-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UvlnFdbQDpHNRmp6NVuzXXj+FdcLsU8Kq4KbVn00gveND+YbBOQZlcUYYzkdzGKZ wJZrtA2g2LMo/7Z2lujqEg== 0000853665-01-500089.txt : 20010804 0000853665-01-500089.hdr.sgml : 20010804 ACCESSION NUMBER: 0000853665-01-500089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLEBEES INTERNATIONAL INC CENTRAL INDEX KEY: 0000853665 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 431461763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17962 FILM NUMBER: 1695630 BUSINESS ADDRESS: STREET 1: 4551 W 107TH ST STE 100 CITY: OVERLAND PARK STATE: KS ZIP: 66207 BUSINESS PHONE: 9139674000 MAIL ADDRESS: STREET 1: 4551 W 107TH STREET STREET 2: SUITE 100 CITY: OVERLAND PARK STATE: KS ZIP: 66207 10-Q 1 q2final.txt SECOND QUARTER 2001 10-Q 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 July 1, 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 --------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- The number of shares of the registrant's common stock outstanding as of July 27, 2001 was 36,863,529. 1 APPLEBEE'S INTERNATIONAL, INC. FORM 10-Q FISCAL QUARTER ENDED JULY 1, 2001 INDEX
Page Part I Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of July 1, 2001 and December 31, 2000................................................................ 3 Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks Ended July 1, 2001 and June 25, 2000................................................. 4 Consolidated Statement of Stockholders' Equity for the 26 Weeks Ended July 1, 2001.......................................................... 5 Consolidated Statements of Cash Flows for the 26 Weeks Ended July 1, 2001 and June 25, 2000................................................. 6 Notes to Consolidated Financial Statements.............................................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 17 Part II Other Information Item 1. Legal Proceedings....................................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders..................................... 19 Item 6. Exhibits and Reports on Form 8-K........................................................ 20 Signatures ................................................................................................. 21 Exhibit Index............................................................................................... 22
2 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts)
July 1, December 31, 2001 2000 -------------- ------------- ASSETS Current assets: Cash and cash equivalents...................................................... $ 7,202 $ 10,763 Short-term investments, at market value (amortized cost of $925 in 2001 and $1,250 in 2000)............................................................. 960 1,312 Receivables (less allowance for bad debts of $2,547 in 2001 and $2,295 in 2000) 19,426 19,760 Inventories.................................................................... 9,379 12,616 Prepaid and other current assets............................................... 7,156 6,389 -------------- ------------- Total current assets........................................................ 44,123 50,840 Property and equipment, net......................................................... 316,845 314,216 Goodwill, net....................................................................... 80,615 83,265 Franchise interest and rights, net.................................................. 2,699 2,949 Other assets........................................................................ 21,959 20,437 -------------- ------------- $ 466,241 $ 471,707 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt.............................................. $ 816 $ 894 Accounts payable............................................................... 26,190 26,556 Accrued expenses and other current liabilities................................. 57,659 62,511 Accrued dividends.............................................................. -- 2,774 Accrued income taxes........................................................... 2,874 1,100 -------------- ------------- Total current liabilities................................................... 87,539 93,835 -------------- ------------- Non-current liabilities: Long-term debt - less current portion.......................................... 83,121 90,461 Deferred income taxes.......................................................... 1,603 4,097 Other non-current liabilities.................................................. 3,342 1,596 -------------- ------------- Total non-current liabilities............................................... 88,066 96,154 -------------- ------------- Total liabilities........................................................... 175,605 189,989 -------------- ------------- 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..................................................... 177,105 172,037 Retained earnings.............................................................. 328,344 293,772 Accumulated other comprehensive income (loss), net of income taxes ............ (1,183) 39 -------------- ------------- 504,748 466,330 Treasury stock - 11,375,206 shares in 2001 and 10,395,795 shares in 2000, at cost....................................................................... (214,112) (184,612) -------------- ------------- Total stockholders' equity.................................................. 290,636 281,718 -------------- ------------- $ 466,241 $ 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 26 Weeks Ended --------------------------- --------------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 ----------- ----------- ------------ ----------- Revenues: Company restaurant sales.................... $162,035 $147,909 $ 322,178 $ 293,360 Franchise income............................ 23,885 20,736 46,119 40,535 ----------- ----------- ------------ ----------- Total operating revenues................. 185,920 168,645 368,297 333,895 ----------- ----------- ------------ ----------- Cost of company restaurant sales: Food and beverage........................... 43,633 39,323 86,938 79,381 Labor....................................... 51,533 46,954 102,433 93,122 Direct and occupancy........................ 41,104 36,095 81,863 71,755 Pre-opening expense......................... 132 213 267 509 ----------- ----------- ------------ ----------- Total cost of company restaurant sales... 136,402 122,585 271,501 244,767 ----------- ----------- ------------ ----------- General and administrative expenses.............. 18,085 16,338 35,251 32,345 Amortization of intangible assets................ 1,462 1,455 2,925 2,906 Loss on disposition of restaurants and equipment. 571 322 758 675 ----------- ----------- ------------ ----------- Operating earnings............................... 29,400 27,945 57,862 53,202 ----------- ----------- ------------ ----------- Other income (expense): Investment income........................... 415 367 772 716 Interest expense............................ (2,043) (2,267) (4,400) (4,631) Other income................................ 385 303 475 421 ----------- ----------- ------------ ----------- Total other expense...................... (1,243) (1,597) (3,153) (3,494) ----------- ----------- ------------ ----------- Earnings before income taxes..................... 28,157 26,348 54,709 49,708 Income taxes..................................... 10,361 9,696 20,132 18,293 ----------- ----------- ------------ ----------- Net earnings..................................... $ 17,796 $ 16,652 $ 34,577 $ 31,415 =========== =========== ============ =========== Basic net earnings per common share.............. $ 0.48 $ 0.42 $ 0.93 $ 0.78 =========== =========== ============ =========== Diluted net earnings per common share............ $ 0.47 $ 0.41 $ 0.92 $ 0.78 =========== =========== ============ =========== Basic weighted average shares outstanding........ 36,914 40,035 37,015 40,020 =========== =========== ============ =========== Diluted weighted average shares outstanding...... 37,872 40,550 37,774 40,341 =========== =========== ============ ===========
See notes to consolidated financial statements. 4 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands, except share amounts)
Accumulated Common Stock Additional Other Total ------------------------- Paid-In Retained Comprehensive Treasury Stockholders' Shares Amount Capital Earnings Income (Loss) Stock Equity -------------- ---------- ------------ ------------ --------------- ---------- ---------------- Balance, December 31, 2000........ 48,225,358 $ 482 $ 172,037 $ 293,772 $ 39 $(184,612) $ 281,718 Comprehensive income: Net earnings................. -- -- -- 34,577 -- -- 34,577 Change in unrealized gain on short-term investments, net of income taxes........ -- -- -- -- (17) -- (17) Transition adjustment related to financial instruments, net of taxes............... -- -- -- -- (250) -- (250) Net loss on financial instruments, net of taxes.. -- -- -- -- (955) -- (955) -------------- ---------- ------------ ------------ --------------- ---------- ---------------- Total comprehensive income..... -- -- -- 34,577 (1,222) -- 33,355 -------------- ---------- ------------ ------------ --------------- ---------- ---------------- Purchases of treasury stock.... -- -- -- -- -- (39,578) (39,578) Stock options exercised and related tax benefit.......... -- -- 4,079 -- -- 8,855 12,934 Shares issued under employee stock and 401(k) plans....... -- -- 636 -- -- 932 1,568 Restricted stock shares awarded under equity incentive plan, net of cancellations......... -- -- (164) -- -- 291 127 Unearned compensation relating to restricted shares......... -- -- 148 -- -- -- 148 Notes receivable from officers for stock sales.............. -- -- 369 -- -- -- 369 Dividends paid for fractional shares....................... -- -- -- (5) -- -- (5) -------------- ---------- ------------ ------------ --------------- ---------- ---------------- Balance, July 1, 2001............. 48,225,358 $ 482 $ 177,105 $ 328,344 $ (1,183) $(214,112) $ 290,636 ============== ========== ============ ============ =============== ========== ================
See notes to consolidated financial statements. 5 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
