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 March 31, 2002
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission File Number: 000-17962
-----------------
Applebee's International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-1461763
--------------------------------- ------------------------------------
(State or other jurisdiction 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 19, 2002 was 37,206,672.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED MARCH 31, 2002
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2002
and December 30, 2001................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks
Ended March 31, 2002 and April 1, 2001............................................... 4
Consolidated Statement of Stockholders' Equity for the
13 Weeks Ended March 31, 2002........................................................ 5
Consolidated Statements of Cash Flows for the 13 Weeks
Ended March 31, 2002 and April 1, 2001 .............................................. 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 18
Part II Other Information
Item 1. Legal Proceedings....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
Signatures ................................................................................................. 20
Exhibit Index............................................................................................... 21
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
March 31, December 30,
2002 2001
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 10,235 $ 22,048
Short-term investments, at market value (amortized cost of $477 in 2002 and
$677 in 2001)................................................................ 501 699
Receivables (less allowance for bad debts of $4,804 in 2002 and $4,343 in 2001) 23,081 22,827
Inventories..................................................................... 12,011 10,165
Prepaid and other current assets................................................ 10,292 12,260
-------------- -------------
Total current assets......................................................... 56,120 67,999
Property and equipment, net.......................................................... 333,374 330,924
Goodwill, net........................................................................ 77,965 77,965
Franchise interest and rights, net................................................... 2,324 2,449
Other assets......................................................................... 20,919 21,074
-------------- -------------
$ 490,702 $ 500,411
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................... $ 45 $ 43
Notes payable................................................................... 500 --
Accounts payable................................................................ 23,658 22,196
Accrued expenses and other current liabilities.................................. 57,286 71,551
Accrued dividends............................................................... -- 2,977
Accrued income taxes............................................................ 7,986 979
-------------- -------------
Total current liabilities.................................................... 89,475 97,746
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion........................................... 54,525 74,525
Franchise deposits.............................................................. 1,338 1,515
Deferred income taxes........................................................... 2,107 1,442
-------------- -------------
Total non-current liabilities................................................ 57,970 77,482
-------------- -------------
Total liabilities............................................................ 147,445 175,228
-------------- -------------
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 - 48,225,358 shares................................................... 482 482
Additional paid-in capital...................................................... 183,715 180,802
Retained earnings............................................................... 375,466 355,191
Accumulated other comprehensive income, net of income taxes..................... 15 14
-------------- -------------
559,678 536,489
Treasury stock - 11,039,508 shares in 2002 and 11,014,733 shares in 2001, at
cost......................................................................... (216,421) (211,306)
-------------- -------------
Total stockholders' equity................................................... 343,257 325,183
-------------- -------------
$ 490,702 $ 500,411
============== =============
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
-------------------------------
March 31, April 1,
2002 2001
------------- -------------
Revenues:
Company restaurant sales................................ $ 174,973 $ 160,143
Franchise income........................................ 24,840 22,234
------------- -------------
Total operating revenues............................. 199,813 182,377
------------- -------------
Cost of company restaurant sales:
Food and beverage....................................... 47,407 43,305
Labor................................................... 57,457 50,900
Direct and occupancy.................................... 42,872 40,759
Pre-opening expense..................................... 335 135
------------- -------------
Total cost of company restaurant sales............... 148,071 135,099
------------- -------------
General and administrative expenses.......................... 19,246 17,166
Amortization of intangible assets............................ 138 1,463
Loss on disposition of restaurants and equipment............. 294 187
------------- -------------
Operating earnings........................................... 32,064 28,462
------------- -------------
Other income (expense):
Investment income....................................... 397 357
