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 June 29, 2003
--------------------------------------------------
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.
----------------------------------------------------
(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
--------------------------------------------------------------------------------
(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes X No
----- -----
The number of shares of the registrant's common stock outstanding as of July 24,
2003 was 55,838,740.
1
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
FORM 10-Q
FISCAL QUARTER ENDED JUNE 29, 2003
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 29, 2003
and December 29, 2002................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks
Ended June 29, 2003 and June 30, 2002................................................ 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 29, 2003......................................................... 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 29, 2003 and June 30, 2002 ............................................... 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 23
Item 4. Controls and Procedures................................................................. 24
Part II Other Information
Item 1. Legal Proceedings....................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders..................................... 25
Item 6. Exhibits and Reports on Form 8-K........................................................ 26
Signatures ................................................................................................. 27
Exhibit Index............................................................................................... 28
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
June 29, December 29,
2003 2002
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 4,535 $ 15,169
Short-term investments, at market value (amortized cost of $478 in 2002)......... 26 503
Receivables (less allowance for bad debts of $3,955 in 2003 and $4,089 in 2002).. 31,824 26,092
Receivables related to captive insurance subsidiary.............................. 6,162 1,803
Inventories...................................................................... 19,717 11,504
Prepaid income taxes............................................................. 3,122 5,002
Prepaid and other current assets................................................. 8,976 9,506
---------------- ---------------
Total current assets......................................................... 74,362 69,579
Property and equipment, net........................................................... 397,923 383,002
Goodwill.............................................................................. 105,326 88,715
Franchise interest and rights, net.................................................... 1,302 1,468
Other assets, net..................................................................... 18,973 23,350
---------------- ---------------
$ 597,886 $ 566,114
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 501 $ 377
Accounts payable................................................................. 30,026 27,479
Accrued expenses and other current liabilities................................... 74,563 82,204
Loss reserve and unearned premiums related to captive insurance subsidiary....... 10,013 1,803
Accrued dividends................................................................ -- 3,323
---------------- ---------------
Total current liabilities.................................................... 115,103 115,186
---------------- ---------------
Non-current liabilities:
Long-term debt - less current portion............................................ 34,751 52,186
Other non-current liabilities.................................................... 8,380 6,161
---------------- ---------------
Total non-current liabilities................................................ 43,131 58,347
---------------- ---------------
Total liabilities............................................................ 158,234 173,533
---------------- ---------------
Commitments and contingencies (Note 3)
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 - 72,336,788 shares..................................................... 723 723
Additional paid-in capital....................................................... 194,628 187,523
Retained earnings................................................................ 479,408 434,621
Accumulated other comprehensive income, net of income taxes...................... -- 16
---------------- ---------------
674,759 622,883
Treasury stock - 16,579,329 shares in 2003 and 16,948,371 shares in 2002, at
cost........................................................................... (235,107) (230,302)
---------------- ---------------
Total stockholders' equity................................................... 439,652 392,581
---------------- ---------------
$ 597,886 $ 566,114
================ ===============
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 26 Weeks Ended
--------------- -- ---------------- -----------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- ---------------- ---------------- ---------------
Revenues:
Company restaurant sales ....................... $ 220,107 $ 178,893 $ 428,517 $ 353,866
Franchise royalties and fees.................... 27,331 25,484 54,494 50,324
Other franchise income.......................... 3,268 463 5,909 597
--------------- ---------------- ---------------- ---------------
Total operating revenues.................... 250,706 204,840 488,920 404,787
--------------- ---------------- ---------------- ---------------
Cost of company restaurant sales:
Food and beverage............................... 57,040 47,073 111,886 94,480
Labor........................................... 71,804 58,881 140,168 116,338
Direct and occupancy............................ 54,386 44,291 104,947 87,163
Pre-opening expense............................. 334 305 555 640
--------------- ---------------- ---------------- ---------------
Total cost of company restaurant sales...... 183,564 150,550 357,556 298,621
--------------- ---------------- ---------------- ---------------
Cost of other franchise income....................... 3,173 93 5,673 153
General and administrative expenses.................. 22,887 19,923 45,507 39,243
Amortization of intangible assets.................... 92 52 191 190
Loss on disposition of restaurants and equipment..... 731 727 1,198 1,021
--------------- ---------------- ---------------- ---------------
Operating earnings................................... 40,259 33,495 78,795 65,559
--------------- ---------------- ---------------- ---------------
Other income (expense):
Investment income............................... 485 381 821 778
Interest expense................................ (518) (555) (1,039) (1,188)
Impairment of Chevys note receivable (Note 6)... (8,803) -- (8,803) --
