Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 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
incorporation or organization) No.)
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 April
22, 2005 was 81,125,240.
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED MARCH 27, 2005
INDEX
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets as of March 27, 2005
and December 26, 2004........................................ 3
Consolidated Statements of Earnings for the 13 Weeks
Ended March 27, 2005 and March 28, 2004 (as restated)........ 4
Consolidated Statement of Stockholders' Equity for the
13 Weeks Ended March 27, 2005................................ 5
Consolidated Statements of Cash Flows for the 13 Weeks
Ended March 27, 2005 and March 28, 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................ 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 27
Item 4. Controls and Procedures......................................... 27
PART II OTHER INFORMATION
- ------- -----------------
Item 1. Legal Proceedings............................................... 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..... 28
Item 6. Exhibits........................................................ 28
Signatures ......................................................................... 29
Exhibit Index....................................................................... 30
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)
March 27, December 26,
2005 2004
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 6,195 $ 10,642
Short-term investments, at market value..................................... 282 282
Receivables (less allowance for bad debts of $394 in 2005 and $417 in 2004). 43,712 39,152
Receivables related to captive insurance subsidiary......................... 4,163 2,566
Inventories................................................................. 28,755 35,936
Prepaid and other current assets............................................ 15,660 12,079
-------------- -------------
Total current assets..................................................... 98,767 100,657
Property and equipment, net...................................................... 506,072 486,548
Goodwill......................................................................... 117,002 116,344
Restricted assets related to captive insurance subsidiary........................ 18,162 17,386
Other intangible assets, net..................................................... 8,318 8,524
Other assets, net................................................................ 27,429 24,972
-------------- -------------
$ 775,750 $ 754,431
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt........................................... $ 233 $ 222
Notes payable............................................................... 2,000 --
Accounts payable............................................................ 34,811 42,830
Accrued expenses and other current liabilities.............................. 85,829 89,064
Loss reserve and unearned premiums related to captive insurance subsidiary.. 15,168 12,137
Accrued dividends........................................................... -- 4,867
Accrued income taxes........................................................ 15,495 2,578
-------------- -------------
Total current liabilities................................................ 153,536 151,698
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion....................................... 25,412 35,472
Deferred income taxes....................................................... 32,185 28,995
Other non-current liabilities............................................... 43,802 41,539
-------------- -------------
Total non-current liabilities............................................ 101,399 106,006
-------------- -------------
Total liabilities........................................................ 254,935 257,704
-------------- -------------
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.................................................. 228,474 220,897
Unearned compensation....................................................... (4,155) (1,924)
Retained earnings........................................................... 654,972 623,315
-------------- -------------
880,376 843,373
Treasury stock - 27,428,482 shares in 2005 and 27,375,044 shares in 2004,
at cost................................................................. (359,561) (346,646)
-------------- -------------
Total stockholders' equity....................................................... 520,815 496,727
-------------- -------------
$ 775,750 $ 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
--------------------------------
March 27, March 28,
2005 2004
------------- -------------
(as restated)
Revenues:
Company restaurant sales................................ $ 270,458 $ 243,560
Franchise royalties and fees............................ 33,008 30,715
Other franchise income.................................. 1,065 3,115
------------- -------------
Total operating revenues............................. 304,531 277,390
------------- -------------
Cost of company restaurant sales:
Food and beverage....................................... 71,635 63,515
Labor................................................... 88,724 79,655
Direct and occupancy.................................... 66,367 59,342
Pre-opening expense..................................... 1,167 567
------------- -------------
Total cost of company restaurant sales............... 227,893 203,079
------------- -------------
Cost of other franchise income............................... 819 2,937
General and administrative expenses.......................... 26,946 25,422
Amortization of intangible assets............................ 228 86
Loss on disposition of restaurants and equipment............. 297 495
------------- -------------
Operating earnings........................................... 48,348 45,371
------------- -------------
Other income (expense):
Investment income (expense)............................. (41) 223
Interest expense........................................ (337) (344)
Other income............................................ 435 461
------------- -------------
