UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 000-17962
-----------------
Applebee's International, Inc.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1461763
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4551 W. 107th Street, Suite 100, Overland Park, Kansas 66207
-------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
(913) 967-4000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------ ------
The number of shares of the registrant's common stock outstanding as of October
25, 2001 was 37,040,324.
1
APPLEBEE'S INTERNATIONAL, INC.
FORM 10-Q
FISCAL QUARTER ENDED SEPTEMBER 30, 2001
INDEX
Page
Part I Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000................................................................ 3
Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
Ended September 30, 2001 and September 24, 2000...................................... 4
Consolidated Statement of Stockholders' Equity for the
39 Weeks Ended September 30, 2001.................................................... 5
Consolidated Statements of Cash Flows for the 39 Weeks
Ended September 30, 2001 and September 24, 2000...................................... 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.............................. 18
Part II Other Information
Item 1. Legal Proceedings....................................................................... 19
Item 6. Exhibits and Reports on Form 8-K........................................................ 19
Signatures ................................................................................................. 20
Exhibit Index............................................................................................... 21
2
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
September 30, December 31,
2001 2000
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 13,372 $ 10,763
Short-term investments, at market value (amortized cost of $926 in 2001 and
$1,250 in 2000)............................................................. 963 1,312
Receivables (less allowance for bad debts of $2,740 in 2001 and $2,295 in 2000) 19,969 19,760
Inventories.................................................................... 9,948 12,616
Prepaid and other current assets............................................... 8,633 6,389
-------------- -------------
Total current assets........................................................ 52,885 50,840
Property and equipment, net......................................................... 327,440 314,216
Goodwill, net....................................................................... 79,290 83,265
Franchise interest and rights, net.................................................. 2,574 2,949
Other assets........................................................................ 22,351 20,437
-------------- -------------
$ 484,540 $ 471,707
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................................. $ 818 $ 894
Accounts payable............................................................... 22,867 26,556
Accrued expenses and other current liabilities................................. 61,012 62,511
Accrued dividends.............................................................. -- 2,774
Accrued income taxes........................................................... 10,954 1,100
-------------- -------------
Total current liabilities................................................... 95,651 93,835
-------------- -------------
Non-current liabilities:
Long-term debt - less current portion.......................................... 79,121 90,461
Deferred income taxes.......................................................... 100 4,097
Other non-current liabilities.................................................. 5,599 1,596
-------------- -------------
Total non-current liabilities............................................... 84,820 96,154
-------------- -------------
Total liabilities........................................................... 180,471 189,989
-------------- -------------
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 - 48,225,358 shares.................................................. 482 482
Additional paid-in capital..................................................... 177,886 172,037
Retained earnings.............................................................. 345,130 293,772
Accumulated other comprehensive income (loss), net of income taxes ............ (2,595) 39
-------------- -------------
520,903 466,330
Treasury stock - 11,394,299 shares in 2001 and 10,395,795 shares in 2000, at
cost........................................................................ (216,834) (184,612)
-------------- -------------
Total stockholders' equity.................................................. 304,069 281,718
-------------- -------------
$ 484,540 $ 471,707
============== =============
See notes to consolidated financial statements.