Interest expense........................................ (633) (2,357)
Other income............................................ 101 90
------------- -------------
Total other expense.................................. (135) (1,910)
------------- -------------
Earnings before income taxes................................. 31,929 26,552
Income taxes................................................. 11,654 9,771
------------- -------------
Net earnings................................................. $ 20,275 $ 16,781
============= =============
Basic net earnings per common share.......................... $ 0.54 $ 0.45
============= =============
Diluted net earnings per common share........................ $ 0.53 $ 0.45
============= =============
Basic weighted average shares outstanding.................... 37,252 37,116
============= =============
Diluted weighted average shares outstanding.................. 38,218 37,628
============= =============
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 30, 2001......... 48,225,358 $ 482 $ 180,802 $ 355,191 $ 14 $(211,306) $ 325,183
Comprehensive income:
Net earnings.................. -- -- -- 20,275 -- -- 20,275
Change in unrealized gain on
short-term investments,
net of income taxes......... -- -- -- -- 1 -- 1
-------------- ---------- ------------ ----------- ------------- ------------ -------------
Total comprehensive income...... -- -- -- 20,275 1 -- 20,276
-------------- ---------- ------------ ----------- ------------- ------------ -------------
Purchases of treasury stock..... -- -- -- -- -- (8,324) (8,324)
Stock options exercised and
related tax benefit........... -- -- 912 -- -- 1,720 2,632
Shares issued under employee
stock and 401(k) plans........ -- -- 1,788 -- -- 1,309 3,097
Restricted shares awarded
under equity incentive plan,
net of cancellations.......... -- -- (20) -- -- 180 160
Unearned compensation relating
to restricted shares.......... -- -- 187 -- -- -- 187
Notes receivable from officers
for stock sales, net of
repayments.................... -- -- 46 -- -- -- 46
-------------- ---------- ------------ ----------- ------------- ------------ -------------
Balance, March 31, 2002............ 48,225,358 $ 482 $ 183,715 $ 375,466 $ 15 $(216,421) $ 343,257
============== ========== ============ =========== ============= ============ =============
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
13 Weeks Ended
--------------------------------
March 31, April 1,
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings....................................................... $ 20,275 $ 16,781
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................................... 8,381 7,781
Amortization of intangible assets............................... 138 1,463
Amortization of deferred financing costs........................ 48 180
Deferred income tax provision (benefit)......................... 873 (1,657)
Loss on disposition of restaurants and equipment................ 294 187
Income tax benefit from exercise of stock options............... 665 160
Changes in assets and liabilities:
Receivables..................................................... (254) (3,227)
Inventories..................................................... (1,846) (400)
Prepaid and other current assets................................ 1,760 691
Accounts payable................................................ 1,462 (2,155)
Accrued expenses and other current liabilities.................. (11,566) (6,882)
Accrued income taxes............................................ 7,007 9,322
Franchise deposits.............................................. (177) (127)
Other........................................................... 334 (381)
-------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 27,394 21,736
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................................ (10,972) (6,438)
Proceeds from sale of restaurants and equipment.................... -- 14
Purchases of short-term investments................................ (50) (49)
Maturities and sales of short-term investments..................... 250 100
-------------- -------------
NET CASH USED BY INVESTING ACTIVITIES........................... (10,772) (6,373)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock........................................ (8,324) (29,525)
Dividends paid..................................................... (2,977) (2,774)
Issuance of common stock upon exercise of stock options............ 1,967 1,636
Shares sold under employee stock purchase plan..................... 399 211
Proceeds from issuance of long-term debt........................... -- 15,000
Proceeds from issuance of notes payable............................ 500 --
Payments on long-term debt......................................... (20,000) --
-------------- -------------
NET CASH USED BY FINANCING ACTIVITIES........................... (28,435) (15,452)
-------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................... (11,813) (89)
CASH AND CASH EQUIVALENTS, beginning of period.......................... 22,048 10,763
-------------- -------------
CASH AND CASH EQUIVALENTS, end of period................................ $ 10,235 $ 10,674
============== =============
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
------------------------------------
March 31, April 1,
2002 2001
---------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the 13 week period for:
Income taxes........................................................ $ 203 $ 2,748
================ ================
Interest............................................................ $ 463 $ 2,079
================ ================
Disclosure of Accounting Policy:
For purposes of the consolidated statements of cash flows, we consider 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
30, 2001 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 30, 2001.
