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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 30, 2002
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission File Number: 000-17962
-----------------
Applebee's International, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1461763
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
-------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(913) 967-4000
---------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- -------
The number of shares of the registrant's common stock outstanding as of July 26,
2002 was 55,995,834.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED JUNE 30, 2002
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2002
and December 30, 2001................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks
Ended June 30, 2002 and July 1, 2001................................................. 4
Consolidated Statement of Stockholders' Equity for the
26 Weeks Ended June 30, 2002......................................................... 5
Consolidated Statements of Cash Flows for the 26 Weeks
Ended June 30, 2002 and July 1, 2001................................................. 6
Notes to Consolidated Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 19
Part II Other Information
Item 1. Legal Proceedings....................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders..................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 21
Signatures ................................................................................................. 22
Exhibit Index............................................................................................... 23
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
June 30, December 30,
2002 2001
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 7,778 $ 22,048
Short-term investments, at market value (amortized cost of $478 in 2002 and
$677 in 2001)............................................................... 495 699
Receivables (less allowance for bad debts of $5,177 in 2002 and $4,343 in 2001) 23,706 22,827
Inventories.................................................................... 10,653 10,165
Prepaid and other current assets............................................... 10,161 12,260
-------------- -------------
Total current assets........................................................ 52,793 67,999
Property and equipment, net......................................................... 343,048 330,924
Goodwill, net....................................................................... 78,614 78,614
Franchise interest and rights, net.................................................. 1,634 1,800
Other assets........................................................................ 21,050 21,074
-------------- -------------
$ 497,139 $ 500,411
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 47 $ 43
Accounts payable............................................................... 25,588 22,196
Accrued expenses and other current liabilities................................. 61,021 71,551
Accrued dividends.............................................................. -- 2,977
Accrued income taxes........................................................... 6,546 979
-------------- -------------
Total current liabilities................................................... 93,202 97,746
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion.......................................... 32,524 74,525
Franchise deposits............................................................. 1,258 1,515
Deferred income taxes.......................................................... 1,974 1,442
-------------- -------------
Total non-current liabilities............................................... 35,756 77,482
-------------- -------------
Total liabilities........................................................... 128,958 175,228
-------------- -------------
Commitments and contingencies (Note 2)
Stockholders' equity:
Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
no shares issued............................................................ -- --
Common stock - par value $0.01 per share: authorized - 125,000,000 shares;
issued - 72,336,788 shares.................................................. 723 723
Additional paid-in capital..................................................... 185,481 180,802
Retained earnings.............................................................. 396,657 354,950
Accumulated other comprehensive income, net of income taxes.................... 11 14
-------------- -------------
582,872 536,489
Treasury stock - 16,369,087 shares in 2002 and 16,522,099 shares in 2001, at
cost........................................................................ (214,691) (211,306)
-------------- -------------
Total stockholders' equity.................................................. 368,181 325,183
-------------- -------------
$ 497,139 $ 500,411
============== =============
See notes to consolidated financial statements.
3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
13 Weeks Ended 26 Weeks Ended
--------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
----------- ----------- ------------ -----------
Revenues:
Company restaurant sales.................... $178,893 $162,035 $353,866 $322,178
Franchise income............................ 25,484 23,885 50,324 46,119
----------- ----------- ------------ -----------
Total operating revenues................. 204,377 185,920 404,190 368,297
----------- ----------- ------------ -----------
Cost of company restaurant sales:
Food and beverage........................... 47,073 43,633 94,480 86,938
Labor....................................... 58,881 51,533 116,338 102,433
Direct and occupancy........................ 44,291 41,104 87,163 81,863
Pre-opening expense......................... 305 132 640 267
----------- ----------- ------------ -----------
Total cost of company restaurant sales... 150,550 136,402 298,621 271,501
----------- ----------- ------------ -----------
General and administrative expenses.............. 19,553 18,085 38,799 35,251
Amortization of intangible assets................ 52 1,462 190 2,925
Loss on disposition of restaurants and equipment. 727 571 1,021 758
----------- ----------- ------------ -----------
Operating earnings............................... 33,495 29,400 65,559 57,862
----------- ----------- ------------ -----------
Other income (expense):
Investment income........................... 381 415 778 772
Interest expense............................ (555) (2,043) (1,188) (4,400)
Other income................................ 482 385 583 475
----------- ----------- ------------ -----------
Total other income (expense)............. 308 (1,243) 173 (3,153)
----------- ----------- ------------ -----------
Earnings before income taxes..................... 33,803 28,157 65,732 54,709
Income taxes..................................... 12,338 10,361 23,992 20,132
----------- ----------- ------------ -----------
Net earnings..................................... $ 21,465 $ 17,796 $ 41,740 $ 34,577
=========== =========== ============ ===========
Basic net earnings per common share.............. $ 0.38 $ 0.32 $ 0.75 $ 0.62
=========== =========== ============ ===========
Diluted net earnings per common share............ $ 0.37 $ 0.31 $ 0.73 $ 0.61
=========== =========== ============ ===========
Basic weighted average shares outstanding........ 55,872 55,370 55,874 55,522
=========== =========== ============ ===========
Diluted weighted average shares outstanding...... 57,374 56,808 57,352 56,661
=========== =========== ============ ===========
See notes to consolidated financial statements.