Total other income................................... 57 340
------------- -------------
Earnings before income taxes................................. 48,405 45,711
Income taxes................................................. 16,748 15,975
------------- -------------
Net earnings................................................. $ 31,657 $ 29,736
============= =============
Basic net earnings per common share.......................... $ 0.39 $ 0.36
============= =============
Diluted net earnings per common share........................ $ 0.38 $ 0.35
============= =============
Basic weighted average shares outstanding.................... 80,705 81,986
============= =============
Diluted weighted average shares outstanding.................. 82,375 84,628
============= =============
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 .................................. -- -- -- -- 31,657 -- 31,657
Purchases of treasury stock ................... -- -- -- -- -- (18,657) (18,657)
Stock options exercised and related tax benefit -- -- 4,975 -- -- 4,590 9,565
Shares issued under employee benefit plans .... -- -- 617 -- -- 410 1,027
Restricted shares awarded under equity
incentive plans, net of cancellations ...... -- -- 1,985 (2,727) -- 742 --
Amortization of unearned compensation
relating to restricted shares ............... -- -- -- 496 -- -- 496
------- --------- --------- ---------- ---------- ---------- ------------
Balance, March 27, 2005 .......................... 108,503 $ 1,085 $ 228,474 $ (4,155) $ 654,972 $(359,561) $ 520,815
======= ========= ========= ========== ========== ========== ============
See notes to condensed consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
13 Weeks Ended
--------------------------------
March 27, March 28,
2005 2004
-------------- -------------
(as restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .......................................................................... $ 31,657 $ 29,736
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization ...................................................... 12,531 11,189
Amortization of intangible assets .................................................. 228 86
Amortization of unearned compensation .............................................. 496 338
Other amortization ................................................................. 63 39
Deferred income tax provision ...................................................... 1,659 246
Loss on disposition of restaurants and equipment ................................... 297 495
Income tax benefit from exercise of stock options .................................. 2,638 3,108
Changes in assets and liabilities (exclusive of effects of acquisitions):
Receivables ........................................................................ (4,560) (3,939)
Receivables related to captive insurance subsidiary ................................ (1,597) (7,705)
Inventories ........................................................................ 7,181 (9,510)
Prepaid and other current assets ................................................... (2,050) (4,163)
Accounts payable ................................................................... (8,019) 3,604
Accrued expenses and other current liabilities ..................................... (5,887) (17,547)
Loss reserve and unearned premiums related to captive insurance
subsidiary ....................................................................... 3,031 12,378
Income taxes ....................................................................... 12,917 14,236
Other non-current liabilities ...................................................... 6 643
Other .............................................................................. (282) (467)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................................... 50,309 32,767
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................................... (24,619) (13,796)
Restricted assets related to captive insurance subsidiary ............................. (776) (3,074)
Acquisition of restaurants ............................................................ (5,742) --
Purchases of short-term investments ................................................... -- (253)
Other investing activities ............................................................ -- (966)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES .............................................. (31,137) (18,089)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock ........................................................... (18,657) (32,039)
Dividends paid ........................................................................ (4,867) (3,863)
Issuance of common stock upon exercise of stock options ............................... 6,927 4,971
Shares issued under employee benefit plans ............................................ 1,027 2,915
Net debt proceeds (payments) .......................................................... (8,049) 4,959
-------- --------
NET CASH USED BY FINANCING ACTIVITIES .............................................. (23,619) (23,057)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................................. (4,447) (8,379)
CASH AND CASH EQUIVALENTS, beginning of period ............................................. 10,642 17,867
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................................... $ 6,195 $ 9,488
======== ========
See notes to condensed consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
13 Weeks Ended
------------------------------------
March 27, March 28,
2005 2004
---------------- ----------------
(as restated)
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the 13 week period for:
Income taxes........................................................ $ 626 $ 114
================ ================
Interest............................................................ $ 210 $ 173
================ ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In April 2005, we finalized the acquisition of eight Applebee's restaurants that
were closed in 2004 by a former franchisee. We paid approximately $5,700,000 in
cash in the first quarter of fiscal 2005 and paid approximately $2,300,000 in
cash in the second quarter of fiscal 2005.