26 Weeks Ended -------------------------------- July 1, June 25, 2001 2000 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings...................................................... $ 34,577 $ 31,415 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................................. 15,561 14,589 Amortization of intangible assets.............................. 2,925 2,906 Amortization of deferred financing costs....................... 362 355 Deferred income tax provision (benefit)........................ (3,095) 614 Loss on disposition of restaurants and equipment............... 758 675 Changes in assets and liabilities: Receivables.................................................... 334 (3,995) Inventories.................................................... 3,237 (2,538) Prepaid and other current assets............................... 545 (3,587) Accounts payable............................................... (366) 9,006 Accrued expenses and other current liabilities................. (3,824) (2,560) Accrued income taxes........................................... 1,774 417 Other non-current liabilities.................................. (161) (218) Other.......................................................... (1,381) (896) ------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 51,246 46,183 ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment............................... (18,836) (17,993) Purchases of short-term investments............................... (49) (100) Maturities and sales of short-term investments.................... 375 500 Equity investment in unaffiliated company......................... -- (2,000) Proceeds from sale of restaurants and equipment................... 16 9 ------------- -------------- NET CASH USED BY INVESTING ACTIVITIES.......................... (18,494) (19,584) ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock....................................... (39,578) (4,995) Dividends paid.................................................... (2,779) (2,660) Issuance of common stock upon exercise of stock options........... 12,934 5,341 Shares sold under employee stock purchase plan.................... 540 638 Payments on long-term debt........................................ (7,430) (19,346) ------------- -------------- NET CASH USED BY FINANCING ACTIVITIES.......................... (36,313) (21,022) ------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................... (3,561) 5,577 CASH AND CASH EQUIVALENTS, beginning of period......................... 10,763 1,427 ------------- -------------- CASH AND CASH EQUIVALENTS, end of period............................... $ 7,202 $ 7,004 ============= ==============
See notes to consolidated financial statements. 6 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) (in thousands)
26 Weeks Ended ------------------------------------ July 1, June 25, 2001 2000 ---------------- ---------------- Supplemental disclosures of cash flow information: Cash paid during the 26 week period for: Income taxes........................................................ $ 19,256 $ 21,040 ================ ================ Interest............................................................ $ 4,029 $ 4,162 ================ ================
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 $2,600,000 was outstanding as of July 1, 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 July 1, 2001, the aggregate amount of these lease payments totaled approximately $29,100,000. 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 July 1, 2001, $595,000 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 July 1, 2001, we would have been required to make payments totaling approximately $6,700,000. 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 July 1, 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 26 Weeks Ended ------------------------------- ------------------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 --------------- --------------- --------------- --------------- Net earnings......................................... $ 17,796 $ 16,652 $ 34,577 $ 31,415 =============== =============== =============== =============== Basic weighted average shares outstanding............ 36,914 40,035 37,015 40,020 Dilutive effect of stock options and performance shares................................. 958 515 759 321 --------------- --------------- --------------- --------------- Diluted weighted average shares outstanding.......... 37,872 40,550 37,774 40,341 =============== =============== =============== =============== Basic net earnings per common share.................. $ 0.48 $ 0.42 $ 0.93 $ 0.78 =============== =============== =============== =============== Diluted net earnings per common share................ $ 0.47 $ 0.41 $ 0.92 $ 0.78 =============== =============== =============== ===============
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 July 1, 2001 was a net payable of $1,907,000 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 in other comprehensive income. 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 twenty-six weeks ended July 1, 2001 was $2,650,000. 10 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 July 1, 2001 and June 25, 2000 each contained 13 weeks and are referred to hereafter as the "2001 quarter" and the "2000 quarter", respectively. Our 26 week periods ended July 1, 2001 and June 25, 2000 are referred to hereafter as the "2001 year-to-date period" and the "2000 year-to-date period," respectively. 11 Results of Operations The following table contains information derived from our consolidated statements of earnings expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended 26 Weeks Ended ------------------------- -------------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 ------------ ------------ ------------- ------------ Revenues: Company restaurant sales................................ 87.2% 87.7% 87.5% 87.9% Franchise income........................................ 12.8 12.3 12.5 12.1 ------------ ------------ ------------- ------------ Total operating revenues............................. 100.0% 100.0% 100.0% 100.0% ============ ============ ============= ============ Cost of sales (as a percentage of company restaurant sales): Food and beverage....................................... 26.9% 26.6% 27.0% 27.1% Labor................................................... 31.8 31.7 31.8 31.7 Direct and occupancy.................................... 25.4 24.4 25.4 24.5 Pre-opening expense..................................... 0.1 0.1 0.1 0.2 ------------ ------------ ------------- ------------ Total cost of sales.................................. 84.2% 82.9% 84.3% 83.4% ============ ============ ============= ============ General and administrative expenses.......................... 9.7% 9.7% 9.6% 9.7% Amortization of intangible assets............................ 0.8 0.9 0.8 0.9 Loss on disposition of restaurants and equipment............. 0.3 0.2 0.2 0.2 ------------ ------------ ------------- ------------ Operating earnings........................................... 15.8 16.6 15.7 15.9 ------------ ------------ ------------- ------------ Other income (expense): Investment income....................................... 0.2 0.2 0.2 0.2 Interest expense........................................ (1.1) (1.3) (1.2) (1.4) Other income............................................ 0.2 0.2 0.1 0.1 ------------ ------------ ------------- ------------ Total other expense.................................. (0.7) (0.9) (0.9) (1.0) ------------ ------------ ------------- ------------ Earnings before income taxes................................. 15.1 15.6 14.9 14.9 Income taxes................................................. 5.6 5.7 5.5 5.5 ------------ ------------ ------------- ------------ Net earnings................................................. 9.6% 9.9% 9.4% 9.4% ============ ============ ============= ============
12 The following table sets forth certain unaudited financial information and other restaurant data relating to company and franchise restaurants, as reported to us by franchisees:
13 Weeks Ended 26 Weeks Ended ---------------------------- ---------------------------------- July 1, June 25, July 1, June 25, 2001 2000 2001 2000 ------------- ------------- ---------------- ---------------- Number of restaurants: Company(1): Beginning of period........................... 287 266 285 262 Restaurant openings........................... 2 3 4 8 Restaurant closings........................... -- (1) -- (2) ------------- ------------- ---------------- ---------------- End of period................................. 289 268 289 268 ------------- ------------- ---------------- ---------------- Franchise: Beginning of period........................... 1,012 919 1,001 906 Restaurant openings........................... 24 26 36 40 Restaurant closings........................... (1) (3) (2) (4) ------------- ------------- ---------------- ---------------- End of period................................. 1,035 942 1,035 942 ------------- ------------- ---------------- ---------------- Total: Beginning of period........................... 1,299 1,185 1,286 1,168 Restaurant openings........................... 26 29 40 48 Restaurant closings........................... (1) (4) (2) (6) ------------- ------------- ---------------- ---------------- End of period................................. 1,324 1,210 1,324 1,210 ============= ============= ================ ================ Weighted average weekly sales per restaurant: Company(1)................................... $ 43,291 $ 42,600 $ 43,130 $ 42,485 Franchise.................................... $ 42,924 $ 41,969 $ 42,629 $ 41,725 Total........................................ $ 43,004 $ 42,110 $ 42,739 $ 41,895 Change in comparable restaurant sales:(2) Company(1)................................... 3.1% 1.6% 3.3% 3.2% Franchise.................................... 3.1% 1.2% 3.1% 2.5% Total........................................ 3.1% 1.3% 3.2% 2.6% Total system sales (in thousands)..................... $732,491 $655,123 $ 1,445,440 $ 1,292,343 (1) Includes one Texas restaurant we have operated under a management agreement since July 1990. (2) When computing comparable restaurant sales, restaurants open for at least 18 months are compared from period to period.
