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 26, 2005
-------------------------------------------------
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, Overland Park, Kansas 66207
-----------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(913) 967-4000
----------------------------------------------------
(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 22,
2005 was 79,036,538.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED JUNE 26, 2005
INDEX
Page
Part I Financial Information
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of June 26, 2005
and December 26, 2004................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks
Ended June 26, 2005 and June 27, 2004 (as restated).................................. 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 26, 2005......................................................... 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 26, 2005 and June 27, 2004 (as restated).................................. 6
Notes to Condensed Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 32
Item 4. Controls and Procedures................................................................... 32
Part II Other Information
Item 1. Legal Proceedings......................................................................... 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................... 33
Item 4. Submission of Matters to a Vote of Security Holders....................................... 34
Item 6. Exhibits.................................................................................. 34
Signatures .................................................................................................. 35
Exhibit Index................................................................................................ 36
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
June 26, December 26,
. 2005 2004
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 661 $ 10,642
Short-term investments, at market value....................................... 283 282
Receivables (less allowance for bad debts of $382 in 2005 and $417 in 2004)... 38,318 39,152
Receivables related to captive insurance subsidiary........................... 3,908 2,566
Inventories................................................................... 27,112 35,936
Prepaid and other current assets.............................................. 14,859 12,079
---------------- ---------------
Total current assets..................................................... 85,141 100,657
Property and equipment, net....................................................... 544,082 486,548
Goodwill.......................................................................... 138,788 116,344
Restricted assets related to captive insurance subsidiary......................... 18,803 17,386
Other intangible assets, net...................................................... 8,094 8,524
Other assets, net................................................................. 28,478 24,972
---------------- ---------------
$ 823,386 $ 754,431
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................. $ 243 $ 222
Notes payable................................................................. 4,300 --
Accounts payable.............................................................. 47,456 42,830
Accrued expenses and other current liabilities................................ 82,491 89,064
Loss reserve and unearned premiums related to captive insurance subsidiary.... 14,012 12,137
Accrued dividends............................................................. -- 4,867
Accrued income taxes.......................................................... 13,130 2,578
---------------- ---------------
Total current liabilities................................................ 161,632 151,698
---------------- ---------------
Non-current liabilities:
Long-term debt - less current portion......................................... 82,349 35,472
Deferred income taxes......................................................... 29,264 28,995
Other non-current liabilities................................................. 45,392 41,539
---------------- ---------------
Total non-current liabilities............................................ 157,005 106,006
---------------- ---------------
Total liabilities........................................................ 318,637 257,704
---------------- ---------------
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued......................................................... -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued -108,503,243 shares............................................... 1,085 1,085
Additional paid-in capital.................................................... 231,468 220,897
Unearned compensation......................................................... (3,458) (1,924)
Retained earnings............................................................. 682,462 623,315
---------------- ---------------
911,557 843,373
Treasury stock - 29,082,335 shares in 2005 and 27,375,044 shares in 2004, at
cost........................................................................ (406,808) (346,646)
---------------- ---------------
Total stockholders' equity............................................... 504,749 496,727
---------------- ---------------
$ 823,386 $ 754,431
================ ===============
See notes to condensed 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 26, June 27, June 26, June 27,
2005 2004 2005 2004
---------------- ---------------- ---------------- ----------------
(as restated) (as restated)
Revenues:
Company restaurant sales ........................ $ 272,703 $ 247,769 $ 543,161 $ 491,329
Franchise royalties and fees..................... 32,493 30,722 65,501 61,437
Other franchise income........................... 1,424 3,399 2,489 6,514
---------------- ---------------- ---------------- ----------------
Total operating revenues.................... 306,620 281,890 611,151 559,280
---------------- ---------------- ---------------- ----------------
Cost of company restaurant sales:
Food and beverage................................ 72,565 66,647 144,200 130,162
Labor............................................ 90,115 80,683 178,839 160,338
Direct and occupancy............................. 71,038 60,513 137,405 119,855
Pre-opening expense.............................. 1,268 425 2,435 992
---------------- ---------------- ---------------- ----------------
Total cost of company restaurant sales...... 234,986 208,268 462,879 411,347
---------------- ---------------- ---------------- ----------------
Cost of other franchise income....................... 1,229 5,035 2,048 7,972
General and administrative expenses.................. 27,980 24,960 54,926 50,382
Amortization of intangible assets.................... 226 158 454 244
Loss on disposition of restaurants and equipment..... 564 584 861 1,079
---------------- ---------------- ---------------- ----------------
Operating earnings................................... 41,635 42,885 89,983 88,256
---------------- ---------------- ---------------- ----------------
Other income (expense):
Investment income................................ 449 18 408 241
Interest expense................................. (634) (416) (971) (760)
Other income..................................... 584 562 1,019 1,023
---------------- ---------------- ---------------- ----------------
Total other income.......................... 399 164 456 504
---------------- ---------------- ---------------- ----------------
Earnings before income taxes......................... 42,034 43,049 90,439 88,760
Income taxes......................................... 14,544 14,919 31,292 30,894
---------------- ---------------- ---------------- ----------------
Net earnings......................................... $ 27,490 $ 28,130 $ 59,147 $ 57,866
================ ================ ================ ================
Basic net earnings per common share.................. $ 0.34 $ 0.34 $ 0.74 $ 0.71
================ ================ ================ ================
Diluted net earnings per common share................ $ 0.34 $ 0.33 $ 0.72 $ 0.69
================ ================ ================ ================
Basic weighted average shares outstanding............ 79,897 81,781 80,295 81,883
================ ================ ================ ================
Diluted weighted average shares outstanding.......... 81,360 84,098 81,861 84,371
================ ================ ================ ================
See notes to condensed consolidated financial statements.
4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
Common Stock Additional Total
------------------ Paid-In Unearned Retained Treasury Stockholders'
Shares Amount Capital Compensation Earnings Stock Equity
--------- -------- ---------- ------------ ---------- ---------- -------------
Balance, December 26, 2004......................... 108,503 $1,085 $220,897 $ (1,924) $623,315 $(346,646) $ 496,727
Net earnings..................................... -- -- -- -- 59,147 -- 59,147
Purchases of treasury stock...................... -- -- -- -- -- (68,238) (68,238)
Stock options exercised and related tax benefit.. -- -- 7,173 -- -- 6,550 13,723
Shares issued under employee benefit plans....... -- -- 1,413 -- -- 910 2,323
Restricted shares awarded under equity
incentive plans, net of cancellations.......... -- -- 1,985 (2,601) -- 616 --
Amortization of unearned compensation
relating to restricted shares.................. -- -- -- 1,067 -- -- 1,067
--------- -------- ---------- ------------ ---------- ---------- -------------
Balance, June 26, 2005............................. 108,503 $1,085 $231,468 $ (3,458) $682,462 $(406,808) $ 504,749
========= ======== ========== ============ ========== ========== =============
See notes to condensed consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
26 Weeks Ended
------------------------------------
June 26, June 27,
2005 2004
---------------- ---------------
(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................................... $ 59,147 $ 57,866
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization............................................... 25,676 22,402
Amortization of intangible assets........................................... 454 244
Amortization of unearned compensation....................................... 1,067 695
Other amortization.......................................................... 63 175
Inventory impairment........................................................ -- 2,300
Deferred income tax benefit................................................. (2,294) (52)
Loss on disposition of restaurants and equipment............................ 861 1,079
Income tax benefit from exercise of stock options........................... 3,794 5,169
Changes in assets and liabilities (exclusive of effects of acquisitions):
Receivables................................................................. 834 (8,889)
Receivables related to captive insurance subsidiary......................... (1,342) (4,325)
Inventories................................................................. 9,014 (13,103)
Other current assets related to captive insurance subsidiary................ -- (1,049)
Prepaid and other current assets............................................ (217) (923)
Accounts payable....................................................... .... 4,626 1,874
Accrued expenses and other current liabilities.............................. (6,902) (16,933)
Loss reserve and unearned premiums related to captive insurance subsidiary.. 1,875 8,914
Income taxes................................................................ 10,552 26,287
Other non-current liabilities............................................... 1,759 1,892
Other....................................................................... (1,177) (3,184)
---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 107,790 80,439
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (59,922) (36,543)
Restricted assets related to captive insurance subsidiary........................ (1,417) (5,488)
Acquisitions of restaurants...................................................... (46,777) (13,817)
Lease acquisition costs.......................................................... -- (4,919)
Purchases of short-term investments.............................................. -- (253)
Other investing activities....................................................... -- (966)
---------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES....................................... (108,116) (61,986)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock...................................................... (68,238) (53,223)
Dividends paid................................................................... (4,867) (3,911)
Issuance of common stock upon exercise of stock options.......................... 9,929 8,789
Shares issued under employee benefit plans....................................... 2,323 3,981
Net debt proceeds................................................................ 51,198 22,934
---------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES....................................... (9,655) (21,430)
---------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (9,981) (2,977)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 10,642 17,867
---------------- ---------------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 661 $ 14,890
================ ===============
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
26 Weeks Ended
------------------------------------
June 26, June 27,
2005 2004
---------------- ----------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the 26 week period for:
Income taxes........................................................... $ 20,316 $ 749
================ ================
Interest............................................................... $ 654 $ 377
================ ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
We issued restricted common stock, net of forfeitures, of $2,601,000 and
$1,497,000 for the 26 weeks ended June 26, 2005 and June 27, 2004, respectively.
