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 September 28, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 000-17962
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Applebee's International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-1461763
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
-------------------------------------------------------------------------------
(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 October
27, 2003 was 54,976,791.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 28, 2003
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 28, 2003
and December 29, 2002................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 28, 2003 and September 29, 2002...................................... 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 28, 2003.................................................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 28, 2003 and September 29, 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.............................. 24
Item 4. Controls and Procedures................................................................. 24
Part II Other Information
Item 1. Legal Proceedings....................................................................... 25
Item 6. Exhibits and Reports on Form 8-K........................................................ 25
Signatures ................................................................................................. 26
Exhibit Index............................................................................................... 27
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
September 28, December 29,
2003 2002
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 3,359 $ 15,169
Short-term investments, at market value (amortized cost of $478 in 2002)......... 26 503
Receivables (less allowance for bad debts of $4,096 in 2003 and $4,089 in 2002).. 31,778 26,092
Receivables related to captive insurance subsidiary.............................. 2,093 1,803
Inventories...................................................................... 14,114 11,504
Prepaid income taxes............................................................. -- 5,002
Prepaid and other current assets................................................. 9,729 9,506
---------------- ---------------
Total current assets......................................................... 61,099 69,579
Property and equipment, net........................................................... 405,141 383,002
Goodwill.............................................................................. 105,326 88,715
Franchise interest and rights, net.................................................... 1,220 1,468
Restricted assets related to captive insurance subsidiary............................. 8,830 --
Other assets, net..................................................................... 18,201 23,350
---------------- ---------------
$ 599,817 $ 566,114
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................ $ 186 $ 377
Notes payable.................................................................... 4,800 --
Accounts payable................................................................. 34,700 27,479
Accrued expenses and other current liabilities................................... 79,478 82,204
Loss reserve and unearned premiums related to captive insurance subsidiary....... 11,876 1,803
Accrued dividends................................................................ -- 3,323
Accrued income taxes............................................................. 457 --
---------------- ---------------
Total current liabilities.................................................... 131,497 115,186
---------------- ---------------
Non-current liabilities:
Long-term debt - less current portion............................................ 23,714 52,186
Other non-current liabilities.................................................... 10,188 6,161
---------------- ---------------
Total non-current liabilities................................................ 33,902 58,347
---------------- ---------------
Total liabilities............................................................ 165,399 173,533
---------------- ---------------
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....................................................... 197,611 187,523
Retained earnings................................................................ 505,005 434,621
Accumulated other comprehensive income, net of income taxes...................... -- 16
---------------- ---------------
703,339 622,883
Treasury stock - 17,432,947 shares in 2003 and 16,948,371 shares in 2002, at
cost........................................................................... (268,921) (230,302)
---------------- ---------------
Total stockholders' equity................................................... 434,418 392,581
---------------- ---------------
$ 599,817 $ 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 39 Weeks Ended
------------------------------ -----------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues:
Company restaurant sales........................ $ 222,429 $ 182,807 $ 650,946 $ 536,673
Franchise royalties and fees.................... 27,594 26,033 82,088 76,357
Other franchise income.......................... 2,972 168 8,881 765
------------- ------------- ------------- -------------
Total operating revenues..................... 252,995 209,008 741,915 613,795
------------- ------------- ------------- -------------
Cost of company restaurant sales:
Food and beverage............................... 57,200 47,765 169,086 142,245
Labor........................................... 73,018 60,054 213,186 176,392
Direct and occupancy............................ 55,869 47,009 160,816 134,172
Pre-opening expense............................. 576 792 1,131 1,432
------------- ------------- ------------- -------------
Total cost of company restaurant sales....... 186,663 155,620 544,219 454,241
------------- ------------- ------------- -------------
Cost of other franchise income....................... 2,837 99 8,510 252
General and administrative expenses.................. 23,589 20,118 69,096 59,361
Amortization of intangible assets.................... 87 95 278 285
Loss on disposition of restaurants and equipment..... 116 458 1,314 1,479
------------- ------------- ------------- -------------
Operating earnings................................... 39,703 32,618 118,498 98,177
------------- ------------- ------------- -------------
Other income (expense):
Investment income............................... 227 346 1,048 1,124
Interest expense................................ (330) (414) (1,369) (1,602)
Impairment of Chevys note receivable (Note 7)... -- -- (8,803) --