13 Company Restaurant Sales Total company restaurant sales increased $14,126,000 (10%) from $147,909,000 in the 2000 quarter to $162,035,000 in the 2001 quarter and increased $28,818,000 (10%) from $293,360,000 in the 2000 year-to-date period to $322,178,000 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 3.1% and 3.3% in the 2001 quarter and the 2001 year-to-date period, respectively. Weighted average weekly sales at company restaurants increased 1.6% from $42,600 in the 2000 quarter to $43,291 in the 2001 quarter and increased 1.5% from $42,485 in the 2000 year-to-date period to $43,130 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 $3,149,000 (15%) from $20,736,000 in the 2000 quarter to $23,885,000 in the 2001 quarter and increased $5,584,000 (14%) from $40,535,000 in the 2000 year-to-date period to $46,119,000 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 2.3% and 2.2% in the 2001 quarter and 2001 year-to-date period, respectively and franchise comparable restaurant sales increased 3.1% in both the 2001 quarter and 2001 year-to-date periods. Cost of Company Restaurant Sales. Food and beverage costs increased from 26.6% in the 2000 quarter to 26.9% in the 2001 quarter and decreased from 27.1% in the 2000 year-to-date period to 27.0% in the 2001 year-to-date period. The increase in the 2001 quarter was due to higher costs relating to the implementation of a new menu in the fourth quarter of 2000 and higher product costs relating to our food promotions. Both the 2001 quarter and the 2001 year-to-date periods were favorably impacted by menu price increases in 2001. Labor costs increased from 31.7% in both the 2000 quarter and the 2000 year-to-date period to 31.8% in the 2001 quarter and 2001 year-to-date period. These increases were due primarily to higher group insurance costs and continued pressure on management costs due to low unemployment as well as the highly competitive nature of the restaurant industry. Direct and occupancy costs increased from 24.4% in the 2000 quarter to 25.4% in the 2001 quarter and from 24.5% in the 2000 year-to-date period to 25.4% in the 2001 year-to-date period. The increases in both periods were due primarily to higher utility costs and repairs and maintenance expense. The increase in the 2001 quarter was also due to an increase in advertising costs, as a percentage of sales, due to the timing of food promotions. General and Administrative Expenses. General and administrative expenses were 9.7% in both the 2000 quarter and 2001 quarter and decreased from 9.7% in the 2000 year-to-date period to 9.6% 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 offset by the absorption of general and administrative expense 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. 14 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 $18,836,000 in the 2001 year-to-date period. We currently expect to open approximately 25 restaurants in 2001. Capital expenditures are expected to be between $50,000,000 and $55,000,000 in fiscal 2001. 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. We repurchased 1,714,000 shares of our common stock at an average price of $23.09 per share for an aggregate cost of $39,578,000 in the 2001 year-to-date period, including $28,965,000 under this authorization and $10,613,000 under previous authorizations. As of July 1, 2001, our liquid assets totaled $8,162,000. These assets consisted of cash and cash equivalents in the amount of $7,202,000 and short-term investments in the amount of $960,000. The working capital deficit increased from $42,995,000 as of December 31, 2000 to $43,416,000 as of July 1, 2001. As of July 1, 2001, $4,000,000 was outstanding under our working capital and line of credit facilities, and standby letters of credit totaling $6,267,000 were outstanding under our letter of credit facilities. 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. 15 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 July 1, 2001 was a net payable of $1,907,000 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 in other comprehensive income. 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 twenty-six weeks ended July 1, 2001 was $2,650,000. 16 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 of July 1, 2001, the total amount of debt subject to interest rate fluctuations was $4,372,000. This amount was comprised of $372,000 under the term loan and $4,000,000 under the working capital facility. A 1% change in interest rates would result in an increase or decrease in interest expense of $44,000 per year. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings As of July 1, 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 18 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders was held on May 10, 2001. The Stockholders voted on the following matters: Proposal I. Elect Lloyd L.Hill, Jack P. Helms and Burton M. Sack as directors to serve a three-year term expiring in 2004. Proposal II. Approve the Applebee's International, Inc. 2001 Senior Executive Bonus Plan. Proposal III. Ratify Deloitte & Touche LLP as our independent auditors for the 2001 fiscal year. The results of the voting were as follows:
Negative Broker Proposal Affirmative Votes Votes Abstentions Non-Votes - --------------------- ------------------ -------------------- -------------------- ------------------ I (Hill) 21,784,654 80,078 -- -- I (Helms) 21,778,698 86,034 -- -- I (Sack) 19,360,628 2,504,104 -- -- II 21,120,752 692,680 51,296 4 III 21,769,202 80,012 15,515 3
Each Proposal received the required affirmative votes and was affirmatively adopted by the Stockholders. 19 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 May 2, 2001 reporting first quarter earnings and April comparable sales. We filed a report on Form 8-K on May 10, 2001 announcing a three-for-two stock split. We filed a report on June 6, 2001 under Item 5 reporting May comparable sales. 20 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: August 1, 2001 By: /s/ Lloyd L. Hill -------------------- ------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) Date: August 1, 2001 By: /s/ George D. Shadid -------------------- ------------------------------------- George D. Shadid Executive Vice President and Chief Financial Officer (principal financial officer) Date: August 1, 2001 By: /s/ Mark A. Peterson -------------------- ------------------------------------- Mark A. Peterson Vice President and Controller (principal accounting officer) 21 APPLEBEE'S INTERNATIONAL, INC. EXHIBIT INDEX Exhibit Number Description of Exhibit - ------------- ------------------------------------------------------------------ 10.1 Amendment to Development and Franchise Agreements. 10.2 New Form of Change in Control Agreement and schedule of parties thereto. 22 EX-10 4 devagrexhibit.txt DEVELOPMENT AGREEMENT AMENDMENT AMENDMENT TO DEVELOPMENT AGREEMENT AND FRANCHISE AGREEMENT[S] THIS AMENDMENT TO DEVELOPMENT AGREEMENT AND FRANCHISE AGREEMENT[S] ("Amendment") is made and entered into effective as of the ______ day of ___________, 2000, by and between APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation ("Franchisor"), _________________________, a _________________ corporation ("Developer" or "Franchisee") and _______________________ (individually, "Principal Shareholder", and collectively, "Principal Shareholders"): WITNESSETH: WHEREAS, Franchisor franchises the Applebee's Neighborhood Grill & Bar restaurant system (the "System"); and WHEREAS, Franchisor and Developer have entered into the Development Agreement listed on Schedule 1 (as amended from time to time, the "Development Agreement") and the Franchise Agreement[s] listed on Schedule 1 (as amended from time to time, collectively, the "Franchise Agreements" and, individually a "Franchise Agreement"), relating to the development and operation of certain Applebee's Neighborhood Grill & Bar restaurants (the "Restaurants"); and WHEREAS, pursuant to said Development Agreement and Franchise Agreement[s], Developer has opened for operation or commenced construction on a Restaurant at each of the locations identified on Schedule 1; and WHEREAS, the parties desire to amend the Development Agreement and Franchise Agreement[s] as herein set forth. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Notwithstanding anything to the contrary contained in Section 1.1 or Section 9.1 of the Development Agreement, the term of the Development Agreement shall be extended to expire twenty (20) years from the date hereof, unless sooner terminated as permitted pursuant to the terms of this Amendment or the Development Agreement. 2. Section 2.1 of the Development Agreement is hereby amended by deleting the same as it now appears and inserting the following in its place and stead: A2.1. Developer shall develop the number of Restaurants franchised by Franchisor in the Territory during the period commencing on November 1, 1999 and expiring October 31, 2004, in accordance with the schedule outlined on Appendix A.2 hereof ("Initial Development Period"). 1 3. The Appendix A.2, attached hereto as Exhibit A [and Exhibit B] shall be deemed attached to and incorporated by reference into the Development Agreement, the same as if originally attached thereto as the Initial Development Period schedule. 4. The provisions of Section 2.3 of the Development Agreement shall remain in effect. 5. Section 3.1 of the Development Agreement is hereby amended by deleting the same as it now appears and inserting the following in its place and stead: 3.1 During the period commencing on November 1, 2004 and expiring January 1, 2020, Developer shall develop and open for business in the Territory, in accordance with the parameters established under Subsection 3.2, that number of additional Restaurants as is required to achieve at the end of such period, a total number of Restaurants open for business within the Territory which, after including the Restaurants currently open and operating for business within the Territory, will equal the Minimum Development Potential of the Territory (as defined herein below)." 