-----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, SoK7lZU86TG/rn93aJdpbzHJ0IZ2MUYhPHlDEr8hijw+H/3xUyydgz2iln5aa+UW adP1QPPfgmXn6nZyG978lA== 0000853665-02-000281.txt : 20021108 0000853665-02-000281.hdr.sgml : 20021108 20021108161546 ACCESSION NUMBER: 0000853665-02-000281 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021108 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: 02814382 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 q3final.txt Q3 2002 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 September 29, 2002 -------------------------------------------------- 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 ----- ----- Number of shares of the registrant's common stock outstanding as of November 1, 2002 was 55,250,390. 1 APPLEBEE'S INTERNATIONAL, INC. FORM 10-Q FISCAL QUARTER ENDED SEPTEMBER 29, 2002 INDEX
Page Part I Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of September 29, 2002 and December 30, 2001................................................................ 3 Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks Ended September 29, 2002 and September 30, 2001...................................... 4 Consolidated Statement of Stockholders' Equity for the 39 Weeks Ended September 29, 2002.................................................... 5 Consolidated Statements of Cash Flows for the 39 Weeks Ended September 29, 2002 and September 30, 2001...................................... 6 Notes to Consolidated Financial Statements.............................................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 20 Item 4. Controls and Procedures................................................................. 20 Part II Other Information Item 1. Legal Proceedings....................................................................... 21 Item 6. Exhibits and Reports on Form 8-K........................................................ 21 Signatures ................................................................................................. 22 Exhibit Index............................................................................................... 25
2 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts)
September 29, December 30, 2002 2001 -------------- ------------- ASSETS Current assets: Cash and cash equivalents....................................................... $ 7,522 $ 22,048 Short-term investments, at market value (amortized cost of $478 in 2002 and $677 in 2001)................................................................ 504 699 Receivables (less allowance for bad debts of $5,443 in 2002 and $4,343 in 2001). 25,207 22,827 Inventories..................................................................... 7,070 10,165 Prepaid and other current assets................................................ 13,782 12,260 -------------- ------------- Total current assets......................................................... 54,085 67,999 Property and equipment, net.......................................................... 353,730 330,924 Goodwill, net........................................................................ 78,614 78,614 Franchise interest and rights, net................................................... 1,551 1,800 Other assets......................................................................... 20,864 21,074 -------------- ------------- $ 508,844 $ 500,411 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................... $ 375 $ 43 Notes payable................................................................... 3,500 -- Accounts payable................................................................ 28,106 22,196 Accrued expenses and other current liabilities.................................. 63,894 71,551 Accrued dividends............................................................... -- 2,977 Accrued income taxes............................................................ 1,919 979 -------------- ------------- Total current liabilities.................................................... 97,794 97,746 -------------- ------------- Non-current liabilities: Long-term debt - less current portion........................................... 35,192 74,525 Franchise deposits.............................................................. 1,182 1,515 Deferred income taxes........................................................... 2,026 1,442 -------------- ------------- Total non-current liabilities................................................ 38,400 77,482 -------------- ------------- Total liabilities............................................................ 136,194 175,228 -------------- ------------- 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 - 72,336,788 shares................................................... 723 723 Additional paid-in capital...................................................... 186,055 180,802 Retained earnings............................................................... 417,652 354,950 Accumulated other comprehensive income, net of income taxes .................... 17 14 -------------- ------------- 604,447 536,489 Treasury stock - 17,123,011 shares in 2002 and 16,522,099 shares in 2001, at cost......................................................................... (231,797) (211,306) -------------- ------------- Total stockholders' equity................................................... 372,650 325,183 -------------- ------------- $ 508,844 $ 500,411 ============== =============
See notes to consolidated financial statements. 3
APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (in thousands, except per share amounts) 13 Weeks Ended 39 Weeks Ended ------------------------------ ------------------------------ September 29, September 30, September 29, September 30, 2002 2001 2002 2001 ------------- -------------- ------------- ------------- Revenues: Company restaurant sales.................... $ 182,807 $ 164,238 $ 536,673 $ 486,416 Franchise income............................ 26,033 23,787 76,357 69,906 ------------- -------------- ------------- ------------- Total operating revenues................. 208,840 188,025 613,030 556,322 ------------- -------------- ------------- ------------- Cost of company restaurant sales: Food and beverage........................... 47,765 44,489 142,245 131,427 Labor....................................... 60,054 52,864 176,392 155,297 Direct and occupancy........................ 47,009 41,459 134,172 123,322 Pre-opening expense......................... 792 632 1,432 899 ------------- -------------- ------------- ------------- Total cost of company restaurant sales... 155,620 139,444 454,241 410,945 ------------- -------------- ------------- ------------- General and administrative expenses.............. 20,049 19,197 58,848 54,448 Amortization of intangible assets................ 95 1,463 285 4,388 Loss on disposition of restaurants and equipment. 458 329 1,479 1,087 ------------- -------------- ------------- ------------- Operating earnings............................... 32,618 27,592 98,177 85,454 ------------- -------------- ------------- ------------- Other income (expense): Investment income........................... 346 479 1,124 1,251 Interest expense............................ (414) (1,831) (1,602) (6,231) Other income................................ 513 322 1,096 797 ------------- -------------- ------------- ------------- Total other income (expense)............. 445 (1,030) 618 (4,183) ------------- -------------- ------------- ------------- Earnings before income taxes..................... 33,063 26,562 98,795 81,271 Income taxes..................................... 12,068 9,776 36,060 29,908 ------------- -------------- ------------- ------------- Net earnings..................................... $ 20,995 $ 16,786 $ 62,735 $ 51,363 ============= ============== ============= ============= Basic net earnings per common share.............. $ 0.38 $ 0.30 $ 1.12 $ 0.93 ============= ============== ============= ============= Diluted net earnings per common share............ $ 0.37 $ 0.30 $ 1.10 $ 0.91 ============= ============== ============= ============= Basic weighted average shares outstanding........ 55,654 55,366 55,801 55,470 ============= ============== ============= ============= Diluted weighted average shares outstanding...... 56,714 56,821 57,119 56,736 ============= ============== ============= =============