3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share amounts)
13 Weeks Ended 39 Weeks Ended
------------------------------ ------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
------------- -------------- ------------- -------------
Revenues:
Company restaurant sales.................... $ 164,238 $ 151,038 $ 486,416 $ 444,398
Franchise income............................ 23,787 21,252 69,906 61,787
------------- -------------- ------------- -------------
Total operating revenues................. 188,025 172,290 556,322 506,185
------------- -------------- ------------- -------------
Cost of company restaurant sales:
Food and beverage........................... 44,489 41,408 131,427 120,789
Labor....................................... 52,864 47,703 155,297 140,825
Direct and occupancy........................ 41,459 38,005 123,322 109,760
Pre-opening expense......................... 632 322 899 831
------------- -------------- ------------- -------------
Total cost of company restaurant sales... 139,444 127,438 410,945 372,205
------------- -------------- ------------- -------------
General and administrative expenses.............. 19,197 16,224 54,448 48,569
Amortization of intangible assets................ 1,463 1,460 4,388 4,366
Loss on disposition of restaurants and equipment. 329 231 1,087 906
------------- -------------- ------------- -------------
Operating earnings............................... 27,592 26,937 85,454 80,139
------------- -------------- ------------- -------------
Other income (expense):
Investment income........................... 479 389 1,251 1,105
Interest expense............................ (1,831) (2,225) (6,231) (6,856)
Other income (expense)...................... 322 (79) 797 342
------------- -------------- ------------- -------------
Total other expense...................... (1,030) (1,915) (4,183) (5,409)
------------- -------------- ------------- -------------
Earnings before income taxes..................... 26,562 25,022 81,271 74,730
Income taxes..................................... 9,776 9,208 29,908 27,501
------------- -------------- ------------- -------------
Net earnings..................................... $ 16,786 $ 15,814 $ 51,363 $ 47,229
============= ============== ============= =============
Basic net earnings per common share.............. $ 0.45 $ 0.40 $ 1.39 $ 1.19
============= ============== ============= =============
Diluted net earnings per common share............ $ 0.44 $ 0.40 $ 1.36 $ 1.18
============= ============== ============= =============
Basic weighted average shares outstanding........ 36,911 39,147 36,980 39,729
============= ============== ============= =============
Diluted weighted average shares outstanding...... 37,880 39,280 37,824 39,940
============= ============== ============= =============
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
-------------- ---------- ------------ ------------ -------------- ---------- ---------------
alance, December 31, 2000.......... 48,225,358 $ 482 $ 172,037 $ 293,772 $ 39 $(184,612) $ 281,718
Comprehensive income:
Net earnings.................. -- -- -- 51,363 -- -- 51,363
Change in unrealized gain on
short-term investments,
net of income taxes......... -- -- -- -- (16) -- (16)
Transition adjustment related
to financial instruments,
net of taxes................ -- -- -- -- (250) -- (250)
Loss on financial
instruments, net of taxes... -- -- -- -- (2,368) -- (2,368)
-------------- ---------- ------------ ------------ -------------- ----------- --------------
Total comprehensive income...... -- -- -- 51,363 (2,634) -- 48,729
-------------- ---------- ------------ ------------ -------------- ----------- --------------
Purchases of treasury stock..... -- -- -- -- -- (44,987) (44,987)
Stock options exercised and
related tax benefit........... -- -- 4,772 -- -- 11,294 16,066
Shares issued under employee
stock and 401(k) plans........ -- -- 716 -- -- 1,141 1,857
Restricted stock shares awarded
under equity incentive plan,
net of cancellations.......... -- -- (202) -- -- 330 128
Unearned compensation relating
to restricted shares.......... -- -- 203 -- -- -- 203
Notes receivable from officers
for stock sales............... -- -- 360 -- -- -- 360
Dividends paid for fractional
shares........................ -- -- -- (5) -- -- (5)
-------------- ---------- ------------ ------------ -------------- ----------- --------------
Balance, September 30, 2001........ 48,225,358 $ 482 $ 177,886 $ 345,130 $ (2,595) $(216,834) $ 304,069
============== ========== ============ ============ ============== =========== ==============
See notes to consolidated financial statements.