4
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands, except share amounts)
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-In Retained Comprehensive Treasury Stockholders'
Shares Amount Capital Earnings Income (Loss) Stock Equity
--------------- ---------- ------------ ---------- ------------- ------------ -------------
Balance, December 30, 2001............. 72,336,788 $ 723 $ 180,802 $ 354,950 $ 14 $(211,306) $ 325,183
Comprehensive income:
Net earnings...................... -- -- -- 41,740 -- -- 41,740
Change in unrealized gain on
short-term investments,
net of income taxes............. -- -- -- -- (3) -- (3)
--------------- ---------- ------------ ---------- ------------- ------------ -------------
Total comprehensive income.......... -- -- -- 41,740 (3) -- 41,737
--------------- ---------- ------------ ---------- ------------- ------------ -------------
Purchases of treasury stock......... -- -- -- -- -- (8,324) (8,324)
Stock options exercised and
related tax benefit............... -- -- 1,830 -- -- 3,159 4,989
Shares issued under employee
stock and 401(k) plans............ -- -- 2,083 -- -- 1,600 3,683
Restricted shares awarded
under equity incentive plan, net
of cancellations.................. -- -- (20) -- -- 180 160
Unearned compensation relating
to restricted shares.............. -- -- 295 -- -- -- 295
Repayments of notes receivable from
officers for stock sales.......... -- -- 491 -- -- -- 491
Dividends paid for fractional shares -- -- -- (33) -- -- (33)
--------------- ---------- ------------ ---------- ------------- ------------ -------------
Balance, June 30, 2002................. 72,336,788 $ 723 $ 185,481 $ 396,657 $ 11 $(214,691) $ 368,181
=============== ========== ============ ========== ============= ============ =============
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
26 Weeks Ended
--------------------------------
June 30, July 1,
2002 2001
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings...................................................... $ 41,740 $ 34,577
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization.................................. 16,953 15,561
Amortization of intangible assets.............................. 190 2,925
Amortization of deferred financing costs....................... 96 362
Deferred income tax provision (benefit)........................ 617 (3,095)
Loss on disposition of restaurants and equipment............... 1,021 758
Income tax benefit from exercise of stock options.............. 1,359 2,163
Changes in assets and liabilities:
Receivables.................................................... (879) 334
Inventories.................................................... (488) 3,237
Prepaid and other current assets............................... 2,016 545
Accounts payable............................................... 3,392 (366)
Accrued expenses and other current liabilities................. (8,336) (3,824)
Accrued income taxes........................................... 5,567 1,774
Franchise deposits............................................. (257) (161)
Other.......................................................... 801 (1,381)
------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 63,792 53,409
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (29,545) (18,836)
Proceeds from sale of restaurants and equipment................... 3 16
Purchases of short-term investments............................... (100) (49)
Maturities and sales of short-term investments.................... 300 375
------------- --------------
NET CASH USED BY INVESTING ACTIVITIES.......................... (29,342) (18,494)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock....................................... (8,324) (39,578)
Dividends paid.................................................... (3,010) (2,779)
Issuance of common stock upon exercise of stock options........... 3,630 10,771
Shares sold under employee stock purchase plan.................... 984 540
Payments on long-term debt........................................ (42,000) (7,430)
------------- --------------
NET CASH USED BY FINANCING ACTIVITIES.......................... (48,720) (38,476)
------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS.............................. (14,270) (3,561)
CASH AND CASH EQUIVALENTS, beginning of period......................... 22,048 10,763
------------- --------------
CASH AND CASH EQUIVALENTS, end of period............................... $ 7,778 $ 7,202
============= ==============
See notes to consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
26 Weeks Ended
------------------------------------
June 30, July 1,
2002 2001
---------------- ----------------
Supplemental disclosures of cash flow information:
Cash paid during the 26 week period for:
Income taxes........................................................ $ 13,534 $ 19,256
================ ================
Interest............................................................ $ 891 $ 4,029
================ ================
Disclosure of Accounting Policy:
For purposes of the consolidated statements of cash flows, we consider all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.