In 2002, we entered into a rabbi trust agreement to protect the assets of the
nonqualified deferred compensation plan for certain of our associates. The plan
investments are included in other assets and the offsetting obligation is
included in other non-current liabilities in our consolidated balance sheets. We
had non-cash increases in these balances of $2,094,000 and $1,727,000 for the 26
weeks ended June 26, 2005 and June 27, 2004, respectively.
In 2004, we made matching contributions in shares of our common stock to a
profit sharing plan and trust established in accordance with Section 401(k) of
the Internal Revenue Code of $1,308,000.
See notes to condensed consolidated financial statements.
7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Our condensed consolidated financial statements included in this Form 10-Q have
been prepared without audit 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 condensed
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 26, 2004.
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 condensed consolidated financial
statements to conform to the fiscal 2005 presentation.
2. Restatement of Financial Statements
Like many other companies in the restaurant, retail and other industries, we
reviewed our accounting treatment for leases and depreciation of related
leasehold improvements during the fourth fiscal quarter of 2004 and we restated
our consolidated financial statements for fiscal years 2003 and 2002 and the
first three fiscal quarters of fiscal 2004 in our Annual Report on Form 10-K for
the fiscal year ended December 26, 2004.
Historically, when accounting for leases with renewal options, we had recorded
rent expense on a straight-line basis over the initial non-cancelable lease
term, with the term commencing when actual rent payments began and depreciated
leasehold improvements on those properties over a maximum period of 20 years
which, in certain cases, included a portion of the renewal option periods. We
corrected our lease term to include option periods where failure to recognize
such options would result in an economic penalty such that the renewal appears
reasonably assured. The primary result of this correction was to accelerate the
recognition of rent expense under certain leases that include fixed-rent
escalations. In addition, the lease term is deemed to commence on the date the
company becomes legally obligated for rent payments. Therefore, we adopted a
policy to capitalize the straight-line rent amounts during the construction
period of leased properties, which resulted in an increase to depreciation
expense in the restated consolidated statements of earnings. Straight-line rent
subsequent to the construction period and prior to the restaurant opening is
recognized as expense, which resulted in an increase to previously reported
pre-opening expenses in the restated consolidated statements of earnings.
In connection with the restatement for lease accounting matters, we also
corrected previously identified immaterial errors, primarily related to vacation
and workers' compensation expense.
8
The following table contains information regarding the impact of the restatement
adjustments on our consolidated statements of earnings for the 13 and 26 weeks
ended June 27, 2004. All amounts, except per share amounts, are in thousands.
Consolidated Statements of Earnings
13 Weeks Ended
June 27, 2004 13 Weeks Ended
(As previously Restatement June 27, 2004
reported) amounts (As restated)
-------------- ----------- --------------
Revenues:
Company restaurant sales.................................................... $ 247,769 $ -- $ 247,769
Franchise royalties and fees................................................ 30,779 (57) 30,722
Other franchise income...................................................... 3,399 -- 3,399
-------------- ----------- --------------
Total operating revenue................................................ 281,947 (57) 281,890
-------------- ----------- --------------
Cost of company restaurant sales:
Food and beverage........................................................... 66,647 -- 66,647
Labor....................................................................... 81,086 (403) 80,683
Direct and occupancy........................................................ 60,240 273 60,513
Pre-opening expense......................................................... 391 34 425
-------------- ----------- --------------
Total cost of company restaurant sales................................. 208,364 (96) 208,268
-------------- ----------- --------------
Cost of other franchise income.................................................. 5,035 -- 5,035
General and administrative expenses............................................. 24,932 28 24,960
Amortization of intangible assets............................................... 158 -- 158
Loss on disposition of restaurants and equipment................................ 584 -- 584
-------------- ----------- --------------
Operating earnings.............................................................. 42,874 11 42,885
-------------- ----------- --------------
Other income (expense):
Investment income........................................................... 18 -- 18
Interest expense............................................................ (416) -- (416)
Other income................................................................ 951 (389) 562
-------------- ----------- --------------
Total other income..................................................... 553 (389) 164
-------------- ----------- --------------
Earnings before income taxes.................................................... 43,427 (378) 43,049
Income taxes.................................................................... 15,200 (281) 14,919
-------------- ----------- --------------
Net earnings.................................................................... $ 28,227 $ (97) $ 28,130
============== =========== ==============
Basic net earnings per common share............................................. $ 0.35 $ -- $ 0.34
============== =========== ==============
Diluted net earnings per common share........................................... $ 0.34 $ -- $ 0.33
============== =========== ==============
Basic weighted average shares outstanding....................................... 81,781 81,781
============== ==============
Diluted weighted shares outstanding............................................. 84,098 84,098
============== ==============
9
26 Weeks Ended
June 27, 2004 26 Weeks Ended
(As previously Restatement June 27, 2004
reported) amounts (As restated)
-------------- ----------- --------------
Revenues:
Company restaurant sales.................................................... $ 491,329 $ -- $ 491,329
Franchise royalties and fees................................................ 61,551 (114) 61,437
Other franchise income...................................................... 6,514 -- 6,514
-------------- ----------- --------------
Total operating revenue................................................ 559,394 (114) 559,280
-------------- ----------- --------------
Cost of company restaurant sales:
Food and beverage........................................................... 130,162 -- 130,162
Labor....................................................................... 160,745 (407) 160,338
Direct and occupancy........................................................ 119,309 546 119,855
Pre-opening expense......................................................... 941 51 992
-------------- ----------- --------------
Total cost of company restaurant sales................................. 411,157 190 411,347
-------------- ----------- --------------
Cost of other franchise income.................................................. 7,972 -- 7,972
General and administrative expenses............................................. 50,449 (67) 50,382
Amortization of intangible assets............................................... 244 -- 244
Loss on disposition of restaurants and equipment................................ 1,079 -- 1,079
-------------- ----------- --------------
Operating earnings.............................................................. 88,493 (237) 88,256
-------------- ----------- --------------
Other income (expense):
Investment income........................................................... 241 -- 241
Interest expense............................................................ (760) -- (760)
Other income................................................................ 842 181 1,023
-------------- ----------- --------------
Total other income..................................................... 323 181 504
-------------- ----------- --------------
Earnings before income taxes.................................................... 88,816 (56) 88,760
Income taxes.................................................................... 31,086 (192) 30,894
-------------- ----------- --------------
Net earnings.................................................................... $ 57,730 $ 136 $ 57,866
============== =========== ==============
Basic net earnings per common share............................................. $ 0.71 $ -- $ 0.71
============== =========== ==============
Diluted net earnings per common share........................................... $ 0.68 $ -- $ 0.69
============== =========== ==============
Basic weighted average shares outstanding....................................... 81,883 81,883
============== ==============
Diluted weighted shares outstanding............................................. 84,371 84,371
============== ==============
3. 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, "Accounting for Stock Issued to Employees."
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 net 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).