5
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
39 Weeks Ended
-----------------------------------
September 30, September 24,
2001 2000
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings..................................................... $ 51,363 $ 47,229
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization................................. 23,544 21,999
Amortization of intangible assets............................. 4,388 4,366
Amortization of deferred financing costs...................... 544 537
Deferred income tax benefit (provision)....................... (3,503) 1,310
Loss on disposition of restaurants and equipment.............. 1,087 906
Changes in assets and liabilities:
Receivables................................................... (209) (4,851)
Inventories................................................... 2,668 (619)
Prepaid and other current assets.............................. (1,205) (4,266)
Accounts payable.............................................. (3,689) 12,692
Accrued expenses and other current liabilities................ (471) 1,548
Accrued income taxes.......................................... 9,854 (303)
Other non-current liabilities................................. (140) (83)
Income tax benefit from exercise of options................... 3,017 110
Other......................................................... (1,897) (953)
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 85,351 79,622
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................. (38,181) (30,680)
Purchases of short-term investments.............................. (149) (100)
Maturities and sales of short-term investments................... 474 1,050
Equity investment in unaffiliated company........................ -- (2,000)
Proceeds from sale of restaurants and equipment.................. 433 11
--------------- ----------------
NET CASH USED BY INVESTING ACTIVITIES......................... (37,423) (31,719)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock...................................... (44,987) (42,167)
Dividends paid................................................... (2,779) (2,660)
Issuance of common stock upon exercise of stock options.......... 13,049 5,281
Shares sold under employee stock purchase plan................... 828 892
Payments on long-term debt....................................... (11,430) (2,556)
--------------- ----------------
NET CASH USED BY FINANCING ACTIVITIES......................... (45,319) (41,210)
--------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................. 2,609 6,693
CASH AND CASH EQUIVALENTS, beginning of period........................ 10,763 1,427
--------------- ----------------
CASH AND CASH EQUIVALENTS, end of period.............................. $ 13,372 $ 8,120
=============== ================
See notes to consolidated financial statements.
6
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Unaudited)
(in thousands)
39 Weeks Ended
-------------------------------------
September 30, September 24,
2001 2000
---------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid during the 39 week period for:
Income taxes........................................................ $ 20,483 $ 31,272
================ =================
Interest............................................................ $ 5,676 $ 6,083
================ =================
Disclosure of Accounting Policy:
For purposes of the consolidated statements of cash flows, the Company considers
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
31, 2000 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 31, 2000.
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 2001 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
certain 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, in the aggregate, have a
material adverse effect upon our business or consolidated financial position.
Franchise financing: In 1992, we entered into an agreement with a financing
source to provide up to $75,000,000 of financing to our franchisees to fund
development of new franchise restaurants. We provided a limited guaranty of
loans made under the agreement. Our maximum recourse obligation for each
long-term loan is 10% of the amount funded, and this is gradually reduced
beginning in the second year of each loan. After the seventh year of each loan,
it decreases to zero. Approximately $49,000,000 was funded through this
financing source. Of this, approximately $2,500,000 was outstanding as of
September 30, 2001. This agreement expired on December 31, 1994 and was not
renewed.
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 September 30, 2001, the aggregate amount of
these lease payments totaled approximately $27,600,000. The buyers have
indemnified us from any losses related to these guaranties.
8
Philadelphia divestiture: In connection with the sale of the Philadelphia
restaurants, we provided a guarantee to a franchise group totaling $1,250,000.
As of September 30, 2001, approximately $500,000 remains outstanding.
Severance agreements: We have severance and employment agreements with certain
officers providing for severance payments to be made in the event the employee
resigns or is terminated related to a change in control. The agreements define
the circumstances which will constitute a change in control. If the severance
payments had been due as of September 30, 2001, 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 $4,300,000 if such officers had
been terminated as of September 30, 2001.
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 performance shares represent the only dilutive effects on weighted
average shares. The chart below presents a reconciliation between basic and
diluted weighted average shares outstanding and the related earnings per share.
All amounts in the chart except per share amounts are expressed in thousands.