Other income.................................... 1 482 206 583
--------------- ---------------- ---------------- ---------------
Total other income (expense)................ (8,835) 308 (8,815) 173
--------------- ---------------- ---------------- ---------------
Earnings before income taxes......................... 31,424 33,803 69,980 65,732
Income taxes......................................... 11,239 12,338 25,193 23,992
--------------- ---------------- ---------------- ---------------
Net earnings......................................... $ 20,185 $ 21,465 $ 44,787 $ 41,740
=============== ================ ================ ===============
Basic net earnings per common share.................. $ 0.36 $ 0.38 $ 0.81 $ 0.75
=============== ================ ================ ===============
Diluted net earnings per common share................ $ 0.35 $ 0.37 $ 0.79 $ 0.73
=============== ================ ================ ===============
Basic weighted average shares outstanding............ 55,435 55,872 55,354 55,874
=============== ================ ================ ===============
Diluted weighted average shares outstanding.......... 57,032 57,374 56,869 57,352
=============== ================ ================ ===============
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 29, 2002........ 72,336,788 $ 723 $ 187,523 $ 434,621 $ 16 $(230,302) $ 392,581
Comprehensive income:
Net earnings................. -- -- -- 44,787 -- -- 44,787
Change in unrealized gain on
short-term investments,
net of income taxes........ -- -- -- -- (16) -- (16)
------------ ------------ -------------- ---------- ------------- ------------ -----------------
Total comprehensive income..... -- -- -- 44,787 (16) -- 44,771
------------ ------------ -------------- ---------- ------------- ------------ -----------------
Purchases of treasury stock.... -- -- -- -- -- (13,282) (13,282)
Stock options exercised and
related tax benefit.......... -- -- 5,441 -- -- 6,756 12,197
Shares issued under employee
stock and 401(k) plans....... -- -- 1,619 -- -- 1,152 2,771
Restricted shares awarded
under equity incentive plan.. -- -- (540) -- -- 569 29
Unearned compensation relating
to restricted shares......... -- -- 539 -- -- -- 539
Repayments of notes receivable
from officers for stock sales -- -- 46 -- -- -- 46
------------ ------------ -------------- ---------- ------------- ------------ -----------------
Balance, June 29, 2003............ 72,336,788 $ 723 $ 194,628 $ 479,408 $ -- $(235,107) $ 439,652
============ ============ ============== ========== ============= ============ =================
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
26 Weeks Ended
------------------------------------
June 29, June 30,
2003 2002
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................................... $ 44,787 $ 41,740
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................... 19,943 16,953
Amortization of intangible assets........................................... 191 190
Amortization of deferred financing costs.................................... 97 96
Deferred income tax provision (benefit)..................................... (734) 617
Gain on sale of investments................................................. (24) --
Loss on disposition of restaurants and equipment............................ 1,198 1,021
Impairment of Chevys note receivable........................................ 8,803 --
Income tax benefit from exercise of stock options........................... 3,879 1,359
Changes in assets and liabilities (exclusive of effects of acquisition):
Receivables................................................................. (5,377) (879)
Receivables related to captive insurance subsidiary......................... (4,359) --
Inventories................................................................. (8,019) (488)
Prepaid income taxes........................................................ 1,880 --
Prepaid and other current assets............................................ 316 2,016
Accounts payable............................................................ 2,547 3,392
Accrued expenses and other current liabilities.............................. (6,693) (8,336)
Loss reserve and unearned premiums related to captive insurance subsidiary.. 8,210 --
Accrued income taxes........................................................ -- 5,567
Other....................................................................... (1,375) 544
---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 65,270 63,792
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (28,964) (29,545)
Acquisition of restaurants...................................................... (21,557) --
Proceeds from sale of restaurants and equipment................................. 35 3
Purchases of short-term investments............................................. -- (100)
Maturities and sales of short-term investments.................................. 480 300
---------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES....................................... (50,006) (29,342)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock..................................................... (13,282) (8,324)
Dividends paid.................................................................. (3,323) (3,010)
Issuance of common stock upon exercise of stock options......................... 8,318 3,630
Shares sold under employee stock purchase plan.................................. 1,418 984
Net payments on long-term debt.................................................. (19,029) (42,000)
---------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES....................................... (25,898) (48,720)
---------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (10,634) (14,270)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 15,169 22,048
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 4,535 $ 7,778
================ ===============
See notes to consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
26 Weeks Ended
------------------------------------
June 29, June 30,
2003 2002
---------------- ---------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the 26 week period for:
Income taxes............................................................ $ 20,746 $ 13,534
================ ===============
Interest................................................................ $ 709 $ 891
================ ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued restricted common stock of $1,666,000 and $256,000 for the 26 weeks
ended June 29, 2003 and June 30, 2002, respectively.
On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection
with the acquisition of 11 restaurants.
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
29, 2002 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 29, 2002.
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.
We have made certain reclassifications to the consolidated financial statements
to conform to the 2003 presentation.
