| APPLEBEES INTERNATIONAL INC Item 1A Risk Factors |
| 14 Item 1A Risk Factors Our business and operations are subject to a number of risks and uncertainties |
| The factors listed below are important factors that could cause actual results to differ materially from our historical results and from those projected in forward-looking statements contained in this report or in other filings with the SEC We and our franchisees may not be successful in operating restaurants profitably |
| Our financial success depends on our ability and the ability of our franchisees to operate restaurants profitably |
| The profitability of our restaurants is dependent on a number of factors |
| The most significant factors are: o the availability of management, restaurant staff and other personnel; o acceptable leasing or financial terms; o the availability of capital to finance growth; o effective national campaigns and local marketing; o effective menu pricing; o appealing menu items; o increases in minimum wage and the impact of other employment laws; o increases in food, labor and other operating costs related to new menu initiatives; o the ability to manage a large number of restaurants in many geographic areas with a standardized operational and marketing approach; and o the extent of competitive intrusion in the market |
| In the course of expanding, we and our franchisees may enter new or more highly competitive geographic regions or local markets in which we may have limited operating experience |
| There can be no assurance of the level of success of our restaurants in these regions or particular local markets |
| Newly opened restaurants typically operate with below normal profitability and incur certain additional costs in the process of achieving operational efficiencies during the first several months of operation |
| We and our franchisees may not be successful in opening the number of restaurants anticipated |
| Our continued growth depends, in part, on our ability and the ability of our franchisees to open additional restaurants |
| The opening of new restaurants, both 14 by us and our franchisees, depends on a number of factors, many of which are beyond our control or the control of our franchisees |
| The most significant factors are: o the cost and availability of suitable restaurant locations; o acceptable leasing or financial terms; o the availability of capital to finance growth; o cost-effective and timely construction of restaurants (construction can be delayed due to, among other reasons, labor disputes, local zoning and licensing matters, and weather conditions); and o securing required governmental permits and licenses |
| Substantial increases in capital expenditure costs may adversely impact future growth |
| Our capital expenditures are primarily related to the development or acquisition of additional restaurants, maintenance and refurbishment of existing restaurants, and expansion of information technology systems, office space and other corporate infrastructure |
| The costs related to restaurant development, maintenance and refurbishment include purchases and leases of land, buildings, equipment and repairs and maintenance |
| The labor and material costs expended vary by geographical location and are subject to general price increases |
| There can be no assurance that future capital expenditure costs will not increase |
| In addition, capital expenditures will be required to maintain and refurbish restaurants as they age |
| There can be no assurance that we will remain profitable in these restaurants even after maintenance and refurbishment has been completed |
| Our continued growth is, in part, dependent upon our ability to find and retain qualified franchisees and for those franchisees to operate restaurants profitably in compliance with our standards, build new restaurants and plan for succession |
| Although we have established criteria to evaluate prospective franchisees, there can be no assurance that our existing or future franchisees will have the business abilities or access to financial resources necessary to open the required number of restaurants or that they will successfully develop or operate these restaurants in their franchise areas in a manner consistent with our standards |
| We intend to continue our efforts to franchise restaurants in certain international territories |
| The ability of franchisees to open and operate restaurants outside of the United States is subject to the same factors as are applicable to opening domestic restaurants described above, as well as factors related to additional legal, regulatory, cultural acceptability and building design issues involved in international locations |
| There can be no assurance that we will be able to attract qualified franchisees or that such franchisees will be able to open and operate restaurants successfully |
| Increased competition for locations, customers and staff could adversely impact our profitability |
| Competition in the casual dining segment of the restaurant industry is expected to remain intense with respect to price, service, location, concept, and the type and quality of food |
| There is also intense competition for real estate sites, qualified management personnel, and hourly restaurant staff |
| Our competitors include national, regional and local chains, as well as local owner-operated restaurants |
| There are a number of well-established competitors, some of which have been in existence for a longer period than us and may be better established in the markets where our restaurants are or may be located |
| Further penetrating existing mature markets could impact the sales and profitability of our existing restaurants in those markets |
| 15 Part of our restaurant development may occur in more mature markets |
| Our restaurants typically attract customers within a limited trade area |
| Sales and profitability of existing restaurants may be negatively impacted by the opening of a restaurant within this trade area |
| Our profitability could be adversely impacted by economic, demographic and other changes that impact guest traffic |
| Our business is affected by changes in consumer tastes and by national, regional, and local economic conditions, demographic trends and traffic patterns |
| We can also be adversely affected by publicity resulting from actual or alleged food quality, illness, injury or other health concerns or operating issues related to restaurant operations or from food suppliers |
| The impact of government regulation may cause us to incur additional costs or liabilities |
| Our restaurants are subject to various international, federal, state and local government regulations, including those related to the sale of food and alcoholic beverages and labor laws |
| Failure to obtain or maintain the necessary licenses, permits and approvals, including food and liquor licenses, could adversely affect our operating results or delay or result in our decision to cancel the opening of new restaurants |
| Local authorities may suspend or deny renewal of our food and liquor licenses if they determine that our conduct does not meet applicable standards or if there are changes in regulations in which we are unable to comply |