10
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(as restated) (as restated)
Net earnings, as reported............................ $ 27,490 $ 28,130 $ 59,147 $ 57,866
Add: Stock-based employee compensation
expense (benefit) included in net earnings,
net of related taxes............................. 373 (12) 655 290
Less: Total stock-based employee
compensation expense determined under
fair value based methods for all awards,
net of related taxes............................. 1,735 2,155 3,428 4,770
--------------- --------------- --------------- ---------------
Pro forma net earnings............................... $ 26,128 $ 25,963 $ 56,374 $ 53,386
=============== =============== =============== ===============
Basic net earnings per common share,
as reported...................................... $ 0.34 $ 0.34 $ 0.74 $ 0.71
=============== =============== =============== ===============
Basic net earnings per common share,
pro forma........................................ $ 0.33 $ 0.32 $ 0.70 $ 0.65
=============== =============== =============== ===============
Diluted net earnings per common share,
as reported...................................... $ 0.34 $ 0.33 $ 0.72 $ 0.69
=============== =============== =============== ===============
Diluted net earnings per common share,
pro forma........................................ $ 0.32 $ 0.31 $ 0.69 $ 0.63
=============== =============== =============== ===============
4. 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.
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 and contingencies: In connection with the sale of restaurants
to franchisees and other parties, we have, in certain cases, remained
contingently liable for the remaining lease payments. As of June 26, 2005, we
have outstanding lease guarantees of approximately $18,200,000. These leases
expire at various times throughout the next several years with the final lease
agreement expiring in 2025. In addition, we or our subsidiaries are contingently
liable for various leases that we have assigned in connection with the sale of
restaurants to franchisees and other parties, in the potential amount of
$17,200,000. We have not recorded a liability as of June 26, 2005 or December
26, 2004.
Franchisee guarantees: In November 2003, we arranged for a third-party financing
company to provide up to $75,000,000 to qualified franchisees for short-term
loans to fund remodel investments, subject to our approval. Under the terms of
this financing program, we will provide a limited guarantee pool for the loans
advanced during the three-year period ending December 2006. As of June 26, 2005,
there were loans outstanding to four franchisees aggregating approximately
$1,300,000 under this program.
11
In May 2004, we arranged for a third-party financing company to provide up to
$250,000,000 to qualified franchisees for loans to fund development of new
restaurants through October 2007, subject to our approval. We will provide a
limited guarantee of certain loans advanced under this program. As of June 26,
2005, there were loans outstanding to five franchisees aggregating approximately
$20,100,000 under this program. The fair value of our guarantee under these two
financing programs was less than $100,000 and is recorded in other non-current
liabilities and other assets in our consolidated balance sheet as of June 26,
2005.
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 26, 2005, we would have been required to make
payments totaling approximately $13,300,000. 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 $6,200,000 if such officers had been
terminated as of June 26, 2005.
5. Net Earnings Per Share
We compute basic net earnings per common share by dividing income available to
common shareholders by the weighted average number of common shares outstanding
for the reporting period. Diluted net earnings per common share reflects the
potential dilution that could occur if holders of options or other contracts to
issue common stock exercised or converted their holdings into common stock.
Outstanding stock options 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 net earnings per share. All amounts in the chart, except per share
amounts, are expressed in thousands.
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Net earnings........................................... $ 27,490 $ 28,130 $ 59,147 $ 57,866
=============== =============== =============== ===============
Basic weighted average shares outstanding.............. 79,897 81,781 80,295 81,883
Dilutive effect of stock options and
equity-based compensation.......................... 1,463 2,317 1,566 2,488
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding............ 81,360 84,098 81,861 84,371
=============== =============== =============== ===============
Basic net earnings per common share.................... $ 0.34 $ 0.34 $ 0.74 $ 0.71
=============== =============== =============== ===============
Diluted net earnings per common share.................. $ 0.34 $ 0.33 $ 0.72 $ 0.69
=============== =============== =============== ===============
We excluded stock options with exercise prices greater than the average market
price of our common stock for the applicable periods from the computation of
diluted weighted average shares outstanding as the effect would be
anti-dilutive. We have excluded approximately 593,000 and 1,464,000 of these
options for the 13 weeks ended June 26, 2005 and June 27, 2004, respectively,
and 338,000 and 90,000 of these options for the 26 weeks ended June 26, 2005 and
June 27, 2004, respectively, from our diluted weighted average share
computation.
12
6. Acquisitions
All of our acquisitions below have been accounted for using the purchase method
of accounting and, accordingly, our consolidated financial statements reflect
the results of operations for each acquisition subsequent to the date of
acquisition. The assets acquired and liabilities assumed are recorded at
estimates of fair values as determined by management based upon information
available. We finalize the allocation of purchase price to the fair value of
assets acquired and liabilities assumed when we obtain information sufficient to
complete the allocation, but in each case, no longer than one year after the
acquisition date.
In May 2005, we completed the acquisition of 12 Applebee's restaurants, which
included one restaurant under construction, in Missouri, Kansas and Arkansas for
approximately $39,500,000. Through June 2005, we have paid approximately
$38,900,000, which has been allocated to the fair value of property and
equipment of $16,800,000, goodwill of $21,900,000 and other net assets of
approximately $200,000. In addition, we expect to pay the remaining $600,000 for
property and equipment relating to the completion of construction of one
restaurant in the third fiscal quarter of 2005.
The following table is comprised of actual company restaurant sales for the
restaurant acquisition above, which are included in our condensed consolidated
financial statements for each period presented and pro forma company restaurant
sales assuming the acquisition above occurred at the beginning of each
respective period (in thousands):
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Actual acquired company restaurant sales............. $ 2,800 $ -- $ 2,800 $ --
=============== =============== =============== ===============
Pro forma acquired company restaurant sales.......... $ 7,300 $ 6,700 $ 14,400 $ 13,400
=============== =============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants that
were closed in fiscal 2004 by a former franchisee for approximately $8,800,000
payable in cash. In connection with this acquisition, we paid approximately
$800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000
in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash
in the second quarter of fiscal 2005. The purchase price of $8,800,000 has been
allocated to the fair value of property and equipment of approximately
$8,200,000 and goodwill of approximately $600,000. As of June 26, 2005, we have
remodeled and opened six restaurants. Subsequent to June 26, 2005, one
additional restaurant was opened and the remaining restaurant was sold to a
third party for $1,300,000.
In April 2004, we completed our acquisition of the operations and assets of ten
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash. The purchase price was allocated to the fair value of
property and equipment of $2,500,000, goodwill of $10,800,000 and other net
assets of approximately $500,000. Company restaurant sales for these restaurants
were $4,700,000 for both the 13 weeks ended and 26 weeks ended June 27, 2004.
Proforma company restaurant sales for these restaurants would have been
approximately $7,000,000 and $13,500,000 for the 13 weeks and 26 weeks ended
June 27, 2004 had this acquisition been completed at the beginning of fiscal
2004.
13
7. Inventory Impairment
In the second quarter of 2004, we determined that we had excess inventories of
riblets that no longer met our quality standards. Accordingly, we recorded an
inventory impairment of $2,300,000 (approximately $1,500,000 net of income
taxes) in our condensed consolidated financial statements. The portion of the
riblet inventory impairment related to the company's historical usage of
approximately $500,000 was recorded in food and beverage cost and the portion
related to the franchisees' historical usage of approximately $1,800,000 was
recorded in cost of other franchise income in the consolidated statement of
earnings. In the third and fourth fiscal quarters of 2004, we recovered a
portion of the inventory impairment as a result of higher than anticipated sales
of these excess inventories.
8. Goodwill and Other Intangible Assets
Changes in goodwill are summarized below (in thousands):
26 Weeks Ended 52 Weeks Ended
June 26, December 26,
2005 2004
---------------------- ----------------------
Carrying amount, beginning of the year.................. $ 116,344 $ 105,326
Goodwill acquired during the period..................... 22,444 11,018
---------------------- ----------------------
Goodwill amount, end of the period...................... $ 138,788 $ 116,344
====================== ======================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets," are summarized below (in thousands):
June 26, 2005
----------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ----------------- -----------------
Amortized intangible assets:
Franchise interest and rights....... $ 6,371 $ 5,730 $ 641
Lease acquisition costs............. 4,911 535 4,376
Noncompete agreement................ 350 65 285
------------------ ---------------- -----------------
Total................................... $ 11,632 $ 6,330 $ 5,302
================== ================= =================
December 26, 2004
----------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ----------------- -----------------
Amortized intangible assets:
Franchise interest and rights....... $ 6,371 $ 5,565 $ 806
Lease acquisition costs............. 4,875 294 4,581
Noncompete agreement................ 350 22 328
------------------ ----------------- -----------------
Total................................... $ 11,596 $ 5,881 $ 5,715
================== ================= =================
In the fourth quarter of fiscal 2004, we acquired the exclusive right to operate
Applebee's restaurants in the Memphis, Tennessee market from a former franchisee
group for approximately $2,800,000. This intangible asset has an indefinite
14
life, and accordingly, will not be amortized but tested for impairment at least
annually. In connection with this acquisition, we entered into an expanded
4-year noncompete agreement with the former franchise principals which is being
amortized over the life of the agreement.