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 Stock Equity --------------- -------- ------------ ---------- ------------- ------------ ---------------- Balance, December 30, 2001............. 72,336,788 $ 723 $ 180,802 $ 354,950 $ 14 $(211,306) $ 325,183 Comprehensive income: Net earnings...................... -- -- -- 62,735 -- -- 62,735 Change in unrealized gain on short-term investments, net of income taxes............. -- -- -- -- 3 -- 3 --------------- -------- ------------ ---------- ------------- ------------ ---------------- Total comprehensive income.......... -- -- -- 62,735 3 -- 62,738 --------------- -------- ------------ ---------- ------------- ------------ ---------------- Purchases of treasury stock......... -- -- -- -- -- (26,113) (26,113) Stock options exercised and related tax benefit............... -- -- 1,898 -- -- 3,290 5,188 Shares issued under employee stock and 401(k) plans............ -- -- 2,390 -- -- 1,839 4,229 Restricted shares awarded under equity incentive plan....... -- -- 8 -- -- 493 501 Unearned compensation relating to restricted shares.............. -- -- 467 -- -- -- 467 Repayments of notes receivable from officers for stock sales.......... -- -- 490 -- -- -- 490 Dividends paid for fractional shares -- -- -- (33) -- -- (33) --------------- -------- ------------ --- ------ ------------- ------------ ---------------- Balance, September 29, 2002............ 72,336,788 $ 723 $ 186,055 $ 417,652 $ 17 $(231,797) $ 372,650 =============== ======== ============ ========== ============= ============ ================
See notes to consolidated financial statements. 5 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
39 Weeks Ended ----------------------------------- September 29, September 30, 2002 2001 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings..................................................... $ 62,735 $ 51,363 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................. 25,812 23,544 Amortization of intangible assets............................. 285 4,388 Amortization of deferred financing costs...................... 145 544 Deferred income tax benefit (provision)....................... 635 (3,503) Loss on disposition of restaurants and equipment.............. 1,479 1,087 Income tax benefit from exercise of options................... 1,397 3,017 Changes in assets and liabilities: Receivables................................................... (2,380) (209) Inventories................................................... 3,095 2,668 Prepaid and other current assets.............................. (1,574) (1,205) Accounts payable.............................................. 5,910 (3,689) Accrued expenses and other current liabilities................ (5,263) (471) Accrued income taxes.......................................... 940 9,854 Franchise deposits............................................ (333) (140) Other......................................................... 1,371 (1,897) --------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 94,254 85,351 --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.............................. (49,680) (38,181) Proceeds from sale of restaurants and equipment.................. 3 433 Purchases of short-term investments.............................. (150) (149) Maturities and sales of short-term investments................... 350 474 --------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES......................... (49,477) (37,423) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock...................................... (26,113) (44,987) Dividends paid................................................... (3,010) (2,779) Issuance of common stock upon exercise of stock options.......... 3,791 13,049 Shares sold under employee stock purchase plan................... 1,529 828 Proceeds from issuance of notes payable.......................... 3,500 -- Payments on long-term debt....................................... (39,000) (11,430) --------------- ---------------- NET CASH USED BY FINANCING ACTIVITIES......................... (59,303) (45,319) --------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (14,526) 2,609 CASH AND CASH EQUIVALENTS, beginning of period........................ 22,048 10,763 --------------- ---------------- CASH AND CASH EQUIVALENTS, end of period.............................. $ 7,522 $ 13,372 =============== ================
See notes to consolidated financial statements. 6 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) (in thousands)
39 Weeks Ended ------------------------------------- September 29, September 30, 2002 2001 ---------------- ----------------- Supplemental disclosures of cash flow information: Cash paid during the 39 week period for: Income taxes........................................................ $ 30,172 $ 20,483 ================ ================= Interest............................................................ $ 1,159 $ 5,676 ================ =================
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 30, 2001 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 30, 2001. 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 2002 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 two 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, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial position. Lease guaranties: In connection with the sale of restaurants to franchisees and other parties, we have, in certain cases, remained contingently liable for the remaining lease payments. As of September 29, 2002, the aggregate amount of these remaining lease payments totaled approximately $25,200,000. The buyers have indemnified us from any losses related to these guaranties. Severance agreements: We have severance and employment agreements with certain officers providing for severance payments to be made in the event the employee resigns or is terminated related to a change in control. The agreements define the circumstances which will constitute a change in control. If the severance payments had been due as of September 29, 2002, we would have been required to make payments totaling approximately $7,900,000. 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 $5,900,000 if such officers had been terminated as of September 29, 2002. 8 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 equity-based compensation represent the only dilutive effects on weighted average shares. The chart below presents a reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share. All amounts in the chart, except per share amounts, are expressed in thousands.
13 Weeks Ended 39 Weeks Ended ---------------------------------------------------------------- September 29, September 30, September 29, September 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Net earnings...................................... $ 20,995 $ 16,786 $ 62,735 $ 51,363 =============== =============== =============== =============== Basic weighted average shares outstanding......... 55,654 55,366 55,801 55,470 Dilutive effect of stock options and performance shares........................... 1,060 1,455 1,318 1,266 --------------- --------------- --------------- --------------- Diluted weighted average shares outstanding....... 56,714 56,821 57,119 56,736 =============== =============== =============== =============== Basic net earnings per common share............... $ 0.38 $ 0.30 $ 1.12 $ 0.93 =============== =============== =============== =============== Diluted net earnings per common share............. $ 0.37 $ 0.30 $ 1.10 $ 0.91 =============== =============== =============== ===============
4. Stock Split On May 9, 2002, we declared a three-for-two stock split, effected in the form of a 50% stock dividend, to shareholders of record on May 24, 2002, payable on June 11, 2002. We issued approximately 24,100,000 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. 5. Goodwill and Other Intangible Assets We adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective December 31, 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. In the first quarter of fiscal 2002, we completed the first step of the required two-step goodwill impairment testing and ceased amortization of goodwill. The first step of the impairment test required us to compare the fair value of each reporting unit to its carrying value to determine whether there was an indication that an impairment existed. If there had been an indication of impairment, we would have allocated the fair value of the reporting unit to its assets and liabilities as if the reporting unit had been acquired in a business combination. No impairment losses were recorded upon the initial adoption of SFAS No. 142. 9 The effect of the adoption of SFAS No. 142 on net income and earnings per share is as follows (in thousands, except per share amounts. May not add due to rounding):