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: We are involved in various legal actions
arising in the normal course of business. These matters include, without
limitation, such matters as employment law related claims and disputes with two
international franchisees regarding disclosures we allegedly made or omitted. In
each instance, we believe that we have meritorious defenses to the allegations
made and we 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, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
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 March 31, 2002, the aggregate amount of these
lease payments totaled approximately $27,100,000. The buyers have indemnified us
from any losses related to these guaranties.
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 March 31, 2002, we would have been required to make
payments totaling approximately $7,700,000. 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 $4,900,000 if such officers had been
terminated as of March 31, 2002.
8
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 and equity-based compensation represent the only dilutive effects on
weighted average shares. The chart below presents a reconciliation between basic
and diluted weighted average shares outstanding and the related earnings per
share. All amounts in the chart, except per share amounts, are expressed in
thousands.
13 Weeks Ended
-------------------------------
March 31, April 1,
2002 2001
--------------- --------------
Net earnings............................................ $ 20,275 $ 16,781
=============== ==============
Basic weighted average shares outstanding............... 37,252 37,116
Dilutive effect of stock options and
equity-based compensation.......................... 966 512
--------------- --------------
Diluted weighted average shares outstanding............. 38,218 37,628
=============== ==============
Basic net earnings per common share..................... $ 0.54 $ 0.45
=============== ==============
Diluted net earnings per common share................... $ 0.53 $ 0.45
=============== ==============
4. Goodwill
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", effective December 31, 2001. SFAS No.
142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. This Statement also provides
that goodwill should not be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. In the first quarter
of fiscal 2002, we ceased amortization of goodwill and performed the first step
of the required two-step goodwill impairment testing. The first step of the
impairment test requires us to compare the fair value of each reporting unit to
its carrying value to determine whether there is an indication that an
impairment may exist. If there is an indication of impairment, we would allocate
the fair value of the reporting unit to its assets and liabilities 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
fair value. No impairment losses were recorded upon the initial adoption of SFAS
No. 142.
9
The effect of the adoption of SFAS No. 142 on net income and earnings per share
is as follows (in thousands, except per share amounts):
13 Weeks Ended
-------------------------------
March 31, April 1,
2002 2001
--------------- --------------
Net earnings, as reported.................................... $ 20,275 $ 16,781
Goodwill amortization (net of income taxes).................. -- 837
--------------- --------------
Net earnings, as adjusted.................................... 20,275 17,618
=============== ==============
Basic net earnings per common share, as reported............. $ 0.54 $ 0.45
Goodwill amortization (net of income taxes).................. -- 0.02
--------------- --------------
Basic net earnings per common share, as adjusted............. $ 0.54 $ 0.47
=============== ==============
Diluted net earnings per common share, as reported........... $ 0.53 $ 0.45
Goodwill amortization (net of income taxes).................. -- 0.02
--------------- --------------
Diluted net earnings per common share, as adjusted........... $ 0.53 $ 0.47
=============== ==============
5. New Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS
No. 121, but addresses certain implementation issues associated with that
Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of
SFAS No. 144 will not have a material impact on our consolidated financial
statements.
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 March 31, 2002 and April 1, 2001 each contained 13
weeks and are referred to hereafter as the "2002 quarter" and the "2001
quarter", respectively.
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 the consolidated financial statements.
We believe that the following significant accounting policies involve a
significant degree of subjectivity or complexity (see Note 2 of our Consolidated
Financial Statements in our Annual Report on Form 10-K for the fiscal year ended
December 30, 2001 for a complete discussion of our significant accounting
policies).