6. Section 3.2 of the Development Agreement is hereby amended by deleting the same as it now appears and inserting the following in its place and stead: 3.2 (a) Each consecutive two (2) year period, commencing with the period beginning on November 1, 2004, is hereafter referred to as a "Subsequent Development Period." (b) On or before the commencement of each Subsequent Development Period, Franchisor shall provide to Developer an updated Appendix A.2 showing the number of Restaurants to be developed by Developer during such Subsequent Development Period ("Subsequent Development Schedule"), together with a detailed summary of the Minimum Development Potential calculations used to determine the Subsequent Development Schedule. The minimum development potential ("Minimum Development Potential") shall be determined as follows: (i) Each A.D.I. comprising all or a portion of the Territory shall be placed into one of four market categories ("Market Categories"), identified as either a "Small Market", defined as those A.D.I.s containing less than 135,000 households in metropolitan counties within the Territory with incomes greater than $25,000 ("Income Qualified Metro Household"); a "Medium Market", defined as those A.D.I.s with containing 135,000 to 399,999 Income Qualified Metro Households; a "Large Market", defined as those A.D.I.s containing 400,000 to 1,399,999 Income Qualified Metro Households; or a "Mega 2 Market", defined as those A.D.I.s containing 1,400,000 or more Income Qualified Metro Households (Small Market, Medium Market, Large Market or Mega Market may also be referred to herein individually as an "A.D.I. Market" or collectively as "A.D.I. Markets"). The parties understand and agree that the income level set forth above may, but need not, be adjusted upward or downward by Franchisor once every five (5) years in order to reflect changes in household income, such adjustments to be determined by reference to the United States Census Bureau's Median Household Income Index or if such index no longer exists at the time it is to be used, then the index employed shall be such other generally known index used by NPD Crest or such other similar company then used by Franchisor. (ii) Each county within an A.D.I. Market shall be classified as a "Metropolitan County", those counties with a total population greater than 50,000; a "Small Town County", those counties with a total population of 20,000 to 50,000; or an "Other County", those counties with a total population less than 20,000 (Metropolitan County, Small Town County and Other County may be for description purposes also referred to herein as a "County Type"). (iii)Each A.D.I. Market shall at that time be assigned to one of four development groups according to the level of development penetration which Developer has achieved in the A.D.I. Market as compared to the level of development penetration achieved by all domestic development in the System. The four development groups will be determined by ranking each A.D.I. in the System within each of the Market Categories from most developed to least developed. The A.D.I.s, in ranking order from most developed to least developed, shall then be divided into four substantially equal development groups: "Opportunistic Group", "Second Group", "Third Group" and "Lower Limit Group". The average number of Restaurants per Income Qualified Metro Household developed by the top three territories in the System of the Second Group in each A.D.I. Market category shall be the development target for each such A.D.I. Market category ("Penetration Target"). (iv) The total number of Restaurants to be developed by Developer in each Metropolitan County of an A.D. I. Market shall be equal to the number of Income Qualified Metro Households in such A.D.I. Market divided by the Penetration Target ("Metropolitan Development Potential"). The Metropolitan Development Potential minus the number of Restaurants in each Metropolitan County then open and operating in said A.D.I. Market shall be the number of Restaurants in each Metropolitan County then available for development in the A.D.I. Market ("Metropolitan Development Balance"). Until such time as Franchisor releases other prototypes for use in Small Town or other Counties, as hereinafter more fully described, the Metropolitan Development Balance shall be the Developer's "Minimum Development Potential" for the Territory. (v) The Minimum Development Potential shall be the maximum number of Restaurants Franchisor may include on the Subsequent Development Schedule and thus require Developer to develop in the A.D.I. Market during the next Subsequent Development Period; subject, however, to the minimum and maximum development criteria outlined in paragraph (c) and (d) of this Subsection 3.2. In the event, however, a particular 3 A.D.I. Market is in the Opportunistic Group, Developer and Franchisor shall negotiate in good faith a mutually agreeable Subsequent Development Schedule; provided, however, said Subsequent Development Schedule shall not reflect a number of Restaurants less than the remaining undeveloped portion of the Metropolitan Development Potential, nor shall the Developer be required (without its consent) to develop more than the remaining undeveloped portion of the Metropolitan Development Potential." 7. Section 3.2 of the Development Agreement is hereby amended by inserting immediately after paragraph (b), the following: (c) During each Subsequent Development Period that Developer has less than ten (10) Restaurants open and operating in the Territory, Developer shall be required to develop no more than one (1) Restaurant each calendar year that the number of Restaurants in Developer's Territory does not meet or exceed the Minimum Development Potential of the Territory. During each Subsequent Development Period that Developer has ten (10) or more Restaurants in the Territory, Developer shall be required to develop no more than two (2) Restaurants each calendar year that the number of Restaurants in the Territory does not meet or exceed the Minimum Development Potential for the Territory. (d) Notwithstanding the Minimum development Potential for which Developer might otherwise be obligated in order to satisfy the Penetration Target for the Territory, Developer shall not be required to develop more than ten (10) Restaurants in any one calendar year in the Territory. In the event Developer holds other development agreements with the System or the Principal Shareholders of Developer are the identical Principal Shareholders of other entities who hold other development agreement[s] within the System (such other entities being defined hereunder as "Affiliates"), Developer, together with such Affiliates, may limit their combined development under all such development agreements to no more than ten (10) Restaurants in the aggregate in any calendar year. Provided however, Developer and Principal Shareholder[s] hereby acknowledge that if Developer exercises its option under this provision to limit its combined development with its Affiliates and after so limiting its development, Developer (together with its Affiliate) does not achieve such aggregate development, Developer shall be in default under that development agreement(or all such development agreements as the case may be) but only such development agreement(s) which did not meet the individual Subsequent Development Schedule calculated and agreed to for that individual development agreement." 8. The provisions of Section 3.3 shall remain in effect. 9. Notwithstanding the foregoing and in additional thereto, Franchisor shall further divide and place those counties identified as Small Town Counties and Other Counties on a separate list, attached hereto as Appendix A-3. It is understood that the matters set forth in paragraphs 2-6 of this Amendment are intended for the development of the Metropolitan Counties in 4 the A.D.I. Market and that this paragraph 7 is intended to (and shall) provide for the development of all other counties (i.e., Small Town Counties and Other Counties) in the A.D.I. Market ). (a) At such time as Franchisor makes available to the franchise system as a whole a small town Restaurant prototype or a revised method of operation or both for use in smaller populated, less dense markets ("STC Release"), Franchisor shall request Developer to commit to develop and open for operation pursuant to a pre-determined development schedule the number of Restaurants utilizing the STC Release and in the specified counties set forth on the written request tendered to Developer by Franchisor (the "STC Notice"). The counties so specified will be a portion of those shown on Appendix A-3. The STC Notice provided Developer will further reflect the proposed development schedule for all such STC Releases. Within 30 days of Developer's receipt of such STC Notice, Developer shall indicate in writing whether it desires to develop a STC Release in all or a portion of the counties listed. Thereafter, the development schedule suggested in the STC Notice will be adjusted by the Franchisor, using the same pace of development as set forth in paragraph 7 above. With respect to this process, the Franchisor and Developer will review the development feasibility of each county listed in the STC Notice, giving appropriate consideration to such factors as liquor license availability, proximity to existing Restaurants, the presence or absence of competitive concepts and other such matters as Franchisor deems appropriate. Any counties removed from the purview of the STC Notice by such negotiations will be returned to the pool of unused counties shown on the Appendix A-3 list for possible future development. At or before the conclusion of the 30 day notice period, unless otherwise extended in writing, Developer shall: (i) Signify its agreement to develop in accordance with the STC Release in all of the listed counties and in accordance with the proposed development schedule included with the revised STC Notice and as a result, Developer's exclusive right to develop Restaurants in the Territory as previously granted remains unaffected; (ii) Signify its agreement to develop a STC Release in a portion of the listed counties, and in such event, Developer shall no longer have the exclusive right to develop Restaurants in the counties in which it chose not to develop the STC Release and will be subject to the terms set forth in subparagraph (c) below; or (iii)Reject the development of a STC Release in all of the STC Notice listed counties, and in such an event, Developer shall no longer have the exclusive right to develop Restaurants in the counties listed in the final STC Notice and will be subject to the terms of subparagraph (c) below; or 5 (iv) Seek mediation of the inclusion of one or more of the counties in the STC Notice with the National Franchise Mediation Board in accordance with Section 9(b); or (v) Fail to respond in writing to the STC Notice, in which event the Developer will no longer have the exclusive right to develop