In the second quarter of fiscal 2004, we acquired six restaurant leases which
were formerly operated as Ground Round restaurants for approximately $4,900,000
in cash.
Franchise interest and rights are being amortized over the next two to four
years, the lease acquisition costs are being amortized over the next 8 to 20
years and the noncompete agreement is being amortized over the next four years.
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $400,000 to $900,000.
9. Captive Insurance Subsidiary
In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a
wholly-owned captive insurance subsidiary to provide Applebee's International,
Inc. and qualified franchisees with workers' compensation and general liability
insurance. 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 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.
In fiscal 2005, we reduced the types of insurance coverage plans which resulted
in fewer franchisee participants in our captive insurance program. Our
consolidated balance sheets include the following balances related to the
captive insurance subsidiary:
o Franchise premium receivables of approximately $3,200,000 and
$1,900,000 as of June 26, 2005 and December 26, 2004, respectively,
included in receivables related to captive insurance subsidiary.
o Cash equivalent and other long-term investments restricted for the
payment of claims of approximately $18,100,000 and $16,700,000 as of
June 26, 2005 and December 26, 2004, respectively, included in
restricted assets related to captive insurance subsidiary.
o Loss reserve and unearned premiums related to captive insurance
subsidiary of approximately $21,400,000 and $19,600,000 as of June 26,
2005 and December 26, 2004, respectively. Approximately $7,400,000 and
$7,500,000 as of June 26, 2005 and December 26, 2004, respectively, is
included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $100,000 and
$1,000,000 as of June 26, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
15
10. Treasury Shares
As of June 26, 2005, we had approximately 29,082,000 shares held in treasury. A
reconciliation of our treasury shares for the 26 weeks ended June 26, 2005 is
provided below (shares in thousands):
Treasury
Shares
---------------
Balance as of December 26, 2004........................ 27,375
Purchases of treasury stock............................ 2,660
Stock options exercised................................ (756)
Shares issued under employee benefit plans............. (105)
Restricted shares awarded under equity incentive
plans............................................. (92)
---------------
Balance as of June 26, 2005............................ 29,082
===============
11. New Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force reached a consensus on Issue No. 05-6, "Determining the
Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance
requires that leasehold improvements acquired in a business combination or
purchased subsequent to the inception of a lease be amortized over the lesser of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. The
guidance is effective for periods beginning after June 29, 2005. The adoption of
EITF 05-6 will not have an impact on our consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections--A Replacement of APB Opinion No.
20 and FASB Statement No. 3." SFAS No. 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies that the
term "conditional" as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Interpretation refers to a legal obligation to perform an
asset retirement activity even if the timing and/or settlement is conditional on
a future event that may or may not be within the control of an entity.
Accordingly, the entity must record a liability for the conditional asset
retirement obligation if the fair value of the obligation can be reasonably
estimated. The Interpretation is effective for fiscal years ending after
December 15, 2005. We are evaluating the impact the adoption of FIN 47 will have
on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based
Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supercedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
16
compensation cost will be measured based on the fair value on the grant date of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service for that award, resulting in a
decrease in our net earnings. We will adopt the provisions of this Statement, as
amended, using the modified prospective method beginning in fiscal 2006. We
expect that the adoption of this Standard will be material to our consolidated
financial statements; however, we are still in the process of evaluating its
impact.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Restatement of Financial Statements
The accompanying Management's Discussion and Analysis gives effect to the
restatement of our condensed consolidated financial statements for quarterly and
year-to-date information in 2004 to correct our accounting treatment for leases,
depreciation of related leasehold improvements and for previously identified
immaterial errors, primarily related to vacation and workers' compensation, as
described in Note 2 to the condensed consolidated financial statements.
General
We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal years and fiscal periods are as follows:
Number
Fiscal Year Fiscal Year End of Weeks
------------------------------ --------------------- ----------------
2004 December 26, 2004 52
2005 December 25, 2005 52
2006 December 31, 2006 53
Number
Fiscal Period Fiscal Period End of Weeks
------------------------------ --------------------- ----------------
2004 Quarter June 27, 2004 13
2005 Quarter June 26, 2005 13
2004 Year-to-date period June 27, 2004 26
2005 Year-to-date period June 26, 2005 26
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 for the current year and premium audit adjustments
for prior years from franchisee participation in our captive insurance program
and revenue from information technology products and services provided to
certain franchisees. In fiscal 2005, we have fewer franchisee participants in
the captive insurance program due to the termination of one of our captive
programs, which will result in a decrease in franchise premiums recognized in
other franchise income of approximately $9,500,000.
Certain expenses relate only to company operated restaurants. These include:
18
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 program and costs related to information
technology products and services provided to certain franchisees. In fiscal
2005, we have fewer franchisee participants in the captive insurance program due
to the termination of one of our captive programs, which will result in a
decrease in franchise premiums expense in the cost of other franchise income of
approximately $9,500,000.
Other expenses, such as general and administrative and amortization expenses,
relate to both company operated restaurants and franchise operations.
Overview
Applebee's International, Inc. and our subsidiaries develop, franchise and
operate casual dining restaurants under the name "Applebee's Neighborhood Grill
& Bar" which is the largest casual dining concept in the world with over 1,700
system-wide restaurants open as of June 26, 2005. The casual dining segment of
the restaurant industry is highly competitive and there are many factors that
affect our profitability. Our industry is susceptible to changes in economic
conditions, trends in lifestyles, fluctuating costs, government regulation,
availability of resources and consumer perceptions. When evaluating and
assessing our business, we believe there are five key factors:
o Development - the number of new company and franchise restaurants opened
during the period. As the largest casual dining concept in the world,
Applebee's has a unique opportunity to leverage our brand, system size and
scale to optimize our future growth. Our expansion strategy has been to
cluster restaurants in targeted markets, thereby increasing consumer
awareness and convenience, and enabling us to take advantage of operational,
distribution and advertising efficiencies. We currently expect that the
Applebee's system will encompass at least 3,000 restaurants in the United
States, as well as the potential for at least 1,000 restaurants
internationally. In the 2005 quarter and the 2005 year-to-date period, we
and our franchisees opened 30 and 56 restaurants, respectively. We have
opened at least 100 restaurants system-wide each year for the past 12 fiscal
years. In fiscal 2005, we currently expect to open at least 135 restaurants
system-wide, comprised of 50 company and 85 franchise restaurants.
o Comparable restaurant sales - a year-over-year comparison of sales for
restaurants open at least 18 months. Our revenues are generated primarily
from company restaurant sales, franchise royalties and fees and other
franchise income. Increases in company and franchise comparable restaurant
sales will result in increases in company restaurant sales and franchise
fees and royalties. In the 2005 quarter, company comparable sales decreased
1.2% while franchise and system-wide comparable sales were up 2.5% and 1.6%,
respectively. For the 2005 year-to-date period, company comparable sales
were down 0.4% while franchise and system-wide comparable sales were up 3.7%
and 2.7%, respectively. We have had 28 consecutive quarters of positive
system-wide comparable sales growth. We currently expect system-wide
comparable restaurant sales to increase by at least 3% in fiscal 2005, with
results expected to accelerate in the latter half of the year as comparisons
19
become easier. Comparable restaurant sales increases are driven by increases
in the average guest check and/or increases in guest traffic. Average guest
check increases result from menu price increases and/or a change in menu
mix. Although we may have increases in our average guest check from period
to period, our main focus has been increasing guest traffic as we view this
component to be more indicative of the long-term health of the Applebee's
brand. We are constantly seeking to increase guest traffic by focusing on
operations and improving our menu with semi-annual new menu rollouts and
implementation of new programs such as Carside to Go(TM)and Weight
Watchers(TM). Carside To Go(TM)is expected to be a driver of company,
franchise and system-wide comparable sales growth in fiscal 2005.