2. Stock-Based Compensation
We have adopted the disclosure provisions of Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure, an amendment of FASB Statement No. 123." The
Statement requires prominent disclosures in both annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We account
for stock-based compensation awards under the intrinsic method of Accounting
Principles Board Opinion No. 25. Opinion No. 25 requires compensation cost to be
recognized based on the excess, if any, between the quoted market price of the
stock at the date of grant and the amount an employee must pay to acquire the
stock. All options awarded under all of our plans are granted with an exercise
price equal to the fair market value on the date of the grant. The following
table presents the effect on our net earnings and earnings per share had we
adopted the fair value method of accounting for stock-based compensation under
SFAS No. 123, "Accounting for Stock-Based Compensation" (in thousands, except
for per share amounts).
8
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net earnings, as reported............................ $ 20,185 $ 21,465 $ 44,787 $ 41,740
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes............................. 2,106 1,647 4,469 2,646
--------------- --------------- --------------- ---------------
Pro forma net earnings............................... $ 18,079 $ 19,818 $ 40,318 $ 39,094
=============== =============== =============== ===============
Basic net earnings per common share,
as reported...................................... $ 0.36 $ 0.38 $ 0.81 $ 0.75
=============== =============== =============== ===============
Basic net earnings per common share,
pro forma........................................ $ 0.33 $ 0.35 $ 0.73 $ 0.70
=============== =============== =============== ===============
Diluted net earnings per common share,
as reported...................................... $ 0.35 $ 0.37 $ 0.79 $ 0.73
=============== =============== =============== ===============
Diluted net earnings per common share,
pro forma........................................ $ 0.32 $ 0.35 $ 0.71 $ 0.68
=============== =============== =============== ===============
3. Commitments and Contingencies
Litigation, claims and disputes: We are involved in various legal actions which
include, without limitation, employment law related matters, dram shop claims,
personal injury claims and other such normal restaurant operational matters. 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 our
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 guarantees: 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 June 29, 2003, the aggregate amount of these
lease payments totaled approximately $23,700,000. These leases expire at various
times throughout the next several years with the final lease agreement expiring
in 2018. The buyers have indemnified us from any losses related to these
guarantees. We have not recorded a liability as of June 29, 2003 or December 29,
2002.
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 June 29, 2003, we would have been required to make
payments totaling approximately $10,000,000. 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 $5,800,000 if such officers had been
terminated as of June 29, 2003.
9
4. 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 26 Weeks Ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net earnings......................................... $ 20,185 $ 21,465 $ 44,787 $ 41,740
=============== =============== =============== ===============
Basic weighted average shares outstanding............ 55,435 55,872 55,354 55,874
Dilutive effect of stock options and
equity-based compensation.......................... 1,597 1,502 1,515 1,478
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding.......... 57,032 57,374 56,869 57,352
=============== =============== =============== ===============
Basic net earnings per common share.................. $ 0.36 $ 0.38 $ 0.81 $ 0.75
=============== =============== =============== ===============
Diluted net earnings per common share................ $ 0.35 $ 0.37 $ 0.79 $ 0.73
=============== =============== =============== ===============
5. Acquisitions
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition. The purchase price of $34,250,000 has been allocated to
the fair value of property and equipment of $25,200,000, goodwill of $10,100,000
and other net current liabilities of $1,050,000.
On March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition. The purchase price of $23,200,000 has
been allocated to the fair value of property and equipment of $7,900,000,
goodwill of $16,600,000, and other net liabilities of $1,300,000.
10
The following table is comprised of actual company restaurant sales included in
our consolidated financial statements for each period presented and pro forma
company restaurant sales assuming the acquisitions occurred at the beginning of
each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Actual company restaurant sales...................... $ 18,700 $ -- $ 30,700 $ --
=============== =============== =============== ===============
Pro forma company restaurant sales................... $ 18,700 $ 17,100 $ 36,700 $ 33,800
=============== =============== =============== ===============
6. Impairment of Chevys Note Receivable
In 1999, we received a $6,000,000, 8% subordinated note in connection with the
sale of the Rio Bravo concept to Chevys Holdings, Inc ("Chevys") due in 2009.
The note receivable balance of approximately $8,800,000 and $8,600,000 as of
June 29, 2003 and December 29, 2002, respectively, is included in other assets
in our consolidated balance sheets. In June 2003, Chevys announced the sale of
the majority of its restaurants. Subsequent to the announcement, we received
Chevys' audited financial statements for the fiscal year ended December 31,
2002. Based upon this information, we believe that the note is impaired. We have
fully reserved the principal and accrued interest by recording an allowance of
approximately $8,800,000 as of June 29, 2003. A charge for the impairment of
this note is included in our consolidated statements of earnings. We will no
longer accrue interest receivable on this note and will record future interest
income on this note only upon the receipt of any related cash payments.