See notes to consolidated financial statements.
7
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Our consolidated financial statements included in this Form 10-Q have been
prepared without audit (except that the balance sheet information as of December
30, 2001 has been derived from consolidated financial statements which were
audited) in accordance with the rules and regulations of the Securities and
Exchange Commission. Although certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted, we believe that the disclosures are adequate to make the
information presented not misleading. The accompanying consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 30, 2001.
We believe that all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of the interim
periods presented have been made. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the full year.
We have made certain reclassifications to the consolidated financial statements
to conform to the 2002 presentation.
2. Commitments and Contingencies
Litigation, claims and disputes: We are involved in various legal actions
arising in the normal course of business. These matters include, without
limitation, such matters as employment law related claims and disputes with two
international franchisees regarding disclosures we allegedly made or omitted. In
each instance, we believe that we have meritorious defenses to the allegations
made and we are vigorously defending these claims.
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
Lease guaranties: In connection with the sale of restaurants to franchisees and
other parties, we have, in certain cases, remained contingently liable for the
remaining lease payments. As of June 30, 2002, the aggregate amount of these
lease payments totaled approximately $26,600,000. The buyers have indemnified us
from any losses related to these guaranties.
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the employee
resigns or is terminated related to a change in control. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of June 30, 2002, we would have been required to make
payments totaling approximately $7,700,000. In addition, we have severance and
employment agreements with certain officers which contain severance provisions
not related to a change in control. Those provisions would have required
aggregate payments of approximately $4,900,000 if such officers had been
terminated as of June 30, 2002.
8
3. Earnings Per Share
We compute basic earnings per share by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if holders of options or other contracts to issue common stock
exercised or converted their holdings into common stock. Outstanding stock
options and equity-based compensation represent the only dilutive effects on
weighted average shares. The chart below presents a reconciliation between basic
and diluted weighted average shares outstanding and the related earnings per
share. All amounts in the chart, except per share amounts, are expressed in
thousands.
13 Weeks Ended 26 Weeks Ended
------------------------------- -------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net earnings......................................... $ 21,465 $ 17,796 $ 41,740 $ 34,577
=============== =============== =============== ===============
Basic weighted average shares outstanding............ 55,872 55,370 55,874 55,522
Dilutive effect of stock options and
performance shares................................. 1,502 1,438 1,478 1,139
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding.......... 57,374 56,808 57,352 56,661
=============== =============== =============== ===============
Basic net earnings per common share.................. $ 0.38 $ 0.32 $ 0.75 $ 0.62
=============== =============== =============== ===============
Diluted net earnings per common share................ $ 0.37 $ 0.31 $ 0.73 $ 0.61
=============== =============== =============== ===============
4. Stock Split
On May 9, 2002, we declared a three-for-two stock split, effected in the form of
a 50% stock dividend, to shareholders of record on May 24, 2002, payable on June
11, 2002. We issued approximately 24,100,000 shares of common stock as a result
of the stock split. All references to the number of shares and per share amounts
of common stock have been restated to reflect the stock split. We have
reclassified an amount equal to the par value of the number of shares issued to
common stock from retained earnings.
5. Goodwill
We adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets", effective December 31, 2001. SFAS No.
142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. This Statement also provides
that goodwill should not be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. In the first quarter
of fiscal 2002, we completed the first step of the required two-step goodwill
impairment testing and ceased amortization of goodwill. The first step of the
impairment test required us to compare the fair value of each reporting unit to
its carrying value to determine whether there was an indication that an
impairment existed. If there had been an indication of impairment, we would have
allocated the fair value of the reporting unit to its assets and liabilities as
if the reporting unit had been acquired in a business combination. No impairment
losses were recorded upon the initial adoption of SFAS No. 142.