13 Weeks Ended 39 Weeks Ended ---------------------------------------------------------------- September 29, September 30, September 29, September 30, 2002 2001 2002 2001 --------------- --------------- --------------- --------------- Net earnings, as reported......................... $ 20,995 $ 16,786 $ 62,735 $ 51,363 Goodwill amortization (net of income taxes)....... -- 837 -- 2,512 --------------- --------------- --------------- --------------- Net earnings, as adjusted......................... $ 20,995 $ 17,623 $ 62,735 $ 53,875 =============== =============== =============== =============== Basic net earnings per common share, as reported................................... $ 0.38 $ 0.30 $ 1.12 $ 0.93 Goodwill amortization (net of income taxes)....... -- 0.02 -- 0.05 --------------- --------------- --------------- --------------- Basic net earnings per common share, as reported................................... $ 0.38 $ 0.32 $ 1.12 $ 0.97 =============== =============== =============== =============== Diluted net earnings per common share, as reported................................... $ 0.37 $ 0.30 $ 1.10 $ 0.91 Goodwill amortization (net of income taxes)....... -- 0.01 -- 0.04 --------------- --------------- --------------- --------------- Diluted net earnings per common share, as reported $ 0.37 $ 0.31 $ 1.10 $ 0.95 =============== =============== =============== ===============
Intangible assets subject to amortization pursuant to SFAS No. 142 consist primarily of franchise interest and rights and are summarized below (in thousands):
September 29, December 30, 2002 2001 ------------------ ------------------ Gross carrying amount $6,371 $6,371 Less, accumulated amortization 4,820 4,571 ------------------ ------------------ Net $1,551 $1,800 ================== ==================
We expect annual amortization expense for all intangible assets for the next five fiscal years to range from approximately $280,000 to $380,000. 6. New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial statements. 10 In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS Nos. 4 and 64 required gains and losses from extinguishment of debt to be classified as extraordinary items. SFAS No. 145 rescinds this requirement and stipulates that gains or losses on extinguishment of debt would have to meet the criteria of APB Opinion No. 30 to be classified as an extraordinary item. In addition, any extraordinary gains or losses on extinguishment of debt in prior periods presented would require reclassification. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We are currently evaluating the impact of this Statement. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized only when the liability is incurred and measured at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the initial adoption of this Statement to have a material impact on our results of operations or financial position. 7. Subsequent Event On November 7, 2002, we acquired the operations and assets of 21 Applebee's restaurants located in the Washington, D.C. area from a franchisee. Under the terms of the purchase agreement and the agreement with the franchisee's secured lender, the total purchase price of the acquisition was $34.3 million, subject to adjustment. The agreement also provides for additional payments if the restaurants achieve cash flows in excess of historical levels in the first 18 months after the closing of the acquisition. Our financial statements will reflect the results of operations for these restaurants subsequent to the date of acquisition. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Our revenues are generated from two primary sources: o Company restaurant sales (food and beverage sales) o Franchise income Franchise income consists of franchise restaurant royalties (generally 4% of each franchise restaurant's monthly gross sales) and franchise fees (which typically range from $30,000 to $35,000 for each restaurant opened). Beverage sales represent sales of alcoholic beverages, while non-alcoholic beverages are included in food sales. Certain expenses relate only to company operated restaurants. These include: o Food and beverage costs o Labor costs o Direct and occupancy costs o Pre-opening expenses Other expenses, such as general and administrative and amortization expenses, relate to both company operated restaurants and franchise operations. We operate on a 52 or 53 week fiscal year ending on the last Sunday in December. Our fiscal quarters ended September 29, 2002 and September 30, 2001 each contained 13 weeks and are referred to hereafter as the "2002 quarter" and the "2001 quarter", respectively. Our 39 week periods ended September 29, 2002 and September 30, 2001 are referred to hereafter as the "2002 year-to-date period" and the "2001 year-to-date period," respectively. Application of Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes thereto. Actual results may differ from these estimates, and such differences may be material to the consolidated financial statements. We have identified the following accounting policies as critical to the understanding of our consolidated financial statements (see Note 2 of our Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 30, 2001 for a complete discussion of our significant accounting policies). Franchise income: Franchise income consists of franchise royalties and franchise fees. We recognize royalties on a franchisee's sales in the period in which the sales occur. We also receive a franchise fee for each restaurant that a franchisee opens. This franchise fee is recognized as income when the restaurant opens. 12 Property and equipment: Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the assets are based upon management's best expectations. We periodically review the assets for changes in circumstances which may impact their useful lives. Impairment of long-lived assets: We periodically review property and equipment for impairment using historical cash flows as well as current estimates of future cash flows and/or appraisals. This assessment process requires the use of estimates and assumptions which are subject to a significant degree of judgement. In addition, we periodically assess the recoverability of goodwill and other intangible assets, which requires us to make assumptions regarding the future cash flows and other factors to determine the fair value of the assets. If these assumptions change in the future, we may be required to record impairment charges for these assets. Legal and insurance reserves: We are periodically involved in various legal actions arising in the normal course of business. We are required to assess the probability of any adverse judgements as well as the potential ranges of any losses. We determine the required accruals after a careful review of the facts of each legal action. Our accruals may change in the future due to new developments in these matters. We use estimates in the determination of the required accruals for general liability, workers' compensation and health insurance. These estimates are based upon a third party's detailed examination of historical and industry claims experience. These estimates may change in the future and may require us to revise these accruals. Employee incentive compensation plans: We have various long-term employee incentive compensation plans which require us to make estimates to determine our liability. If performance against the criteria in each plan differs from our estimates in the future, we will be required to adjust our liability accordingly. Receivables: We continually assess the collectibility of our franchise receivables based on several factors, using estimates based upon specific information available to us at the time. The allowance for bad debts may change in the future due to new developments. We periodically reassess our assumptions and judgements and make adjustments when significant facts and circumstances dictate. A change in any of the above estimates could impact our consolidated statements of earnings and the related asset or liability recorded in the consolidated balance sheets would be adjusted accordingly. Historically, actual results have not been materially different than the estimates that are described above. 13 Results of Operations The following table contains information derived from our consolidated statements of earnings expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended 39 Weeks Ended ----------------------------------- ------------------------------------ September 29, September 30, September 29, September 30, 2002 2001 2002 2001 ---------------- --------------- ---------------- ---------------- Revenues: Company restaurant sales..................... 