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Balance Sheet Analysis Applebee's International

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Balance Sheet Analysis Applebee's International 2004

In analyzing the common-size balance sheet for Applebee's, it is noted that the total current assets has jumped from 11% to 14% of the total assets. The total assets for Applebee's has jumped 6% from 2000 to 2001 driven by increased in the total current assets of 28%. Of those 28% increase, they consisted of 88% increase in the Cash & Equivalents (increased of $10.6 millions) caused by the decreased in the Capital Stock repurchasing in 2001 by Applebee's. The repurchase of capital stock has decreased by 31% as noted from the year-to-year percentage changes of the Statement of Cash Flow which equivalent to about $11 million dollars. The other current assets increased was from the other Current Assets category; there was an increase of 92% from 2000 to 2001. Due to the higher earnings for Applebee's, there was an increase in income tax due. A significant component of the increase of other Current Assets was from increased in prepaid income taxes with net deferred income tax asset of $6.7 millions dollars.

The intangibiles has also decreased from 18% to 16% in common-size balance sheet for Applebee's from 2000 to 2001. This is equivalent to a decrease of 7% from year to year percentage change. This change was driven by amortization of intangible assets related to previous acquisitions of other franchisee restaurants by Applebee's.

There was a trend in rise of the net property & equipment related assets since 2002 to 2004. This boost in net property and equipment assets was related to the acquisition strategy conducted by Applebee's. For the $34 millions acquisitions of 21 restaurants in Washington D.C. area on November 7, 2002; $24 millions has been allocated to the fair value of property and equipment plus $10 millions in goodwill. This has caused a jump in net property & equipment assets for 2002 to jumped 16% and Intangibles assets to jumped 12% when compared to 2001. Since most of the purchased are by cash, this has caused a 31% decreased in the Cash & Equivalents for Applebee's balance sheet. For the 11 Applebee's restaurants acquisitions in Illinois, Indianan, Kentucky, and Missouri for $21.8 million on March 24, 2003, $7.9 millions were allocated to the fair value of property and equipment, the other $16.6 millions went to goodwill, plus a net liabilities in additions of $1.3 millions. The acquisition in 2003 has caused increased of 10% in the net property & equipment assets, 18% increased in the intangibles assets. The common-size balance sheet profile did not change significantly for 2003 because of this acquisitions. Moreover, there was also a 33% increased in Deposits & Other Assets from 2002 to 2003 which was related to the insurance subsidiary of Applebee's. In September of 2002, Applebee's has formed the Neighborhood Insurance Inc., an insurance subsidiary of Applebee's to provide qualified franchisees with workers' compensation and general liability insurance. The new subsidiary required a restricted asset to covered potential claims that was determined based upon third-party actuarial estimates which has been determined to be $10.76 millions and has accounted for most of the 33% increase in Other Assets from 2002 to 2003. The common-size for Deposits & Other Assets has jumped from 4% in 2002 to 5% in 2003 for the common-size analysis. All of the above occurrences in 2003 has added 14% in total assets from 2002 to 2003's balance sheet. There is a consistent increased in the inventory level since 2000. In the most recent year of 2004, common-size inventory level of total assets are 5% the highest in over 5 years. This is mostly due to openings of new company restaurants and acquisitions of existing franchisee restaurants resulting in gains in overall inventory level.

For the $13.8 millions 10 Applebee's restaurants acquisitions in Southern California on 13.8 million, $10.8 millions goodwill are recorded and $2.5 million for property and equipment are recorded in 2004. This has caused a 16% increased in net property & equipment and a 17% increased in intangibles from 2003 to 2004's balance sheet. The purchase was made by cash, so there is a significant decrease in the cash & equivalents for Applebee's in 2004 of a 39% decrease and common-size change from 3% in 2003 to only 1% of total assets in 2004. Red Flag has been raised since Applebee's clearly is using too much of its cash for expansions and acquisitions. Lack of cash might create a liquidity problem for the company in the future. In 2004, there were 17.38 millions added for restricted assets related to the insurance subsidiary which has caused the Deposits and Other Assets to jump 36% and the common-size total assets to change from 2003's 5% to 2004's 6%. Besides the amortization of intangibles from acquisitions in 2004, there are also the lease acquisition costs for six former Ground Round restaurants for about $4.9 million in cash in 2004. This will be amortized over 8 to 20 years and is accounted in the intangibles accounts and caused part of the gains of the 17% in the intangibles for 2004.

For the Shareholders' Equity analysis, it is notable that the retained earnings has been increasing since 2000. It has a total increase of 112% from 2000 to 2004. The common size for retained earnings has improved from 62% in 2000 to 83% in 2004 driven by sales growth from Applebee's new restaurant openings and acquistions. The new initiatives, "Carside To Go" started in 2002 has also helped increase sales and earnings. Because of new equipments needed to accommodate the "Carside To Go" initiatives, company thus required to increase investments in new equipments. The common-size of net property & Equipment jumped from 66% in 2001 to 68% in 2002.

There is a consistent trend of Applebee's in repurchasing it's common stock as shown by the increased of Treasury Stock Account. A big jumped in repurchasing was noted in 2004. A year to year comparison has shown Applebee's increased is repurchasing activities by 30% from 2003 to 2004. This is evident from the management intention to distribute it's earnings to the shareholders in order to maximize shareholders' wealth and also to prevent dilution of shares when distributed options and compensations are exercised. However, considering the financial situation of Applebee's is running low in cash reserve, a red flag is raised because it will be in the best interest for the company to scale back it's repurchasing program to conserve cash to pay for it's obligations such as deferred taxes.

There is an increasing trend that Applebee's are delaying



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