9
The effect of the adoption of SFAS No. 142 on net income and earnings per share
is as follows (in thousands, except per share amounts):
13 Weeks Ended 26 Weeks Ended
-------------------------------- --------------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
---------------- --------------- --------------- ----------------
Net earnings, as reported........................... $ 21,465 $ 17,796 $ 41,740 $ 34,577
Goodwill amortization (net of income taxes)......... -- 838 -- 1,675
---------------- --------------- --------------- ----------------
Net earnings, as adjusted........................... 21,465 18,634 41,740 36,252
================ =============== =============== ================
Basic net earnings per common share,
as reported..................................... $ 0.38 $ 0.32 $ 0.75 $ 0.62
Goodwill amortization (net of income taxes)......... -- 0.02 -- 0.03
---------------- --------------- --------------- ----------------
Basic net earnings per common share,
as adjusted..................................... $ 0.38 $ 0.34 $ 0.75 $ 0.65
================ =============== =============== ================
Diluted net earnings per common share,
as reported..................................... $ 0.37 $ 0.31 $ 0.73 $ 0.61
Goodwill amortization (net of income taxes)......... -- 0.02 -- 0.03
---------------- --------------- --------------- ----------------
Diluted net earnings per common share,
as adjusted..................................... $ 0.37 $ 0.33 $ 0.73 $ 0.64
================ =============== =============== ================
Intangible assets subject to amortization pursuant to SFAS No. 142 consist
primarily of franchise interest and rights and are summarized below (in
thousands):
June 30, December 30,
2002 2001
------------------ ------------------
Gross carrying amount $6,371 $6,371
Accumulated amortization 4,737 4,571
------------------ ------------------
Net $1,634 $1,800
================== ==================
We expect annual amortization expense for all intangible assets for the next
five fiscal years to range from approximately $280,000 to $380,000.
6. New Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS
No. 121, but addresses certain implementation issues associated with that
Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of
SFAS No. 144 did not have a material impact on our consolidated financial
statements.
10
7. Subsequent Event
On July 16, 2002, we reached an agreement with an existing franchisee to acquire
the assets of 21 Applebee's restaurants located in the Washington, D.C. area for
$32.8 million in cash, subject to adjustment. The agreement also provides for
additional payments if the restaurants achieve cash flows in excess of
historical levels. As a condition of this agreement, the franchisee filed a
voluntary Chapter 11 petition for bankruptcy protection in the United States
Bankruptcy Court for the Southern District of Florida. The sale is subject to
normal bankruptcy court bidding procedures, obtaining operating licenses and
other third-party consents. On July 30, 2002, the bankruptcy court established
the procedures to control the bidding and sale process for the restaurants and
confirmed September 13th as the date for the final sale approval hearing. If
bankruptcy approval is received, we anticipate closing on this purchase during
the fourth quarter of 2002.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Our revenues are generated from two primary sources:
o Company restaurant sales (food and beverage sales)
o Franchise income
Franchise income consists of franchise restaurant royalties (generally 4% of
each franchise restaurant's monthly gross sales) and franchise fees (which
typically range from $30,000 to $35,000 for each restaurant opened). Beverage
sales include sales of alcoholic beverages, while non-alcoholic beverages are
included in food sales.
Certain expenses relate only to company operated restaurants. These include:
o Food and beverage costs
o Labor costs
o Direct and occupancy costs
o Pre-opening expenses
Other expenses, such as general and administrative and amortization expenses,
relate to both company operated restaurants and franchise operations.
We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal quarters ended June 30, 2002 and July 1, 2001 each contained 13 weeks
and are referred to hereafter as the "2002 quarter" and the "2001 quarter",
respectively. Our 26 week periods ended June 30, 2002 and July 1, 2001 are
referred to hereafter as the "2002 year-to-date period" and the "2001
year-to-date period," respectively.
Application of Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which were
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require us to make estimates and
assumptions that affect the reported amounts in the consolidated financial
statements and notes thereto. Actual results may differ from these estimates,
and such differences may be material to the consolidated financial statements.
We have identified the following accounting policies as critical to the
understanding of our consolidated financial statements (see Note 2 of our
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended December 30, 2001 for a complete discussion of our significant
accounting policies).
Franchise income: Franchise income is deferred until we have performed
substantially all of our obligations as franchisor. Franchise income consists of
franchise royalties and franchise fees. We recognize royalties on a franchisee's
sales in the period in which the sales occur. We also receive a franchise fee
for each restaurant that a franchisee opens. This franchise fee is recognized as
income when the restaurant opens.
12
Property and equipment: Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets. The useful
lives of the assets are based upon management's best expectations. We
periodically review the assets for changes in circumstances which may impact
their useful lives.
Impairment of long-lived assets: We periodically review property and equipment
for impairment using historical cash flows as well as current estimates of
future cash flows and/or appraisals. This assessment process requires the use of
estimates and assumptions which are subject to a significant degree of
judgement. In addition, we periodically assess the recoverability of goodwill
and other intangible assets, which requires us to make assumptions regarding the
future cash flows and other factors to determine the fair value of the assets.
If these assumptions change in the future, we may be required to record
impairment charges for these assets.
Legal and insurance reserves: We are periodically involved in various legal
actions arising in the normal course of business. We are required to assess the
probability of any adverse judgements as well as the potential ranges of any
losses. We determine the required accruals after a careful review of the facts
of each legal action. Our accruals may change in the future due to new
developments in these matters.