Restaurants in the counties set forth in the STC Notice and will be subject to the terms of subparagraph (c) below. (b) In the event the Developer contests the STC Notice as referenced in subparagraph 9(a)(iv) above, such disagreement shall be submitted for mediation to a board to be formed that shall be known as the National Franchise Mediation Board (the "NFMB"), which shall be comprised of two (2) individuals appointed by Franchisor, two (2) individuals appointed by the Franchise Business Council and one (1) individual chosen by the foregoing four (4) individuals, in accordance with the following: (i) Developer will deposit with Franchisor at the time of the filing of its written demand for mediation an amount equal to $35,000 times the number of counties about which Developer is contesting development. Notwithstanding the foregoing, in no event shall less than $35,000 be so deposited. If the deposit is not so timely made, then in such an event, the Developer shall be deemed to have waived its right to request mediation and further, deemed to have elected alternative (v) as set forth in subparagraph 9(a) above. (ii) The NFMB will determine in its sole discretion the procedure, time limits and additional filing and responses required with respect to the mediation. However, it is understood and agreed by all parties that the mediation is intended to provide a more expeditious resolution of the matter submitted to the NFMB. (iii) The mediation decision to be rendered by the NFMB will be binding upon all parties to the mediation. (iv) The party for whom a favorable decision is rendered shall receive from the other party reimbursement for all out of pocket costs and expenses, including attorneys fees, incurred with respect to the mediation which are determined to be reasonable by the NFMB. (v) At the conclusion of the mediation, the NFMB shall issue its decision either supporting Developer and indicating that the county(ies) to which the Developer objected shall be removed from the STC Notice (and returned to the pool of unused county(ies) shown on the Appendix A-3 list), or conversely, supporting Franchisor and indicating that the county(ies) about which an objection was raised should be so included in the STC Notice and therefore a STC Release should be developed therein. (vi) If the decision of the NFMB supports the Developer, then in such an event, the Developer shall maintain its exclusive right to the county (ies) in question, and shall continue to maintain its right to develop therein in the future. In addition, the amount of deposited by Developer shall be refunded to Developer. 6 (vii)If the decision of the NFMB supports the Franchisor then in such an event, the Developer shall be required to construct the STC Release in the county (ies) in question, pursuant to the development schedule originally listed in the STC Notice. The funds previously deposited by Developer with Franchisor shall be applied to the Franchise fee due for each of said units at the rate of $35,000 per each unit. In the event Developer fails to develop some or all of the STC Releases in the county(ies) here in question, any unused deposit shall be forfeited and further, the Developer's exclusive rights to the county(ies) in which no development occurred shall be terminated and not subject to any first right of refusal rights, notwithstanding anything herein to the contrary. (c) Except as otherwise provided in subparagraph 9(b) hereof, in the event that the Developer, after receiving its STC Notice, falls within the purview of subparagraphs 9(a), (ii), (iii) or (v) above, the counties for which the Developer rejected the right to develop a STC Release, Franchisor may in its discretion seek another franchisee to develop the rejected counties or develop STC Releases in those counties on its own. Upon the identification of a bonafide prospective franchisee for those counties or upon the determination by Franchisor that it will develop those counties, Franchisor shall provide Developer with a written first right of refusal notice ("FROR Notice"), which FROR Notice will set forth the counties in question and the schedule development. Developer shall have 30 days within which to respond to such FROR Notice in writing. Such response shall be solely to accept or reject in whole its right of refusal. No partial acceptances will be honored by the Franchisor. In the event the Developer fails to respond or responds and indicates its desire not to develop the counties listed, then Developer's exclusive right to develop such counties shall no longer be valid and exclusivity rights previously granted in the Development Agreement as to those counties shall be of no further effect, and in such an event the Franchisor may grant a third party prospective franchisee the right to develop STC Releases in those counties or develop STC Releases itself, without regard to the Developer. Conversely, if the Developer responds to the FROR Notice in writing and indicates its desire to build the STC Releases listed in compliance with the schedule set forth, and at the same time tenders a non-refundable deposit in the amount of $35,000 for each of the Restaurants to be developed in the counties listed in the FROR Notice, the Developer shall have the right to develop said STC Releases and shall further retain the exclusive right to develop Restaurants in the counties so listed. (d) As to the other counties unallocated under the foregoing process set forth in subparagraph (c) and shown on Appendix A-3, Franchisor may issue future notices regarding development of the same STC Release for use in some or all of the counties. Further, Franchisor may create other new small town prototypes using the System developed for the Restaurants, which extend the brand name but which would more likely be adaptable to the demographics shown for some or all of the other counties listed on the Appendix A-3 which have not been identified for development under the preceding sentence or under subparagraph (b) above. As each such release (which may be in one or more increments) is developed by the Franchisor, the same procedures set forth in subparagraphs (a) and (b) above shall apply. 7 (e) Once the STC Release is released by Franchisor for use in the System as a whole, the development and opening of a Restaurant in a county listed on Appendix A-3 will not apply to or substitute for the development required under paragraph 2 hereof. However, in the event Developer fails to develop and open the Restaurants called for under this paragraph pursuant to the schedule established by Franchisor, such default in development shall only effect the Developer's right to open and operate in the counties so listed. If Developer fails to open one or more of the STC Release Restaurants in the total aggregate time period set forth in the schedule, then in such an event, Developer shall lose its rights to develop any STC Releases in the counties listed in the STC Notice or the FROR Notice (as the case may be) wherein no Restaurant is in operation and further, the exclusivity provided by this Development Agreement shall be of no further force or effect with respect to those counties listed in said Notice (but only as to said affected counties) and Franchisor may grant development rights to a third party or develop said counties itself. It is understood that the 60 day period provided for in Section 2.3 of the Development Agreement shall apply to all of the Restaurants to be developed under this paragraph. 10. In the event, as a result of the matters described in paragraph 9 hereof, or for some other reason, more than one franchisee operates in an ADI, the provisions contained in the Manuals with respect to co-operative marketing/advertising programs shall apply. 11. Section 4.3 of each Development Agreement described on Schedule 1 is hereby amended by deleting the same as it now appears and inserting the following in its place and stead: 4.3 As partial consideration for the rights granted to Developer pursuant to the franchise agreements covering the Restaurants which Developer develops hereunder, Developer (as franchisee under each such franchise agreement) shall pay Franchisor a monthly royalty fee as determined by Franchisor. Until January 1, 2020, the monthly royalty fee shall not exceed four percent (4%) of each calendar month's gross sales (as that term is defined in the form of franchise agreement which is attached hereto as Appendix B). Thereafter, the monthly royalty fee shall be as determined by Franchisor." 12. (a) Except as otherwise provided in subparagraph 12(b) hereof, Subsection 9.1(b) of each Franchise Agreement described on Schedule 1 is hereby amended by deleting the same as it now appears and inserting the following in its place and stead: (b) until January 1 of the year 2020, a monthly royalty fee equal to four percent (4%) of each calendar month's gross sales, as provided in Subsection 4.3 of the Development Agreement, as payment for Franchisee's continuing right to operate the Restaurant as part of the System. Thereafter, a monthly royalty fee as determined by Franchisor." 8 (b) Notwithstanding the foregoing subparagraph 12(a), if a Franchise Agreement is listed on Schedule 1-A hereof, the 4% maximum royalty fee shall apply only for the remaining term of the Franchise Agreement. 13. (a)Except as provided in subparagraph 13(b) below, notwithstanding anything to the contrary contained in Section 1.2 of each Franchise Agreement described on Schedule 1, the term of the Franchise Agreement shall be extended to expire twenty (20) years from the date hereof, unless sooner terminated as permitted pursuant to the terms of the respective Franchise Agreement. (b) Notwithstanding the foregoing subparagraph 13(a), if a Franchise Agreement is listed on Schedule 1-A hereof, the term of said Franchise Agreement shall not be extended; rather, said Franchise Agreement shall retain its original term as set forth in the Franchise Agreement. 14. Notwithstanding Section 1.3 of each Franchise Agreement described on Schedule 1but not listed on Schedule 1-A, as consideration for the additional term realized as a result of Franchisor issuing a new Franchise Agreement to Developer [extending the term] for each Restaurant, on the date which each original Franchise Agreement for the respective Restaurant would have expired, Developer shall pay Franchisor an additional franchise fee equal to $1,750 [$700 if elects is sign new Franchise Agreement form] multiplied by the difference between twenty (20) years and the number of years which would have been remaining under such original franchise agreement. 