We issued restricted common stock, net of forfeitures, of $2,727,000 and
$1,497,000 for the 13 weeks ended March 27, 2005 and March 28, 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 $2,257,000 and $1,888,000 for the 13
weeks ended March 27, 2005 and March 28, 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 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 previously
reported property and equipment in the restated consolidated balance sheets and
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 statement of earnings for the 13 weeks ended
March 28, 2004. All amounts, except per share amounts, are in thousands.
Consolidated Statement of Earnings
13 Weeks Ended
March 28, 2004 13 Weeks Ended
(As previously Restatement March 28, 2004
reported) amounts (As restated)
Revenues: ------------- ---------- --------------
Company restaurant sales........................................ $ 243,560 $ -- $ 243,560
Franchise royalties and fees .................................... 30,772 (57) 30,715
Other franchise income .......................................... 3,115 -- 3,115
--------- --------- ---------
Total operating revenue ...................................... 277,447 (57) 277,390
--------- --------- ---------
Cost of company restaurant sales:
Food and beverage ............................................... 63,515 -- 63,515
Labor ........................................................... 79,659 (4) 79,655
Direct and occupancy ............................................ 59,069 273 59,342
Pre-opening expense ............................................. 550 17 567
--------- --------- ---------
Total cost of company restaurant sales ....................... 202,793 286 203,079
--------- --------- ---------
Cost of other franchise income ....................................... 2,937 -- 2,937
General and administrative expenses .................................. 25,517 (95) 25,422
Amortization of intangible assets .................................... 86 -- 86
Loss on disposition of restaurants and equipment ..................... 495 -- 495
--------- --------- ---------
Operating earnings ................................................... 45,619 (248) 45,371
--------- --------- ---------
Other income (expense):
Investment income ............................................... 223 -- 223
Interest expense ................................................ (344) -- (344)
Other income .................................................... (109) 570 461
--------- --------- ---------
Total other income (expense) ................................. (230) 570 340
--------- --------- ---------
Earnings before income taxes ......................................... 45,389 322 45,711
Income taxes ......................................................... 15,886 89 15,975
--------- --------- ---------
Net earnings......................................................... $ 29,503 $ 233 $ 29,736
========= ========= =========
Basic net earnings per common share.................................. $ 0.36 $ -- $ 0.36
========= ========= =========
Diluted net earnings per common share................................ $ 0.35 $ -- $ 0.35
========= ========= =========
Basic weighted average shares outstanding ............................ 81,986 81,986
========= =========
Diluted weighted shares outstanding .................................. 84,628 84,628
========= =========
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 ("APB") Opinion No. 25. Opinion No. 25 requires compensation
cost to be recognized based on the excess, if any, between the quoted market
price of the stock at the date of grant and the amount an employee must pay to
acquire the stock. All options awarded under all of our plans are granted with
an exercise price equal to the fair market value on the date of the grant. The
following table presents the effect on our net earnings and earnings per share
had we adopted the fair value method of accounting for stock-based compensation
under SFAS No. 123, "Accounting for Stock-Based Compensation" (in thousands,
except for per share amounts).
9
13 Weeks Ended
----------------------------------
March 27, March 28,
2005 2004
---------------- ----------------
(as restated)
Net earnings, as reported........................................ $ 31,657 $ 29,736
Add: Stock-based compensation expense included
in net earnings, net of related taxes........................ 282 298
Less: Total stock-based employee compensation expense
determined under fair value based methods for all
awards, net of related taxes................................. 1,604 2,576
---------------- ----------------
Pro forma net earnings........................................... $ 30,335 $ 27,458
================ ================
Basic net earnings per common share, as reported................. $ 0.39 $ 0.36
================ ================
Basic net earnings per common share, pro forma................... $ 0.38 $ 0.33
================ ================
Diluted net earnings per common share, as reported............... $ 0.38 $ 0.35
================ ================
Diluted net earnings per common share, pro forma................. $ 0.37 $ 0.32
================ ================
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 March 27, 2005, we
have outstanding lease guarantees of approximately $18,800,000. 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
$17,700,000. We have not recorded a liability as of March 27, 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 March 27,
2005, there were loans outstanding to four franchisees aggregating 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
limited guarantee of certain loans advanced under this program. As of March 27,
2005, there were loans outstanding to two franchisees aggregating approximately
$14,100,000 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 in our consolidated balance sheet as of March 27, 2005.