We use estimates in the determination of the required accruals for general
liability, workers' compensation and health insurance. These estimates are based
upon a third party's detailed examination of historical and industry claims
experience. These estimates may change in the future and may require us to
revise these accruals.
Employee incentive compensation plans: We have various long-term employee
incentive compensation plans which require us to make estimates to determine our
liability. If performance against the criteria in each plan changes in the
future, we will be required to adjust our liability accordingly.
Receivables: We continually assess the collectibility of our franchise
receivables based on several factors, using estimates based upon specific
information available to us at the time. The allowance for bad debts may change
in the future due to new developments.
We periodically reassess our assumptions and judgements and make adjustments
when significant facts and circumstances dictate. A change in any of the above
estimates could impact our consolidated statements of earnings and the related
asset or liability recorded in the consolidated balance sheets would be adjusted
accordingly. Historically, actual results have not been materially different
than the estimates that are described above.
13
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 30, July 1, June 30, July 1,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Company restaurant sales................................ 87.5% 87.2% 87.8% 87.5%
Franchise income........................................ 12.5 12.8 12.2 12.5
------------ ------------ ------------ ------------
Total operating revenues............................. 100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage....................................... 26.3% 26.9% 26.7% 27.0%
Labor................................................... 32.9 31.8 32.9 31.8
Direct and occupancy.................................... 24.8 25.4 24.6 25.4
Pre-opening expense..................................... 0.2 0.1 0.2 0.1
------------ ------------ ------------ ------------
Total cost of sales.................................. 84.2% 84.2% 84.4% 84.3%
============ ============ ============ ============
General and administrative expenses.......................... 9.6% 9.7% 9.6% 9.6%
Amortization of intangible assets............................ -- 0.8 -- 0.8
Loss on disposition of restaurants and equipment............. 0.4 0.3 0.3 0.2
------------ ------------ ------------ ------------
Operating earnings........................................... 16.4 15.8 16.2 15.7
------------ ------------ ------------ ------------
Other income (expense):
Investment income....................................... 0.2 0.2 0.2 0.2
Interest expense........................................ (0.3) (1.1) (0.3) (1.2)
Other income............................................ 0.2 0.2 0.1 0.1
------------ ------------ ------------ ------------
Total other income (expense)......................... 0.2 (0.7) -- (0.9)
------------ ------------ ------------ ------------
Earnings before income taxes................................. 16.5 15.1 16.3 14.9
Income taxes................................................. 6.0 5.6 5.9 5.5
------------ ------------ ------------ ------------
Net earnings................................................. 10.5% 9.6% 10.3% 9.4%
============ ============ ============ ============
14
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 30, July 1, June 30, July 1,
2002 2001 2002 2001
-------------- -------------- ----------------- ----------------
Number of restaurants:
Company:
Beginning of period........................... 314 287 310 285
Restaurant openings........................... 4 2 8 4
-------------- -------------- ----------------- ----------------
End of period................................. 318 289 318 289
-------------- -------------- ----------------- ----------------
Franchise:
Beginning of period........................... 1,090 1,012 1,082 1,001
Restaurant openings........................... 15 24 24 36
Restaurant closings........................... (2) (1) (3) (2)
-------------- -------------- ----------------- ----------------
End of period................................. 1,103 1,035 1,103 1,035
-------------- -------------- ----------------- ----------------
Total:
Beginning of period........................... 1,404 1,299 1,392 1,286
Restaurant openings........................... 19 26 32 40
Restaurant closings........................... (2) (1) (3) (2)
-------------- -------------- ----------------- ----------------
End of period................................. 1,421 1,324 1,421 1,324
============== ============== ================= ================
Weighted average weekly sales per restaurant:
Company....................................... $ 43,558 $ 43,291 $ 43,398 $ 43,130
Franchise..................................... $ 44,566 $ 42,924 $ 44,328 $ 42,629
Total......................................... $ 44,340 $ 43,004 $ 44,120 $ 42,739
Change in comparable restaurant sales: (1)
Company....................................... 1.4% 3.1% 1.5% 3.3%
Franchise..................................... 3.7% 3.1% 3.9% 3.1%
Total......................................... 3.2% 3.1% 3.3% 3.2%
Total system sales (in thousands)...................... $ 812,707 $ 732,491 $ 1,607,772 $ 1,445,440
- --------
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
15
Company Restaurant Sales. Total company restaurant sales increased $16,858,000
(10%) from $162,035,000 in the 2001 quarter to $178,893,000 in the 2002 quarter
and increased $31,688,000 (10%) from $322,178,000 in the 2001 year-to-date
period to $353,866,000 in the 2002 year-to-date period due primarily to company
restaurant openings and increases in comparable restaurant sales.
