UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2001
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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
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
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(Address of principal executive offices and zip code)
(913) 967-4000
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(Registrant's telephone number, including area code)
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
------ ------
The number of shares of the registrant's common stock outstanding as of April
27, 2001 was 24,608,377.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED APRIL 1, 2001
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of April 1, 2001
and December 31, 2000................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks
Ended April 1, 2001 and March 26, 2000............................................... 4
Consolidated Statement of Stockholders' Equity for the
13 Weeks Ended April 1, 2001......................................................... 5
Consolidated Statements of Cash Flows for the 13 Weeks
Ended April 1, 2001 and March 26, 2000 .............................................. 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 11
Part II Other Information
Item 1. Legal Proceedings....................................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................................ 18
Signatures ................................................................................................. 19
Exhibit Index............................................................................................... 20
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
April 1, December 31,
2001 2000
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 10,674 $ 10,763
Short-term investments, at market value (amortized cost of $1,200 in 2001 and
$1,250 in 2000).............................................................. 1,254 1,312
Receivables (less allowance for bad debts of $3,587 in 2001 and $3,137 in 2000) 25,328 22,101
Inventories..................................................................... 13,016 12,616
Prepaid and other current assets................................................ 6,446 6,389
-------------- -------------
Total current assets......................................................... 56,718 53,181
Property and equipment, net.......................................................... 312,688 314,216
Goodwill, net........................................................................ 81,940 83,265
Franchise interest and rights, net................................................... 2,824 2,949
Other assets......................................................................... 18,588 18,096
-------------- -------------
$ 472,758 $ 471,707
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 896 $ 894
Accounts payable................................................................ 24,401 26,556
Accrued expenses and other current liabilities.................................. 54,602 62,511
Accrued dividends............................................................... -- 2,774
Accrued income taxes............................................................ 10,422 1,100
-------------- -------------
Total current liabilities.................................................... 90,321 93,835
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion........................................... 105,466 90,461
Deferred income taxes........................................................... 2,425 4,097
Other non-current liabilities................................................... 3,538 1,596
-------------- -------------
Total non-current liabilities................................................ 111,429 96,154
-------------- -------------
Total liabilities............................................................ 201,750 189,989
-------------- -------------
Commitments and contingencies (Note 2)
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 - 32,150,360 shares................................................... 321 321
Additional paid-in capital...................................................... 173,503 172,037
Retained earnings............................................................... 310,714 293,933
Accumulated other comprehensive income (loss), net of income taxes.............. (1,274) 39
-------------- -------------
483,264 466,330
Treasury stock - 7,717,039 shares in 2001 and 6,930,530 shares in 2000, at cost. (212,256) (184,612)
-------------- -------------
Total stockholders' equity................................................... 271,008 281,718
-------------- -------------
$ 472,758 $ 471,707
============== =============
See notes to consolidated financial statements.
3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
13 Weeks Ended
-------------------------------
April 1, March 26,
2001 2000
------------- -------------
Revenues:
Company restaurant sales................................ $ 160,143 $ 145,451
Franchise income........................................ 22,234 19,799
------------- -------------
Total operating revenues............................. 182,377 165,250
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Cost of company restaurant sales:
Food and beverage....................................... 43,305 40,058
Labor................................................... 50,900 46,168
Direct and occupancy.................................... 40,759 35,660
Pre-opening expense..................................... 135 296
------------- -------------
Total cost of company restaurant sales............... 135,099 122,182
------------- -------------
General and administrative expenses.......................... 17,166 16,007
Amortization of intangible assets............................ 1,463 1,451
Loss on disposition of restaurants and equipment............. 187 353
------------- -------------
Operating earnings........................................... 28,462 25,257
------------- -------------
Other income (expense):
Investment income....................................... 357 349
Interest expense........................................ (2,357) (2,364)
Other income............................................ 90 118
------------- -------------
Total other expense.................................. (1,910) (1,897)
------------- -------------
Earnings before income taxes................................. 26,552 23,360
Income taxes................................................. 9,771 8,597
------------- -------------
Net earnings................................................. $ 16,781 $ 14,763
============= =============
Basic net earnings per common share.......................... $ 0.68 $ 0.55
============= =============
Diluted net earnings per common share........................ $ 0.67 $ 0.55
============= =============
Basic weighted average shares outstanding.................... 24,744 26,670
============= =============
Diluted weighted average shares outstanding.................. 25,085 26,788
============= =============
See notes to consolidated financial statements.