7. Goodwill and Other Intangible Assets
Changes in goodwill are summarized below (in thousands):
June 29, December 29,
2003 2002
--------------------- -------------------
Carrying amount, beginning of the year.................. $ 88,715 $ 78,614
Goodwill acquired during the period..................... 16,611 10,101
--------------------- -------------------
$ 105,326 $ 88,715
===================== ===================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets," consist of franchise interest and rights and are
summarized below (in thousands):
June 29, December 29,
2003 2002
--------------------- -------------------
Gross carrying amount.................................. $ 6,371 $ 6,371
Less, accumulated amortization......................... 5,069 4,903
--------------------- -------------------
Net.................................................... $ 1,302 $ 1,468
===================== ===================
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $280,000 to $380,000.
11
8. Captive Insurance Subsidiary
On September 20, 2002, we formed Neighborhood Insurance, Inc., a 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. Applebee's International, Inc. and covered
franchisees make premium payments to the captive insurance company which pays
administrative fees and insurance claims, subject to individual and aggregate
maximum claim limits under the captive insurance company's reinsurance policies.
Franchisee premium amounts billed by the captive insurance company were
established based upon third-party actuarial estimates of ultimate settlement
costs for incurred claims and administrative fees. The franchisee premiums are
included in other franchise income ratably over the policy year. The related
offsetting expenses are included in cost of other franchise income. Accordingly,
we do not expect franchisee participation in the captive insurance company to
have an impact on our net earnings.
As of June 29, 2003 we have included approximately $2,000,000 in deferred policy
acquisition costs in prepaid and other current assets and approximately
$1,600,000 of investments in other assets in our consolidated balance sheet
related to the captive insurance company.
9. New Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
at fair value. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The initial adoption of this Statement
did not have a material impact on our results of operations or financial
position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
prospectively. The disclosure requirements were effective for financial
statements for interim or annual periods ending after December 15, 2002. We
adopted the initial recognition provisions of Interpretation No. 45 in January
of 2003. The initial adoption of Interpretation No. 45 did not have a material
impact on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement were effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. We have adopted the disclosure provisions of SFAS No.
148.
12
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation provides clarification on the consolidation of certain entities
in which equity investors do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support from
other parties. Such entities are defined as variable interest entities ("VIEs").
This Interpretation requires that VIEs be consolidated by the entity considered
to be the primary beneficiary of the VIE. The Interpretation is effective for
newly created VIEs after January 31, 2003 and effective in the second quarter
2003 for any VIEs created prior to February 1, 2003. We have evaluated our
relationships with potential unconsolidated entities which may meet the
consolidation requirements of this Interpretation, and the initial adoption did
not have any impact on our consolidated financial statements.
10. Subsequent Event
On July 20, 2003, we completed the sale of eight company restaurants in the
Atlanta, Georgia market to an affiliate of an existing franchisee for
$8,000,000. We do not expect this transaction to have a significant impact on
our net earnings for fiscal 2003, and no significant gain or loss on the sale is
anticipated. Actual company restaurant sales included in our consolidated
financial statements for these restaurants were approximately $4,300,000 in both
the 13 weeks ended June 29, 2003 and June 30, 2002 and were approximately
$8,800,000 in both the 26 weeks ended June 29, 2003 and June 30, 2002. In
connection with this sale, we closed one restaurant in the Atlanta market in
June 2003.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Our revenues are generated from three primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise royalties and fees
o Other franchise income
Beverage sales include sales of alcoholic beverages, while non-alcoholic
beverages are included in food sales. Franchise royalties are generally 4% of
each franchise restaurant's monthly gross sales. Franchise fees typically range
from $30,000 to $35,000 for each restaurant opened. Other franchise income
includes insurance premiums from franchisee participation in our captive
insurance company and revenue from information technology products and services
provided to certain franchisees.
Certain expenses relate only to company operated restaurants. These include:
o Food and beverage costs
o Labor costs
o Direct and occupancy costs
o Pre-opening expenses
Cost of other franchise income includes the costs related to franchisee
participation in our captive insurance company and costs related to information
technology products and services provided to certain franchisees.
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 June 29, 2003 and June 30, 2002 each contained 13
weeks and are referred to hereafter as the "2003 quarter" and the "2002
quarter," respectively. Our 26 week periods ended June 29, 2003 and June 30,
2002 are referred to hereafter as the "2003 year-to-date period" and the "2002
year-to-date period," respectively.
On September 20, 2002, we formed Neighborhood Insurance, Inc., a 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. Applebee's International, Inc. and covered
franchisees make premium payments to the captive insurance company which pays
administrative fees and insurance claims, subject to individual and aggregate
maximum claim limits under the captive insurance company's reinsurance policies.
Franchisee premium amounts billed by the captive insurance company were
established based upon third-party actuarial estimates of ultimate settlement
costs for incurred claims and administrative fees. The franchisee premiums are
included in other franchise income ratably over the policy year. The related
offsetting expenses are included in cost of other franchise income. Accordingly,
we do not expect franchisee participation in the captive insurance company to
have an impact on our net earnings.
14
As of June 29, 2003 we have included approximately $2,000,000 in deferred policy
acquisition costs in prepaid and other current assets and approximately
$1,600,000 of investments in other assets in our consolidated balance sheet
related to the captive insurance company.