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net earnings...................................... $ 16,786 $ 15,814 $ 51,363 $ 47,229
=============== =============== =============== ===============
Basic weighted average shares outstanding......... 36,911 39,147 36,980 39,729
Dilutive effect of stock options and
performance shares........................... 969 133 844 211
--------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding....... 37,880 39,280 37,824 39,940
=============== =============== =============== ===============
Basic net earnings per common share............... $ 0.45 $ 0.40 $ 1.39 $ 1.19
=============== =============== =============== ===============
Diluted net earnings per common share............. $ 0.44 $ 0.40 $ 1.36 $ 1.18
=============== =============== =============== ===============
4. Stock Split
On May 10, 2001, we declared a three-for-two stock split, effected in the form
of a 50% stock dividend, to shareholders of record on May 25, 2001, payable on
June 12, 2001. We issued approximately 16,100,000 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.
9
5. New Accounting Pronouncements
Effective January 1, 2001, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities" issued by the Financial Accounting Standards Board. SFAS
No. 133, as amended by SFAS Nos. 137 and 138, establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet. The statement also requires changes in the fair value of
the derivative instruments to be recorded in either net earnings or other
comprehensive income depending on their intended use.
We have interest rate swap agreements to manage our exposure to interest rate
fluctuations. The swap agreements effectively fix the underlying three-month
LIBOR interest rate on $75,000,000 of our senior credit facilities to rates
ranging from 5.91% to 6.05%. The estimated fair value of these agreements at
September 30, 2001 was a net payable of $4,143,000 and is included in other
non-current liabilities on the accompanying balance sheets. Our interest rate
swap agreements meet the criteria for hedge accounting under SFAS No. 133 and
accordingly, the cumulative after-tax fair value of the interest rate hedges is
included as a reduction of other comprehensive income. As a result of the
refinancing of our existing credit agreement (see Note 6), we expect to
terminate our interest rate swap agreements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
using the purchase method of accounting and requires separate recognition of
intangible assets that meet certain criteria. This statement applies to all
business combinations after June 30, 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. SFAS No.
142 is effective for fiscal periods beginning after December 15, 2001. We will
continue to amortize existing goodwill through the remainder of fiscal 2001, at
which time amortization will cease and we will perform a transitional goodwill
impairment test. We are currently evaluating the impact of the new accounting
standards on existing goodwill and other intangible assets. The ultimate impact
of the new accounting standards has not yet been determined. Goodwill
amortization expense for the thirty-nine weeks ended September 30, 2001 was
$3,975,000.
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" for the disposal of a segment of a business. SFAS No.
144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. We will adopt SFAS No. 144
beginning in fiscal 2002. We have not yet determined the impact of SFAS No. 144
on our consolidated financial statements.
10
6. Financing
In November 2001, we anticipate completing the refinancing of our existing
credit facilities. The new bank credit agreement will provide for a $150,000,000
three-year unsecured working capital facility of which $25,000,000 may be used
for the issuance of letters of credit and $5,000,000 may be used for short-term
borrowings. The proceeds will be used to repay indebtedness related to our
existing credit facilities and for general corporate purposes.
The facility bears interest at either the bank's prime rate or LIBOR plus 1%, at
our option. We are required to pay a commitment fee of 0.20% on any unused
portion of the facility. The interest rate and commitment fee are subject to
change based upon our leverage ratio. The facility is subject to standard other
terms, conditions, covenants, and fees.
As a result of this refinancing, we will write-off the remaining balance of the
deferred financing costs related to our existing agreement and terminate our
interest rate swap agreements. The costs associated with this refinancing will
be reflected in the consolidated statement of income for the fourth quarter of
2001. As of September 30, 2001, these costs would have been approximately
$3,900,000, net of tax.
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 September 30, 2001 and September 24, 2000 each
contained 13 weeks and are referred to hereafter as the "2001 quarter" and the
"2000 quarter", respectively. Our 39 week periods ended September 30, 2001 and
September 24, 2000 are referred to hereafter as the "2001 year-to-date period"
and the "2000 year-to-date period," respectively.