10
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the employee
resigns or is terminated related to a change in control. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of March 27, 2005, we would have been required to make
payments totaling approximately $13,200,000. 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 $6,900,000 if such officers had been
terminated as of March 27, 2005.
5. Net Earnings Per Share
We compute basic net earnings per share by dividing earnings available to common
shareholders by the weighted average number of common shares outstanding for the
reporting period. Diluted net 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 net earnings per
share. All amounts in the chart, except per share amounts, are expressed in
thousands.
13 Weeks Ended
----------------------------------------------
March 27, March 28,
2005 2004
---------------------- ----------------------
(as restated)
Net earnings............................................ $ 31,657 $ 29,736
====================== ======================
Basic weighted average shares outstanding............... 80,705 81,986
Dilutive effect of stock options and
equity-based compensation.......................... 1,670 2,642
---------------------- ----------------------
Diluted weighted average shares outstanding............. 82,375 84,628
====================== ======================
Basic net earnings per common share..................... $ 0.39 $ 0.36
====================== ======================
Diluted net earnings per common share................... $ 0.38 $ 0.35
====================== ======================
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. There were approximately 167,000
and 21,000 of these options for the 13 weeks ended March 27, 2005 and March 28,
2004, respectively.
6. Acquisitions
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
11
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. The restaurants will be re-opened throughout fiscal 2005
as they are remodeled. The first restaurant opened in March 2005. Our condensed
consolidated financial statements reflect these restaurants subsequent to the
date of acquisition. Due to the administrative and training costs to re-enter
this market, this acquisition is expected to be slightly dilutive to our net
earnings for fiscal 2005.
On April 26, 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. Our financial statements reflect the results of operations
for these restaurants subsequent to the date of acquisition. 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. This
transaction did not have a significant impact on our net earnings for fiscal
2004. Company restaurant sales for these restaurants would have been
approximately $6,600,000 for the 13 weeks ended March 28, 2004 had the
acquisition occurred at the beginning of that period.
7. Goodwill and Other Intangible Assets
Changes in goodwill are summarized below (in thousands):
13 Weeks Ended 52 Weeks Ended
March 27, December 26,
2005 2004
Carrying amount, beginning of the year.................. $ 116,344 $ 105,326
Goodwill acquired during the period..................... 658 11,018
---------------------- ----------------------
Goodwill amount, end of period.......................... $ 117,002 $ 116,344
====================== ======================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill
and Other Intangible Assets," are summarized below (in thousands):
March 27, 2005
---------------------------------------------------------
Gross Carrying Accumulated Net Book
Amount Amortization Value
------------------ ---------------- -----------------
Amortized intangible assets:
Franchise interest and rights ........... $ 6,371 $ 5,647 $ 724
Lease acquisition costs ................. 4,911 415 4,496
Noncompete agreement .................... 350 306 44
------------------ --------------- -----------------
Total ....................................... $11,632 $ 6,106 $ 5,526
================== =============== =================
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
================== =============== =================
12
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 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 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.
8. 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 $3,500,000 and
$1,900,000 as of March 27, 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 $17,400,000 and $16,700,000 as of
March 27, 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 $22,600,000 and $19,600,000 as of March
27, 2005 and December 26, 2004, respectively. Approximately $7,500,000
in both periods is included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $1,700,000 and
$1,000,000 as of March 27, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
13
9. Treasury Shares
As of March 27, 2005, we had approximately 27,428,000 shares held in treasury. A
reconciliation of our treasury shares for the 13 weeks ended March 27, 2005 is
provided below (shares in thousands):
Treasury
Shares
---------------
Balance as of December 26, 2004........................ 27,375
Purchases of treasury stock............................ 728
Stock options exercised................................ (531)
Shares issued under employee benefit plans............. (47)
Restricted shares awarded under equity incentive
plans.............................................. (97)
---------------
Balance as of March 27, 2005........................... 27,428
===============
10. New Accounting Pronouncements
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 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. This new Standard, as amended, will be effective for us beginning in
fiscal 2006. We are evaluating the impact of this Standard on our consolidated
financial statements.