Property and equipment: Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets. The useful
lives of the assets are based upon management's expectations for the period of
time that the asset will be used for the generation of revenue. We periodically
review the assets for changes in circumstances which may impact their useful
lives.
11
Impairment of long-lived assets: We periodically review property and equipment
for impairment using historical cash flows as well as current estimates of
future cash flows and/or appraisals. This assessment process requires the use of
estimates and assumptions which are subject to a high degree of judgement. In
addition, we periodically assess the recoverability of goodwill and other
intangible assets which requires us to make assumptions regarding the future
cash flows and other factors to determine the fair value of the assets. If these
assumptions change in the future, we may be required to record impairment
charges for these assets.
Other estimates: We are required to make judgements and/or estimates in the
determination of several of the accruals that are reflected in our consolidated
financial statements. We believe that the following accruals are subject to a
significant degree of subjectivity.
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
judgements as well as the potential ranges of any losses. We determine the
required accruals after a careful review of the facts of each legal action. Our
accruals may change in the future due to new developments in these matters.
We use estimates in the determination of the required accruals for general
liability, workers' compensation and health insurance. These estimates are based
upon a detailed examination of historical and industry claims experience. This
claims information may change in the future and may require us to revise these
accruals.
We continually assess the collectibility of our receivables based on several
factors, using estimates based upon specific information available to us at the
time. The allowance for bad debts may change in the future due to new
developments.
We continually reassess our assumptions and judgements and make adjustments when
significant facts and circumstances dictate. Historically, actual results have
not been materially different than the estimates that are described above.
12
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
----------------------------------
March 31, April 1,
2002 2001
--------------- ---------------
Revenues:
Company restaurant sales.................................... 87.6% 87.8%
Franchise income............................................ 12.4 12.2
--------------- ---------------
Total operating revenues................................. 100.0% 100.0%
=============== ===============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage........................................... 27.1% 27.0%
Labor....................................................... 32.8 31.8
Direct and occupancy........................................ 24.5 25.5
Pre-opening expense......................................... 0.2 0.1
--------------- ---------------
Total cost of sales...................................... 84.6% 84.4%
=============== ===============
General and administrative expenses.............................. 9.6% 9.4%
Amortization of intangible assets................................ 0.1 0.8
Loss on disposition of restaurants and equipment................. 0.1 0.1
--------------- ---------------
Operating earnings............................................... 16.0 15.6
--------------- ---------------
Other income (expense):
Investment income........................................... 0.2 0.2
Interest expense............................................ (0.3) (1.3)
Other income................................................ 0.1 --
--------------- ---------------
Total other expense...................................... (0.1) (1.0)
--------------- ---------------
Earnings before income taxes..................................... 16.0 14.6
Income taxes..................................................... 5.8 5.4
--------------- ---------------
Net earnings..................................................... 10.1% 9.2%
=============== ===============
13
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
-----------------------------------------
March 31, April 1,
2002 2001
------------------- -------------------
Number of restaurants:
Company:
Beginning of period........................................ 310 285
Restaurant openings........................................ 4 2
------------------- -------------------
End of period.............................................. 314 287
------------------- -------------------
Franchise:
Beginning of period........................................ 1,082 1,001
Restaurant openings........................................ 9 12
Restaurant closings........................................ (1) (1)
------------------- -------------------
End of period.............................................. 1,090 1,012
------------------- -------------------
Total:
Beginning of period........................................ 1,392 1,286
Restaurant openings........................................ 13 14
Restaurant closings........................................ (1) (1)
------------------- -------------------
End of period.............................................. 1,404 1,299
=================== ===================
Weighted average weekly sales per restaurant:
Company.................................................... $ 43,235 $ 42,968
Franchise.................................................. $ 44,088 $ 42,328
Total...................................................... $ 43,897 $ 42,470
Change in comparable restaurant sales:(1)
Company.................................................... 1.5% 3.6%
Franchise.................................................. 4.1% 3.1%
Total...................................................... 3.5% 3.2%
Total system sales (in thousands)................................... $ 795,065 $ 712,949
--------
(1) When computing comparable restaurant sales, restaurants open for at
least 18 months are compared from period to period.
