
Accrued expenses............................................ $ 3,032 $ 3,879
Allowance for bad debts..................................... 783 128
Other, net.................................................. 2,010 2,331
----------------- -----------------
Net deferred income tax asset............................... $ 5,825 $ 6,338
================= =================
Classified as non-current:
Depreciation and amortization............................... $ (48,984) $ (48,530)
Stock-based compensation.................................... 7,926 --
Impairment and other restaurant closure costs............... 3,300 1,463
Franchise deposits.......................................... 648 446
Other, net.................................................. 11,984 8,899
----------------- -----------------
Net deferred income tax liability........................... $ (25,126) $ (37,722)
================= =================
18. Commitments and Contingencies
Litigation, claims and disputes: We are subject from time to time to lawsuits,
claims and governmental inspections or audits arising in the ordinary course of
business. Some of these lawsuits purport to be class actions and/or seek
substantial damages. In the opinion of management, these matters are adequately
covered by insurance, or, if not so covered, are without merit or are of such a
nature or involve amounts that would not have a material adverse impact on 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 31, 2006,
we have outstanding lease guarantees of approximately $15,300,000. 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 $12,300,000. These leases expire at various
times with the final lease agreement expiring in 2018. We did not record a
liability related to these contingent lease liabilities as of December 31, 2006
or December 25, 2005.
F-30
Franchisee guarantees: 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
31, 2006, there were loans outstanding to five franchisees for approximately
$65,800,000 under this program. The fair value of our guarantees under this
financing program is approximately $130,000 and is recorded in non-current
liabilities in our consolidated balance sheet as of December 31, 2006.
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the officer
resigns or is terminated not related to a change in control, some of which
require payments to be made only if we enforce certain terms in the agreements.
If the severance payments had been due as of December 31, 2006, we would have
been required to make payments totaling approximately $10,600,000. In addition,
we have severance and employment agreements with certain officers which contain
severance provisions related to a change in control. The agreements define the
circumstances which will constitute a change in control. Those provisions would
have required additional aggregate payments of approximately $5,300,000 if such
officers had been terminated as of December 31, 2006.
19. Stockholders' Equity
In October 2005, our Board of Directors authorized repurchases of our common
stock of up to $175,000,000 during 2005 and 2006, subject to market conditions.
In November 2006 our Board of Directors authorized additional repurchases of our
common stock of up to $150,000,000, subject to market conditions. During 2006,
we repurchased 1,760,506 shares of our common stock at an average price of
$21.88 for an aggregate cost of approximately $38,522,000. As of December 31,
2006, we had approximately $240,400,000 remaining under our 2005 and 2006
repurchase authorizations.
A reconciliation of our treasury shares for the past three fiscal years is
provided below (shares in thousands):
Treasury
Shares
---------------
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)
Nonvested 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)
Nonvested shares awarded under equity incentive plans........ (104)
---------------
Balance as of December 25, 2005.............................. 34,305
Purchases of treasury stock.................................. 1,761
Stock options exercised...................................... (1,268)
Shares issued under employee benefit plans................... (237)
Nonvested shares awarded under equity incentive plans........ (168)
---------------
Balance as of December 31, 2006.............................. 34,393
===============
F-31
20. Employee Benefit Plans
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 31, 2006 and December 25,
2005, 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 (expense) and the
offsetting amount is 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
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. In 2005, our contributions vested 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. In 2006, our vesting schedule
changed to 100% vesting immediately. Contributions under these plans were
$2,614,000 in 2006, $2,429,000 in 2005 and $2,158,000 in 2004.
F-32
21. Quarterly Results of Operations (Unaudited)
The following presents the unaudited consolidated quarterly results of
operations for 2006 and 2005. The fiscal quarter ended December 31, 2006
contained 14 weeks. All other fiscal quarters contained 13 weeks. All amounts,
except per share amounts, are expressed in thousands.