15. [Section 9.3 (a) of the Franchise Agreement shall be amended so as to provide that a royalty shall not be due upon the sale of a gift certificate by the Franchisee. Rather, royalty shall be due and payable upon the redemption of the gift certificate. Section 9.3 (b) (iii) shall be modified by deleting the same as it now appears and inserting in its place the following: The sale of merchandise for which a gift certificate is redeemed, if the initial sale of the gift certificate shall have been previously included in gross sales, . . ." 16. Section 18.3 of the Franchise Agreements listed on the attached exhibit and those to be issued in the future shall be amended by inserting the following subsection (c): (c) the production, distribution and sale of products through another restaurant or restaurants which do not utilize the System or the Applebee's Neighborhood Grill & Bar service mark and which otherwise compete or might compete with the Restaurant." 9 17. (a) If the Developer has timely developed and opened for operation the Restaurants called for by Appendix A.2 and thereafter during a Subsequent Development Period objects to the development of the last Restaurant required during that Subsequent Development Period under Article 3 of the Development Agreement, then, Franchisor hereby grants Developer the right to make a written demand for a study as to whether said last Restaurant may be located in the Territory or whether said Restaurant will at that time cannibalize the sales and traffic with respect to its other existing Restaurants in the Territory. In the event a written request for such a study is received by Franchisor prior to the end of the subsequent Development Period in question and prior to any default under the Development Agreement, then, in such an event, Franchisor and Developer shall in good faith attempt to resolve the issue regarding whether the last Restaurant should or should not be developed and opened. If an agreement cannot be reached (which process may include the Franchisor and Developer ordering a PIN study at Developer's cost) Franchisor and Developer shall submit the disagreement to the NFMB for handling and disposition. The submission of said disagreement will be in accordance with subparagraph 17(b) hereof. (b) The following shall apply to the submission to the NFMB pursuant to the preceding paragraph: (i) The disagreement shall be submitted by the Developer by way of a written demand for mediation tendered to Franchisor within thirty (30) days after the Franchisor has indicated to the Developer that an agreement cannot be reached. Developer will deposit $35,000 with Franchisor at the time of the filing of its written demand for mediation. If the demand or the deposit or either or both of them are not so timely made, then in such an event, the Developer shall be deemed to have waived its right to request mediation and further, shall be deemed to have elected to accept the full number of Restaurants Franchisor had determined for the Subsequent Development Period then in question. (ii) The NFMB will determine in its sole discretion the procedure, time limits and additional filing and responses required with respect to the mediation. However, it is understood and agreed by all parties that the mediation is intended to provide a more expeditious resolution of the matter submitted to the NFMB. (iii)The mediation decision to be rendered by the NFMB will be binding upon all parties to the mediation. (iv) The party for whom a favorable decision is rendered shall receive from the other party reimbursement for all out of pocket costs and expenses, including attorneys fees incurred and any PIN study conducted with respect to the mediation which are determined to be reasonable by the NFMB. 10 (v) At the conclusion of the mediation, the NFMB shall issue its decision either supporting Developer and indicating that the last Restaurant need not be developed as a part of the Subsequent Development Period in question, or conversely, supporting Franchisor and indicating that the last Restaurant should be a part of the development for that Subsequent Development Period. (vi) If the decision of the NFMB supports the Developer, then in such an event, the Developer shall maintain its exclusive rights to the Territory, and shall continue to maintain its right to develop therein in the future. Provided, however, Franchisor may request further development during future Subsequent Development Periods. In addition Franchisor shall reimburse Developer the $35,000 previously deposited at the commencement of the mediation process. (vii)If the decision of the NFMB supports the Franchisor then in such an event, the Devleoper shall be required to construct and open the last Restaurant, pursuant to the development schedule originally listed as a part of the Subsequent Development Period so in question. In addition, the funds previously deposited by Developer with Franchisor shall be applied to the Franchise fee due for such Restaurant. However, in the event Developer fails to develop the Restaurant, the $35,000 shall be forfeited and shall become the exclusive property of Franchisor and further, the exclusive development rights granted by the Development Agreement shall terminate and be of no further force and effect. (c) If after a new developer has been appointed to open the last Restaurant, and said Restaurant has opened for operation, and within the first twelve (12) months of operation of said Restaurant, Developer believes that said new developer's Restaurant has had a significant cannibalization effect upon one or more of Developer's Restaurants, then, in such in event, the Developer may avail itself of the following post impact process ("Post Impact Process"). The Post Impact Process will consist of the submission of the positions of the Developer, new developer and Franchisor to the NFMB for study and mediation. The Post Impact Process is and shall be from time to time more fully outlined in the Manuals. The NFMB shall have the right to issue a non-binding determination as to whether or not the Developer's Restaurant or Restaurants (as the case may be) were, in fact significantly cannibalized as contended by Developer and if so determined, a recommendation on whether any and what type of royalty relief or other relief, if any, should be granted Developer. The parties agree to exhaust the foregoing remedies and seek the mediation provided by the NFMB prior to submitting the matter to any judicial tribunal. 18. Developer and Principal Shareholder[s] hereby acknowledge and agree that each of them, jointly and severally, shall remain liable to Franchisor including, if appropriate, interest thereon, for any royalties, franchise fees, advertising fees and other charges and expenses as determined by Franchisor to be incurred by and due from Developer prior to the date hereof. 11 19. Developer and Principal Shareholder[s] hereby warrant and represent to Franchisor that: (a) Developer is a [corporation] duly organized and validly existing under the laws of the State of [_______________] and is in good standing under the laws of all other states or jurisdictions where the conduct of its business requires such qualifications; Developer has all requisite [corporate] power and authority to own all of its assets and carry on its business as now conducted. (b) The execution and delivery of this Amendment and the consummation of the transactions contemplated hereby have been duly and validly authorized by the [Board of Directors] of Developer and by all other necessary [corporate] action. This Amendment has been duly executed and validly delivered by Developer and the Principal Shareholder[s] and constitutes a legally binding agreement on them. (c) The execution, delivery and performance of this Amendment and the consummation of the obligations contemplated hereby do not and will not (i) conflict with the organizational documents of Developer or (ii) result in any breach of any of the provisions of, or constitute a default under, any contract, agreement, commitment, indenture, mortgage, note, security interest, bond, license, pledge, encumbrance, lien, claim, charge, right, option, or other instrument or obligations to which Developer or the Principal Shareholder[s] or any of them individually is now a party or by which any of them may be bound or affected; or (iii) violate any law, statute, ordinance, rule, or regulation of any administrative agency or governmental body, or any order, writ, injunction, judgment or decree of any court, administrative agency, or governmental body, or any decision or finding of any arbitration panel to which Developer or the Principal Shareholder[s] is subject. (d) There is no suit, action, or legal, administrative, arbitration, or other proceeding or governmental investigation pending, or to the knowledge of Developer or Principal Shareholder[s] threatened, against Developer or affecting the System or the operation of the Restaurants to which either Developer or the Principal Shareholder[s] is a party. (e) Developer and Principal Shareholder[s] are otherwise in compliance with their obligations, covenants and agreements as set forth in the Development Agreement and any Franchise Agreement executed as of the date hereof. 20. Except as otherwise expressly set forth in this Amendment, the Development Agreement[s] and any addendum or amendment thereto made and entered prior to the date hereof shall remain in full force and effect, Developer and Principal Shareholders hereby reaffirming and readopting said instruments, the same as if they were fully set forth herein. 12 21. Except as otherwise expressly set forth in this Amendment, the Franchise Agreement[s] and any addendum or amendment thereto made and entered prior to the date hereof shall remain in full force and effect, Developer and Principal Shareholders hereby reaffirming and readopting said instruments, the same as if they were fully set forth herein. 22. Developer and Principal Shareholder[s], jointly and severally, represent and warrant to Franchisor that with respect to the terms of this Amendment, they have sought and have been represented by independent legal counsel. Said legal counsel has fully and completely explained to Developer and Principal Shareholders the terms and conditions of this Amendment. Accordingly, Developer and Principal Shareholders hereby acknowledge that they enter this Amendment to Development Agreement with a full understanding of the terms and conditions contained herein. 