4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share amounts)
Accumulated
Common Stock Additional Other Total
------------------------- Paid-In Retained Comprehensive Treasury Stockholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
-------------- ---------- ------------ ------------ ------------- ------------ ---------------
Balance, December 31, 2000........ 32,150,360 $ 321 $ 172,037 $ 293,933 $ 39 $(184,612) $ 281,718
Comprehensive income:
Net earnings................. -- -- -- 16,781 -- -- 16,781
Change in unrealized gain on
short-term investments,
net of income taxes........ -- -- -- -- (5) -- (5)
Fair value of financial
instruments, net of income
taxes....................... -- -- -- -- (1,308) -- (1,308)
-------------- ---------- ------------ ------------ ------------- ------------ ---------------
Total comprehensive income..... -- -- -- 16,781 (1,313) -- 15,468
-------------- ---------- ------------ ------------ ------------- ------------ ---------------
Purchases of treasury stock.... -- -- -- -- -- (29,525) (29,525)
Stock options exercised and
related tax benefit.......... -- -- 693 -- -- 1,103 1,796
Shares issued under employee
stock and 401(k) plans....... -- -- 526 -- -- 712 1,238
Restricted stock shares awarded
under equity incentive plan,
net of cancellations......... -- -- (66) -- -- 66 --
Unearned compensation relating
to restricted shares......... -- -- 83 -- -- -- 83
Notes receivable from officers
for stock sales.............. -- -- 230 -- -- -- 230
-------------- ---------- ------------ ------------ ------------- ------------ ---------------
Balance, April 1, 2001............ 32,150,360 $ 321 $ 173,503 $ 310,714 $ (1,274) $(212,256) $ 271,008
============== ========== ============ ============ ============= ============ ===============
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
13 Weeks Ended
--------------------------------
April 1, March 26,
2001 2000
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................................... $ 16,781 $ 14,763
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................................... 7,781 7,240
Amortization of intangible assets............................... 1,463 1,451
Amortization of deferred financing costs........................ 180 174
Deferred income tax provision (benefit)......................... (1,657) 148
Loss on disposition of restaurants and equipment................ 187 353
Changes in assets and liabilities:
Receivables..................................................... (3,227) (2,865)
Inventories..................................................... (400) 860
Prepaid and other current assets................................ 691 (95)
Accounts payable................................................ (2,155) 2,100
Accrued expenses and other current liabilities.................. (6,882) (1,531)
Accrued income taxes............................................ 9,322 6,253
Other non-current liabilities................................... (127) (35)
Other........................................................... (381) (690)
-------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES......................................... 21,576 28,126
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (6,438) (8,896)
Proceeds from sale of restaurants and equipment.................... 14 1
Purchases of short-term investments................................ (49) --
Maturities of short-term investments............................... 100 --
-------------- -------------
NET CASH USED BY INVESTING ACTIVITIES........................... (6,373) (8,895)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock........................................ (29,525) (4,990)
Dividends paid..................................................... (2,774) (2,660)
Issuance of common stock upon exercise of stock options............ 1,796 739
Shares sold under employee stock purchase plan..................... 211 239
Proceeds from issuance of long-term debt........................... 15,000 --
Payments on long-term debt......................................... -- (8,916)
-------------- -------------
NET CASH USED BY FINANCING ACTIVITIES........................... (15,292) (15,588)
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................... (89) 3,643
CASH AND CASH EQUIVALENTS, beginning of period.......................... 10,763 1,427
-------------- -------------
CASH AND CASH EQUIVALENTS, end of period................................ $ 10,674 $ 5,070
============== =============
See notes to consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
13 Weeks Ended
------------------------------------
April 1, March 26,
2001 2000
---------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the 13 week period for:
Income taxes........................................................ $ 2,748 $ 2,601
================ ================
Interest............................................................ $ 2,079 $ 2,102
================ ================
Disclosure of Accounting Policy:
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less
to be cash equivalents.