2006
------------------------------------------------------------
Fiscal Quarter Ended
------------------------------------------------------------
March 26, June 25, September 24, December 31,
2006 2006 2006 2006
------------ ------------ ------------ ------------
Operating revenues:
Company restaurant sales......................... $307,899 $296,128 $286,938 $305,293
Franchise royalties and fees..................... 35,935 34,306 33,340 36,274
Other franchise income........................... 445 539 371 453
------------ ------------ ------------ ------------
Total operating revenues...................... 344,279 330,973 320,649 342,020
------------ ------------ ------------ ------------
Cost of company restaurant sales:
Food and beverage................................ 82,236 78,433 76,616 82,528
Labor............................................ 101,031 100,296 99,105 103,084
Direct and occupancy............................. 78,946 80,411 80,047 84,439
Pre-opening expense.............................. 750 1,157 1,115 1,326
------------ ------------ ------------ ------------
Total cost of company restaurant sales........ 262,963 260,297 256,883 271,377
------------ ------------ ------------ ------------
Cost of other franchise income........................ 766 281 694 958
General and administrative expenses................... 35,606 32,320 35,601 37,297
Amortization of intangible assets..................... 204 204 154 159
Impairment and other restaurant closure costs......... 1,600 3,000 1,900 2,300
Loss on disposition of property and equipment......... 577 430 685 881
------------ ------------ ------------ ------------
Operating earnings.................................... 42,563 34,441 24,732 29,048
------------ ------------ ------------ ------------
Other income (expense):
Investment income................................ 745 (285) 885 1,423
Interest expense................................. (2,554) (2,985) (2,970) (2,912)
Other income..................................... 136 101 301 (522)
------------ ------------ ------------ ------------
Total other income (expense).................. (1,673) (3,169) (1,784) (2,011)
------------ ------------ ------------ ------------
Earnings before income taxes.......................... 40,890 31,272 22,948 27,037
Income taxes.......................................... 13,739 10,868 8,107 8,527
------------ ------------ ------------ ------------
Net earnings.......................................... $ 27,151 $ 20,404 $ 14,841 $ 18,510
============ ============ ============ ============
Basic net earnings per common share................... $ 0.37 $ 0.28 $ 0.20 $ 0.25
============ ============ ============ ============
Diluted net earnings per common share................. $ 0.36 $ 0.27 $ 0.20 $ 0.25
============ ============ ============ ============
Basic weighted average shares outstanding............. 74,147 74,112 73,902 73,883
============ ============ ============ ============
Diluted weighted average shares outstanding........... 75,281 75,083 74,673 74,859
============ ============ ============ ============
F-33
2005
---------------------------------------------------------------
Fiscal Quarter Ended
---------------------------------------------------------------
March 27, June 26, September 25, December 25,
2005 2005 2005 2005
------------- ------------- ------------- --------------
Operating 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 and other restaurant closure costs.......... -- -- 3,900 --
Loss on disposition of property 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 48,405 42,034 35,971 30,319
change in accounting principle.......................
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,
net of tax........................................... -- -- -- (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-34
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 Amended and Restated Bylaws of Applebee's International, Inc.
(incorporated by reference to the Registrant's Form 8-K filed on
August 30, 2006).
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 31, 2006.
10.4 Revolving Credit Agreement dated as of December 18, 2006
(incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed on December 20, 2006).
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 Amendment to the 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
25, 2006).
10.7 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).
10.8 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).
10.9 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).
10.12 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.
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 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.
10.21 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).
10.22 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).
E-2
Exhibit
Number Description of Exhibit
-------------- ----------------------------------------------------------------
10.23 Director Compensation Policy.
10.24 FlexPerx Program (incorporated by reference to Exhibit 10.1 of
the Registrant's Form 8-K filed on January 7, 2005).
10.25 Form of Stock Appreciation Rights Agreement (incorporated by
reference to Form 8-K filed on February 22, 2006).
10.26 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).
10.27 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).
10.28 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).
10.29 Memorandum of Understanding, dated October 5, 2002 and Amendment
1 dated July 1, 2005, with Louis A. Kaucic (incorporated by
reference to 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).
10.30 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).
10.31 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).
10.32 2001 Senior Executive Bonus Plan, as amended (incorporated by
reference to the Registrant's Form 8-K filed on May 16, 2006).
10.33 Separation Agreement, Release and Waiver dated May 17, 2006 by
and between the Company and John C. Cywinski (incorporated by
reference to the Registrant's Form 8-K filed on May 18, 2006).
10.34 Personal Use of Corporate Aircraft by Non-Executive Chairman
(incorporated by reference to the Registrant's Form 8-K filed on
August 30, 2006).
10.35 Severance Plan for Officers (incorporated by reference to the
Registrant's Form 8-K filed on August 30, 2006).
E-3
Exhibit
Number Description of Exhibit
-------------- ----------------------------------------------------------------
10.36 Amended and Restated Nonqualified Deferred Compensation Plan
(incorporated by reference to Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 24, 2006).
10.37 New Form of Officer Restricted Stock Award Agreement for shares
subject to the Company's stock ownership guidelines
(incorporated by reference to Exhibit 10.3 of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 24, 2006).
10.38 New Form of Officer Restricted Stock Award Agreement for
Participants in the Executive Retirement Plan (incorporated by
reference to Exhibit 10.3 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 24, 2006).
10.39 Amended Executive Stock Ownership Guidelines (incorporated by
reference to Exhibit 10.3 of the Registrant's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 24, 2006).
21 Subsidiaries of Applebee's International, Inc.
23.1 Consent of Deloitte & Touche LLP.
24 Power of Attorney (see page 47 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