23. This Amendment to Development Agreement and the documents and instruments referred to herein constitute the entire agreement between the parties, superseding and canceling any and all prior and contemporaneous agreements, understandings, representations, inducements and statements, oral or written, of the parties in connection with the subject matter hereof. 24. Except as expressly set forth herein or in the documents or instruments herein referred to, no further amendment or modification of this Amendment to Development Agreement shall be binding unless executed in writing by the parties hereto or their authorized successors or assigns. 25. If any part of this Amendment shall for any reason be declared invalid, unenforceable or impaired in any way, the validity of the remaining portions shall remain in full force and effect as if this Amendment had been executed with such invalid portion eliminated, and it is hereby declared the intention of the parties that they would have executed the remaining portion of this Amendment without including therein any such portions which might be declared invalid. 26. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto, their successors and assigns and shall be construed in accordance with and governed by the laws of the state of Kansas [Missouri], except as to any "choice of law" provision or rule thereof. 13 IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their duly authorized officers the day and year first above written. FRANCHISOR: WITNESS: APPLEBEE'S INTERNATIONAL, INC. ____________________________ By: ______________________________ Robert T. Steinkamp Steven K. Lumpkin Secretary Executive Vice President of Strategic Development DEVELOPER: --------- WITNESS: [__________________________] By: _______________________________ Name: ________________________ Name: ____________________________ Title: _________________________ Title: _____________________________ PRINCIPAL SHAREHOLDERS: ---------------------- Witness - ---------------------------- [---------------------------- ] Witness - ---------------------------- [---------------------------- ] 14 SCHEDULE 1 [developer name] DOCUMENT * LOCATION DATE Development Agreement ____________ ADI _________________ ADI _________________ ADI Franchise Agreement [Restaurant address] Franchise Agreement [Restaurant address] * Each document specified includes the original document plus all amendments or addendums thereto. 15 EXHIBIT A APPENDIX A.2 to Development Agreement for the following Territory: [list applicable A.D.I.'s] METRO. SMALL COUNTY DEV. DEV. OPEN AND ADI POTENTIAL POTENTIAL OPERATING BY - ---------------------------- ---------------- ---------------- ----------------- 16 SCHEDULE 1-A [developer name] 17 EX-10 5 newchangeincontrol.txt NEW FORM OF CHANGE IN CONTROL AGREEMENT. CHANGE IN CONTROL AND NONCOMPETE AGREEMENT This Agreement is made as of , ______, by and between APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation (the "Company") and ____________ (the "Executive"). WHEREAS, ___ for purposes of this ___ Agreement, ___ "Company" is hereby defined to include ___ Applebee's International, Inc. and all of its wholly-owned subsidiaries or subsidiaries of subsidiaries now or hereafter in existence. WHEREAS, the Company believes it to be in its best interest to provide for continuity of management and to protect its management personnel against financial hardship in the event of a change in control of the Company. NOW, THEREFORE, in consideration of premises and the mutual terms and conditions hereof, the company and the Executive hereby agree as follows: 1. Termination After Change in Control. In the event of a Change in Control, as defined below, upon any termination of Executive's employment with the Company within the 18 month period following such Change in Control, if by Executive for Good Reason, as defined below, or by the Company without Cause, as defined below, the following shall occur: a. On the tenth business day following the effective date of such termination, the Executive shall receive a lump sum payment equal to (A) the Executive's base salary in effect immediately prior to the change in control, plus the greater of (i) the average of the Executive's actual bonus attributable to each of the preceding three (3) fiscal years or (ii) the Executive's target bonus amount for the fiscal year in which the termination occurs (B) divided by twelve (12) and (C) multiplied by _______; b. The Company shall pay health insurance premiums on behalf of the Executive, for coverage substantially similar to that provided under the Company's group health policy, for so long as the Executive elects to continue such coverage, up to a maximum of _____ months. c. The immediate vesting of any unvested stock options held by the Executive as of the day immediately preceding the effective date of termination and, with respect to all Restricted Share awards, all restrictions will immediately be removed and deemed to have been satisfied and any vesting periods will be accelerated, and with respect to all Performance Share awards, the Executive will receive a pro rata portion (based upon the number of complete months that have passed in the Performance Period as of the date of the Change in Control) of the applicable Award Agreement as if all performance criteria were achieved at their targeted levels. 1 d. Participation by the Executive in all compensation and benefit plans of the Company will cease immediately and all unvested bonuses, equity awards and other like items will immediately lapse, except as specifically provided in subsection (c), above. In addition, all amounts owed by the Executive to the Company for any reasons whatsoever will become immediately due and payable and the Company will have the right in its discretion to collect any or all such amounts by offset against any amounts due to the Executive from the Company whether or not under this Agreement. 2. Definitions. ----------- a. "Change in Control" means any one of the following: (i) Continuing Directors no longer constitute at least 2/3 of the Board of Directors; (ii) any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934 (the "Exchange Act")), together with its affiliates, become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of thirty percent (30%) or more of the Company's then outstanding Common Stock or thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities (calculated in accordance with Section 13(d)(3) or 14(d) of the Exchange Act) entitled generally to vote for the election of the Company's Directors; (iii) the merger or consolidation of the Company with any other corporation, the sale of substantially all of the assets of the Company or the liquidation or dissolution of the Company, unless, in the case of a merger or consolidation, the then Continuing Directors in office immediately prior to such merger or consolidation will constitute at least 2/3 of the Board of Directors of the surviving corporation of such merger or consolidation and any parent (as such term is defined in Rule 12b-2 under the Exchange Act of such corporation; or (iv) at least 2/3 of the then Continuing Directors in office immediately prior to any other action proposed to be taken by the Company's stockholders or by the Company's Board of Directors determine that such proposed action, if taken, would constitute a change in control of the Company and such action is taken. b. "Continuing Director" means any individual who either (i) was a member of AII's Board of Directors on the date hereof, or (ii) was designated (as of the day of initial election as a Director) as a continuing Director by a majority of the then Continuing Directors. c. The following shall constitute "Cause": (i) The Executive is convicted of -- or pleads no contest / nolo contendre to -- any felony or any criminal offense involving fraud; or (ii) The Executive is determined by a g overnment agency or court to have violated any applicable local, state or federal employment law, including, but not limited to, any anti-discrimination law. d. The Executive shall have "Good Reason" to effect a termination in the event the Company (i) diminishes the Executive's compensation or benefits as in effect prior to the Change in Control, (ii) requires the Executive to relocate more than 50 miles from the greater Kansas City area, or (iii) diminishes the responsibilities of 2 the Executive, and in any of (i), (ii) or (iii) the Executive has given written notice to the Company as to the details of the basis for such Good Reason within 30 days following the date on which the Executive alleges the event giving rise to such Good Reason occurred and the Company has failed to provide a reasonable cure within ten (10) days after its receipt of such notice. 3. Confidentiality/Trade Secrets. The Executive acknowledges that his/her position with the Company is one of the highest trust and confidence both by reason of his/her position and by reason of his/her access to and contact with the trade secrets and confidential and proprietary business information of the Company. Both during the term of this Agreement and thereafter, the Executive covenants and agrees as follows: a. He/She shall use his/her best efforts and exercise utmost diligence to protect and safeguard the trade secrets and confidential and proprietary information of the Company, including but not limited to the identity of its customers and suppliers, its arrangements with customers and suppliers, and its technical and financial data, records, compilations of information, processes, recipes and specifications relating to its customers, suppliers, products and services; b. He/She shall not disclose any of such trade secrets and confidential and proprietary information, except as may be required in the course of his/her employment with the Company or by law; and c. He/She shall not use, directly or indirectly, for his/her own benefit or for the benefit of another, any of such trade secrets and confidential and proprietary information. All files, records, documents, drawings, specifications, memoranda, notes, or other documents relating to the business of the Company, whether prepared by the Executive or otherwise coming into his/her possession, shall be the exclusive property of the Company and shall be delivered to the Company and not retained by the Executive upon termination of his/her employment for any reason whatsoever or at any other time upon request of the Company. 