o Company restaurant margin - company restaurant sales less food and beverage,
labor, direct and occupancy restaurant costs and pre-opening expenses
expressed as a percentage of company restaurant sales. Company restaurant
margins were 13.8% and 14.8% in the 2005 quarter and 2005 year-to-date
period, respectively. We currently expect full year fiscal 2005 company
restaurant margins to be less than full year fiscal 2004 results and will be
dependent on comparable sales performance at company restaurants. Company
restaurant margins are susceptible to fluctuations in commodity costs, labor
costs and other operating costs such as utilities costs. We attempt to
negotiate contracts for the majority of our food products in order to
mitigate the impact of rising commodity costs. We currently expect commodity
costs for beef, poultry and other proteins to increase by approximately 1.5%
in fiscal 2005. Labor costs are impacted by many factors, including minimum
wage rate and other employment laws.
o General and administrative expenses - general and administrative expense
expressed as a percentage of total operating revenues. General and
administrative expense leverage is a key focus for us. We currently expect
that revenues will grow faster than general and administrative expenses. In
fiscal 2005, general and administrative expenses as a percent of total
revenues are currently expected to be approximately 9%.
o Return on equity - net earnings expressed as a percent of average
stockholders' equity. We believe this is an important indicator as it allows
us to evaluate our ability to create value for our shareholders. We have
exceeded our stated goal of at least 20% return on equity for the past six
years and we are a leader in the casual dining industry in this category.
The above overview contains forward-looking statements. Please refer to
"Forward-Looking Statements" later in this section.
Application of Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our condensed 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 condensed consolidated
financial statements and notes thereto. Actual results may differ from these
estimates, and such differences may be material to our condensed consolidated
financial statements. We believe that the following significant accounting
policies involve a significant degree of judgment or complexity.
Inventory valuation: We state inventories at the lower of cost, using the
first-in, first-out method, or market. Market is determined based upon our
estimates of the net realizable value.
We purchase and maintain inventories of certain specialty products to assure
sufficient supplies to the system. We review and make quality control
inspections of our inventories to determine obsolescence on an ongoing basis.
These reviews require management to make certain estimates and judgments
regarding projected usage which may change in the future and may require us to
record an inventory impairment.
20
Property and equipment: We report property and equipment at historical cost less
accumulated depreciation. Depreciation is provided on a straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
amortized over the lesser of the lease term or the estimated useful life of the
related asset. The useful lives of the assets are based upon management's
expectations. We periodically review the assets for changes in circumstances
which may impact their useful lives. If there are changes in circumstances that
shorten an asset's useful life, we will recognize increased depreciation expense
for that asset in future periods.
Impairment of long-lived assets: We periodically review restaurant 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.
We review other long-lived assets annually and when events or circumstances
indicate that the carrying value of the asset may not be recoverable. The
recoverability is assessed in most instances by comparing the carrying value to
its undiscounted cash flows. This assessment process requires the use of
estimates and assumptions regarding future cash flows and estimated useful lives
which are subject to a significant degree of judgment. If these assumptions
change in the future, we may be required to record impairment charges for these
assets.
Income taxes: We record valuation allowances against our deferred tax assets,
when necessary, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." Realization of deferred tax
assets is dependent on future taxable earnings and is therefore uncertain. We
assess the likelihood that our deferred tax assets in each of the jurisdictions
in which we operate will be recovered from future taxable income. Deferred tax
assets do not include future tax benefits that we deem likely not to be
realized.
We are periodically audited by foreign, state and local tax authorities for both
income and sales and use taxes. We record accruals when we determine it is
probable that we have an exposure in a matter relating to an audit. The accruals
may change in the future due to new developments in each matter.
Legal and insurance reserves: We are periodically involved in various legal
actions. We are required to assess the probability of any adverse judgments as
well as the potential range of loss. We determine the required accruals after a
review of the facts of each legal action.
We use estimates in the determination of the appropriate liabilities for general
liability, workers' compensation and health insurance. The estimated liability
is established based upon historical claims data and third-party actuarial
estimates of settlement costs for incurred claims. Unanticipated changes in
these factors may require us to revise our estimates.
We periodically reassess our assumptions and judgments and make adjustments when
significant facts and circumstances dictate. A change in any of the above
estimates could impact our consolidated statements of earnings and the related
asset or liability recorded in our consolidated balance sheets would be adjusted
accordingly. Historically, actual results have not been materially different
than the estimates that are described above.
Acquisitions
All of our acquisitions below have been accounted for using the purchase method
of accounting and, accordingly, our consolidated financial statements reflect
the results of operations for each acquisition subsequent to the date of
acquisition. The assets acquired and liabilities assumed are recorded at
21
estimates of fair values as determined by management based upon information
available. We finalize the allocation of purchase price to the fair value of
assets acquired and liabilities assumed when we obtain information sufficient to
complete the allocation, but in each case, no longer than one year after the
acquisition date.
In May 2005, we completed the acquisition of 12 Applebee's restaurants, which
included one restaurant under construction, in Missouri, Kansas and Arkansas for
approximately $39,500,000. Through June 2005, we have paid approximately
$38,900,000, which has been allocated to the fair value of property and
equipment of $16,800,000, goodwill of $21,900,000 and other net assets of
approximately $200,000. In addition, we expect to pay the remaining $600,000 for
property and equipment relating to the completion of construction of one
restaurant in the third fiscal quarter of 2005.
The following table is comprised of actual company restaurant sales for the
restaurant acquisition above, which are included in our condensed consolidated
financial statements for each period presented and pro forma company restaurant
sales assuming the acquisition above occurred at the beginning of each
respective period (in thousands):
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 26, June 27, June 26, June 27,
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Actual acquired company restaurant sales............. $ 2,800 $ -- $ 2,800 $ --
=============== =============== =============== ===============
Pro forma acquired company restaurant sales.......... $ 7,300 $ 6,700 $ 14,400 $ 13,400
=============== =============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants that
were closed in fiscal 2004 by a former franchisee for approximately $8,800,000
payable in cash. In connection with this acquisition, we paid approximately
$800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000
in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash
in the second quarter of fiscal 2005. The purchase price of $8,800,000 has been
allocated to the fair value of property and equipment of approximately
$8,200,000 and goodwill of approximately $600,000. As of June 26, 2005, we have
remodeled and opened six restaurants. Subsequent to June 26, 2005, one
additional restaurant was opened and the remaining restaurant was sold to a
third party for $1,300,000.
In April 2004, we completed our acquisition of the operations and assets of ten
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash. The purchase price was allocated to the fair value of
property and equipment of $2,500,000, goodwill of $10,800,000 and other net
assets of approximately $500,000. Company restaurant sales for these restaurants
were $4,700,000 for both the 13 weeks ended and 26 weeks ended June 27, 2004.
Proforma company restaurant sales for these restaurants would have been
approximately $7,000,000 and $13,500,000 for the 13 weeks and 26 weeks ended
June 27, 2004 had this acquisition been completed at the beginning of fiscal
2004.
22
Captive Insurance Subsidiary
In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a
wholly-owned captive insurance subsidiary to provide Applebee's International,
Inc. and qualified franchisees with workers' compensation and general liability
insurance. 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 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.