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 the consolidated financial statements.
We believe that the following significant accounting policies involve a higher
degree of judgement or complexity (see Note 2 of our Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended December
29, 2002 for a complete discussion of our significant accounting policies).
Franchise revenues: Franchise revenues consist of franchise royalties, franchise
fees and other franchise income. We recognize royalties on a franchisee's sales
in the period in which the sales occur. We also receive a franchise fee for each
restaurant that a franchisee opens. Franchise fees are deferred until we have
performed substantially all of our related obligations as franchisor, typically
when the restaurant opens. Other franchise income includes insurance premiums
from franchisee participation in our captive insurance company and revenue from
information technology products and services provided to certain franchisees.
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. We periodically
review the assets for changes in circumstances which may impact their useful
lives.
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 significant 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.
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.
Employee incentive compensation plans: We have various long-term employee
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.
15
Receivables: 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.
We periodically reassess our assumptions and judgements 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 the consolidated balance sheets would be adjusted
accordingly. Historically, actual results have not been materially different
than the estimates that are described above.
Acquisitions
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition.
On March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition.
The following table is comprised of actual company restaurant sales included in
our consolidated financial statements for each period presented and pro forma
company restaurant sales assuming the acquisitions occurred at the beginning of
each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Actual company restaurant sales...................... $ 18,700 $ -- $ 30,700 $ --
=============== =============== =============== ===============
Pro forma company restaurant sales................... $ 18,700 $ 17,100 $ 36,700 $ 33,800
=============== =============== =============== ===============
16
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 26 Weeks Ended
------------------------- --------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Company restaurant sales................................ 87.8% 87.3% 87.6% 87.4%
Franchise royalties and fees............................ 10.9 12.4 11.1 12.4
Other franchise income.................................. 1.3 0.2 1.2 0.1
------------ ------------ ------------ ------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage....................................... 25.9% 26.3% 26.1% 26.7%
Labor................................................... 32.6 32.9 32.7 32.9
Direct and occupancy.................................... 24.7 24.8 24.5 24.6
Pre-opening expense..................................... 0.2 0.2 0.1 0.2
------------ ------------ ------------ ------------
Total cost of sales.................................. 83.4% 84.2% 83.4% 84.4%
============ ============ ============ ============
Cost of other franchise income (as a percentage of other
franchise income)....................................... 97.1% 20.1% 96.0% 25.6%
General and administrative expenses.......................... 9.1 9.7 9.3 9.7
Amortization of intangible assets............................ -- -- -- --
Loss on disposition of restaurants and equipment............. 0.3 0.4 0.2 0.3
------------ ------------ ------------ ------------
Operating earnings........................................... 16.1 16.4 16.1 16.2
------------ ------------ ------------ ------------
Other income (expense):
Investment income....................................... 0.2 0.2 0.2 0.2
Interest expense........................................ (0.2) (0.3) (0.2) (0.3)
Impairment of Chevys note receivable.................... (3.5) -- (1.8) --
Other income............................................ -- 0.2 -- 0.1
------------ ------------ ------------ ------------
Total other income (expense)......................... (3.5) 0.2 (1.8) --
------------ ------------ ------------ ------------
Earnings before income taxes................................. 12.5 16.5 14.3 16.2
Income taxes................................................. 4.5 6.0 5.2 5.9
------------ ------------ ------------ ------------
Net earnings................................................. 8.1% 10.5% 9.2% 10.3%
============ ============ ============ ============
17
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 26 Weeks Ended
------------------------------- -------------------------------
June 29, June 30, June 29, June 30,
2003 2002 2003 2002
------------- ------------- -------------- --------------
Number of restaurants:
Company:
Beginning of period....................... 371 314 357 310
Restaurant openings....................... 4 4 7 8
Restaurants closed........................ (2) -- (2) --
Restaurants acquired from franchisee...... -- -- 11 --
------------- ------------- -------------- --------------
End of period............................. 373 318 373 318
------------- ------------- -------------- --------------
Franchise:
Beginning of period....................... 1,142 1,090 1,139 1,082
Restaurant openings....................... 13 15 29 24
Restaurants closed........................ -- (2) (2) (3)
Restaurants acquired from franchisee...... -- -- (11) --
------------- ------------- -------------- --------------
End of period............................. 1,155 1,103 1,155 1,103
------------- ------------- -------------- --------------
Total:
Beginning of period....................... 1,513 1,404 1,496 1,392
Restaurant openings....................... 17 19 36 32
Restaurants closed........................ (2) (2) (4) (3)
------------- ------------- -------------- --------------
End of period............................. 1,528 1,421 1,528 1,421
============= ============= ============== ==============
Weighted average weekly sales per restaurant:
Company....................................... $ 45,402 $ 43,558 $ 45,041 $ 43,398
Franchise..................................... $ 45,940 $ 44,566 $ 45,682 $ 44,328
Total......................................... $ 45,807 $ 44,340 $ 45,526 $ 44,120
Change in comparable restaurant sales: (1)
Company....................................... 5.1% 1.4% 4.9% 1.5%
Franchise..................................... 3.2% 3.7% 3.0% 3.9%
Total......................................... 3.6% 3.2% 3.5% 3.3%
Total system sales (in thousands).................. $ 904,238 $ 812,707 $ 1,788,960 $ 1,607,772
--------
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
18
Company Restaurant Sales. Total company restaurant sales increased $41,214,000
(23%) from $178,893,000 in the 2002 quarter to $220,107,000 in the 2003 quarter
and increased $74,651,000 (21%) from $353,866,000 in the 2002 year-to-date
period to $428,517,000 in the 2003 year-to-date period. Company restaurant
openings contributed approximately 8% of the increase in total company
restaurant sales in both the 2003 quarter and the 2003 year-to-date period. The
remaining increase in both periods was due to the acquisition of 21 franchise
restaurants in the Washington, D.C. area in November 2002 and 11 restaurants in
Illinois, Indiana, Kentucky, and Missouri in late March 2003 as well as
increases in weighted average weekly sales.