87.5% 87.3% 87.5% 87.4% Franchise income............................. 12.5 12.7 12.5 12.6 ---------------- --------------- ---------------- ---------------- Total operating revenues.................. 100.0% 100.0% 100.0% 100.0% ================ =============== ================ ================ Cost of sales (as a percentage of company restaurant sales): Food and beverage............................ 26.1% 27.1% 26.5% 27.0% Labor........................................ 32.9 32.2 32.9 31.9 Direct and occupancy......................... 25.7 25.2 25.0 25.4 Pre-opening expense.......................... 0.4 0.4 0.3 0.2 ---------------- --------------- ---------------- ---------------- Total cost of sales....................... 85.1% 84.9% 84.6% 84.5% ================ =============== ================ ================ General and administrative expenses............... 9.6% 10.2% 9.6% 9.8% Amortization of intangible assets................. -- 0.8 -- 0.8 Loss on disposition of restaurants and equipment.. 0.2 0.2 0.2 0.2 ---------------- --------------- ---------------- ---------------- Operating earnings................................ 15.6 14.7 16.0 15.4 ---------------- --------------- ---------------- ---------------- Other income (expense): Investment income............................ 0.2 0.3 0.2 0.2 Interest expense............................. (0.2) (1.0) (0.3) (1.1) Other income................................. 0.2 0.2 0.2 0.1 ---------------- --------------- ---------------- ---------------- Total other income (expense).............. 0.2 (0.5) 0.1 (0.8) ---------------- --------------- ---------------- ---------------- Earnings before income taxes...................... 15.8 14.1 16.1 14.6 Income taxes...................................... 5.8 5.2 5.9 5.4 ---------------- --------------- ---------------- ---------------- Net earnings...................................... 10.1% 8.9% 10.2% 9.2% ================ =============== ================ ================
14 The following table sets forth certain unaudited financial information and other restaurant data relating to company and franchise restaurants, as reported to us by franchisees:
13 Weeks Ended 39 Weeks Ended ------------------------------- ------------------------------- September 29, September 30, September 29, September 30, 2002 2001 2002 2001 --------------- --------------- --------------- -------------- Number of restaurants: Company: Beginning of period..................... 318 289 310 285 Restaurant openings..................... 11 9 19 13 Restaurant closings..................... -- -- -- -- --------------- --------------- --------------- -------------- End of period........................... 329 298 329 298 --------------- --------------- --------------- -------------- Franchise: Beginning of period..................... 1,103 1,035 1,082 1,001 Restaurant openings..................... 26 25 50 61 Restaurant closings..................... -- -- (3) (2) --------------- --------------- --------------- -------------- End of period........................... 1,129 1,060 1,129 1,060 --------------- --------------- --------------- -------------- Total: Beginning of period..................... 1,421 1,324 1,392 1,286 Restaurant openings..................... 37 34 69 74 Restaurant closings..................... -- -- (3) (2) --------------- --------------- --------------- -------------- End of period........................... 1,458 1,358 1,458 1,358 =============== =============== =============== ============== Weighted average weekly sales per restaurant: Company................................. $ 43,474 $ 43,118 $ 43,424 $ 43,126 Franchise............................... $ 44,105 $ 42,680 $ 44,252 $ 42,646 Total................................... $ 43,963 $ 42,776 $ 44,067 $ 42,752 Change in comparable restaurant sales:(1) Company................................. 1.7 % 1.9 % 1.5 % 2.9 % Franchise............................... 3.1 % 2.9 % 3.6 % 3.0 % Total................................... 2.8 % 2.7 % 3.1 % 3.0 % Total system sales (in thousands)................ $ 822,640 $ 745,887 $2,430,412 $2,191,326
- -------- (1) When computing comparable restaurant sales, restaurants open for at least 18 months are compared from period to period. 15 Company Restaurant Sales. Total company restaurant sales increased $18,569,000 (11%) from $164,238,000 in the 2001 quarter to $182,807,000 in the 2002 quarter and increased $50,257,000 (10%) from $486,416,000 in the 2001 year-to-date period to $536,673,000 in the 2002 year-to-date period due primarily to company restaurant openings and increases in comparable restaurant sales. Comparable restaurant sales at company restaurants increased by 1.7% and 1.5% in the 2002 quarter and the 2002 year-to-date period, respectively. Weighted average weekly sales at company restaurants increased 0.8% from $43,118 in the 2001 quarter to $43,474 in the 2002 quarter and also increased 0.7% from $43,126 in the 2001 year-to-date period to $43,424 in the 2002 year-to-date period. These increases were due primarily to an increase in guest traffic in both periods and an increase in the average guest check in the 2002 year-to-date period resulting from the company's food promotions. In addition, a portion of the increase in both periods resulted from the implementation of our To Go initiative in 2002 and a menu price increase of approximately 1.0% in early August 2002. Franchise Income. Overall franchise income increased $2,246,000 (9%) from $23,787,000 in the 2001 quarter to $26,033,000 in the 2002 quarter and increased $6,451,000 (9%) from $69,906,000 in the 2001 year-to-date period to $76,357,000 in the 2002 year-to-date period. These increases were due primarily to the increased number of franchise Applebee's restaurants operating during the 2002 quarter and 2002 year-to-date period and increases in comparable restaurant sales. Weighted average weekly sales at franchise restaurants increased 3.3% and 3.8% in the 2002 quarter and 2002 year-to-date period, respectively and franchise comparable restaurant sales increased 3.1% and 3.6% in the 2002 quarter and 2002 year-to-date periods, respectively. Cost of Company Restaurant Sales. Food and beverage costs decreased from 27.1% in the 2001 quarter to 26.1% in the 2002 quarter and decreased from 27.0% in the 2001 year-to-date period to 26.5% in the 2002 year-to-date period. The decreases in both the 2002 quarter and the 2002 year-to-date period were due to lower commodity costs relating to our food promotions and the benefit of certain supply chain management initiatives implemented in 2001. Labor costs increased from 32.2% and 31.9% in the 2001 quarter and the 2001 year-to-date period, respectively, to 32.9% in both the 2002 quarter and 2002 year-to-date period. These increases were due primarily to higher costs related to wage rates, management incentive compensation relating to a new restaurant management bonus program and workers compensation and group insurance costs. Direct and occupancy costs increased from 25.2% in the 2001 quarter to 25.7% in the 2002 quarter and decreased from 25.4% in the 2001 year-to-date period to 25.0% in the 2002 year-to-date period. Direct and occupancy costs were impacted in both periods by lower utility costs, higher packaging costs relating to our To Go initiative and higher insurance costs. Advertising costs, as a percentage of sales, also decreased in the 2002 year-to-date period. General and Administrative Expenses. General and administrative expenses decreased from 10.2% in the 2001 quarter and 9.8% in the 2001 year-to-date period to 9.6% in both the 2002 quarter and 2002 year-to-date period. General and administrative expenses were lower in both the 2002 quarter and 2002 year-to-date period as a result of costs incurred in 2001 associated with our purchasing supply chain and strategic brand assessment projects and the absorption of general and administrative expenses over a larger revenue base. These decreases were partially offset by higher legal fees and expenses related to certain litigation and higher incentive compensation. 