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," which refers to a legal obligation to perform an asset retirement
activity even if the timing and/or settlement are 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 us no later than the end of our 2005 fiscal year. We are
evaluating the impact of FIN 47 on our consolidated financial statements.
11. Subsequent Event
On April 12, 2005, we announced that we have reached an agreement with a
franchisee to acquire the assets of 12 Applebee's restaurants in Missouri,
Kansas and Arkansas for approximately $39,500,000 in cash at closing, subject to
adjustment pursuant to agreed upon prorations and adjustments. This acquisition
is expected to close in the second quarter of fiscal 2005, subject to obtaining
operating licenses and other third-party consents. This transaction is expected
to be slightly accretive to our net earnings for fiscal 2005.
14
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 the first
quarter of fiscal 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 quarters 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
Fiscal Quarter Number
Fiscal Quarter End of Weeks
- ------------------- -------------------------- -----------------
2004 Quarter March 28, 2004 13
2005 Quarter March 27, 2005 13
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 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:
o Food and beverage costs
o Labor costs
o Direct and occupancy costs
o Pre-opening expenses
15
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 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 nearly 1,700
system-wide restaurants open as of March 27, 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, we
opened 26 restaurants, including 13 company and 13 franchise
restaurants. We have opened at least 100 restaurants each year for the
past 12 fiscal years. In fiscal 2005, we currently expect to open at
least 135 restaurants, 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. Company, franchise
and system-wide comparable sales increased 0.3%, 4.9% and 3.7%,
respectively, in the 2005 quarter. We have had 27 consecutive quarters
of positive system-wide comparable sales growth. We currently expect
system-wide comparable restaurant sales to increase by at least 3%
percent in fiscal 2005, with results expected to accelerate in the
latter half of the year as comparisons 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 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
16
restaurant sales. Company restaurant margin was 15.7% in the 2005
quarter and we currently expect that our full year fiscal 2005 margin
will be similar to the full year fiscal 2004 margin of 15.6%. Company
restaurant margin is 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 nine percent.
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 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.
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
17
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
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. The restaurants will be
re-opened throughout fiscal 2005 as they are remodeled. The first restaurant
opened in March 2005. Our condensed consolidated financial statements reflect
these restaurants subsequent to the date of acquisition. Due to the
administrative and training costs to re-enter this market, this acquisition is
expected to be slightly dilutive to our net earnings for fiscal 2005.
On April 26, 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. Our financial statements reflect the results of operations
for these restaurants subsequent to the date of acquisition. The
18
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. This transaction did not have a significant impact on our net earnings
for fiscal 2004. Company restaurant sales for these restaurants would have been
approximately $6,600,000 for the 13 weeks ended March 28, 2004 had the
acquisition occurred at the beginning of that period.
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 $3,500,000 and
$1,900,000 as of March 27, 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 $17,400,000 and $16,700,000 as of
March 27, 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 $22,600,000 and $19,600,000 as of March
27, 2005 and December 26, 2004, respectively. Approximately $7,500,000
in both periods is included in other non-current liabilities.
o Other miscellaneous items, net, of approximately $1,700,000 and
$1,000,000 as of March 27, 2005 and December 26, 2004, respectively,
included in several line items in the consolidated balance sheets.