12
Results of Operations
The following table contains information derived from our consolidated
statements of earnings expressed as a percentage of total operating revenues,
except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended 39 Weeks Ended
----------------------------------- ------------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
---------------- --------------- ---------------- ----------------
Revenues:
Company restaurant sales................ 87.3% 87.7% 87.4% 87.8%
Franchise income........................ 12.7 12.3 12.6 12.2
---------------- --------------- ---------------- ----------------
Total operating revenues............. 100.0% 100.0% 100.0% 100.0%
================ =============== ================ ================
Cost of sales (as a percentage of company
restaurant sales):
Food and beverage....................... 27.1% 27.4% 27.0% 27.2%
Labor................................... 32.2 31.6 31.9 31.7
Direct and occupancy.................... 25.2 25.2 25.4 24.7
Pre-opening expense..................... 0.4 0.2 0.2 0.2
---------------- --------------- ---------------- ----------------
Total cost of sales.................. 84.9% 84.4% 84.5% 83.8%
================ =============== ================ ================
General and administrative expenses.......... 10.2% 9.4% 9.8% 9.6%
Amortization of intangible assets............ 0.8 0.8 0.8 0.9
Loss on disposition of restaurants
and equipment.............................. 0.2 0.1 0.2 0.2
---------------- --------------- ---------------- ----------------
Operating earnings........................... 14.7 15.6 15.4 15.8
---------------- --------------- ---------------- ----------------
Other income (expense):
Investment income....................... 0.3 0.2 0.2 0.2
Interest expense........................ (1.0) (1.3) (1.1) (1.4)
Other income............................ 0.2 -- 0.1 0.1
---------------- --------------- ---------------- ----------------
Total other expense.................. (0.5) (1.1) (0.8) (1.1)
---------------- --------------- ---------------- ----------------
Earnings before income taxes................. 14.1 14.5 14.6 14.8
Income taxes................................. 5.2 5.3 5.4 5.4
---------------- --------------- ---------------- ----------------
Net earnings................................. 8.9% 9.2% 9.2% 9.3%
================ =============== ================ ================
13
The following table sets forth certain unaudited financial information and other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:
13 Weeks Ended 39 Weeks Ended
------------------------------- -------------------------------
September 30, September 24, September 30, September 24,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
Number of restaurants:
Company:
Beginning of period..................... 289 268 285 262
Restaurant openings..................... 9 5 13 13
Restaurant closings..................... -- -- -- (2)
--------------- --------------- --------------- --------------
End of period........................... 298 273 298 273
--------------- --------------- --------------- --------------
Franchise:
Beginning of period..................... 1,035 942 1,001 906
Restaurant openings..................... 25 27 61 67
Restaurant closings..................... -- -- (2) (4)
--------------- --------------- --------------- --------------
End of period........................... 1,060 969 1,060 969
--------------- --------------- --------------- --------------
Total:
Beginning of period..................... 1,324 1,210 1,286 1,168
Restaurant openings..................... 34 32 74 80
Restaurant closings..................... -- -- (2) (6)
--------------- --------------- --------------- --------------
End of period........................... 1,358 1,242 1,358 1,242
=============== =============== =============== ==============
Weighted average weekly sales per restaurant:
Company................................. $ 43,118 $ 42,799 $ 43,126 $ 42,591
Franchise............................... $ 42,680 $ 41,536 $ 42,646 $ 41,660
Total................................... $ 42,776 $ 41,815 $ 42,752 $ 41,868
Change in comparable restaurant sales:(1)
Company................................. 1.9% 1.1% 2.9% 2.5%
Franchise............................... 2.9% 1.6% 3.0% 2.2%
Total................................... 2.7% 1.5% 3.0% 2.2%
Total system sales (in thousands)................ $ 745,887 $ 667,494 $2,191,326 $1,959,837
(1) When computing comparable restaurant sales, restaurants open for at least
18 months are compared from period to period.