16 Amortization of Intangible Assets: Amortization of intangible assets decreased from $1,463,000 in the 2001 quarter to $95,000 in the 2002 quarter and decreased from $4,388,000 in the 2001 year-to date period to $285,000 in the 2002 year-to-date period. These decreases were due to the elimination of goodwill amortization in accordance with SFAS No. 142. Interest Expense: Interest expense decreased in both the 2002 quarter and the 2002 year-to-date period due primarily to a reduction in our debt levels and lower interest rates in both periods. Income Taxes. The effective income tax rate, as a percentage of earnings before income taxes, decreased from 36.8% in both the 2001 quarter and 2001 year-to-date period to 36.5% in both the 2002 quarter and the 2002 year-to-date period. Liquidity and Capital Resources Our need for capital historically has resulted from the construction and acquisition of restaurants and the repurchase of our common shares. In 2002 and for the foreseeable future, we will also use our capital resources to invest in information technology systems. In the past, we have obtained capital through public stock offerings, debt financing, and our ongoing operations. Cash flows from our ongoing operations include cash generated from company and franchise operations, credit from trade suppliers, real estate lease financing, and landlord contributions to leasehold improvements. We have also used our common stock as consideration in the acquisition of restaurants. In addition, we have assumed debt or issued new debt in connection with certain mergers and acquisitions. Capital expenditures were $50,086,000 in fiscal year 2001 and $49,680,000 in the 2002 year-to-date period. We currently expect to open at least 25 company restaurants in 2002, and capital expenditures are expected to be between $63,000,000 and $68,000,000 in fiscal 2002, excluding the purchase price of the franchise acquisition discussed below. These expenditures will primarily be for the development of new restaurants, refurbishment and capital replacement for existing restaurants, and the enhancement of information systems including a new accounting and human resource information system. Because we expect to continue to purchase a portion of our sites, the amount of actual capital expenditures will be dependent upon, among other things, the proportion of leased versus owned properties. In addition, if we open more restaurants than we currently anticipate or acquire additional restaurants, our capital requirements will increase accordingly. On November 7, 2002, we acquired the operations and assets of 21 Applebee's restaurants located in the Washington, D.C. area from a franchisee. Under the terms of the purchase agreement and the agreement with the franchisee's secured lender, the total purchase price of the acquisition was $34.3 million, subject to adjustment. The agreement also provides for additional payments if the restaurants achieve cash flows in excess of historical levels in the first 18 months after the closing of the acquisition. Our financial statements will reflect the results of operations for these restaurants subsequent to the date of acquisition. Our bank credit agreement provides for a $150,000,000 three-year unsecured revolving credit facility, of which $25,000,000 may be used for the issuance of letters of credit. The facility is subject to various covenants and restrictions which, among other things, require the maintenance of stipulated fixed charge, leverage and indebtedness to capitalization ratios, as defined, and limit additional indebtedness and capital expenditures in excess of specified amounts. Cash dividends are limited to $10,000,000 annually. The facility is subject to standard other terms, conditions, covenants, and fees. We are currently in compliance with the covenants contained in our credit agreement. 17 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 then-current credit agreement. As of December 30, 2001, we had $20,600,000 remaining on this authorization. In February 2002, our Board of Directors extended the 2001 authorization through 2002. In May 2002, our Board of Directors authorized an additional repurchase of $75,000,000 of our common stock through May 2005. During the 2002 year-to-date period, we repurchased 1,210,000 shares of our common stock at an average price of $21.58 for an aggregate cost of $26,100,000. As of September 29, 2002, we had $69,500,000 remaining under these authorizations. As of September 29, 2002, our liquid assets totaled $8,026,000. These assets consisted of cash and cash equivalents in the amount of $7,522,000 and short-term investments in the amount of $504,000. The working capital deficit increased from $29,747,000 as of December 30, 2001 to $43,709,000 as of September 29, 2002. This increase was due primarily to decreases in cash and cash equivalents due to payments on long-term debt and an increase in accrued insurance which were partially offset by the redemption of gift certificates in 2002 sold in 2001. As of September 29, 2002, we had borrowings of $34,500,000 and standby letters of credit of $5,291,000 outstanding under our $150,000,000 revolving credit facility. We also had a standby letter of credit for $827,000 outstanding with another financial institution. On September 20, 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a wholly-owned subsidiary, as a captive insurance company. Neighborhood Insurance, Inc. was established to provide Applebee's International, Inc. and our franchisees with workers compensation and general liability insurance. Applebee's International, Inc. and our franchisees will make premium payments to the captive insurance company which will pay administrative fees and insurance claims, subject to individual and aggregate maximum claim limits under the captive insurance company's reinsurance policies. As a result, our cash and cash equivalents and accrued liabilities may increase in future periods due to the operation of the captive insurance company. 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. The following table shows our bank debt amortization schedule, our future capital lease commitments (including principal and interest payments) and other obligations and our future operating lease commitments as of September 29, 2002:
- ---------------------------------------------------------------------------------------------------------------- Financial Commitments (in thousands) - ---------------------------------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter ------------ ------------ ------------ ------------ ------------ ------------- Bank Debt...................... $ 3,500 $ -- $ 31,000 $ -- $ -- $ -- Capital Lease and Other Obligations.............. $ 176 $ 1,040 $ 741 $ 767 $ 794 $ 7,536 Operating Leases............... $ 3,913 $ 15,373 $ 14,501 $ 13,841 $ 13,297 $ 119,859
18 Financial commitments for 2002 include only payments to be made for the remaining 13 weeks of fiscal 2002. In addition, we have lease guarantees of approximately $25,200,000 as of September 29, 2002 (see Note 2 to our Consolidated Financial Statements). 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 considering an increased minimum wage. In the past, we have been able to pass along cost increases to customers through food and beverage price increases, 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 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets", which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains many of the provisions of SFAS No. 121, but addresses certain implementation issues associated with that Statement. We adopted SFAS No. 144 effective December 31, 2001. The adoption of SFAS No. 144 did not have a material impact on our consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS Nos. 4 and 64 required gains and losses from extinguishment of debt to be classified as extraordinary items. SFAS No. 145 rescinds this requirement and stipulates that gains or losses on extinguishment of debt would have to meet the criteria of APB Opinion No. 30 to be classified as an extraordinary item. In addition, any extraordinary gains or losses on extinguishment of debt in prior periods presented would require reclassification. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. We are currently evaluating the impact of this Statement. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized only when the liability is incurred and measured at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the initial adoption of this Statement to have a material impact on our results of operations or financial position. In October 2002, the FASB issued an Exposure Draft relating to the transitional methods for the accounting for stock-based compensation. Under the provisions of this proposed Statement, the FASB provides for alternative methods of transition for voluntary changes to the fair value method of accounting. We are currently evaluating the adoption of the fair value method of accounting for stock-based compensation. In fiscal 2001, the impact on diluted earnings per share of adopting the fair value method of accounting excluding any potential cumulative effect of stock-based compensation prior to fiscal 2001 would have been $0.08. We are waiting further clarification from the FASB on this issue before we make our final decision. 