14
Company Restaurant Sales. Total company restaurant sales increased $14,830,000
(9.3%) from $160,143,000 in the 2001 quarter to $174,973,000 in the 2002 quarter
due primarily to company restaurant openings and increases in comparable
restaurant sales. Comparable restaurant sales at company restaurants increased
by 1.5% in the 2002 quarter. Weighted average weekly sales at company
restaurants increased 0.6% from $42,968 in the 2001 quarter to $43,235 in the
2002 quarter. These increases were due primarily to an increase in the average
guest check resulting from the company's food promotions.
Franchise Income. Overall franchise income increased $2,606,000 (11.7%) from
$22,234,000 in the 2001 quarter to $24,840,000 in the 2002 quarter due primarily
to the increased number of franchise restaurants operating during 2002 as
compared to 2001 and increases in comparable restaurant sales. Comparable
restaurant sales and weighted average weekly sales for franchise restaurants
increased 4.1% and 4.2%, respectively, in the 2002 quarter.
Cost of Company Restaurant Sales. Food and beverage costs increased slightly
from 27.0% in the 2001 quarter to 27.1% in the 2002 quarter, due primarily to
higher beef usage relating to our menu promotions and higher lettuce costs in
the 2002 quarter. These increases were partially offset by the impact of a
supply chain management initiative implemented in 2001.
Labor costs increased from 31.8% in the 2001 quarter to 32.8% in the 2002
quarter. This increase was due to higher costs related to improved management
staffing levels and higher management incentive compensation relating to a new
bonus program.
Direct and occupancy costs decreased from 25.5% in the 2001 quarter to 24.5% in
the 2002 quarter due primarily to lower utility costs and smallwares expense as
well as a decrease in advertising costs, as a percentage of sales.
General and Administrative Expenses. General and administrative expenses
increased in the 2002 quarter to 9.6% from 9.4% in the 2001 quarter, due
primarily to higher legal fees and expenses related to certain litigation which
were partially offset by the absorption of general and administrative expenses
over a larger revenue base.
Amortization of Intangible Assets: Amortization of intangible assets decreased
from $1,463,000 in the 2001 quarter to $138,000 in the 2002 quarter due to the
elimination of goodwill amortization in accordance with SFAS No. 142.
Interest Expense: Interest expense decreased in the 2002 quarter compared to the
2001 quarter due primarily to a reduction in our debt levels and lower interest
rates in the 2002 quarter as compared to the 2001 quarter.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.8% in the 2001 quarter to 36.5% in the 2002
quarter due primarily to the elimination of goodwill amortization in accordance
with SFAS No. 142.
15
Liquidity and Capital Resources
Our need for capital historically has resulted from the construction and
acquisition of restaurants and the repurchase of our common shares. 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 $50,086,000 in fiscal year 2001 and $10,972,000 in the
2002 quarter. We currently expect to open approximately 25 restaurants, and
capital expenditures are expected to be between $60,000,000 and $65,000,000, in
fiscal 2002. These expenditures will primarily be for the development of new
restaurants, refurbishment and capital replacement for existing restaurants, and
the enhancement of information systems including a new accounting and human
resource information system. 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 bank credit agreement provides for a $150,000,000 three-year unsecured
revolving credit facility, of which $25,000,000 may be used for the issuance of
letters of credit. The facility is subject to various covenants and restrictions
which, among other things, require the maintenance of stipulated fixed charge,
leverage and indebtedness to capitalization ratios, as defined, and limit
additional indebtedness and capital expenditures in excess of specified amounts.