19
Results of Operations
The following table contains information derived from our consolidated
statements of earnings expressed as a percentage of total operating revenues,
except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended
----------------------------------
March 27, March 28,
2005 2004
--------------- ---------------
(as restated)
Revenues:
Company restaurant sales.................................... 88.8% 87.8%
Franchise royalties and fees................................ 10.8 11.1
Other franchise income...................................... 0.3 1.1
--------------- ---------------
Total operating revenues................................. 100.0% 100.0%
=============== ===============
Cost of sales (as a percentage of company restaurant sales):
Food and beverage........................................... 26.5% 26.1%
Labor....................................................... 32.8 32.7
Direct and occupancy........................................ 24.5 24.4
Pre-opening expense......................................... 0.4 0.2
--------------- ---------------
Total cost of sales...................................... 84.3% 83.4%
=============== ===============
Cost of other franchise income (as a percentage of other
franchise income)........................................... 76.9% 94.3%
General and administrative expenses.............................. 8.8 9.2
Amortization of intangible assets................................ 0.1 --
Loss on disposition of restaurants and equipment................. 0.1 0.2
--------------- ---------------
Operating earnings............................................... 15.9 16.4
--------------- ---------------
Other income (expense):
Investment income........................................... -- 0.1
Interest expense............................................ (0.1) (0.1)
Other income................................................ 0.1 0.2
--------------- ---------------
Total other income....................................... -- 0.1
--------------- ---------------
Earnings before income taxes..................................... 15.9 16.5
Income taxes..................................................... 5.5 5.8
--------------- ---------------
Net earnings..................................................... 10.4% 10.7%
=============== ===============
20
The following table sets forth certain financial information and other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:
13 Weeks Ended
-----------------------------------------
March 27, March 28,
2005 2004
------------------- -------------------
Number of restaurants:
Company:
Beginning of period........................................ 424 383
Restaurant openings........................................ 13 8
------------------- -------------------
End of period.............................................. 437 391
------------------- -------------------
Franchise:
Beginning of period........................................ 1,247 1,202
Restaurant openings........................................ 13 11
Restaurant closings........................................ (3) (1)
------------------- -------------------
End of period.............................................. 1,257 1,212
------------------- -------------------
Total:
Beginning of period........................................ 1,671 1,585
Restaurant openings........................................ 26 19
Restaurant closings........................................ (3) (1)
------------------- -------------------
End of period.............................................. 1,694 1,603
=================== ===================
Weighted average weekly sales per restaurant:
Company.................................................... $ 48,193 $ 48,402
Franchise.................................................. $ 51,277 $ 48,769
Total...................................................... $ 50,485 $ 48,680
Change in comparable restaurant sales:(1)
Company.................................................... 0.3% 8.7%
Franchise.................................................. 4.9% 8.0%
Total...................................................... 3.7% 8.2%
Total operating revenues (in thousands):
Company restaurant sales................................... $ 270,458 $ 243,560
Franchise royalties and fees(2)............................ 33,008 30,715
Other franchise income(3).................................. 1,065 3,115
------------------ -------------------
Total...................................................... $ 304,531 $ 277,390
================== ===================
- ---------------------------
(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 $832,997 and $764,116 in the 2005 quarter and the 2004 quarter,
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.
21
2005 Quarter Compared With 2004 Quarter
Company Restaurant Sales. Total company restaurant sales increased $26,898,000
(11%) from $243,560,000 in the 2004 quarter to $270,458,000 in the 2005 quarter.
Company restaurant openings contributed approximately 9% of the increase in
total company restaurant sales in the 2005 quarter. The acquisition of 10
restaurants in Southern California in April 2004 contributed approximately 3% of
the increase in company restaurant sales. These increases were partially offset
by the weighted average weekly sales decrease in the 2005 quarter as described
below.
Comparable restaurant sales at company restaurants increased by 0.3% in the 2005
quarter. Weighted average weekly sales at company restaurants decreased 0.4%
from $48,402 in the 2004 quarter to $48,193 in the 2005 quarter. The increase in
comparable restaurant sales was due primarily to our Carside To Go(TM)
initiative and menu price increases of approximately 1.0% in the 2005 quarter.