In fiscal 2005, we reduced the types of insurance coverage plans which resulted
in fewer franchisee participants in our captive insurance program. Our
consolidated balance sheets include the following balances related to the
captive insurance subsidiary:
o Franchise premium receivables of approximately $3,200,000 and
$1,900,000 as of June 26, 2005 and December 26, 2004, respectively,
included in receivables related to captive insurance subsidiary.
o Cash equivalent and other long-term investments restricted for the
payment of claims of approximately $18,100,000 and $16,700,000 as of
June 26, 2005 and December 26, 2004, respectively, included in
restricted assets related to captive insurance subsidiary.
o Loss reserve and unearned premiums related to captive insurance
subsidiary of approximately $21,400,000 and $19,600,000 as of June 26,
2005 and December 26, 2004, respectively. Approximately $7,400,000 and
$7,500,000 as of June 26, 2005 and December 26, 2004, respectively, is
included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $100,000 and
$1,000,000 as of June 26, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
23
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 26, June 27, June 26, June 27
2005 2004 2005 2004
------------ ------------ ------------ ------------
(as (as
restated) restated)
Revenues:
Company restaurant sales.................................. 88.9% 87.9% 88.9% 87.9%
Franchise royalties and fees.............................. 10.6 10.9 10.7 11.0
Other franchise income.................................... 0.5 1.2 0.4 1.2
------------ ------------ ------------ ------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage......................................... 26.6% 26.9% 26.5% 26.5%
Labor..................................................... 33.0 32.6 32.9 32.6
Direct and occupancy...................................... 26.0 24.4 25.3 24.4
Pre-opening expense....................................... 0.5 0.2 0.4 0.2
------------ ------------ ------------ ------------
Total cost of sales.................................. 86.2% 84.1% 85.2% 83.7%
============ ============ ============ ============
Cost of other franchise income (as a percentage of other
franchise income)......................................... 86.3% 148.1% 82.3% 122.4%
General and administrative expenses........................... 9.1 8.9 9.0 9.0
Amortization of intangible assets............................. 0.1 0.1 0.1 --
Loss on disposition of restaurants and equipment.............. 0.2 0.2 0.1 0.2
------------ ------------ ------------ ------------
Operating earnings............................................ 13.6 15.2 14.7 15.8
------------ ------------ ------------ ------------
Other income (expense):
Investment income......................................... 0.1 -- 0.1 --
Interest expense.......................................... (0.2) (0.1) (0.2) (0.1)
Other income.............................................. 0.2 0.2 0.2 0.2
------------ ------------ ------------ ------------
Total other income................................... 0.1 0.1 0.1 0.1
------------ ------------ ------------ ------------
Earnings before income taxes.................................. 13.7 15.3 14.8 15.9
Income taxes.................................................. 4.7 5.3 5.1 5.5
------------ ------------ ------------ ------------
Net earnings.................................................. 9.0% 10.0% 9.7% 10.3%
============ ============ ============ ============
24
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 26, June 27, June 26, June 27,
2005 2004 2005 2004
------------- ------------- -------------- -------------
Number of restaurants:
Company:
Beginning of period....................... 437 391 424 383
Restaurant openings....................... 14 4 27 12
Restaurants acquired from franchisees..... 11 10 11 10
------------- ------------- -------------- -------------
End of period............................. 462 405 462 405
------------- ------------- -------------- -------------
Franchise:
Beginning of period....................... 1,257 1,212 1,247 1,202
Restaurant openings....................... 16 8 29 19
Restaurants closed........................ (2) (3) (5) (4)
Restaurants acquired from franchisees..... (11) (10) (11) (10)
------------- ------------- -------------- -------------
End of period............................. 1,260 1,207 1,260 1,207
------------- ------------- -------------- -------------
Total:
Beginning of period....................... 1,694 1,603 1,671 1,585
Restaurant openings....................... 30 12 56 31
Restaurants closed........................ (2) (3) (5) (4)
------------- ------------- -------------- -------------
End of period............................. 1,722 1,612 1,722 1,612
============= ============= ============== =============
Weighted average weekly sales per restaurant:
Company........................................ $ 46,800 $ 47,758 $ 47,483 $ 48,075
Franchise...................................... $ 50,114 $ 48,759 $ 50,705 $ 48,763
Total.......................................... $ 49,244 $ 48,510 $ 49,868 $ 48,593
Change in comparable restaurant sales:(1)
Company........................................ (1.2)% 5.5 % (0.4)% 7.0 %
Franchise...................................... 2.5 % 6.5 % 3.7 % 7.2 %
Total.......................................... 1.6 % 6.3 % 2.7 % 7.2 %
Total operating revenues (in thousands):
Company restaurant sales....................... $ 272,703 $ 247,769 $ 543,161 $ 491,329
Franchise royalties and fees(2)................ 32,493 30,722 65,501 61,437
Other franchise income(3)...................... 1,424 3,399 2,489 6,514
------------- ------------- -------------- -------------
Total.......................................... $ 306,620 $ 281,890 $ 611,151 $ 559,280
============= ============= ============== =============
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
(2) Franchise royalties are generally 4% of each franchise restaurant's reported
monthly gross sales. Reported franchise sales, in thousands, were $820,483
and $764,422 in the 2005 quarter and the 2004 quarter, respectively, and
$1,653,480 and $1,528,538 in the 2005 year-to-date and 2004 year-to-date
period, respectively. Franchise fees typically range from $30,000 to $35,000
for each restaurant opened.
(3) Other franchise income includes insurance premiums from franchisee
participation in our captive insurance program and revenue from information
technology products and services provided to certain franchisees.
25
2005 Quarter Compared With 2004 Quarter and 2005 Year-to-Date Period Compared
With 2004 Year-to-Date Period
Company Restaurant Sales. Total company restaurant sales increased $24,934,000
(10%) from $247,769,000 in the 2004 quarter to $272,703,000 in the 2005 quarter
and increased $51,832,000 (11%) from $491,329,000 in the 2004 year-to-date
period to $543,161,000 in the 2005 year-to-date period. The percentage increase
in total company restaurant sales was comprised of the following:
2005 Year-to-Date
2005 Quarter Period
---------------------- ----------------------
Company restaurant openings............................. 11 % 10 %
Restaurant acquisitions................................. 1 % 2 %
Weighted average weekly sales........................... (2)% (1)%
Comparable restaurant sales at company restaurants decreased by 1.2% and 0.4% in
the 2005 quarter and the 2005 year-to-date period, respectively. Weighted
average weekly sales at company restaurants decreased 2.0% from $47,758 in the
2004 quarter to $46,800 in the 2005 quarter and decreased 1.2% from $48,075 in
the 2004 year-to-date period to $47,483 in the 2005 year-to-date period. These
decreases were a result of a reduction in guest traffic due to lapping over the
implementation of our Weight Watchers(TM) menu system-wide in May 2004 and a
decline in guest counts in the Kansas City, St. Louis and Minnesota markets,
where more than one-third of our company restaurants are located. These
decreases were partially offset by increases in the average guest check
resulting from menu price increases of approximately 1.0% in November 2004 and
1.5% in May 2005 and our Carside To Go(TM) initiative. Carside To Go(TM) sales
mix increased from 9.4% of company restaurant sales in the 2004 quarter to 10.4%
of company restaurant sales in the 2005 quarter.
Franchise Royalties and Fees. Franchise royalties and fees increased $1,771,000
(6%) from $30,722,000 in the 2004 quarter to $32,493,000 in the 2005 quarter and
increased $4,064,000 (7%) from $61,437,000 in the 2004 year-to-date period to
$65,501,000 in the 2005 year-to-date period. These increases were due primarily
to the increased number of franchise restaurants operating during the 2005
quarter and 2005 year-to-date period as compared to the same periods in 2004 and
increases in comparable restaurant sales. Weighted average weekly sales at
franchise restaurants increased 2.8% and 4.0% in the 2005 quarter and 2005
year-to-date period, respectively, and franchise comparable restaurant sales
increased 2.5% and 3.7% in the 2005 quarter and 2005 year-to-date period,
respectively. These increases were due in part to the implementation of the
Carside To Go(TM) program in most franchise restaurants which were partially
offset by lapping over sales increases which resulted from the implementation of
our Weight Watchers(TM) menu system-wide in May 2004.
Other Franchise Income. Other franchise income decreased $1,975,000 (58%) from
$3,399,000 in the 2004 quarter to $1,424,000 in the 2005 quarter and decreased
$4,025,000 (62%) from $6,514,000 in the 2004 year-to-date period to $2,489,000
in the 2005 year-to-date period due primarily to fewer franchisee participants
in our captive insurance program resulting from the reduction of the types of
insurance coverage plans offered. Franchise premiums are included in other
franchise income ratably over the policy year.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 26.9%
in the 2004 quarter to 26.6% in the 2005 quarter and were 26.5% in both the 2004
year-to-date period and the 2005 year-to-date period. Both periods were
favorably impacted by a menu price increases of 1.0% in November 2004 and 1.5%
in May 2005, which were offset by higher commodity costs. The 2004 quarter and
26
2004 year-to-date period were unfavorably impacted by the company portion of the
June 2004 impairment of approximately $500,000 for excess riblet inventories
which no longer met our quality standards.