Cash dividends are limited to $10,000,000 annually. The facility is subject to
standard other terms, conditions, covenants, and fees. 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 then-current credit agreement. As of
December 30, 2001, we had $20,600,000 remaining on this authorization. In
February 2002, our Board of Directors extended the 2001 authorization through
2002. During the 2002 quarter, we repurchased 250,000 shares of our common stock
at an average price of $33.30 for an aggregate cost of $8,324,000. As of March
31, 2002, we had $12,300,000 remaining under this authorization.
As of March 31, 2002, our liquid assets totaled $10,736,000. These assets
consisted of cash and cash equivalents in the amount of $10,235,000 and
short-term investments in the amount of $501,000. The working capital deficit
increased from $29,747,000 as of December 30, 2001 to $33,355,000 as of March
31, 2002. This increase was due primarily to decreases in cash and cash
equivalents due to payments on long-term debt which were partially offset by the
redemption of gift certificates in the 2002 quarter sold in 2001. As of March
31, 2002, we had borrowings of $50,500,000 and standby letters of credit of
$6,516,000 outstanding under our $150,000,000 revolving credit facility. We also
had a standby letter of credit for $827,000 outstanding with another financial
institution.
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.
16
The following table shows our bank debt amortization schedule, our future
capital lease commitments and our future operating lease commitments as of March
31, 2002:
----------------------------------------------------------------------------------------------------------------
Financial Commitments (in thousands)
----------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
------------ ------------ ------------ ------------ ------------ -------------
Bank Debt......................... $ 500 $ -- $ 50,000 $ -- $ -- $ --
Capital Lease Obligations......... $ 521 $ 715 $ 741 $ 767 $ 794 $ 7,536
Operating Leases.................. $ 10,941 $ 14,470 $ 13,537 $ 12,856 $ 12,290 $ 109,377
Financial commitments for 2002 include only payments to be made for the
remaining 39 weeks of fiscal 2002. In addition, we have lease guarantees of
approximately $27,100,000 as of March 31, 2002 (see Note 2 to our Consolidated
Financial Statements).
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.
New Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS
No. 121, but addresses certain implementation issues associated with that
Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of
SFAS No. 144 will not have a material impact on our consolidated financial
statements.
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development, costs and expenses, capital expenditures 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 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,
2002. We disclaim any obligation to update forward-looking statements.
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in
commodity prices. Our revolving credit facility bears interest at either the
bank's prime rate or LIBOR plus 1.0%, at our option. As of March 31, 2002, the
total amount of debt subject to interest rate fluctuations was $50,500,000 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 $505,000 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal actions arising in the normal course of
business. These matters include, without limitation, such matters as employment
law related claims and disputes with two international franchisees regarding
disclosures we allegedly made or omitted. In each instance, we believe that we
have meritorious defenses to the allegations made and we 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, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
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, 2002 reporting
December comparable sales and updating fourth quarter earnings
guidance.
We filed a report on Form 8-K on January 18, 2002 announcing
the promotion of George D. Shadid to the new Chief Operating
Officer position.
We filed a report on Form 8-K on January 18, 2002 announcing
the promotion of Steven K. Lumpkin to Chief Financial Officer.
We filed a report on Form 8-K on February 8, 2002 announcing
January comparable sales and the broadcast of the fourth
quarter 2001 earnings conference call over the Internet.
We filed a report on Form 8-K on February 13, 2002 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.
We filed a report on Form 8-K on February 13, 2002 reporting
fourth quarter and fiscal year 2001 earnings per share.
We filed a report on Form 8-K on February 27, 2002 reporting
February comparable sales and announcing the webcast of our
presentation at the Bear Stearns Retail, Restaurants & Apparel
Conference.
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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: April 24, 2002 By: /s/ Lloyd L. Hill
------------------ ----------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: April 24, 2002 By: /s/ Steven K. Lumpkin
------------------ ----------------------------------------
Steven K. Lumpkin
Executive Vice President and
Chief Financial Officer
(principal financial and accounting
officer)
20
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
None
21