Other income.................................... 395 513 601 1,096
------------- ------------- ------------- -------------
Total other income (expense)................. 292 445 (8,523) 618
------------- ------------- ------------- -------------
Earnings before income taxes......................... 39,995 33,063 109,975 98,795
Income taxes......................................... 14,398 12,068 39,591 36,060
------------- ------------- ------------- -------------
Net earnings......................................... $ 25,597 $ 20,995 $ 70,384 $ 62,735
============= ============= ============= =============
Basic net earnings per common share.................. $ 0.46 $ 0.38 $ 1.27 $ 1.12
============= ============= ============= =============
Diluted net earnings per common share................ $ 0.45 $ 0.37 $ 1.24 $ 1.10
============= ============= ============= =============
Basic weighted average shares outstanding............ 55,556 55,654 55,421 55,801
============= ============= ============= =============
Diluted weighted average shares outstanding.......... 57,184 56,714 56,988 57,119
============= ============= ============= =============
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...................... -- -- -- 70,384 -- -- 70,384
Change in unrealized gain on
short-term investments,
net of income taxes............. -- -- -- -- (16) -- (16)
--------------- ---------- ------------ ----------- ------------- ------------ -------------
Total comprehensive income.......... -- -- -- 70,384 (16) -- 70,368
--------------- ---------- ------------ ----------- ------------- ------------ -------------
Purchases of treasury stock......... -- -- -- -- -- (49,757) (49,757)
Stock options exercised and
related tax benefit............... -- -- 7,701 -- -- 9,104 16,805
Shares issued under employee
stock and 401(k) plans............ -- -- 2,046 -- -- 1,440 3,486
Restricted shares awarded under
equity incentive plan, net of
cancellations..................... -- -- (543) -- -- 594 51
Unearned compensation relating
to restricted shares.............. -- -- 785 -- -- -- 785
Repayments of notes receivable from
officers for stock sales.......... -- -- 99 -- -- -- 99
--------------- ---------- ------------ ----------- ------------- ------------ -------------
Balance, September 28, 2003............ 72,336,788 $ 723 $ 197,611 $ 505,005 $ -- $(268,921) $ 434,418
=============== ========== ============ =========== ============= ============ =============
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
39 Weeks Ended
-----------------------------------
September 28, September 29,
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings.................................................................... $ 70,384 $ 62,735
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization................................................ 30,091 25,812
Amortization of intangible assets............................................ 278 285
Amortization of deferred financing costs..................................... 146 145
Deferred income tax provision (benefit)...................................... (541) 635
Gain on sale of investments.................................................. (24) --
Loss on disposition of restaurants and equipment............................. 1,314 1,479
Impairment of Chevys note receivable......................................... 8,803 --
Income tax benefit from exercise of options.................................. 5,536 1,397
Changes in assets and liabilities (exclusive of effects of acquisitions or
dispositions):
Receivables.................................................................. (5,890) (2,380)
Receivables related to captive insurance subsidiary.......................... (290) --
Inventories.................................................................. (2,454) 3,095
Prepaid income taxes......................................................... 5,002 --
Prepaid and other current assets............................................. 420 (1,574)
Restricted assets related to captive insurance subsidiary.................... (8,830) --
Accounts payable............................................................. 7,300 5,910
Accrued expenses and other current liabilities............................... (1,798) (5,263)
Loss reserve and unearned premiums related to captive insurance subsidiary... 10,073 --
Accrued income taxes......................................................... 457 940
Other........................................................................ 853 1,038
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 120,830 94,254
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................................. (54,893) (49,680)
Acquisition of restaurants...................................................... (21,557) --
Proceeds from sale of restaurants and equipment................................. 8,579 3
Purchases of short-term investments............................................. -- (150)
Maturities and sales of short-term investments.................................. 480 350
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES........................................ (67,391) (49,477)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock..................................................... (49,757) (26,113)
Dividends paid.................................................................. (3,323) (3,010)
Issuance of common stock upon exercise of stock options......................... 11,269 3,791
Shares sold under employee stock purchase plan.................................. 2,134 1,529
Proceeds from issuance of notes payable......................................... 4,800 3,500
Net payments on long-term debt.................................................. (30,372) (39,000)
--------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES........................................ (65,249) (59,303)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (11,810) (14,526)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 15,169 22,048
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 3,359 $ 7,522
=============== ===============
See notes to consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
39 Weeks Ended
-------------------------------------
September 28, September 29,
2003 2002
----------------- -----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the 39 week period for:
Income taxes.................................................................. $ 29,494 $ 30,172
================= =================
Interest...................................................................... $ 887 $ 1,159
================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued restricted common stock of $1,836,000 and $757,000 for the 39 weeks
ended September 28, 2003 and September 29, 2002, respectively.