19 Forward-Looking Statements The statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section regarding restaurant development, costs and expenses, capital expenditures and financial commitments are forward-looking and based on current expectations. There are several risks and uncertainties that could cause actual results to differ materially from those described. These risks include but are not limited to 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 from our estimates, you should read our current report on Form 8-K which we filed with the Securities and Exchange Commission on July 16, 2002. We disclaim any obligation to update forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. Our revolving credit facility bears interest at either the bank's prime rate or LIBOR plus 1.0%, at our option. As of September 29, 2002, the total amount of debt subject to interest rate fluctuations was $34,500,000 which was outstanding on our revolving credit facility. A 1% change in interest rates would result in an increase or decrease in interest expense of $345,000 per year. We may from time to time enter into interest rate swap agreements to manage the impact of interest rate changes on our earnings. Item 4. Controls and Procedures Within ninety days prior to the filing of this report, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 two 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, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial position. Item 6. Exhibits and Reports on Form 8-K (a) The Exhibits listed on the accompanying Exhibit Index are filed as part of this report. (b) We furnished a report on Form 8-K on July 8, 2002 announcing our presentation at the CIBC World Markets Consumer Growth Conference. We filed a report on Form 8-K on July 16, 2002 announcing our agreement to acquire 21 franchise restaurants. We filed a report on Form 8-K on July 16, 2002 in accordance with the Private Securities Litigation Reform Act of 1995 as it relates to a safe harbor for companies making forward-looking statements. The factors listed in the report are important factors that could cause actual results to differ materially from those we project in forward-looking statements. We furnished a report on Form 8-K on July 26, 2002 announcing our broadcast of the second quarter 2002 earnings conference call over the Internet. We filed a report on Form 8-K on August 1, 2002 reporting second quarter earnings. We filed a report on Form 8-K on August 28, 2002 reporting August comparable sales. We filed a report on Form 8-K on September 6, 2002 announcing a court extension of the approval date for the sale of the Apple Capitol restaurants. We furnished a report on Form 8-K on September 18, 2002 announcing our presentation at the Banc of America Securities Investment Conference. We furnished a report on Form 8-K on September 27, 2002 announcing our presentation at the RBC Capital Markets Consumer Conference. 21 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: November 8, 2002 By: /s/ Lloyd L. Hill ------------------ --------------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) Date: November 8, 2002 By: /s/ Steven K. Lumpkin ------------------ --------------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial and accounting officer) 22 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Lloyd L. Hill, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Applebee's International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 By: /s/ Lloyd L. Hill -------------------- --------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) 23 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven K. Lumpkin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Applebee's International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 8, 2002 By: /s/ Steven K. Lumpkin -------------------- --------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial and accounting officer) 24 APPLEBEE'S INTERNATIONAL, INC. EXHIBIT INDEX Exhibit Number Description of Exhibit - ------------- ------------------------------------------------------------------ 4.1 Certificate of Adjustment of Shareholder Rights Plan contained in Rights Agreement dated as of September 7, 1994, between Applebee's International, Inc. and Chemical Bank, as Rights Agent, as amended. 10.1 Employment Agreement dated August 7, 2002, with Steven K. Lumpkin. 10.2 Asset Purchase Agreement between Applebee's International, Inc. and Apple Capitol Group, LLC dated as of July 16, 2002. 10.3 Assignment Agreement between Lehman Brothers Holdings, Inc. and Applebee's International, Inc. dated as of October 1, 2002. 99.1 Certifications of Chairman and Chief Executive Officer and Executive Vice President and Chief Financial Officer. 25
EX-4 4 certofadjustment.txt CERT. OF ADJUSTMENT FOR SHAREHOLDER RIGHTS PLAN CERTIFICATE OF ADJUSTMENT I, Robert T. Steinkamp, hereby certify that: 1. I am the duly elected, qualified and acting Secretary of Applebee's International, Inc., a Delaware corporation (the "Company"). 2. On May 10, 2001, the Board of Directors of the Company declared a distribution in the form of a three-for-two stock split, that was effected in the form of a 50 percent stock dividend (the "2001 Stock Split"), of the shares of Common Stock, $0.01 par value (the "Common Stock"), of the Company whereby one additional share of Common Stock was distributed on or about June 12, 2001, for every two shares of Common Stock outstanding or held in treasury on May 25, 2001. 3. On May 9, 2002, the Board of Directors of the Company declared a distribution in the form of a three-for-two stock split, to be effected in the form of a 50 percent stock dividend (the "2002 Stock Split"), of the shares of Common Stock, $0.01 par value, of the Company whereby one additional share of Common Stock was distributed on or about June 11, 2002 for every two shares of Common Stock outstanding or held in treasury on May 24, 2002. 4. The Board of Directors has determined that pursuant to Sections 11 and 12 of that certain Rights Agreement, dated as of September 7, 1994, as amended (the "Rights Agreement"), between the Company and Chemical Bank, as Rights Agent, and Section 2 of the Certificate of The Voting Powers, Designations, Preferences and Relative Participating, Optional and Other Special Rights and Qualifications, Limitations or Restrictions of Series A Participating Cumulative Preferred Stock of Applebee's International, Inc. (the "Certificate of Designation"), the number of shares of Series A Participating Cumulative Preferred Stock, par value $0.01 (the "Preferred Shares") which may be purchased pursuant to each Right, (currently, under the Rights Agreement, a "Right" being the right to purchase 1/1000 of a share of Preferred Shares) associated with each of the shares of Common Stock outstanding as of the close of business on May 25, 2001 and May 24, 2002, respectively, or issued or delivered thereafter prior to the "Distribution Date" (as defined in the Rights Agreement), is to be proportionately adjusted to account for the 2001 Stock Split and the 2002 Stock Split as more specifically set forth in Sections 5 and 6 hereof. 5. Immediately prior to the 2001 Stock Split, 24,694,836 shares of Common Stock were outstanding and immediately following the 2001 Stock Split, 37,042,254 shares of Common Stock were outstanding. As a result, the number of Preferred Shares which could be purchased by each Right following the 2001 Stock Split was 1/1500 (until the 2002 Stock Split, discussed in Section 6 below). 6. Immediately prior to the 2002 Stock Split, 37,042,254 shares of Common Stock were outstanding and immediately following the 2002 Stock Split, 55,563,381 shares of Common Stock were outstanding. As a result, the number of Preferred Shares which may be purchased by each Right following the 2002 Stock Split is 1/2250. 1 7. The Board of Directors by unanimous written consent has adjusted the number of Preferred Shares that could be purchased pursuant to the Rights Agreement and Certificate of Designation to 1/2250 of a share for each Right instead of the current 1/1000 of a Preferred Share. This adjustment factors in the 2001 Stock Split and the 2002 Stock Split and will be in line with the Formula Number under the Certificate of Designation, and provide one vote per 1/2250 per share. 