4. Discoveries. The Executive covenants and agrees that he/she will fully inform the Company of and disclose to the Company all inventions, designs, improvements, discoveries, and processes ("Discoveries") that he/she has now or may hereafter have during his/her employment with the Company and that pertain or relate to the business of the Company or to any experimental work, products, services, or processes of the Company in progress or planned for the future, whether conceived by the Executive alone or with others, and whether or not conceived during regular working hours or in conjunction with the use of any Company assets. All such Discoveries shall be the exclusive property of the Company whether or not patent or trademark applications are filed thereon. The Executive shall assist the Company, at any time during or after his/her employment, in obtaining patents on all such Discoveries deemed patentable by the Company and shall execute all documents and do all things necessary to obtain letters patent, vest the Company with full and exclusive title thereto, and protect the same against infringement by others. If such assistance takes place after his her employment is terminated, then the Executive shall be paid by the Company at an hourly rate determined based on fifty percent (50%) of his/her existing salary at the date of termination divided by 2500 for any time actually spent in rendering such assistance at the request of the Company. 3 5. Non-Competition. The Executive covenants and agrees that during the period of his/her employment and for 12 months thereafter, he/she shall not, without the prior written consent of the Board, directly or indirectly, as an employee, employer, consultant, agent, principal, partner, shareholder, corporate officer, director, or through any other kind of ownership (other than ownership of securities of publicly held corporations of which the Executive owns less than five percent 5% of any class of outstanding securities) or in any other representative or individual capacity, engage in or render any services to any business in United States engaged in the casual dining restaurant industry, or in any other segment of the restaurant industry in which the Company or any subsidiary of the Company may become involved after the date hereof and prior to the date of termination of Executives employment. For purposes of this Agreement "casual dining restaurant industry" consists of "sit down" restaurants serving alcoholic beverages, with a per guest average guest check within the United States of under $20.00 (adjusted upward each year to recognize Company menu price increases). 6. Nonsolicitation. The Executive agrees that during the period of his/her employment, and for a period of 12 months thereafter, he/she will not, either directly or indirectly, for himself or for any third party, solicit, induce, recruit, or cause another person in the employ of the Company to terminate his/her employment for the purpose of joining, associating, or becoming employed with any business or activity that is engaged in the casual dining restaurant industry or any other segment of the restaurant industry in which the Company may become involved after the date hereof and prior to the date of any termination of employment. 7. Remedies for Breach of Covenants of the Executive. a. The Company and the Executive specifically acknowledge and agree that the foregoing covenants of the Executive in Sections 3, 4, 5, and 6 are reasonable in content and scope and are given by the Executive for adequate consideration. The Company and the Executive further acknowledge and agree that, if any court of competent jurisdiction or other appropriate authority shall disagree with the parties' foregoing agreement as to reasonableness, then such court or other authority shall reform or otherwise the foregoing covenants as reason dictates. b. The covenants set forth in Sections 3, 4, 5 and 6 of this Agreement shall continue to be binding upon the Executive, notwithstanding the termination of his/her employment with the Company for any reason whatsoever, except in the case where the Executive both (i) voluntarily terminates his/her employment following a Change in Control and (ii) does not do so for Good Reason. Such covenants shall be deemed and construed as separate agreements independent of any other provisions of this Agreement and any other agreement between the Company and the Executive. The existence of any claim or cause of action by the Executive against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of any or all such covenants. It is expressly agreed that the remedy at law for the breach of any such covenant is inadequate and injunctive relief and specific performance shall be available to prevent the breach or any threatened breach thereof. 4 8. Arbitration of Disputes. Any dispute or claim arising out of or relating to this Agreement shall be settled by arbitration in Johnson County, Kansas by one arbitrator in accordance with the then current rules of the American Arbitration Association, and judgment upon any award rendered therein may be entered in any court having proper jurisdiction. a. Pre-Change in Control. If the dispute or claim arises prior to any Change in Control, this subsection (a) shall apply. The Company shall bear the full cost of any arbitration, including the expenses and attorneys' fees incurred by the Executive related thereto and including any actions taken by either party to appeal or enforce the judgment rendered therein, regardless of the outcome of such arbitration, and the Company shall not be entitled to use any lawyer who is a Company employee to represent it in any dispute or arbitration related hereto. Notwithstanding the foregoing, if the Company refuses to arbitrate such a dispute and the same is submitted to a court for resolution, the Company shall pay all attorneys' fees and expenses as incurred by Executive in enforcing this Agreement, in addition to any such fees and expenses incurred by the Company. Conversely, if the Executive refuses to arbitrate such a dispute and the same is submitted to a court for resolution, the Company shall not be obligated to pay Executive's attorneys' fees or expenses. Provided however, in no event shall the attorneys' fees to be paid by the Company on behalf of the Executive exceed $25,000. b. Post-Change in Control. If the dispute or claim arises after any Change in Control, this subsection (b) shall apply. Each party shall bear its own costs and expenses, including attorneys' fees, related to the dispute or claim and the parties shall share equally the costs and fees of the arbitrator; provided, however, that the arbitral award or any court rendered judgment may include a finding that one party substantially prevailed in the proceeding and, if so, such prevailing party may be awarded a judgment (in addition to any other judgment awarded to such party) for all or any part of its costs and expenses, including attorneys' fees and its portion of the costs and fees of the arbitrator. 9. Mitigation. The Executive shall have no duty to attempt to mitigate the level of benefits payable by the Company to him hereunder and the Company shall not be entitled to set off against the amounts payable hereunder any amounts received by the Executive from any other source, including any subsequent employer. 10.Excess Payment. In the event of a Change in Control, as defined above, if the total amount payable by the Company to the Executive pursuant to Section 1 of this Agreement (the "Paragraph 1 Amount") would create an excess parachute payment, as that term is defined in Section 280G of the Internal Revenue Code (the "Code"), then, the Executive shall be paid either (i) the Paragraph 1 Amount, or (ii) the Paragraph 1 Amount reduced to an amount equal to one-dollar ($1) less than the maximum amount allowed under the Code, whichever amount results in the greater after-tax payment to the Executive. 11. General Provisions. a. Law governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas. 5 b. Termination. This Agreement shall remain in effect for a period of two (2) years from and after the date hereof and shall be automatically extended thereafter for additional terms of one (1) year each, unless either party has provided the other party written notice of the termination hereof sixty (60) days prior to the end of the then applicable term. Notwithstanding the foregoing, if a Change in Control occurs, this Agreement shall not terminate or be terminable by either party until eighteen (18) months after the effective date of the Change in Control. c. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and still be legal, valid or enforceable. d. Entire Agreement. This Agreement sets forth the entire understanding of the parties and supersedes all prior agreements or understandings, whether written or oral, with respect to termination or severance benefits payable by the Company to the Executive. No terms, conditions, warranties, other than those contained herein, and no amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. e. Binding Effect. This Agreement shall extend to and be binding upon and inure to the benefit to the parties hereto, their respective heirs, representatives, successors and assigns. This Agreement may not be assigned by the Executive. f. Waiver. The waiver by either party hereto of a breach of any term or provision of this Agreement shall not operate or be construed as a waiver of a subsequent breach of the same provision by any party or of the breach of any other term or provision of this Agreement. g. Titles. Titles of the paragraphs herein are used solely for convenience and shall not be used for interpretation or construing any work, clause, paragraph, or provision of this Agreement. h. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. i. Notices. Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed as follows: 6 a. If to the Company: Applebee's International, Inc. 4551 West 107th Street, Suite 100 Overland Park, Kansas 66207 Attn: General Counsel b. If to the Executive: Either party may change its address for notice by giving notice in accordance with the terms of this Section 10(i). IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date and year first above written above. EXECUTIVE: APPLEBEE'S INTERNATIONAL, INC. By: - ---------------------------- --------------------------------------- Lloyd L. Hill 7 PARTIES TO CHANGE IN CONTROL AGREEMENT DAVID L. GOEBEL TAMY T. DUPLANTIS 8 -----END PRIVACY-ENHANCED MESSAGE-----