On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection
with the acquisition of 11 restaurants.
As of September 28, 2003, we have recorded a receivable of $1,125,000 in
connection with the sale of a restaurant.
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 39 Weeks Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net earnings, as reported............................ $ 25,597 $ 20,995 $ 70,384 $ 62,735
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes............................. 1,884 1,683 6,197 4,329
--------------- --------------- --------------- ---------------
Pro forma net earnings............................... $ 23,713 $ 19,312 $ 64,187 $ 58,406
=============== =============== =============== ===============
Basic net earnings per common share,
as reported...................................... $ 0.46 $ 0.38 $ 1.27 $ 1.12
=============== =============== =============== ===============
Basic net earnings per common share,
pro forma........................................ $ 0.43 $ 0.35 $ 1.16 $ 1.05
=============== =============== =============== ===============
Diluted net earnings per common share,
as reported...................................... $ 0.45 $ 0.37 $ 1.24 $ 1.10
=============== =============== =============== ===============
Diluted net earnings per common share,
pro forma........................................ $ 0.41 $ 0.34 $ 1.13 $ 1.02
=============== =============== =============== ===============
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 September 28, 2003, the aggregate amount of
these lease payments totaled approximately $25,100,000. These leases expire at
various times throughout the next several years with the final lease agreement
expiring in 2025. The buyers have indemnified us from any losses related to
these guarantees. We do not consider our exposure under these guarantees to be
material.
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 September 28, 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 September 28, 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 39 Weeks Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net earnings......................................... $ 25,597 $ 20,995 $ 70,384 $ 62,735
=============== =============== =============== ===============
Basic weighted average shares outstanding............ 55,556 55,654 55,421 55,801
Dilutive effect of stock options and
equity-based compensation.......................... 1,628 1,060 1,567 1,318
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding.......... 57,184 56,714 56,988 57,119
=============== =============== =============== ===============
Basic net earnings per common share.................. $ 0.46 $ 0.38 $ 1.27 $ 1.12
=============== =============== =============== ===============
Diluted net earnings per common share................ $ 0.45 $ 0.37 $ 1.24 $ 1.10
=============== =============== =============== ===============
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 39 Weeks Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 18,400 $ -- $ 49,100 $ --
=============== =============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 18,400 $ 17,500 $ 55,100 $ 52,500
=============== =============== =============== ===============
6. Dispositions
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
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. We do not expect this transaction to have a
significant impact on our net earnings for fiscal 2003. Actual company
restaurant sales included in our consolidated financial statements for the nine
restaurants were approximately $900,000 and $4,500,000 in the 13 weeks ended
September 28, 2003 and September 29, 2002, respectively, and were approximately
$10,300,000 and $14,000,000 in the 39 weeks ended September 28, 2003 and
September 29, 2002, respectively.
7. 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
September 28, 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.
During the fiscal quarter ended June 29, 2003, we fully reserved the principal
by recording an allowance of approximately $8,800,000. A charge for the
impairment of this note is included in our consolidated statements of earnings
for the thirty-nine weeks ended September 28, 2003. We 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. In October 2003, Chevys Inc.
filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy
Code.
11
8. Goodwill and Other Intangible Assets
Changes in goodwill are summarized below (in thousands):
September 28, 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):
September 28, December 29,
2003 2002
---------------------- ----------------------
Gross carrying amount................................... $ 6,371 $ 6,371
Less accumulated amortization........................... 5,151 4,903
---------------------- ----------------------
Net...................................................... $ 1,220 $ 1,468
====================== ======================
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $40,000 to $330,000.