Comparable restaurant sales at company restaurants increased by 5.1% and 4.9% in
the 2003 quarter and the 2003 year-to-date period, respectively. Weighted
average weekly sales at company restaurants increased 4.2% from $43,558 in the
2002 quarter to $45,402 in the 2003 quarter and increased 3.8% from $43,398 in
the 2002 year-to-date period to $45,041 in the 2003 year-to-date period. These
increases were due primarily to increases in guest traffic and in the average
guest check resulting from our food promotions. In addition, a portion of the
increase resulted from the implementation of our To Go initiative and menu price
increases of approximately 1.5% in fiscal 2003. To Go sales mix increased from
4.6% of company restaurant sales in the 2002 quarter to 6.8% of company
restaurant sales in the 2003 quarter.
Franchise Royalties and Fees. Overall franchise income increased $1,847,000 (7%)
from $25,484,000 in the 2002 quarter to $27,331,000 in the 2003 quarter and
increased $4,170,000 (8%) from $50,324,000 in the 2002 year-to-date period to
$54,494,000 in the 2003 year-to-date period. These increases were due primarily
to the increased number of franchise restaurants operating during the 2003
quarter and 2003 year-to-date period and increases in comparable restaurant
sales. Weighted average weekly sales at franchise restaurants increased 3.1% in
both the 2003 quarter and 2003 year-to-date period, respectively, and franchise
comparable restaurant sales increased 3.2% and 3.0% in the 2003 quarter and 2003
year-to-date period, respectively.
Other Franchise Income. Other franchise income increased from $463,000 in the
2002 quarter to $3,268,000 in the 2003 quarter and increased from $597,000 in
the 2002 year-to-date period to $5,909,000 in the 2003 year-to-date period due
primarily to revenues recognized related to the franchise premium amounts billed
by the captive insurance company which was formed in September 2002. Franchise
premiums are included in other franchise income ratably over the policy year.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 26.3%
in the 2002 quarter to 25.9% in the 2003 quarter and decreased from 26.7% in the
2002 year-to-date period to 26.1% in the 2003 year-to-date period. The decreases
in both the 2003 quarter and 2003 year-to-date period were due to menu price
increases and operational improvements resulting from our supply chain
management initiatives. The decrease in the 2003 year-to-date period was also
due to lower beef usage related to our menu promotions.
Labor costs decreased from 32.9% in both the 2002 quarter and the 2002
year-to-date period to 32.6% in the 2003 quarter and 32.7% in the 2003
year-to-date period. These decreases were due to lower hourly and management
costs due to higher sales volumes at company restaurants, lower staffing levels
and lower incentive compensation which were partially offset by higher workers'
compensation costs.
19
Direct and occupancy costs decreased from 24.8% in the 2002 quarter and 24.6% in
the 2002 year-to-date period to 24.7% in the 2003 quarter and 24.5% in the 2003
year-to-date period. Higher sales volumes at company restaurants during the 2003
quarter and the 2003 year-to-date period resulted in lower depreciation expense,
as a percentage of sales, due to its relatively fixed nature. Decreases in both
periods were partially offset by higher packaging costs relating to our To Go
initiative. Advertising costs, as a percentage of sales, were higher in the 2003
quarter but lower in the 2003 year-to-date period due to the timing of our menu
promotions.
Cost of Other Franchise Income. Cost of other franchise income increased from
$93,000 in the 2002 quarter to $3,173,000 in the 2003 quarter and increased from
$153,000 in the 2002 year-to-date period to $5,673,000 in the 2003 year-to-date
due primarily to the costs related to the operation of our captive insurance
company, which was formed in September 2002.