8.This Certificate has been prepared pursuant to Section 13 of the Rights Agreement and in accordance with Section 2 of the Certificate of Designation and may be relied upon by Chemical Bank, as the Rights Agent, and by each transfer agent of the Company's Preferred Stock and Common Stock. IN WITNESS WHEREOF, I have hereunto signed my name this __ day of October 2002. -------------------------------------------- Robert T. Steinkamp, Secretary of Applebee's International, Inc. 2 EX-10 5 lumpkinagreement.txt STEVE LUMPKIN EMPLOYMENT AGREEMENT STEVEN K. LUMPKIN APPLEBEE'S INTERNATIONAL, INC. EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is made effective as of August 7, 2002, by and between Applebee's International, Inc., a Delaware corporation (the "Company"), and Steven K. Lumpkin (the "Executive"). WHEREAS, the Company believes it to be in its best interest to provide for continuity of management and to provide protection for its valuable trade secrets and confidential information; and WHEREAS, the Company desires to employ the Executive and the Executive is willing to render his services to the Company on the terms and conditions with respect to such employment hereinafter set forth. NOW, THEREFORE, in consideration of premises and the mutual terms and conditions hereof, the Company and the Executive hereby agree as follows: 1. Employment. The Company hereby employs the Executive and the Executive hereby accepts employment with the Company upon the terms and conditions hereinafter set forth. 2. Exclusive Services. The Executive shall devote all necessary working time, ability and attention to the business of the Company during the term of this Agreement and shall not, directly or indirectly, render any material services to any business, corporation, or organization whether for compensation or otherwise, without the prior knowledge and written consent of the Board of Directors of the Company (hereinafter referred to as the "Board"). 3. Duties. The Executive is hereby employed as Executive Vice President and Chief Financial Officer of the Company and shall render his services at the principal business offices of the Company, as such may be located from time to time, unless otherwise agreed in writing between the Board and the Executive. The Executive shall have such authority and shall perform such duties as are described in Exhibit A attached hereto. 4. Term. This Agreement shall have a term of eighteen (18) months commencing as of August 7, 2002 and is subject to earlier termination as hereinafter provided. 5. Compensation. As compensation for his services rendered under this Agreement, the Executive shall be entitled to receive the following: a. Base Salary. The executive shall be paid a base salary of at least $300,000 per year, payable in 26 equal bi-weekly installments during the term of this Agreement, prorated for any partial employment month. Such salary ("Base Salary") may be increased by the Board in its sole discretion. 1 b. Additional Compensation. The Executive shall be paid such additional compensation and bonuses as may be determined and authorized in the sole discretion of the Board. The Executive's target bonus for 2002 is 60% of his Base Salary. 6. Benefits. In addition to the compensation to be paid to the Executive pursuant to Section 5 hereof, the Executive shall further be entitled to receive the following: a. Participation in Employee Plans. The Executive shall be entitled to participate in any health, disability, group term life insurance plan, any pension, retirement, or profit sharing plan, any executive bonus plan, or any other perquisites and fringe benefits that may be extended generally from time to time to employees of the Company at the level of Executive Vice President. b. Vacation. The Executive shall be entitled to a minimum of four (4) weeks vacation with full salary and benefits each year. Under current Company policy (which may be changed at the discretion of the Company) no cash or other payment will be due, however, for unused vacation and vacation may not be carried over from any calendar year to the next. Upon any termination of the Executive's employment, earned but unused vacation will be paid in accordance with the Company's policy then in effect. c. Equity Awards. The Executive shall be entitled to equity-based compensation awards that may be extended generally from time to time to employees of the Company at the level of Executive Vice President, as approved by the Board, subject to the terms and conditions of the respective equity-based compensation plans and award agreements and the provisions of this Agreement. 7. Reimbursement of Expenses. Subject to such rules and procedures as from time to time are specified by the Company, the Company shall reimburse the Executive on a monthly basis for reasonable business expenses necessarily incurred in the performance of his duties under this Agreement. 8.Confidentiality/Trade Secrets. The Executive acknowledges that his position with the Company is one of the highest trust and confidence both by reason of his position and by reason of his 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 shall use his 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 shall not disclose any of such trade secrets and confidential and proprietary information, except as may be required in the course of his employment with the Company or by law; and 2 c. He shall not use, directly or indirectly, for his 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 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 employment for any reason whatsoever or at any other time upon request of the Board. 9. Discoveries. The Executive covenants and agrees that he will fully inform the Company of and disclose to the Company all inventions, designs, improvements, discoveries, and processes ("Discoveries") that he has now or may hereafter have during his 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 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 employment is terminated, then the Executive shall be paid by the Company at an hourly rate determined based on fifty percent (50%) of his 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. 10. Non-Competition. The Executive covenants and agrees that during the period of his employment and for additional periods after termination of employment as provided in Section 13 or 14, he 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 North America 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 Executive's employment. For purposes of this Agreement "casual dining restaurant industry" consists of "sit down table service" 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). 11. Nonsolicitation. The Executive agrees that during the period of his employment, and for a period of two (2) years following the effective date of the termination of the Executive's employment for any reason, he will not, either directly or indirectly, for himself or for any third party, except as otherwise agreed to in writing by the Company's Chief Executive Officer, employ 3 or hire any other person who is then employed by the Company, or solicit, induce, recruit, or cause any other person who is then employed by 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. 12. 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 8, 9, 10, and 11 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 8, 9, 10 and 11 of this Agreement, as provided in Section 13 or 14, shall continue to be binding upon the Executive, notwithstanding the termination of his employment with the Company for any reason whatsoever. 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, unless predicated on this Agreement, 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. 