14
Company Restaurant Sales. Total company restaurant sales increased $13,200,000
(9%) from $151,038,000 in the 2000 quarter to $164,238,000 in the 2001 quarter
and increased $42,018,000 (9%) from $444,398,000 in the 2000 year-to-date period
to $486,416,000 in the 2001 year-to-date period due primarily to company
restaurant openings and increases in comparable restaurant sales.
Comparable restaurant sales at company restaurants increased by 1.9% and 2.9% in
the 2001 quarter and the 2001 year-to-date period, respectively. Weighted
average weekly sales at company restaurants increased 0.7% from $42,799 in the
2000 quarter to $43,118 in the 2001 quarter and increased 1.3% from $42,591 in
the 2000 year-to-date period to $43,126 in the 2001 year-to-date period. These
increases were due primarily to an increase in the average guest check resulting
from the company's food promotions and menu price increases of approximately
2.0%.
Franchise Income. Overall franchise income increased $2,535,000 (12%) from
$21,252,000 in the 2000 quarter to $23,787,000 in the 2001 quarter and increased
$8,119,000 (13%) from $61,787,000 in the 2000 year-to-date period to $69,906,000
in the 2001 year-to-date period. These increases were due primarily to the
increased number of franchise Applebee's restaurants operating during the 2001
quarter and 2001 year-to-date period and increases in comparable restaurant
sales. Weighted average weekly sales at franchise restaurants increased 2.8% and
2.4% in the 2001 quarter and 2001 year-to-date period, respectively and
franchise comparable restaurant sales increased 2.9% and 3.0% in the 2001
quarter and 2001 year-to-date periods, respectively.
Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.4%
in the 2000 quarter to 27.1% in the 2001 quarter and decreased from 27.2% in the
2000 year-to-date period to 27.0% in the 2001 year-to-date period. Both the 2001
quarter and the 2001 year-to-date periods were favorably impacted by menu price
increases in 2001.
Labor costs increased from 31.6% and 31.7% in the 2000 quarter and the 2000
year-to-date period, respectively, to 32.2% and 31.9% in the 2001 quarter and
2001 year-to-date period, respectively. These increases were due primarily to
continued pressure on management costs due to low unemployment as well as the
highly competitive nature of the restaurant industry.
Direct and occupancy costs were 25.2% in both the 2000 quarter and 2001 quarter.
Direct and occupancy costs increased from 24.7% in the 2000 year-to-date period
to 25.4% in the 2001 year-to-date period. This increase was due primarily to
higher utility costs and repairs and maintenance expense.
General and Administrative Expenses. General and administrative expenses
increased from 9.4% in the 2000 quarter to 10.2% in the 2001 quarter and
increased from 9.6% in the 2000 year-to-date period to 9.8% in the 2001
year-to-date period. General and administrative expenses were impacted in both
the 2001 quarter and 2001 year-to-date period by costs associated with our
purchasing supply chain and strategic brand assessment projects. These costs
were partially offset by the absorption of general and administrative expenses
over a larger revenue base.
Income Taxes. The effective income tax rate, as a percentage of earnings before
income taxes, was 36.8% in both the 2000 quarter and 2000 year-to-date period,
as well as the 2001 quarter and the 2001 year-to-date period.
15
Liquidity and Capital Resources
Our need for capital resources historically has resulted from the construction
and acquisition of restaurants. 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 $46,220,000 in fiscal year 2000 and $38,181,000 in the
2001 year-to-date period. In 2001, we currently expect to open approximately 25
restaurants and capital expenditures are expected to be between $50,000,000 and
$55,000,000. ___ These expenditures will primarily be for the development of new
restaurants, refurbishment and capital replacement in 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.