General and Administrative Expenses. General and administrative expenses
decreased from 9.7% in both the 2002 quarter and the 2002 year-to-date period to
9.1% in the 2003 quarter and 9.3% in the 2003 year-to-date period. General and
administrative expenses were lower in both the 2003 quarter and 2003
year-to-date period due to the absorption of general and administrative expenses
over a larger revenue base and a reduction in bad debt expense. Decreases in
both periods were partially offset by higher depreciation expense related to our
new information systems and increased compensation due to staffing levels.
Impairment of Chevys Note Receivable. In June 2003, Chevys announced the sale of
the majority of its restaurants. Subsequent to the announcement, we received
Chevys' audited financial statements for the fiscal year ended December 31,
2002. Based upon this information, we believe that the note is impaired. We have
fully reserved the principal and accrued interest by recording an allowance of
approximately $8,800,000 as of June 29, 2003.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.5% in both the 2002 quarter and 2002
year-to-date period to 35.8% in the 2003 quarter and 36.0% in the 2003
year-to-date period due to a reduction in state and local income taxes and the
discontinuation of goodwill amortization required under SFAS No. 142.
Liquidity and Capital Resources
Our need for capital historically has resulted from the construction and
acquisition of restaurants, investment in information technology systems and the
repurchase of our common shares. In the past, we have obtained capital through
public stock offerings, debt financing, and our ongoing operations. Cash flows
from our ongoing operations include 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 $64,874,000 in fiscal year 2002 (excluding the
acquisition of 21 restaurants) and $28,964,000 in the 2003 year-to-date period
(excluding the acquisition of 11 restaurants). We currently expect to open
approximately 25 company restaurants, and capital expenditures excluding
acquisitions are expected to be between $70,000,000 and $80,000,000 in 2003.
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.
20
On November 7, 2002, we acquired the operations and assets of 21 Applebee's
restaurants located in the Washington, D.C. area from a franchisee. Under the
terms of the purchase agreement and the agreement with the franchisee's secured
lender, the total purchase price of the acquisition was $34,250,000. The
agreement also provides for additional consideration in July 2004 if the
restaurants achieve cash flows in excess of historical levels. Our financial
statements reflect the results of operations for these restaurants subsequent to
the date of acquisition.
On March 24, 2003, we acquired the operations and assets of 11 Applebee's
restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000
in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment
included $20,800,000 paid at closing, approximately $200,000 paid as a deposit
in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003.
Our financial statements reflect the results of operations for these restaurants
subsequent to the date of acquisition.
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. As of June 29,
2003, we had borrowings of $29,000,000 and standby letters of credit of
$11,939,000 outstanding under our revolving credit facility.
In May 2002, our Board of Directors authorized an additional repurchase of
$75,000,000 of our common stock through May 2005. During the 2003 year-to-date
period, we repurchased 545,000 shares at an average cost of $24.37 for an
aggregate cost of $13,300,000. As of June 29, 2003, we had $56,200,000 remaining
under the 2002 authorization.
As of June 29, 2003, our liquid assets totaled $4,561,000. These assets
consisted of cash and cash equivalents in the amount of $4,535,000 and
short-term investments in the amount of $26,000. The working capital deficit
decreased from $45,607,000 as of December 29, 2002 to $40,741,000 as of June 29,
2003. This decrease was due primarily to the redemption of gift certificates in
the 2003 year-to-date period sold in 2002 and an increase in inventory and were
partially offset by decreases in cash and cash equivalents due to the
acquisition of 11 restaurants in Illinois, Indiana, Kentucky and Missouri,
repurchases of our common stock and the repayment of debt.
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.
21
The following table shows our debt amortization schedule, our future capital
lease commitments (including principal and interest payments) and our future
operating lease commitments as of June 29, 2003 (in thousands):
Payments due by period
-----------------------------------------------------------------------
Certain Less than 1 1-3 3-5 More than 5
Contractual Obligations Total year years years years
------------------------------------------- -------------- ------------- ------------- ------------ ---------------
Long-term Debt (excluding capital
lease obligations)..................... $ 31,024 $ 441 $ 29,236 $ 153 $ 1,194
Capital Lease Obligations................ $ 10,186 $ 729 $ 1,534 $ 1,644 $ 6,279
Operating Leases......................... $ 215,630 $ 18,550 $ 34,642 $ 33,274 $ 129,164
In addition, we have outstanding lease guarantees of approximately $23,700,000
as of June 29, 2003 (see Note 3 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 considering 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 Pronouncements
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement requires that a liability for
a cost associated with an exit or disposal activity be recognized only when the
liability is incurred and measured at fair value. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. The
initial adoption of this Statement did not have a material impact on our results
of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others." Interpretation No. 45 supersedes Interpretation No. 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," and provides
guidance to guarantors on the recognition and disclosure concerning obligations
under certain guarantees in interim and annual financial statements. The initial
recognition and measurement provisions of Interpretation No. 45 are effective
for guarantees issued or modified after December 31, 2002, and are to be applied
prospectively. The disclosure requirements were effective for financial
statements for interim or annual periods ending after December 15, 2002. We
adopted the initial recognition provisions of Interpretation No. 45 in January
of 2003. The initial adoption of Interpretation No. 45 did not have a material
impact on our results of operations or financial position.