9. 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 are
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 a material impact on our net earnings.
As of September 28, 2003 we have included in our consolidated balance sheet
approximately $1,100,000 in deferred policy acquisition costs in prepaid and
other current assets and approximately $8,800,000 of restricted assets
restricted for the payment of claims, held primarily in cash equivalent
investments. In addition, we have recorded current liabilities of approximately
$11,900,000 in loss and premium reserves related to the captive insurance
subsidiary.
10. 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.
12
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.
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 was effective for
newly created VIEs after January 31, 2003. We have concluded that we have not
created or obtained any VIEs subsequent to January 31, 2003 that would require
consolidation and the initial adoption did not have any impact on our
consolidated financial statements.
FASB Staff Position No. 46-6 "Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities," deferred the effective date for
applying the provisions of the Interpretation for VIEs created before February
1, 2003 to the first interim or annual period ending after December 15, 2003, if
certain conditions are met. We will implement the provisions of Interpretation
46 for any VIEs created prior to February 1, 2003 in our consolidated financial
statements for the fiscal year ending December 28, 2003.
As of the date of this filing, the FASB is deliberating certain FASB Staff
Positions ("FSPs") and may issue additional FSPs prior to our fiscal year ending
December 28, 2003. These FSPs, when finalized, may impact the accounting under
this Interpretation. We are currently assessing Interpretation No. 46 and,
although we have not completed our analysis, we do not expect the adoption to
have a material impact on our consolidated financial statements.
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 consist of sales of alcoholic beverages, while non-alcoholic
beverages are included in food sales. Franchise royalties are generally 4% of
each franchise restaurant's monthly gross sales. Franchise fees typically range
from $30,000 to $35,000 for each restaurant opened. Other franchise income
includes insurance premiums from franchisee participation in our captive
insurance company and revenue from information technology products and services
provided to certain franchisees.
Comparable restaurant sales are based upon those restaurants open for at least
18 months and are compared from period to period.
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 September 28, 2003 and September 29, 2002 each
contained 13 weeks and are referred to hereafter as the "2003 quarter" and the
"2002 quarter," respectively. Our 39 week periods ended September 28, 2003 and
September 29, 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 are
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 a material impact on our net earnings.
14
As of September 28, 2003 we have included in our consolidated balance sheet
approximately $1,100,000 in deferred policy acquisition costs in prepaid and
other current assets and approximately $8,800,000 of restricted assets
restricted for the payment of claims, held primarily in cash equivalent
investments. In addition, we have recorded current liabilities of approximately
$11,900,000 in loss and premium reserves related to the captive insurance
subsidiary.
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 judgment 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 are reported to have occurred. We also receive
a franchise fee for each restaurant that a franchisee opens. The recognition of
franchise fees is deferred until we have performed substantially all of our
related obligations as franchisor, typically when the restaurant opens. 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 on a restaurant by restaurant basis 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 judgment. 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.
15
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.
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 judgments and make adjustments when
significant facts and circumstances dictate. A change in any of the above
estimates could impact our consolidated statements of earnings and the related
asset or liability recorded in 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 39 Weeks Ended
------------------------------- -------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Actual company restaurant sales
for acquired restaurants......................... $ 18,400 $ -- $ 49,100 $ --
=============== =============== =============== ===============
Pro forma company restaurant sales
for acquired restaurants......................... $ 18,400 $ 17,500 $ 55,100 $ 52,500
=============== =============== =============== ===============
Dispositions
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
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. We do not expect this transaction to have a
significant impact on our net earnings for fiscal 2003. Actual company
restaurant sales included in our consolidated financial statements for the nine
restaurants were approximately $900,000 and $4,500,000 in the 13 weeks ended
September 28, 2003 and September 29, 2002, respectively, and were approximately
$10,300,000 and $14,000,000 in the 39 weeks ended September 28, 2003 and
September 29, 2002, respectively.