Comparable restaurant sales at company restaurants increased by 1.4% and 1.5% in
the 2002 quarter and the 2002 year-to-date period, respectively. Weighted
average weekly sales at company restaurants increased 0.6% from $43,291 in the
2001 quarter to $43,558 in the 2002 quarter and also increased 0.6% from $43,130
in the 2001 year-to-date period to $43,398 in the 2002 year-to-date period.
These increases were due primarily to an increase in the average guest check
resulting from the company's food promotions.
Franchise Income. Overall franchise income increased $1,599,000 (7%) from
$23,885,000 in the 2001 quarter to $25,484,000 in the 2002 quarter and increased
$4,205,000 (9%) from $46,119,000 in the 2001 year-to-date period to $50,324,000
in the 2002 year-to-date period. These increases were due primarily to the
increased number of franchise Applebee's restaurants operating during the 2002
quarter and 2002 year-to-date period and increases in comparable restaurant
sales. Weighted average weekly sales at franchise restaurants increased 3.8% and
4.0% in the 2002 quarter and 2002 year-to-date period, respectively, and
franchise comparable restaurant sales increased 3.7% and 3.9% in the 2002
quarter and 2002 year-to-date period, respectively.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 26.9%
in the 2001 quarter to 26.3% in the 2002 quarter and from 27.0% in the 2001
year-to-date period to 26.7% in the 2002 year-to-date period. The decreases in
both the 2002 quarter and 2002 year-to-date period were due to lower commodity
costs relating to our food promotions and the benefit of certain supply chain
management initiatives implemented in 2001.
Labor costs increased from 31.8% in both the 2001 quarter and the 2001
year-to-date period to 32.9% in both the 2002 quarter and 2002 year-to-date
period. These increases were due primarily to higher costs related to improved
management staffing levels, higher management incentive compensation relating to
a new restaurant management bonus program and higher insurance costs.
Direct and occupancy costs decreased from 25.4% in both the 2001 quarter and the
2001 year-to-date period to 24.8% in the 2002 quarter and 24.6% in the 2002
year-to-date period. The decreases in both periods were due primarily to lower
utility costs as well as a decrease in advertising costs, as a percentage of
sales. The decrease in the 2002 quarter was partially offset by higher packaging
costs relating to our To Go initiative.
General and Administrative Expenses. General and administrative expenses
decreased from 9.7% in the 2001 quarter to 9.6% in the 2002 quarter and were
9.6% in both the 2001 year-to-date period and the 2002 year-to-date period.
General and administrative expenses were impacted in both the 2002 quarter and
2002 year-to-date period by higher legal fees and expenses related to certain
litigation and higher incentive compensation. General and administrative
expenses were lower in both the 2002 quarter and 2002 year-to-date period as a
result of costs incurred in 2001 associated with our purchasing supply chain and
strategic brand assessment projects and the absorption of general and
administrative expenses over a larger revenue base.
16
Amortization of Intangible Assets: Amortization of intangible assets decreased
from $1,462,000 in the 2001 quarter to $52,000 in the 2002 quarter and decreased
from $2,925,000 in the 2001 year-to date period to $190,000 in the 2002
year-to-date period. These decreases were due to the elimination of goodwill
amortization in accordance with SFAS No. 142.
Interest Expense: Interest expense decreased in both the 2002 quarter and the
2002 year-to-date period due primarily to a reduction in our debt levels and
lower interest rates in both periods.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 36.8% in both the 2001 quarter and 2001
year-to-date period to 36.5% in both the 2002 quarter and the 2002 year-to-date
period.
Liquidity and Capital Resources
Our need for capital historically has resulted from the construction and
acquisition of restaurants and the repurchase of our common shares. For the
foreseeable future, this should continue to be the case. In the past, we have
obtained capital through public stock offerings, debt financing, and our ongoing
operations. Income from our ongoing operations includes cash generated from
company and franchise operations, credit from trade suppliers, real estate lease
financing, and landlord contributions to leasehold improvements. We have also
used our common stock as consideration in the acquisition of restaurants. In
addition, we have assumed debt or issued new debt in connection with certain
mergers and acquisitions.
Capital expenditures were $50,086,000 in fiscal year 2001 and $29,545,000 in the
2002 year-to-date period. We currently expect to open approximately 25
restaurants, and capital expenditures are expected to be between $60,000,000 and
$65,000,000 in fiscal 2002, excluding the potential acquisition discussed below.