Labor costs increased from 32.6% in the 2004 quarter to 33.0% in the 2005
quarter and increased from 32.6% in the 2004 year-to-date period to 32.9% in the
2005 year-to-date period. The increases in both periods were due primarily to
higher management and hourly wage rates and higher group insurance costs which
were partially offset by lower management incentive compensation.
Direct and occupancy costs increased from 24.4% in both the 2004 quarter and the
2004 year-to-date period to 26.0% in the 2005 quarter and 25.3% in the 2005
year-to-date period due primarily to lower sales volumes at company restaurants
which resulted in unfavorable depreciation, rent and property tax expenses, as a
percentage of sales, due to their relatively fixed nature as well as higher
utilities, packaging and smallwares costs. The increase in the 2005 quarter was
also due to higher advertising costs, as a percentage of sales.
Pre-Opening Expenses. Pre-opening expenses increased from 0.2% in both the 2004
quarter and the 2004 year-to-date period to 0.5% in the 2005 quarter and 0.4% in
the 2005 year-to-date period due primarily to the increased number of restaurant
openings.
Cost of Other Franchise Income. Cost of other franchise income decreased
$3,806,000 (76%) from $5,035,000 in the 2004 quarter to $1,229,000 in the 2005
quarter and decreased $5,924,000 (74%) from $7,972,000 in the 2004 year-to-date
period to $2,048,000 in the 2005 year-to-date due to fewer franchisee
participants in our captive insurance program resulting from the reduction of
the types of insurance coverage plans offered and the franchisee portion of the
June 2004 impairment of approximately $1,800,000 for excess riblet inventories
which no longer met our quality standards.
General and Administrative Expenses. General and administrative expenses
increased from 8.9% in the 2004 quarter to 9.1% in the 2005 quarter and were
9.0% in both the 2004 year-to-date period and the 2005 year-to-date period.
General and administrative expenses were unfavorably impacted in both periods by
higher compensation expense due to staffing levels and higher management
training costs due to the increased number of company restaurant openings as
compared to 2004. The increase in the 2005 quarter was also due to the timing of
our restaurant general manager convention.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 34.7% in the 2004 quarter and 34.8% in the 2004
year-to-date period to 34.6% in both the 2005 quarter and the 2005 year-to-date
period due to a reduction in state and local income taxes.
27
Liquidity and Capital Resources
Our primary source of liquidity is cash provided by operations. Our need for
capital resources historically has resulted from the construction and
acquisition of restaurants, the repurchase of our common stock and investment in
information technology systems. 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. In addition, we have assumed
debt or issued new debt in connection with certain mergers and acquisitions. The
following table presents a summary of our cash flows for the 2005 and 2004
year-to-date period (in thousands):
2005 2004
Year-to-Date Year-to-Date
Period Period
------------------- -------------------
(as restated)
Net cash provided by operating activities.......... $ 107,790 $ 80,439
Net cash used by investing activities.............. (108,116) (61,986)
Net cash used by financing activities.............. (9,655) (21,430)
------------------- -------------------
Net decrease in cash and cash equivalents.......... $ (9,981) $ (2,977)
=================== ===================
Capital expenditures, excluding acquisitions, were $36,543,000 in the 2004
year-to-date period and $59,922,000 in the 2005 year-to-date period. In fiscal
2005, we currently expect to open at least 50 company restaurants, and capital
expenditures are expected to be between $150,000,000 and $160,000,000, including
the costs to acquire and re-open seven company restaurants that were closed in
fiscal 2004 by a former franchisee in Memphis, Tennessee, but excluding the
costs to acquire the assets of 12 Applebee's restaurants in Missouri, Kansas and
Arkansas.
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 or fewer restaurants than we currently
anticipate or acquire additional restaurants, our capital requirements will
increase or decrease accordingly.
In May 2005, we completed the acquisition of 12 Applebee's restaurants, which
included one restaurant under construction, in Missouri, Kansas and Arkansas for
approximately $39,500,000. Through June 2005, we have paid approximately
$38,900,000, which has been allocated to the fair value of property and
equipment of $16,800,000, goodwill of $21,900,000 and other net assets of
approximately $200,000. In addition, we expect to pay the remaining $600,000 for
property and equipment relating to the completion of construction of one
restaurant in the third fiscal quarter of 2005.
In April 2005, we finalized the acquisition of eight Applebee's restaurants that
were closed in fiscal 2004 by a former franchisee for approximately $8,800,000
payable in cash. In connection with this acquisition, we paid approximately
$800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000
in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash
in the second quarter of fiscal 2005.
28
In April 2004, we completed our acquisition of the operations and assets of ten
Applebee's restaurants located in Southern California for approximately
$13,800,000 in cash.
In December 2004, we completed the refinancing of our $150,000,000 unsecured
revolving credit facility. The new bank credit agreement provides for a
$150,000,000 five-year unsecured revolving credit facility, of which $40,000,000
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. There is no limit on cash dividends provided
that the declaration and payment of such dividend does not cause a default of
any other covenant contained in the agreement. The facility is subject to
standard other terms, conditions, covenants, and fees. As of June 26, 2005, we
are in compliance with the covenants contained in our credit agreement. As of
June 26, 2005, we had borrowings of $81,300,000, standby letters of credit of
$9,500,000 outstanding and approximately $59,200,000 available under our
revolving credit facility. During fiscal 2005, we expect to fund operations,
capital expansion, any repurchases of common stock, and the payment of dividends
from operating cash flows and borrowings under our revolving credit facility.
In October 2004, our Board of Directors authorized additional repurchases of our
common stock of up to $150,000,000 beginning in fiscal 2005 and approved a
written plan for repurchases of our common stock in the open market. During the
2005 year-to-date period, we repurchased 2,660,000 shares of our common stock at
an average price of $25.65 for an aggregate cost of $68,200,000. As of June 26,
2005, we had $81,800,000 remaining under our repurchase authorization.
As of June 26, 2005, our liquid assets totaled $944,000. These assets consisted
of cash and cash equivalents in the amount of $661,000 and short-term
investments in the amount of $283,000. The working capital deficit increased
from $51,041,000 as of December 26, 2004 to $76,491,000 as of June 26, 2005.
This increase was due primarily to increases in accrued income taxes and
decreases in cash and cash equivalents due to repurchases of our common stock,
acquisition of restaurants and capital expenditures in the 2005 year-to-date
period and was partially offset by the redemption of gift cards in the 2005
year-to-date period sold in fiscal 2004.
We believe that our liquid assets and cash generated from operations, combined
with borrowings available under our credit facility, will provide sufficient
funds for capital expenditures, repurchases of our common stock, the payment of
dividends and other such operating activities for the foreseeable future.
29
The following table shows our debt amortization schedule, future capital lease
commitments (including principal and interest payments), future operating lease
commitments and future purchase obligations as of June 26, 2005 (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) (1)...................... $ 82,784 $ 4,428 $ 162 $ 77,095 $ 1,099
Capital Lease Obligations....................... 8,720 780 1,644 1,760 4,536
Operating Leases (2)............................ 360,523 25,208 50,628 50,634 234,053
Purchase Obligations - Company(3)............... 206,221 174,938 21,130 10,153 --
Purchase Obligations - Franchise(4)............ 448,359 384,875 40,934 22,550 --
(1) The amounts for long-term debt are primarily borrowings under our revolving
credit facility and exclude interest payments which are variable in nature.
(2) The amounts for operating leases include option periods where failure to
exercise such options would result in an economic penalty such that the renewal
appears reasonably assured.
(3) The amounts for company purchase obligations include commitments for food
items, energy, supplies, severance and employment agreements, and other
miscellaneous commitments.
(4) The amounts for franchise purchase obligations include commitments for food
items and supplies made by Applebee's International, Inc. for our franchisees.
Applebee's International, Inc. contracts with certain suppliers to ensure
competitive pricing. These amounts will only be payable by Applebee's
International, Inc. if our franchisees do not meet certain minimum contractual
requirements.