See notes to consolidated financial statements.
7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Our consolidated financial statements included in this Form 10-Q have been
prepared without audit (except that the balance sheet information as of December
31, 2000 has been derived from consolidated financial statements which were
audited) in accordance with the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted, we believe that the disclosures are adequate to make the
information presented not misleading. The accompanying consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
We believe that all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of the interim
periods presented have been made. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.
2. Commitments and Contingencies
Litigation, claims and disputes: As of April 1, 2001, we were using assets owned
by a former franchisee in the operation of one restaurant. That restaurant
remains under a purchase rights agreement that required us to make certain
payments to the franchisee's lender. In 1991, a dispute arose between the lender
and us over the amount of the payments due the lender under that agreement and
over whether we had agreed to guarantee the franchisee's debt. Based upon a
then-current independent appraisal, we offered to settle the dispute and
purchase the assets of the three then-existing restaurants for $1,000,000 in
1991. In November 1992, the FDIC declared the lender insolvent, and the lender
has since been liquidated. We closed one of the three restaurants in 1994 and
one of the two remaining restaurants in February 1996. In the fourth quarter of
1996, we received information indicating that a third party had acquired the
franchisee's indebtedness to the FDIC. In June 1997, the third party filed a
lawsuit against us seeking approximately $3,800,000. In April 1999, the district
court awarded a summary judgment of $3,833,000 to the third party. In June 2000,
the court of appeals reversed the summary judgment and remanded the case to the
district court for further action. The third party appealed the court's decision
but its appeal was denied. This case is currently pending in the district court.
As of April 1, 2001, we believe we have recorded adequate reserves for this
matter.
In addition, we are involved in various legal actions arising in the normal
course of business. These matters include disputes with certain international
franchisees regarding disclosures we allegedly made or omitted. We have also
filed claims against these franchisees for amounts due. These matters are in the
initial stages of assessment; however, we believe that we have meritorious
defenses to the allegations of the franchisees and are vigorously defending
these claims.
8
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, in the aggregate, have a
material adverse effect upon our business or consolidated financial position.
Franchise financing: In 1992, we entered into an agreement with a financing
source to provide up to $75,000,000 of financing to our franchisees to fund
development of new franchise restaurants. We provided a limited guaranty of
loans made under the agreement. Our maximum recourse obligation for each
long-term loan is 10% of the amount funded, and this is gradually reduced
beginning in the second year of each loan. After the seventh year of each loan,
it decreases to zero. Approximately $49,000,000 was funded through this
financing source. Of this, approximately $3,000,000 was outstanding as of April
1, 2001. This agreement expired on December 31, 1994 and was not renewed.
Lease guaranties: 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 April 1, 2001, the aggregate amount of these
lease payments totaled approximately $29,800,000. The buyers have indemnified us
from any losses related to these guaranties.
Philadelphia divestiture: In connection with the sale of the Philadelphia
restaurants, we provided a guarantee to a franchise group totaling $1,250,000.
As of April 1, 2001, $718,000 remains outstanding.
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the employee
resigns or is terminated related to a change in control. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of April 1, 2001, we would have been required to make
payments totaling approximately $6,800,000. In addition, we have severance and
employment agreements with certain officers which contain severance provisions
not related to a change in control. Those provisions would have required
aggregate payments of approximately $4,300,000 if such officers had been
terminated as of April 1, 2001.
3. Earnings Per Share
We compute basic earnings per share by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if holders of options or other contracts to issue common stock
exercised or converted their holdings into common stock. Outstanding stock
options 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 earnings per share. All amounts in the chart
except per share amounts are expressed in thousands.