Our senior term loan and working capital facilities are subject to various
covenants and restrictions which, among other things, require the maintenance of
stipulated fixed charge, interest coverage and leverage ratios, as defined, and
limit additional indebtedness and capital expenditures in excess of specified
amounts. The credit agreement permits annual cash dividends of the greater of
$5,000,000 or 50% of consolidated net income. In addition, in April 2000, the
credit agreement was amended to permit additional repurchases of common stock of
up to $50,000,000 through December 31, 2001. 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 credit agreement. As of September 30,
2001, $20,626,000 remains available under this authorization. During 2001, we
have repurchased 1,909,000 shares of our common stock at an average price of
$23.56 per share for an aggregate cost of $44,987,000 under this and previous
authorizations.
In November 2001, we anticipate completing the refinancing of our existing
credit facilities. The new bank credit agreement will provide for a $150,000,000
three-year unsecured working capital facility of which $25,000,000 may be used
for the issuance of letters of credit and $5,000,000 may be used for short-term
borrowings. The proceeds will be used to repay indebtedness related to our
existing credit facilities and for general corporate purposes.
As of September 30, 2001, our liquid assets totaled $14,335,000. These assets
consisted of cash and cash equivalents in the amount of $13,372,000 and
short-term investments in the amount of $963,000. The working capital deficit
decreased from $42,995,000 as of December 31, 2000 to $42,766,000 as of
September 30, 2001. As of September 30, 2001, we had no outstanding borrowings
under our working capital or line of credit facilities, and standby letters of
credit totaling $6,313,000 were outstanding under our letter of credit
facilities.
16
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.
Inflation
Substantial increases in costs and expenses could impact our operating results
to the extent such increases cannot be passed along to customers. In particular,
increases in food, supplies, labor and operating expenses could have a
significant impact on our operating results. We do not believe that inflation
has materially affected our operating results during the past three years.
A majority of our employees are paid hourly rates related to federal and state
minimum wage laws and various laws that allow for credits to that wage. The
Federal government continues to consider an increase in the minimum wage.
Several state governments have increased the minimum wage and other state
governments are also discussing an increased minimum wage. In the past, we have
been able to minimize the effect of these increases through food and beverage
price increases or improvements in efficiency and productivity, and we will
attempt to do so in the future. We cannot guarantee, however, that all future
cost increases can be reflected in our prices or that increased prices will be
absorbed by customers without at least somewhat diminishing customer spending in
our restaurants.
New Accounting Pronouncements
Effective January 1, 2001, we adopted the provisions of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" issued by the
Financial Accounting Standards Board. SFAS No. 133, as amended by SFAS Nos. 137
and 138, establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities on the balance sheet. The statement
also requires changes in the fair value of the derivative instruments to be
recorded in either net earnings or other comprehensive income depending on their
intended use.
We have interest rate swap agreements to manage our exposure to interest rate
fluctuations. The swap agreements effectively fix the underlying three-month
LIBOR interest rate on $75,000,000 of our senior credit facilities to rates
ranging from 5.91% to 6.05%. The estimated fair value of these agreements at
September 30, 2001 was a net payable of $4,143,000 and is included in other
non-current liabilities on the accompanying balance sheets. Our interest rate
swap agreements meet the criteria for hedge accounting under SFAS No. 133 and
accordingly, the cumulative after-tax fair value of the interest rate hedges is
included as a reduction of other comprehensive income. As a result of the
refinancing of our existing credit agreement, we expect to terminate our
interest rate swap agreements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
using the purchase method of accounting and requires separate recognition of
intangible assets that meet certain criteria. This statement applies to all
business combinations after June 30, 2001.
17
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. SFAS No.
142 is effective for fiscal periods beginning after December 15, 2001. We will
continue to amortize existing goodwill through the remainder of fiscal 2001, at
which time amortization will cease and we will perform a transitional goodwill
impairment test. We are currently evaluating the impact of the new accounting
standards on existing goodwill and other intangible assets. The ultimate impact
of the new accounting standards has not yet been determined. Goodwill
amortization expense for the thirty-nine weeks ended September 30, 2001 was
$3,975,000.