Other Contractual Obligations
We have outstanding lease guarantees of approximately $18,200,000 as of June 26,
2005 (see Note 4 to the condensed consolidated financial statements). In
addition, we or our subsidiaries are contingently liable for various leases that
we have assigned in connection with the sale of restaurants to franchisees and
other parties, in the potential amount of $17,200,000. We have not recorded a
liability for these guarantees as of June 26, 2005 or December 26, 2004.
We have severance and employment agreements with certain officers providing for
severance payments to be made in the event the associate resigns or is
terminated 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 26, 2005, we would have been required to make
payments totaling approximately $13,300,000. 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 $6,200,000 if such officers had been
terminated as of June 26, 2005.
In November 2003, we arranged for a third-party financing company to provide up
to $75,000,000 to qualified franchisees for short-term loans to fund remodel
investments, subject to our approval. Under the terms of this financing program,
we will provide a limited guarantee pool for the loans advanced during the
three-year period ending December 2006. As of June 26, 2005, there were loans
outstanding to four franchisees for approximately $1,300,000 under this program.
In May 2004, we arranged for a third-party financing company to provide up to
$250,000,000 to qualified franchisees for loans to fund development of new
restaurants through October 2007, subject to our approval. We will provide a
30
limited guarantee of certain loans advanced under this program. As of June 26,
2005, there were loans outstanding to five franchisees for approximately
$20,100,000 under this program. The fair value of our guarantees under these two
financing programs was less than $100,000 and is recorded in other non-current
liabilities and other assets in our consolidated balance sheet as of June 26,
2005.
New Accounting Pronouncements
In June 2005, the Financial Accounting Standards Board's ("FASB") Emerging
Issues Task Force reached a consensus on Issue No. 05-6, "Determining the
Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance
requires that leasehold improvements acquired in a business combination or
purchased subsequent to the inception of a lease be amortized over the lesser of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. The
guidance is effective for periods beginning after June 29, 2005. The adoption of
EITF 05-6 will not have an impact on our consolidated financial statements.
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections--A Replacement of APB Opinion No.
20 and FASB Statement No. 3." SFAS No. 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies that the
term "conditional" as used in SFAS No. 143, "Accounting for Asset Retirement
Obligations." This Interpretation refers to a legal obligation to perform an
asset retirement activity even if the timing and/or settlement is conditional on
a future event that may or may not be within the control of an entity.
Accordingly, the entity must record a liability for the conditional asset
retirement obligation if the fair value of the obligation can be reasonably
estimated. The Interpretation is effective for fiscal years ending after
December 15, 2005. We are evaluating the impact the adoption of FIN 47 will have
on our consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based
Payment," which replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supercedes Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004)
requires compensation costs related to share-based payment transactions to be
recognized in the financial statements. With limited exceptions, the amount of
compensation cost will be measured based on the fair value on the grant date of
the equity or liability instruments issued. Compensation cost will be recognized
over the period that an employee provides service for that award, resulting in a
decrease in our net earnings. We will adopt the provisions of this Statement, as
amended, using the modified prospective method beginning in fiscal 2006. We
expect that the adoption of this Standard will be material to our consolidated
financial statements; however, we are still in the process of evaluating its
impact.
31
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development, comparable sales, Carside To Go(TM), revenue growth, restaurant
margin, commodity costs, general and administrative expenses, capital
expenditures, return on equity and financial commitments are forward-looking and
based on current expectations. There are several risks and uncertainties that
could cause actual results to differ materially from those described. These
risks include but are not limited to our ability and the ability of our
franchisees to open and operate additional restaurants profitably, 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, the impact
of economic factors on consumer spending, 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 9, 2005. 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 0.5%, at our option. As of June 26, 2005, the
total amount of debt subject to interest rate fluctuations was $81,300,000 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 $813,000 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, seasonality and fuel costs. As part of
our strategy to moderate this volatility, we have entered into fixed price
purchase commitments.
Item 4. Controls and Procedures
As of June 26, 2005, 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.
32
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.
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 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities.
------------------------------------------------------------------------------------------------------------------
Purchases of Equity Securities(1)
------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
------------------------------ ------------------ ----------- ------------------------- --------------------------
Maximum Dollar
Total Number of Value of Shares that
Average Shares Purchased as May Yet Be
Total Number Price Part of Publicly Purchased Under the
of Shares Paid Per Announced Plans or Plans or Programs
Period Purchased Share Programs (in thousands)
------------------------------ ------------------ ----------- ------------------------- --------------------------
March 28, 2005 through
April 24, 2005 86,000 $26.72 86,000 $129,079
------------------------------ ------------------ ----------- ------------------------- --------------------------
April 25, 2005 through
May 22, 2005 1,752,400 $25.56 1,752,400 $84,291
------------------------------ ------------------ ----------- ------------------------- --------------------------
May 23, 2005 through
June 26, 2005 94,239(2) $26.76 93,300 $81,795
------------------------------ ------------------ ----------- ------------------------- --------------------------
Total 1,932,639 1,931,700
============================== ================== =========== ========================= ==========================
(1) In October 2004, our Board of Directors authorized additional repurchases of
our common stock of up to $150,000,000 beginning in fiscal 2005.
(2) Includes 939 shares received as partial payment for shares issued under
stock option plans.
33
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders was held on May 12, 2005. The stockholders
voted on the following matters:
Proposal I. Elect Erline Belton and Eric L. Hansen as Directors.
Proposal II. Approve an amendment to the Applebee's International,
Inc. Amended and Restated 1995 Equity Incentive Plan.
Proposal III. Approve an amendment to the Applebee's International,
Inc. Employee Stock Purchase Plan.
Proposal IV. Ratify Deloitte & Touche LLP as our independent
registered public accounting firm for the 2005 fiscal
year.
Proposal V. Act on a shareholder proposal to require us to issue a
report on the feasibility of requiring our chicken
suppliers to utilize an alternative method of slaughter.
The results of the voting were as follows:
Negative/
Affirmative Withheld Broker
Proposal Votes Votes Abstentions Non-Votes
-------------------------- ---------------- -------------------- -------------------- -----------------
I (Belton) 74,075,223 1,885,305 -- --
I (Hansen) 73,930,090 2,030,438 -- --
II 47,478,774 17,841,092 135,508 10,505,154
III 62,431,883 2,904,626 118,865 10,505,154
IV 75,129,910 554,259 276,359 --
V 3,639,797 57,048,023 4,767,554 10,505,154
Proposals I, II, III and IV received the required affirmative votes and were
affirmatively adopted by the Stockholders. Proposal V did not receive the
required affirmative votes.
Item 6. Exhibits
(a) The Exhibits listed on the accompanying Exhibit Index are filed
as part of this report.
34
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 27, 2005 By: /s/ Lloyd L. Hill
--------------------------- --------------------------------------
Lloyd L. Hill
Director, Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Date: July 27, 2005 By: /s/ Steven K. Lumpkin
--------------------------- --------------------------------------
Steven K. Lumpkin
Director, Executive Vice President, Chief
Financial Officer and Treasurer
(principal financial officer)
Date: July 27, 2005 By: /s/ Beverly O. Elving
--------------------------- --------------------------------------
Beverly O. Elving
Vice President and Controller
(principal accounting officer)
35
APPLEBEE'S INTERNATIONAL, INC AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
----------- --------------------------------------------------------------------
10.1 Amendment to Memorandum of Understanding, dated October 5, 2002,
with Louis A. Kaucic
10.2 Asset Purchase Agreement with The Ozark Apples, Inc. dated April 8,
2005
10.3 Amended and Restated 1995 Equity Incentive Plan, as amended
10.4 Employee Stock Purchase Plan, as amended
10.5 Amendment to Executive Retirement Plan
10.6 CEO Use of the Company Airplane Policy (incorporated by reference
to Form 8-K filed on May 16, 2005)
10.7 Personal Use of Corporate Aircraft for Senior Team (incorporated by
reference to Form 8-K filed on May 16, 2005)
31.1 Certification of Chairman and Chief Executive Officer Pursuant to
SEC Rule 13a-14(a)
31.2 Certification of Chief Financial Officer Pursuant to SEC Rule
13a-14(a)
32.1 Certification of Chairman and Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350
36