9
13 Weeks Ended
----------------------------------------------
April 1, March 26,
2001 2000
---------------------- ----------------------
Net earnings............................................ $ 16,781 $ 14,763
====================== ======================
Basic weighted average shares outstanding............... 24,744 26,670
Dilutive effect of stock options........................ 341 118
---------------------- ----------------------
Diluted weighted average shares outstanding............. 25,085 26,788
====================== ======================
Basic net earnings per common share..................... $ 0.68 $ 0.55
====================== ======================
Diluted net earnings per common share................... $ 0.67 $ 0.55
====================== ======================
4. New Accounting Pronouncement
Effective January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" issued by the
Financial Accounting Standards Board. SFAS No. 133, as amended by SFAS Nos. 137
and 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet. The statement
also requires changes in the fair value of the derivative instruments to be
recorded in either net earnings or other comprehensive income depending on their
intended use.
We have interest rate swap agreements to manage our exposure to interest rate
fluctuations. The swap agreements effectively fix the underlying three-month
LIBOR interest rate on $75,000,000 of our senior credit facilities to rates
ranging from 5.91% to 6.05%. The estimated fair value of these agreements at
April 1, 2001 was a net payable of $2,069,000 and is included in other
non-current liabilities on the accompanying balance sheets. Our interest rate
swap agreements meet the criteria for hedge accounting under SFAS No. 133 and
accordingly, the cumulative after-tax fair value of the interest rate hedges is
included as a reduction in other comprehensive income in the first quarter of
2001.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Our revenues are generated from two primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise income
Franchise income consists of franchise restaurant royalties (generally 4% of
each franchise restaurant's monthly gross sales) and franchise fees (which
typically range from $30,000 to $35,000 for each restaurant opened). Beverage
sales include sales of alcoholic beverages, while non-alcoholic beverages are
included in food sales.
Certain expenses relate only to company operated restaurants. These include:
o food and beverage costs
o labor costs
o direct and occupancy costs
o pre-opening expenses
Other expenses, such as general and administrative and amortization expenses,
relate to both company operated restaurants and franchise operations.
We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal quarters ended April 1, 2001 and March 26, 2000 each contained 13
weeks and are referred to hereafter as the "2001 quarter" and the "2000
quarter", respectively.
11
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.
13 Weeks Ended
---------------------------------
April 1, March 26,
2001 2000
--------------- ---------------
Revenues:
Company restaurant sales.................................... 87.8% 88.0%
Franchise income............................................ 12.2 12.0
--------------- ---------------
Total operating revenues................................. 100.0% 100.0%
=============== ===============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage........................................... 27.0% 27.5%
Labor....................................................... 31.8 31.7
Direct and occupancy........................................ 25.5 24.5
Pre-opening expense......................................... 0.1 0.2
--------------- ---------------
Total cost of sales...................................... 84.4% 84.0%
=============== ===============
General and administrative expenses.............................. 9.4% 9.7%
Amortization of intangible assets................................ 0.8 0.9
Loss on disposition of restaurants and equipment................. 0.1 0.2
--------------- ---------------
Operating earnings............................................... 15.6 15.3
--------------- ---------------
Other income (expense):
Investment income........................................... 0.2 0.2
Interest expense............................................ (1.3) (1.4)
Other income................................................ -- 0.1
--------------- ---------------
Total other expense...................................... (1.0) (1.1)
--------------- ---------------
Earnings before income taxes..................................... 14.6 14.1
Income taxes..................................................... 5.4 5.2
--------------- ---------------
Net earnings..................................................... 9.2% 8.9%
=============== ===============
12
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:
13 Weeks Ended
------------------------------------------
April 1, March 26,
2001 2000
------------------- -------------------
Number of restaurants:
Company(1):
Beginning of period........................................ 285 262
Restaurant openings........................................ 2 5
Restaurant closings........................................ -- (1)
------------------- -------------------
End of period.............................................. 287 266
------------------- -------------------
Franchise:
Beginning of period........................................ 1,001 906
Restaurant openings........................................ 12 14
Restaurant closings........................................ (1) (1)
------------------- -------------------
End of period.............................................. 1,012 919
------------------- -------------------
Total:
Beginning of period........................................ 1,286 1,168
Restaurant openings........................................ 14 19
Restaurant closings........................................ (1) (2)
------------------- -------------------
End of period.............................................. 1,299 1,185
=================== ===================
Weighted average weekly sales per restaurant:
Company(1)................................................. $ 42,968 $ 42,369
Franchise.................................................. $ 42,328 $ 41,475
Total...................................................... $ 42,470 $ 41,676
Change in comparable restaurant sales:(2)
Company(1)................................................. 3.6% 5.0%
Franchise.................................................. 3.1% 3.8%
Total...................................................... 3.2% 4.1%
Total system sales (in thousands)................................... $ 712,949 $ 637,220
(1) Includes one Texas restaurant we have operated under a management agreement
since July 1990.