These expenditures will primarily be for the development of new restaurants,
refurbishment and capital replacement for existing restaurants, and the
enhancement of information systems including a new accounting and human resource
information system. Because we expect to continue to purchase a portion of our
sites, the amount of actual capital expenditures will be dependent upon, among
other things, the proportion of leased versus owned properties. In addition, if
we open more restaurants than we currently anticipate or acquire additional
restaurants, our capital requirements will increase accordingly.
On July 16, 2002, we reached an agreement with an existing franchisee to acquire
the assets of 21 Applebee's restaurants located in the Washington, D.C. area for
$32.8 million in cash, subject to adjustment. The agreement also provides for
additional payments if the restaurants achieve cash flows in excess of
historical levels. As a condition of this agreement, the franchisee filed a
voluntary Chapter 11 petition for bankruptcy protection in the United States
Bankruptcy Court for the Southern District of Florida. The sale is subject to
normal bankruptcy court bidding procedures, obtaining operating licenses and
other third-party consents. On July 30, 2002, the bankruptcy court established
the procedures to control the bidding and sale process for the restaurants and
confirmed September 13th as the date for the final sale approval hearing. If
bankruptcy approval is received, we anticipate closing on this purchase during
the fourth quarter of 2002.
17
Our bank credit agreement provides for a $150,000,000 three-year unsecured
revolving credit facility, of which $25,000,000 may be used for the issuance of
letters of credit. The facility is subject to various covenants and restrictions
which, among other things, require the maintenance of stipulated fixed charge,
leverage and indebtedness to capitalization ratios, as defined, and limit
additional indebtedness and capital expenditures in excess of specified amounts.
Cash dividends are limited to $10,000,000 annually. The facility is subject to
standard other terms, conditions, covenants, and fees. We are currently in
compliance with the covenants contained in our credit agreement.
In February 2001, our Board of Directors authorized the repurchase of up to
$55,000,000 of our common stock through 2001, subject to market conditions and
applicable restrictions imposed by our then-current credit agreement. As of
December 30, 2001, we had $20,600,000 remaining on this authorization. In
February 2002, our Board of Directors extended the 2001 authorization through
2002. During the 2002 year-to-date period, we repurchased 375,000 shares of our
common stock at an average price of $22.20 for an aggregate cost of $8,324,000.
In May 2002, our Board of Directors authorized an additional repurchase of
$75,000,000 of our common stock through May 2005. As of June 30, 2002, we had
$87,300,000 remaining under these authorizations.
As of June 30, 2002, our liquid assets totaled $8,273,000. These assets
consisted of cash and cash equivalents in the amount of $7,778,000 and
short-term investments in the amount of $495,000. The working capital deficit
increased from $29,747,000 as of December 30, 2001 to $40,409,000 as of June 30,
2002. This increase was due primarily to decreases in cash and cash equivalents
due to payments on long-term debt which were partially offset by the redemption
of gift certificates in 2002 sold in 2001. As of June 30, 2002, we had
borrowings of $28,000,000 and standby letters of credit of $5,260,000
outstanding under our $150,000,000 revolving credit facility. We also had a
standby letter of credit for $827,000 outstanding with another financial
institution.
We believe that our liquid assets and cash generated from operations, combined
with borrowings available under our credit facilities, will provide sufficient
funds for our operating, capital and other requirements for the foreseeable
future.
The following table shows our bank debt amortization schedule, our future
capital lease commitments and our future operating lease commitments as of June
30, 2002:
- ----------------------------------------------------------------------------------------------------------------
Financial Commitments (in thousands)
- ----------------------------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
------------ ------------ ------------ ------------ ------------ -------------
Bank Debt..................... $ -- $ -- $ 28,000 $ -- $ -- $ --
Capital Lease Obligations..... $ 351 $ 715 $ 741 $ 767 $ 794 $ 7,536
Operating Leases.............. $ 11,112 $ 14,470 $ 13,537 $ 12,856 $ 12,290 $ 109,377
Financial commitments for 2002 include only payments to be made for the
remaining 26 weeks of fiscal 2002. In addition, we have lease guarantees of
approximately $26,600,000 as of June 30, 2002 (see Note 2 to our Consolidated
Financial Statements).
Inflation
Substantial increases in costs and expenses could impact our operating results
to the extent such increases cannot be passed along to customers. In particular,
increases in food, supplies, labor and operating expenses could have a
significant impact on our operating results. We do not believe that inflation
has materially affected our operating results during the past three years.
18
A majority of our employees are paid hourly rates related to federal and state
minimum wage laws and various laws that allow for credits to that wage. The
Federal government continues to consider an increase in the minimum wage.