| We are subject to "e dram shop "e statutes in some states |
| These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person |
| A judgment substantially in excess of our insurance coverage could harm our financial condition |
| Various federal and state labor laws related to employment eligibility, minimum wage requirements, overtime pay, meal and rest breaks, and other matters have an effect on our operating costs |
| Changes in these laws, including additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, and increased tax reporting and tax payment requirements for associates who receive tips, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements could harm our operating results |
| The federal Americans with Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment |
| Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants to provide service to, or make reasonable accommodations for, disabled persons |
| We are also subject to various federal and state environmental regulations that could delay or prevent development of new restaurants in certain locations |
| We are also subject to federal and state laws that regulate the offer and sale of franchises and the relationship with our franchise partners |
| These laws and regulations, together with decisions of several state and federal courts may limit our ability to enforce certain provisions of, or alter or terminate our franchise agreements |
| Our continued growth may depend, in part, on our acquisition of franchised Applebeeapstas restaurants |
| There is no assurance that we will be able to find franchise restaurants available for purchase or that we will be able to acquire franchise restaurants at favorable prices |
| In addition, if we do successfully identify and complete acquisitions in the future, the acquisitions may involve the following risks: 16 o increases in our debt and contingent liabilities; o entering geographic markets in which we have little or no direct prior experience; and o unanticipated or undiscovered legal liabilities or other obligations of acquired franchise restaurants |
| Even if we are successful in acquiring franchise operations, there is no assurance that we will be able to operate the acquired restaurants profitably |
| The integration of acquired restaurants into our operations may involve a number of issues, any of which could materially and adversely affect our operations and financial performance |
| These issues include: o burdens on our management resources and financial controls; o diversion of corporate resources and acquisition integration issues, such as business process and system incapabilities; o potential loss of key personnel of acquired franchise restaurants; and o potential loss of customer relationships and related revenues |
| Our growth and profitability could be impacted by the lack of needed inventories |
| Our profitability depends, in part, on our strategies to control food costs |
| Our dependence on commodities subject us to the risk that shortages or interruption in supply, caused by adverse weather or other conditions, could adversely affect the availability, quality or cost of ingredients |
| Changes in the price of commodities, particularly beef and chicken, could materially impact our profitability |
| We may not be able to react to increased food costs by adjusting our supply chain practices or menu pricing which would negatively impact our operating results |
| Our global supply chain may be subject to interruptions, dislocation or may be rendered less effective for a variety of reasons such as: o political unrest; o animal borne disease or illness; o contamination of growing fields, water supplies or animal processing facilities; o inadequate storage facilities; and o loss of effective climate controls in storage facilities and processing plants |
| Our continued growth depends on our successful adaptation and implementation of our operating systems |
| System-wide expansion has and will continue to require the implementation of enhanced operating systems |
| We regularly evaluate the adequacy of our current policies, procedures, systems and resources, including financial controls, information technology systems, field and restaurant management, and vendor capacities and relations |
| There can be no assurance that we will adequately address all of the changing demands that our planned expansion will impose on such systems, controls, and resources |
| We may acquire one or more additional restaurant concepts |
| Operating more than one restaurant concept presents many significant risks that could, individually or together, have a material adverse effect on our business and financial results |
| Our success in acquiring or investing in new concepts is subject to the following risks: 17 o the attention of our management team may be diverted from the Applebeeapstas system and operations may suffer as a result; o we may be unable to identify suitable opportunities; o we may pay too much for a new concept in relation to its long-term potential and actual economic return to us; and o we may be required to borrow the funds needed to make an acquisition, thereby increasing our interest expense and debt level |
| In addition, our ability to expand another concept, through our own development or through franchising, will be subject to risks such as: o we may not be able to find suitable locations at appropriate purchase prices or lease terms; o we may not be able to attract franchisees; o we may experience construction delays or cost overruns caused by numerous factors, such as shortages of materials and skilled labor, labor disputes, weather interference, environmental problems, and construction or zoning problems; o we may not be able to hire and train experienced and dedicated operating personnel; o we may face competition from other restaurants, including other Applebeeapstas; and o the new concept may not be profitable |
| A significant increase in litigation could have a material adverse effect on our results of operations, financial condition and business prospects |
| We are sometimes the subject of complaints or litigation from guests alleging illness, injury or other food quality, health or operational concerns |
| Adverse publicity resulting from these allegations could harm the operation and profitability of our restaurants, regardless of whether the allegations are valid, whether we are liable or whether the claim involves our restaurants or one of our franchisees |
| Failure to comply with the various federal and state labor laws pertaining to minimum wage, overtime pay, meal and rest breaks, unemployment tax rates, workers &apos compensation rates, citizenship or residency requirements, child labor requirements and sales taxes, may have a material adverse effect on our business or operations |
| Further, employee claims against us based on, among other things, discrimination, harassment or wrongful termination may divert our financial and management resources and adversely affect our operations |