(2) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
13
Company Restaurant Sales. Total company restaurant sales increased $14,692,000
(10%) from $145,451,000 in the 2000 quarter to $160,143,000 in the 2001 quarter
due primarily to company restaurant openings and increases in comparable
restaurant sales. Comparable restaurant sales at company restaurants increased
by 3.6% in the 2001 quarter. Weighted average weekly sales at company
restaurants increased 1.4% from $42,369 in the 2000 quarter to $42,968 in the
2001 quarter. These increases were due primarily to an increase in the average
guest check resulting from the company's food promotions, a menu price increase
of approximately 1.8% in the 2001 quarter and increased sales of appetizers,
drinks and desserts.
Franchise Income. Overall franchise income increased $2,435,000 (12%) from
$19,799,000 in the 2000 quarter to $22,234,000 in the 2001 quarter due primarily
to the increased number of franchise restaurants operating during 2001 as
compared to 2000 and increases in comparable restaurant sales. Comparable
restaurant sales and weighted average weekly sales for franchise restaurants
increased 3.1% and 2.1%, respectively, in the 2001 quarter.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.5%
in the 2000 quarter to 27.0% in the 2001 quarter, due primarily to a menu price
increase in the 2001 quarter and operational improvements including the
implementation of a new theoretical food cost system in the second quarter of
2000.
Labor costs increased from 31.7% in the 2000 quarter to 31.8% in the 2001
quarter. This increase was due primarily to higher group insurance costs and
continued pressure on management costs due to low unemployment as well as the
highly competitive nature of the restaurant industry.
Direct and occupancy costs increased from 24.5% in the 2000 quarter to 25.5% in
the 2001 quarter due primarily to higher utility costs and smallwares expense.
This increase was partially offset by a decrease in advertising costs, as a
percentage of sales, due to the timing of food promotions.
General and Administrative Expenses. General and administrative expenses
decreased in the 2001 quarter to 9.4% from 9.7% in the 2000 quarter, due
primarily to the absorption of general and administrative expenses over a larger
revenue base.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 36.8% in both the 2000 quarter and 2001 quarter.
Liquidity and Capital Resources
Our need for capital resources historically has resulted from the construction
and acquisition of restaurants. For the foreseeable future, this should continue
to be the case. In the past, we have obtained capital through public stock
offerings, debt financing, and our ongoing operations. Income from our ongoing
operations includes cash generated from company and franchise operations, credit
from trade suppliers, real estate lease financing, and landlord contributions to
leasehold improvements. We have also used our common stock as consideration in
the acquisition of restaurants. In addition, we have assumed debt or issued new
debt in connection with certain mergers and acquisitions.
Capital expenditures were $46,220,000 in fiscal year 2000 and $6,438,000 in the
2001 quarter. We currently expect to open approximately 25 restaurants in 2001.