Several state governments have increased the minimum wage and other state
governments are also discussing an increased minimum wage. In the past, we have
been able to pass along cost increases to customers through food and beverage
price increases, and we will attempt to do so in the future. We cannot
guarantee, however, that all future cost increases can be reflected in our
prices or that increased prices will be absorbed by customers without at least
somewhat diminishing customer spending in our restaurants.
New Accounting Pronouncement
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" and the accounting and reporting provisions of APB No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS
No. 121, but addresses certain implementation issues associated with that
Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of
SFAS No. 144 did not have a material impact on our consolidated financial
statements.
Forward-Looking Statements
The statements contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section regarding restaurant
development, costs and expenses, capital expenditures and financial commitments
are forward-looking and based on current expectations. There are several risks
and uncertainties that could cause actual results to differ materially from
those described. These risks include but are not limited to the impact of
intense competition in the casual dining segment of the restaurant industry and
our ability to control restaurant operating costs which are impacted by market
changes, minimum wage and other employment laws, food costs and inflation. For a
more detailed discussion of the principal factors that could cause actual
results to be materially different, you should read our current report on Form
8-K which we filed with the Securities and Exchange Commission on July 16, 2002.
We disclaim any obligation to update forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from fluctuations in interest rates and changes in
commodity prices. Our revolving credit facility bears interest at either the
bank's prime rate or LIBOR plus 1.0%, at our option. As of June 30, 2002, the
total amount of debt subject to interest rate fluctuations was $28,000,000 which
was outstanding on our revolving credit facility. A 1% change in interest rates
would result in an increase or decrease in interest expense of $280,000 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.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various legal actions arising in the normal course of
business. These matters include, without limitation, such matters as employment
law related claims and disputes with two international franchisees regarding
disclosures we allegedly made or omitted. In each instance, we believe that we
have meritorious defenses to the allegations made and we are vigorously
defending these claims.
While the resolution of the matters described above may have an impact on the
financial results for the period in which they are resolved, we believe that the
ultimate disposition of these matters will not, individually or in the
aggregate, have a material adverse effect upon our business or consolidated
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on May 9, 2002. The Stockholders
voted on the following matters:
Proposal I. Elect Erline Belton, Eric L. Hansen and Mark S. Hansen as
directors to serve a three-year term expiring in 2005.
Proposal II. Approve an amendment to the Applebee's International, Inc.
Employee Stock Purchase Plan.
Proposal III. Ratify Deloitte & Touche LLP as our independent auditors
for the 2002 fiscal year.
The results of the voting were as follows:
Affirmative Negative Broker
Proposal Votes Votes Abstentions Non-Votes
- ---------------------- ----------------- -------------------- -------------------- ------------------
I (Erline Belton) 33,416,528 89,123 -- --
I (Eric Hansen) 33,416,528 89,123 -- --
I (Mark Hansen) 33,416,528 89,123 -- --
II 33,075,794 372,435 57,421 1
III 32,428,125 1,051,177 25,899 450
Each Proposal received the required affirmative votes and was affirmatively
adopted by the Stockholders.
20
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) We furnished a report on Form 8-K on April 8, 2002 announcing
our presentation at the Banc of America Securities Consumer
Conference.
We filed a report on Form 8-K on April 11, 2002 clarifying
comments made at the Banc of America Securities Consumer
Conference.
We furnished a report on Form 8-K on April 11, 2002 announcing
our presentation at the SunTrust Robinson Humphrey
Institutional Conference.
We furnished a report on Form 8-K on April 19, 2002 announcing
our broadcast of the first quarter 2002 earnings conference
call over the Internet.
We filed a report on Form 8-K on April 25, 2002 reporting
first quarter 2002 earnings.
We filed a report on Form 8-K on April 30, 2002 reporting
April comparable sales.
We filed a report on Form 8-K on May 9, 2002 announcing a
three-for-two stock split.
We furnished a report on Form 8-K on May 13, 2002 announcing
the webcast of the Investor Conferences in New York and
Boston.
We furnished a report on Form 8-K on May 15, 2002 outlining
our future growth strategies and long-term EPS growth
expectations. We also announced that we have increased the
domestic potential of the Applebee's concept.
We filed a report on Form 8-K on May 29, 2002 reporting May
comparable sales.
We furnished a report on Form 8-K on June 11, 2002 announcing
our presentation at the U.S. Bancorp Piper Jaffray Consumer
Conference.
21
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 31, 2002 By: /s/ Lloyd L. Hill
----------------- --------------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: July 31, 2002 By: /s/ Steven K. Lumpkin
----------------- --------------------------------------------
Steven K. Lumpkin
Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)
22
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------- ------------------------------------------------------------------
10.1 Amendment to Employee Stock Purchase Plan.
23