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" for the disposal of a segment of a business. SFAS No.
144 retains many of the provisions of SFAS No. 121, but addresses certain
implementation issues associated with that Statement. We will adopt SFAS No. 144
beginning in fiscal 2002. We have not yet determined the impact of SFAS No. 144
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 and capital expenditures 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 February 13, 2001. We disclaim any obligation to update
forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our senior term loan bears interest at either the bank's prime rate plus 1.25%
or LIBOR plus 2.25%, at our option. Our working capital facility bears interest
at either the bank's prime rate plus 0.125% or LIBOR plus 1.125%, at our option.
The interest rate on the working capital facility is subject to change based
upon our leverage ratio.
We have interest rate swap agreements in place to manage our exposure to
interest rate fluctuations. The swap agreements effectively fix the underlying
three-month LIBOR interest rate on $75,000,000 of the senior credit facilities
to rates ranging from 5.91% to 6.05%. As a result of the refinancing of our
existing credit agreement, we expect to terminate our interest rate swap
agreements.
As of September 30, 2001, the total amount of debt subject to interest rate
fluctuations was $372,000 under our term loan. A 1% change in interest rates
would result in an increase or decrease in interest expense of $4,000 per year.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As of September 30, 2001, we were using assets owned by a former franchisee in
the operation of one restaurant. That restaurant remains under a purchase rights
agreement that required us to make certain payments to the franchisee's lender.
In 1991, a dispute arose between the lender and us over the amount of the
payments due the lender under that agreement and over whether we had agreed to
guarantee the franchisee's debt. Based upon a then-current independent
appraisal, we offered to settle the dispute and purchase the assets of the three
then-existing restaurants for $1,000,000 in 1991. In November 1992, the FDIC
declared the lender insolvent, and the lender has since been liquidated. We
closed one of the three restaurants in 1994 and one of the two remaining
restaurants in February 1996. In the fourth quarter of 1996, we received
information indicating that a third party had acquired the franchisee's
indebtedness to the FDIC. In June 1997, the third party filed a lawsuit against
us seeking approximately $3,800,000. In April 1999, the district court awarded
summary judgment to the third party. In June 2000, the court of appeals reversed
the summary judgment and remanded the case to the district court for further
action. The third party appealed the court's decision but its appeal was denied.
In May 2001, we reached an agreement to settle this matter within our
established reserves. There was no impact on our consolidated statements of
earnings.
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 certain 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, in the aggregate, have a
material adverse effect upon our business or consolidated financial position
Item 6. Exhibits and Reports on Form 8-K
(a) The Exhibits listed on the accompanying Exhibit Index are
filed as part of this report.
(b) We filed a report on Form 8-K on July 25, 2001 announcing
senior management changes.
We filed a report on Form 8-K on July 25, 2001 announcing a
new Chief Marketing Officer.
We filed a report on Form 8-K on August 2, 2001 under Item 5
reporting second quarter earnings.
We filed a report on Form 8-K on August 8, 2001 announcing a
new Vice President of Research and Development.
We filed a report on Form 8-K on August 29, 2001 announcing
August comparable sales.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
APPLEBEE'S INTERNATIONAL, INC.
(Registrant)
Date: October 30, 2001 By: /s/ Lloyd L. Hill
------------------- -----------------------------------------
Lloyd L. Hill
Chairman and Chief Executive Officer
(principal executive officer)
Date: October 30, 2001 By: /s/ George D. Shadid
------------------- -----------------------------------------
George D. Shadid
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date: October 30, 2001 By: /s/ Mark A. Peterson
------------------- -----------------------------------------
Mark A. Peterson
Vice President and Controller
(principal accounting officer)
20
APPLEBEE'S INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------- ------------------------------------------------------------------
10.1 Agreement Regarding Employment.
10.2 Second Amendment to Employee Stock Purchase Plan.
21