Capital expenditures are expected to be between $50,000,000 and $55,000,000 in
14
fiscal 2001. These expenditures will primarily be for the development of new
restaurants, refurbishment and capital replacement for existing restaurants, and
the enhancement of information systems. Because we expect to continue to
purchase a portion of our sites, the amount of actual capital expenditures will
be dependent upon, among other things, the proportion of leased versus owned
properties. In addition, if we open more restaurants than we currently
anticipate or acquire additional restaurants, our capital requirements will
increase accordingly.
Our senior term loan and working capital facilities are subject to various
covenants and restrictions which, among other things, require the maintenance of
stipulated fixed charge, interest coverage and leverage ratios, as defined, and
limit additional indebtedness and capital expenditures in excess of specified
amounts. The credit agreement permits annual cash dividends of the greater of
$5,000,000 or 50% of consolidated net income. In addition, in April 2000, the
credit agreement was amended to permit additional repurchases of common stock of
up to $50,000,000 through December 31, 2001. We are currently in compliance with
the covenants contained in our credit agreement.
In February 2001, our Board of Directors authorized the repurchase of up to
$55,000,000 of our common stock through 2001, subject to market conditions and
applicable restrictions imposed by our credit agreement. We repurchased 890,000
shares of our common stock at an average price of $33.16 per share for an
aggregate cost of $29,525,000 in the 2001 quarter, including $18,912,000 under
this authorization and $10,613,000 under previous authorizations.
As of April 1, 2001, our liquid assets totaled $11,928,000. These assets
consisted of cash and cash equivalents in the amount of $10,674,000 and
short-term investments in the amount of $1,254,000. The working capital deficit
decreased from $40,654,000 as of December 31, 2000 to $33,603,000 as of April 1,
2001. This decrease was due primarily to the redemption of gift certificates
sold in 2000, the payment of accrued bonuses and the payment of our annual
dividend in January 2001. As of April 1, 2001, $18,000,000 was outstanding under
our working capital and line of credit facilities, and standby letters of credit
totaling $6,413,000 were outstanding under our letter of credit facilities.
We believe that our liquid assets and cash generated from operations, combined
with borrowings available under our credit facilities, will provide sufficient
funds for our operating, capital and other requirements for the foreseeable
future.
Inflation
Substantial increases in costs and expenses could impact our operating results
to the extent such increases cannot be passed along to customers. In particular,
increases in food, supplies, labor and operating expenses could have a
significant impact on our operating results. We do not believe that inflation
has materially affected our operating results during the past three years.
A majority of our employees are paid hourly rates related to federal and state
minimum wage laws and various laws that allow for credits to that wage. The
Federal government continues to consider an increase in the minimum wage.
Several state governments have increased the minimum wage and other state
governments are also discussing an increased minimum wage. In the past, we have
been able to pass along cost increases to customers through food and beverage
price increases, and we will attempt to do so in the future. We cannot
guarantee, however, that all future cost increases can be reflected in our
prices or that increased prices will be absorbed by customers without at least
somewhat diminishing customer spending in our restaurants.
15
New Accounting Pronouncement
Effective January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" issued by the
Financial Accounting Standards Board. SFAS No. 133, as amended by SFAS Nos. 137
and 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet. The statement
also requires changes in the fair value of the derivative instruments to be
recorded in either net earnings or other comprehensive income depending on their
intended use.
We have interest rate swap agreements to manage our exposure to interest rate
fluctuations. The swap agreements effectively fix the underlying three-month
LIBOR interest rate on $75,000,000 of our senior credit facilities to rates
ranging from 5.91% to 6.05%. The estimated fair value of these agreements at
April 1, 2001 was a net payable of $2,069,000 and is included in other
non-current liabilities on the accompanying balance sheets. Our interest rate
swap agreements meet the criteria for hedge accounting under SFAS No. 133 and
accordingly, the cumulative after-tax fair value of the interest rate hedges is
included as a reduction in other comprehensive income in the first quarter of
2001.