To Go sales mix increased from 9.4% of company restaurant sales in the 2004
quarter to 10.0% of company restaurant sales in the 2005 quarter. Both
comparable restaurant sales and weighted average weekly sales at company
restaurants were negatively impacted by decreases in guest traffic.
Franchise Royalties and Fees. Franchise royalties and fees increased $2,293,000
(7%) from $30,715,000 in the 2004 quarter to $33,008,000 in the 2005 quarter due
primarily to the increased number of franchise restaurants operating during the
2005 quarter as compared to the 2004 quarter and increases in franchisee
comparable restaurant sales. Weighted average weekly sales and franchise
comparable restaurant sales increased 5.1% and 4.9%, respectively, in the 2005
quarter due in part to the implementation of the Carside To Go(TM) program in
most franchise restaurants.
Other Franchise Income. Other franchise income decreased $2,050,000 (66%) from
$3,115,000 in the 2004 quarter to $1,065,000 in the 2005 quarter due primarily
to fewer franchisee participants in our captive insurance program resulting from
the reduction of the types of insurance coverage plans offered. Franchisee
premiums are included in other franchise income ratably over the policy year.
Cost of Company Restaurant Sales. Food and beverage costs increased from 26.1%
in the 2004 quarter to 26.5% in the 2005 quarter, due to higher commodity costs
which were partially offset by menu price increases of 1.0% and better food cost
control.
Labor costs increased slightly from 32.7% in the 2004 quarter to 32.8% in the
2005 quarter. This increase was due to higher management and hourly wage rates
and was partially offset by lower management incentive compensation.
Direct and occupancy costs increased slightly from 24.4% in the 2004 quarter to
24.5% in the 2005 quarter due primarily to higher utilities, rent and
depreciation expense, as a percentage of sales, which were partially offset by
lower advertising costs, as a percentage of sales.
Pre-Opening Expenses. Pre-opening expenses increased from 0.2% in the 2004
quarter to 0.4% in the 2005 quarter due primarily to the number of restaurant
openings in the 2005 quarter versus the 2004 quarter.
Cost of Other Franchise Income. Cost of other franchise income decreased
$2,118,000 (72%) from $2,937,000 in the 2004 quarter to $819,000 in the 2005
quarter due primarily to fewer franchisee participants in our captive insurance
program resulting from the reduction of the types of insurance coverage plans
offered.
22
General and Administrative Expenses. General and administrative expenses
decreased from 9.2% in the 2004 quarter to 8.8% in the 2005 quarter due
primarily to the absorption of general and administrative expenses over a larger
revenue base which was partially offset by higher compensation expense due to
staffing levels.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, decreased from 34.9% in the 2004 quarter to 34.6% in the 2005
quarter due to a reduction in state and local income taxes.
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. 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. The following table presents a summary of our cash flows for the
2005 and 2004 quarter (in thousands):
2005 Quarter 2004 Quarter
---------------- ----------------
(as restated)
Net cash provided by operating activities.......... $ 50,309 $ 32,767
Net cash used by investing activities.............. (31,137) (18,089)
Net cash used by financing activities.............. (23,619) (23,057)
---------------- ----------------
Net decrease in cash and cash equivalents.......... $ (4,447) $ (8,379)
================ ================
Capital expenditures were $13,796,000 in the 2004 quarter and $24,619,000 in the
2005 quarter. In fiscal 2005, we currently expect to open at least 50 company
restaurants, and capital expenditures excluding franchise acquisitions are
expected to be between $140,000,000 and $150,000,000 including the costs to
acquire and re-open eight 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 restaurants than we currently
anticipate or acquire additional restaurants, our capital requirements will
increase accordingly.
On April 12, 2005, we announced that we have reached an agreement with a
franchisee to acquire the assets of 12 Applebee's restaurants in Missouri,
Kansas and Arkansas for approximately $39,500,000 in cash at closing, subject to
adjustment pursuant to agreed upon prorations and adjustments. This acquisition
is expected to close in the second quarter of fiscal 2005, subject to obtaining
operating licenses and other third-party consents.