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 39 Weeks Ended
------------------------------------ -----------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---------------- ---------------- --------------- ----------------
Revenues:
Company restaurant sales..................... 87.9% 87.5% 87.7% 87.4%
Franchise royalties and fees................. 10.9 12.5 11.1 12.4
Other franchise income....................... 1.2 0.1 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............................ 25.7% 26.1% 26.0% 26.5%
Labor........................................ 32.8 32.9 32.8 32.9
Direct and occupancy......................... 25.1 25.7 24.7 25.0
Pre-opening expense.......................... 0.3 0.4 0.2 0.3
---------------- ---------------- --------------- ----------------
Total cost of sales....................... 83.9% 85.1% 83.6% 84.6%
================ ================ =============== ================
Cost of other franchise income (as a percentage
of other franchise income)..................... 95.5% 58.9% 95.8% 32.9%
General and administrative expenses............... 9.3 9.6 9.3 9.7
Amortization of intangible assets................. -- -- -- --
Loss on disposition of restaurants and equipment.. -- 0.2 0.2 0.2
---------------- ---------------- --------------- ----------------
Operating earnings................................ 15.7 15.6 16.0 16.0
---------------- ---------------- --------------- ----------------
Other income (expense):
Investment income............................ 0.1 0.2 0.1 0.2
Interest expense............................. (0.1) (0.2) (0.2) (0.3)
Impairment of Chevys note receivable......... -- -- (1.2) --
Other income................................. 0.2 0.2 0.1 0.2
---------------- ---------------- --------------- ----------------
Total other income (expense).............. 0.1 0.2 (1.1) 0.1
---------------- ---------------- --------------- ----------------
Earnings before income taxes...................... 15.8 15.8 14.8 16.1
Income taxes...................................... 5.7 5.8 5.3 5.9
---------------- ---------------- --------------- ----------------
Net earnings...................................... 10.1% 10.1% 9.5% 10.2%
================ ================ =============== ================
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 39 Weeks Ended
------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
--------------- -------------- --------------- ---------------
Number of restaurants:
Company:
Beginning of period..................... 373 318 357 310
Restaurant openings..................... 8 11 15 19
Restaurants closed...................... -- -- (2) --
Restaurants acquired from franchisee.... -- -- 11 --
Restaurants acquired by franchisee...... (9) -- (9) --
--------------- -------------- --------------- ---------------
End of period........................... 372 329 372 329
--------------- -------------- --------------- ---------------
Franchise:
Beginning of period..................... 1,155 1,103 1,139 1,082
Restaurant openings..................... 12 26 41 50
Restaurants closed...................... (5) -- (7) (3)
Restaurants acquired from franchisee.... -- -- (11) --
Restaurants acquired by franchisee...... 9 -- 9 --
--------------- -------------- --------------- ---------------
End of period........................... 1,171 1,129 1,171 1,129
--------------- -------------- --------------- ---------------
Total:
Beginning of period..................... 1,528 1,421 1,496 1,392
Restaurant openings..................... 20 37 56 69
Restaurants closed...................... (5) -- (9) (3)
--------------- -------------- --------------- ---------------
End of period........................... 1,543 1,458 1,543 1,458
=============== ============== =============== ===============
Weighted average weekly sales per restaurant:
Company................................. $ 45,976 $ 43,474 $ 45,356 $ 43,424
Franchise............................... $ 45,760 $ 44,105 $ 45,637 $ 44,252
Total................................... $ 45,812 $ 43,963 $ 45,569 $ 44,067
Change in comparable restaurant sales:(1)
Company................................. 5.9% 1.7% 5.2% 1.5%
Franchise............................... 4.4% 3.1% 3.5% 3.6%
Total................................... 4.8% 2.8% 3.9% 3.1%
System-wide sales (in thousands):(2)
Company.......................................... $ 222,429 $ 182,807 $ 650,946 $ 536,673
Franchise........................................ $ 687,292 $ 639,833 $2,047,735 $1,893,739
Total............................................ $ 909,721 $ 822,640 $2,698,681 $2,430,412
--------
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
(2) System-wide sales are a non-GAAP financial measure that includes sales at
all company and franchisee Applebee's restaurants, as reported by
franchisees. We believe that system-wide sales information is useful in
analyzing Applebee's market share and growth, and because franchisees pay
royalties and contribute to the national advertising pool based on a
percentage of their sales.