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development and capital expenditures are forward-looking and based on current
expectations. There are several risks and uncertainties that could cause actual
results to differ materially from those described. These risks include but are
not limited to the impact of intense competition in the casual dining segment of
the restaurant industry and our ability to control restaurant operating costs
which are impacted by market changes, minimum wage and other employment laws,
food costs and inflation. For a more detailed discussion of the principal
factors that could cause actual results to be materially different, you should
read our current report on Form 8-K which we filed with the Securities and
Exchange Commission on February 13, 2001. We disclaim any obligation to update
forward-looking statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our senior term loan bears interest at either the bank's prime rate plus 1.25%
or LIBOR plus 2.25%, at our option. Our working capital facility bears interest
at either the bank's prime rate plus 0.125% or LIBOR plus 1.125%, at our option.
The interest rate on the working capital facility is subject to change based
upon our leverage ratio.
We have interest rate swap agreements in place to manage our exposure to
interest rate fluctuations. The swap agreements effectively fix the underlying
three-month LIBOR interest rate on $75,000,000 of the senior credit facilities
to rates ranging from 5.91% to 6.05%.
As of April 1, 2001, the total amount of debt subject to interest rate
fluctuations was $26,802,000. This amount was comprised of $8,802,000 under the
term loan and $18,000,000 under the working capital facility. A 1% change in
interest rates would result in an increase or decrease in interest expense of
$268,000 per year.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of April 1, 2001, we were using assets owned by a former franchisee in the
operation of one restaurant. That restaurant remains under a purchase rights
agreement that required us to make certain payments to the franchisee's lender.
In 1991, a dispute arose between the lender and us over the amount of the
payments due the lender under that agreement and over whether we had agreed to
guarantee the franchisee's debt. Based upon a then-current independent
appraisal, we offered to settle the dispute and purchase the assets of the three
then-existing restaurants for $1,000,000 in 1991. In November 1992, the FDIC
declared the lender insolvent, and the lender has since been liquidated. We
closed one of the three restaurants in 1994 and one of the two remaining
restaurants in February 1996. In the fourth quarter of 1996, we received
information indicating that a third party had acquired the franchisee's
indebtedness to the FDIC. In June 1997, the third party filed a lawsuit against
us seeking approximately $3,800,000. In April 1999, the district court awarded a
summary judgment of $3,833,000 to the third party. In June 2000, the court of
appeals reversed the summary judgment and remanded the case to the district
court for further action. The third party appealed the court's decision but its
appeal was denied. This case is currently pending in the district court. As of
April 1, 2001, we believe we have recorded adequate reserves for this matter.
In addition, we are involved in various legal actions arising in the normal
course of business. These matters include disputes with certain international
franchisees regarding disclosures we allegedly made or omitted. We have also
filed claims against these franchisees for amounts due. These matters are in the
initial stages of assessment; however, we believe that we have meritorious
defenses to the allegations of the franchisees and are vigorously defending
these claims.
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, in the aggregate, have a
material adverse effect upon our business or consolidated financial position.
17
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) We filed a report on Form 8-K on January 17, 2001 announcing
an addition to our executive team and a CEO succession plan.
(c) We filed a report on Form 8-K on January 17, 2001 confirming
EPS guidance and announcing sales for the fourth quarter.
(d) We filed a report on Form 8-K on February 7, 2001 announcing a
new $55 million stock repurchase program and that the
previously announced repurchase programs were complete.
(e) We filed a report on Form 8-K on February 13, 2001 in
accordance with the Private Securities Litigation Reform Act
of 1995 as it relates to a safe harbor for companies making
forward-looking statements. The factors listed in the report
are important factors that could cause actual results to
differ materially from those we project in forward-looking
statements.
(f) We filed a report on Form 8-K on February 15, 2001 reporting
fourth quarter earnings per share of 63 cents and an EPS
increase of 20 percent in 2000 to $2.40.
18
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.
(Registrant)
Date: May 2, 2001 By: /s/ Lloyd L. Hill
------------------ ----------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: May 2, 2001 By: /s/ George D. Shadid
------------------ ----------------------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: May 2, 2001 By: /s/ Mark A. Peterson
------------------ ----------------------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
19
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
None
20