22
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," and provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. This Statement also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosure in annual and
interim financial statements about the effects of stock-based compensation. The
transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for financial statements issued for fiscal years ending after December
15, 2002. The interim disclosure provisions of this Statement were effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. We have adopted the disclosure provisions of SFAS No.
148.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51." This
Interpretation provides clarification on the consolidation of certain entities
in which equity investors do not have sufficient equity at risk for the entity
to finance its activities without additional subordinated financial support from
other parties. Such entities are defined as variable interest entities ("VIEs").
This Interpretation requires that VIEs be consolidated by the entity considered
to be the primary beneficiary of the VIE. The Interpretation is effective for
newly created VIEs after January 31, 2003 and effective in the second quarter
2003 for any VIEs created prior to February 1, 2003. We have evaluated our
relationships with potential unconsolidated entities which may meet the
consolidation requirements of this Interpretation, and we do not believe the
adoption will 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, 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 our ability and the ability of our
franchisees to open and operate additional restaurants profitably, the ability
of our franchisees to obtain financing, the continued growth of our franchisees,
our ability to attract and retain qualified franchisees, the impact of intense
competition in the casual dining segment of the restaurant industry, 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 12,
2003. We disclaim any obligation to update forward-looking statements.
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 June 29, 2003, the
total amount of debt subject to interest rate fluctuations was $29,000,000 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 $290,000 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. Many of the food
products we purchase are subject to price volatility due to factors that are
outside of our control such as weather and seasonality. As part of our strategy
to moderate this volatility, we have entered into fixed price purchase
commitments.
23
Item 4. Controls and Procedures
As of the end of the period covered by this report, 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 were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal actions which include, without limitation,
employment law related matters, dram shop claims, personal injury claims and
other such normal restaurant operational matters. 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 our
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 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on May 8, 2003. The stockholders
voted on the following matters:
Proposal I. Elect Douglas R. Conant and D. Patrick Curran as
directors to serve three-year terms expiring in 2006.
Proposal II. Approve an amendment to the Applebee's International,
Inc. 1995 Equity Incentive Plan.
Proposal III. Approve an amendment to the Applebee's International,
Inc. Certificate of Incorporation.
Proposal IV. Ratify Deloitte & Touche LLP as our independent auditors
for the 2003 fiscal year.
Proposal V. Act on a Shareholder Proposal to require us to issue a
report relating to genetically engineered ingredients.
The results of the voting were as follows:
Affirmative Negative Broker
Proposal Votes Votes Abstentions Non-Votes
-------------------------- ---------------- -------------------- -------------------- -----------------
I (Conant) 49,924,641 1,552,887 -- --
I (Curran) 37,393,989 14,083,539 -- --
II 34,979,717 16,294,398 77,672 125,741
III 11,662,859 32,767,059 73,208 7,014,402
IV 32,892,023 18,425,756 34,008 125,741
V 2,740,750 40,200,587 1,521,783 7,014,408
Proposals I, II and IV received the required affirmative votes and were
affirmatively adopted by the Stockholders. Proposals III and V did not receive
the required affirmative votes.
25
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 furnished a report on Form 8-K on April 3, 2003 announcing
our presentation at the SunTrust Robinson Humphrey
Institutional Investor Conference.
We filed a report on Form 8-K on April 8, 2003 announcing the
sale of eight restaurants in the Atlanta market to a
franchisee.
We furnished a report on Form 8-K on April 24, 2003 announcing
the webcast of our first quarter earnings conference call over
the Internet.
We furnished a report on Form 8-K on May 1, 2003 reporting
first quarter diluted earnings per share.
We filed a report on Form 8-K on May 22, 2003 announcing the
establishment of a plan to manage the exercise and sale of
certain stock options by our Chairman and Chief Executive
Officer.
We filed a report on Form 8-K on May 28, 2003 reporting May
comparable sales.
We furnished a report on Form 8-K on May 29, 2003 announcing
our presentation at the Goldman Sachs Lodging, Gaming,
Restaurants, and Leisure Conference.
We furnished a report on Form 8-K on June 6, 2003 announcing
our presentation at two Investment Conferences in June.
26
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: July 30, 2003 By: /s/ Lloyd L. Hill
-------------------- ----------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: July 30, 2003 By: /s/ Steven K. Lumpkin
-------------------- ----------------------------------------
Steven K. Lumpkin
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: July 30, 2003 By: /s/ Beverly O. Elving
-------------------- ----------------------------------------
Beverly O. Elving
Vice President, Accounting
(principal accounting officer)
27
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
99.1 Certification of Chairman and Chief Executive Officer Pursuant to
SEC Rule 13a-14
99.2 Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14
99.3 Certification of Chairman and Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
28