18
Company Restaurant Sales. Total company restaurant sales increased $39,622,000
(22%) from $182,807,000 in the 2002 quarter to $222,429,000 in the 2003 quarter
and increased $114,273,000 (21%) from $536,673,000 in the 2002 year-to-date
period to $650,946,000 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. The increase in both periods was
partially offset by the sale of 8 restaurants in the Atlanta, Georgia market in
July 2003.
Comparable restaurant sales at company restaurants increased by 5.9% and 5.2% in
the 2003 quarter and the 2003 year-to-date period, respectively. Weighted
average weekly sales at company restaurants increased 5.8% from $43,474 in the
2002 quarter to $45,976 in the 2003 quarter and also increased 4.4% from $43,424
in the 2002 year-to-date period to $45,356 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 4.9% of company restaurant sales in the 2002 quarter to 6.9% of
company restaurant sales in the 2003 quarter.
Franchise Royalties and Fees. Overall franchise royalties and fees increased
$1,561,000 (6%) from $26,033,000 in the 2002 quarter to $27,594,000 in the 2003
quarter and increased $5,731,000 (8%) from $76,357,000 in the 2002 year-to-date
period to $82,088,000 in the 2003 year-to-date period. These increases were due
primarily to the increased number of franchise Applebee's 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 3.8% and 3.1% in the 2003 quarter and 2003 year-to-date period,
respectively and franchise comparable restaurant sales increased 4.4% and 3.5%
in the 2003 quarter and 2003 year-to-date periods, respectively.
Other Franchise Income. Other franchise income increased from $168,000 in the
2002 quarter to $2,972,000 in the 2003 quarter and increased from $765,000 in
the 2002 year-to-date period to $8,881,000 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 26.1%
in the 2002 quarter to 25.7% in the 2003 quarter and decreased from 26.5% in the
2002 year-to-date period to 26.0% in the 2003 year-to-date period. The decreases
in both the 2003 quarter and the 2003 year-to-date period were due to menu price
increases and operational improvements resulting from our supply chain
management initiatives.
Labor costs decreased from 32.9% in both the 2002 quarter and the 2002
year-to-date period to 32.8% in both the 2003 quarter and 2003 year-to-date
period. These decreases were due to lower hourly costs due to higher sales
volume at company restaurants and were partially offset by higher costs related
to the addition of dedicated To Go hourly labor at most of our restaurants
during the 2003 quarter and workers compensation costs. In addition, the 2003
quarter was impacted by higher management incentive compensation.
Direct and occupancy costs decreased from 25.7% in the 2002 quarter to 25.1% in
the 2003 quarter and from 25.0% in the 2002 year-to-date period to 24.7% in the
2003 year-to-date period. The decrease in both periods was due primarily to a
decrease in advertising costs, as a percentage of sales, due to the timing of
our menu promotions and was partially offset by higher insurance costs and
higher packaging costs relating to our To Go initiative. In addition, higher
sales volume at company restaurants during both periods resulted in lower
depreciation expense, as a percentage of sales, due to its relatively fixed
nature.
19
Cost of Other Franchise Income. Cost of other franchise income increased from
$99,000 in the 2002 quarter to $2,837,000 in the 2003 quarter and increased from
$252,000 in the 2002 year-to-date period to $8,510,000 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 9.6% in the 2002 quarter and 9.7% in the 2002 year-to-date period
to 9.3% in both the 2003 quarter and 2003 year-to-date period. General and
administrative expenses were lower in both the 2003 quarter and 2003
year-to-date period as a result of the absorption of general and administrative
expenses over a larger revenue base. Decreases in both periods were partially
offset by a higher depreciation expense related to our new information systems
and increased incentive compensation.
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. During
the fiscal quarter ended June 29, 2003, we fully reserved the principal and
accrued interest by recording an allowance of approximately $8,800,000 as of
September 28, 2003. In October 2003, Chevys Inc. filed a voluntary petition to
reorganize under Chapter 11 of the U.S. Bankruptcy Code.
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 36.0% in both the 2003 quarter and 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 $54,893,000 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.
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
and recognized an immaterial gain in our consolidated statements of earnings. In
connection with the sale of these restaurants, we closed one restaurant in the
Atlanta market in June 2003. We do not expect this transaction to have a
significant impact on our net earnings for fiscal 2003.