23
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 March 27, 2005, we
are in compliance with the covenants contained in our credit agreement. As of
March 27, 2005, we had borrowings of $22,000,000, standby letters of credit of
$12,000,000 outstanding and approximately $116,000,000 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 quarter, we repurchased 728,300 shares of our common stock at an average
price of $25.62 for an aggregate cost of $18,700,000. As of March 27, 2005, we
had $131,300,000 remaining under our repurchase authorization.
As of March 27, 2005, our liquid assets totaled $6,477,000. These assets
consisted of cash and cash equivalents in the amount of $6,195,000 and
short-term investments in the amount of $282,000. The working capital deficit
increased from $51,041,000 as of December 26, 2004 to $54,769,000 as of March
27, 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 in the 2005 quarter and was partially offset by the redemption of gift
cards in the 2005 quarter 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.
24
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 March 27, 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)....................... $ 23,516 $ 2,128 $ 184 $ 20,092 $ 1,112
Capital Lease Obligations....................... 8,910 774 1,630 1,746 4,760
Operating Leases (2)............................ 347,590 24,272 48,562 48,824 225,932
Purchase Obligations - Company (3).............. 121,936 93,492 17,230 11,214 --
Purchase Obligations - Franchise.(4)............ 209,634 153,574 33,510 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 $18,800,000 as of March
27, 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 $17,700,000. We have not recorded a
liability for these guarantees as of March 27, 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 March 27, 2005, we would have been required to make
payments totaling approximately $13,200,000. 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 $6,900,000 if such officers had been
terminated as of March 27, 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 March 27, 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
limited guarantee of certain loans advanced under this program. As of March 27,
2005, there were loans outstanding to two franchisees for approximately
$14,100,000 under this program. The fair value of our guarantees under these two
financing programs was less than
25
$100,000 and is recorded in non-current liabilities in our consolidated balance
sheet as of March 27, 2005.
New Accounting Pronouncements
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 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. This new Standard, as amended, will be effective for us beginning in
fiscal 2006. We are evaluating the impact of this Standard on our consolidated
financial statements.
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," which refers to a legal obligation to perform an asset retirement
activity even if the timing and/or settlement are 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 us no later than the end of our 2005 fiscal year. We are
evaluating the impact of FIN 47 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, 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, 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.
26
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 March 27, 2005, the
total amount of debt subject to interest rate fluctuations was $22,000,000 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 $220,000 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 March 27, 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.
27
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 Value of
Average Total Number of Shares Shares that May Yet Be
Total Number Price Purchased as Part of Purchased Under the Plans
of Shares Paid Per Publicly Announced or Programs
Period Purchased Share Plans or Programs (in thousands)
- ---------------------------- -------------- ---------- ------------------------- ---------------------------
December 27, 2004 through
January 26, 2005 728,300 $25.62 728,300 $131,377
- ---------------------------- -------------- ---------- ------------------------- ---------------------------
January 27, 2005 through
February 26, 2005 7,066(2) $28.30 -- $131,377
- ---------------------------- -------------- ---------- ------------------------- ---------------------------
February 27, 2005 through
March 27, 2005 -- -- -- $131,377
- ---------------------------- -------------- ---------- ------------------------- ---------------------------
Total 735,366 728,300
============================ ============== ========== ========================= ===========================
(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) Represents shares received as partial payment for shares issued under stock
option plans.
Item 6. Exhibits
The Exhibits listed on the accompanying Exhibit Index are filed as part of this
report.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: April 27, 2005 By: /s/ Lloyd L. Hill
------------------------ -------------------------------------------
Lloyd L. Hill
Director, Chairman of the Board and Chief
Executive Officer
(principal executive officer)
Date: April 27, 2005 By: /s/ Steven K. Lumpkin
------------------------ -------------------------------------------
Steven K. Lumpkin
Director, Executive Vice President, Chief
Financial Officer and Treasurer
(principal financial officer)
Date: April 27, 2005 By: /s/ Beverly O. Elving
------------------------ -------------------------------------------
Beverly O. Elving
Vice President and Controller
(principal accounting officer)
29
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- --------------------------------------------------------------
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
30