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 September
28, 2003, we had borrowings of $22,800,000 and standby letters of credit of
$11,892,000 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 1,679,500 shares at an average cost of $29.63 for an
aggregate cost of $49,800,000. As of September 28, 2003, we had $19,800,000
remaining under the 2002 authorization.
As of September 28, 2003, our liquid assets totaled $3,385,000. These assets
consisted of cash and cash equivalents in the amount of $3,359,000 and
short-term investments in the amount of $26,000. The working capital deficit
increased from $45,607,000 as of December 29, 2002 to $70,398,000 as of
September 28, 2003. This increase was due primarily to 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
and was partially offset by the redemption of gift certificates in the 2003
year-to-date period sold in 2002.
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 September 28, 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)..................... $ 24,480 $ 4,919 $ 18,242 $ 136 $ 1,183
Capital Lease Obligations................ $ 10,005 $ 735 $ 1,548 $ 1,635 $ 6,087
Operating Leases......................... $ 211,122 $ 18,349 $ 34,381 $ 33,336 $ 125,056
In addition, we have outstanding lease guarantees of approximately $25,100,000
as of September 28, 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 was effective for
newly created VIEs after January 31, 2003. We have concluded that we have not
created or obtained any VIEs subsequent to January 31, 2003 that would require
consolidation and the initial adoption did not have any impact on our
consolidated financial statements.
FASB Staff Position No. 46-6 "Effective Date of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities," deferred the effective date for
applying the provisions of the Interpretation for VIEs created before February
1, 2003 to the first interim or annual period ending after December 15, 2003, if
certain conditions are met. We will implement the provisions of Interpretation
46 for any VIEs created prior to February 1, 2003 in our consolidated financial
statements for the fiscal year ending December 28, 2003.
As of the date of this filing, the FASB is deliberating certain FASB Staff
Positions ("FSPs") and may issue additional FSPs prior to our fiscal year ending
December 28, 2003. These FSPs, when finalized, may impact the accounting under
this Interpretation. We are currently assessing Interpretation No. 46 and,
although we have not completed our analysis, we do not expect the adoption to
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.
23
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 September 28, 2003,
the total amount of debt subject to interest rate fluctuations was $24,500,000.
A 1% change in interest rates would result in an increase or decrease in
interest expense of $245,000 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.
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. During our most recent fiscal
quarter, there have been no changes in our internal control over financial
reporting that occurred that have materially affected or are reasonably likely
to materially affect our internal control over financial reporting.
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 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 July 2, 2003 announcing
our presentation at the CIBC World Markets Consumer Growth
Conference.
We furnished a report on Form 8-K on July 23, 2003 announcing
our broadcast of the second quarter 2003 earnings conference
call over the Internet.
We furnished a report on Form 8-K on July 25, 2003 announcing
plans to co-develop a new menu with Weight Watchers
International, Inc.
We furnished a report on Form 8-K on July 25, 2003 announcing
the temporary suspension of trading under an employee benefit
plan.
We filed a report on Form 8-K on July 31, 2003 reporting second
quarter earnings.
We filed a report on Form 8-K on August 26, 2003 reporting
August comparable sales.
We furnished a report on Form 8-K on September 10, 2003
announcing our presentation at the Banc of America Securities
Investment Conference.
We furnished a report on Form 8-K on September 24, 2003
announcing our presentation at the RBC Capital Markets Consumer
Conference.
25
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: October 29, 2003 By: /s/ Lloyd L. Hill
----------------------- -----------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: October 29, 2003 By: /s/ Steven K. Lumpkin
----------------------- -----------------------------------------
Steven K. Lumpkin
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: October 29, 2003 By: /s/ Beverly O. Elving
----------------------- -----------------------------------------
Beverly O. Elving
Vice President, Accounting
(principal accounting officer)
26
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
10.1 Memorandum of Understanding dated May 12, 2003 with Robert T.
Steinkamp
10.2 Confidentiality, Non-Solicitation and Non-Competition Agreement
dated May 12, 2003 with Robert T. Steinkamp
31.1 Certification of Chairman and Chief Executive Officer Pursuant to
SEC Rule 13a-14
31.2 Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14
32 Certification of Chairman and Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
27