13. Termination. This Agreement (other than Sections 8, 9, 10 and 11, as provided in Section 13 or 14, shall survive any termination hereof for any reason, including non-renewal) may be terminated as follows: a. Subject to earlier termination as provided herein, this Agreement will automatically renew on each anniversary date beginning at the end of its initial term, unless either party gives written notice of non-renewal at least sixty (60) days prior to an anniversary date. The first such renewal shall be for a thirty (30) month term and any subsequent renewals will be for one-year terms. If within the two (2) year period following non-renewal the Executive ceases to continue in the employ of the Company, the Company may elect to make Severance Payments to the Executive under Section 13(g)(i), (ii) and (vii) and, if so, the provisions of Section 10 shall survive and be in force for the Severance Payment Period. The Company must make an election and must notify the Executive of such an election to provide these Severance Payments within the first one hundred fifty (150) day period following non-renewal of this Agreement. If no such election is made by the Company to make Severance Payments within the first one hundred fifty (150) days following non-renewal and the Executive is no longer in the employ of the Company and the Company did not offer renewal of 4 this Agreement, the provisions of Section 10 will be terminated effective one hundred fifty (150) days after non-renewal of this Agreement. If no such election is made by the Company to make Severance Payments within the first one hundred fifty (150) days following non-renewal and the Executive is no longer in the employ of the Company and the non-renewal was caused by the Executive's election, then the Company shall have the balance of the two (2) year period following non-renewal in which to elect to make Severance Payments. In addition, if the Executive does not continue to offer his services to the Company (illness notwithstanding) in his then capacity and consistent with his prior practice, for at least 120 days following a non-renewal caused by his election, the provisions of Section 10 shall survive and be in force during such one hundred twenty (120) days and for one (1) year thereafter, and no Severance Payments of any kind shall be required of the Company. b. The Company may terminate this Agreement and the Executive's employment hereunder at any time, with or without Cause, upon written notice to the Executive. The Executive may terminate this Agreement and his employment hereunder, at any time, with or without Good Reason. In the event of a termination by the Executive without Good Reason the provisions of Section 10 shall survive and be in force for 24 months. c. In the event of termination by the Company without Cause, the effective date thereof shall be stated in a written notice to the Executive from the Board, which shall not be earlier than 30 days from the date such written notice is delivered to the Executive. In the event the Company effects a termination without Cause and Lloyd Hill is at that time no longer Chief Executive Officer of the Company or the Executive no longer reports directly to Mr. Hill then, the Executive shall be entitled to receive all Severance Payments under Section 13(g) and the provisions of Section 10 shall survive and be in force for the Severance Payment Period. In the event the Company effects a termination without Cause at a time when (i) Lloyd Hill continues to be Chief Executive Officer and (ii) the Executive reports directly to Mr. Hill, then the provisions of Section 10 shall survive and be in force for 24 months and the Executive shall only be entitled to receive the amounts described in subsections (i), (ii) and (vii) of Section 13(g), below. d. In the event of termination by the Company with Cause, the Executive shall be entitled to receive only his salary through such date of termination and any bonus amounts as may be payable pursuant to the terms of any written plans in which the Executive was a participant immediately prior to the effective date of the termination and the provisions of Section 10 shall survive and be in force for 24 months. The Executive shall also be entitled to exercise his rights under COBRA at the Executive's expense. e. The following shall constitute "Cause": (i) The Executive is convicted of -- or pleads no contest / nolo contendre to -- any felony or any other serious criminal offense; or (ii) The Executive breaches any material provision of this Agreement (other than as related to Sections 8, 9, 10 and 11 which is covered by Section 13(e)(iii) below), or habitually neglects to perform his duties under this Agreement 5 (other than for reasons related to illness, injury or temporary disability) and such breach or neglect is not corrected in the Company's good faith belief within fifteen (15) business days after receipt of written notice from the Board of the Company; or (iii) The Executive breaches any provision of Section 8, 9, 10 or 11, and such breach is not corrected in the Company's good faith belief within five (5) business days after receipt of written notice from the Chief Executive Officer; or (iv) The Executive is determined to have violated any applicable local, state or federal law relating to discrimination or harassment through egregious conduct; or (v) The Executive dies or becomes permanently disabled from continuing to provide the level of service required under this Agreement. f. The Executive shall have "Good Reason" to effect a termination in the event that (a) Lloyd Hill is no longer Chief Executive Officer of the Company or (b) the Executive no longer reports directly to Mr. Hill, and the Company (i) breaches its obligations to pay any salary, benefit or bonus due hereunder or, (ii) requires the Executive to relocate more than 50 miles from the greater Kansas City area, or (iii) substantially diminishes the functional responsibilities of the Executive (it being understood that structural changes, such as a change in title or to whom the Executive reports, do not constitute changes in functional responsibilities), and in the event of any of (i), (ii) or (iii) the Executive has given written notice to the Board 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. In the event of a termination by the Executive with Good Reason, the Executive will be entitled to all Severance Payments under Section 13(g) and the provisions of Section 10 shall survive and be in force for the Severance Payment Period. g. The "Severance Payments" consist of the following: (i) an amount paid monthly equal to one-twelfth (1/12) of the Executive's annual Base Salary at the current effective annual rate, paid for the Severance Payment Period; (ii) an amount paid monthly equal to one-twelfth (1/12) of the greater of (y) the average of the Executive's actual bonus attributable to each of the preceding three (3) fiscal years or (z) Executive's target bonus amount for the fiscal year in which the termination occurred multiplied by the average percentage bonus attainment of the Executive over the preceding three (3) fiscal years, in either case paid for the Severance Payment Period; (iii) the immediate vesting of any unvested stock options held by the Executive as of the day immediately preceding the effective date of termination; (iv) with respect to all Restricted Share awards, all restrictions will immediately be removed and deemed to have been satisfied and any 6 vesting periods will be accelerated; (v) with respect to all Performance Share awards, the Executive will receive, at the time of the first Severance Payment, a lump sum pro rata portion (based upon the number of complete months that have passed in the Performance Period as of the effective date of the termination) of the applicable Award Agreement as if all performance criteria were achieved at their Target Levels (as defined in the Performance Share Plan); (vi) the continued payment for the duration of the Severance Payment Period, of the Company's matching portion of the Executive's Non-Qualified Deferred Compensation Plan (or such retirement arrangement, if any, as may replace it); and (vii) the payment by the Company of premiums on behalf of the Executive, for coverage substantially similar to that provided under the Company's group health and medical policies, for so long as the Executive elects to continue such coverage, but for no longer than the Severance Payment Period. h. The "Severance Payment Period" is initially the twenty-four (24) month period immediately following the effective date of termination of the Executive's employment. The Severance Payment Period may be extended, at the sole discretion of the Company, by written notice to the Executive within 30 days after the effective date of termination of employment, for up to 12 additional months by the continued payment of the amounts under Section 13(g)(i) and (ii). i. In the event of any termination of the Executive, whether by the Executive or the Company and for any reason, participation by the Executive in all compensation and benefit plans of the Company will cease upon the effective termination date and all unvested bonuses, equity awards and other like items will immediately lapse, except as specifically provided in subsection (g), above. 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. In addition, the Severance Payments hereunder are in lieu of and supercede any other severance or termination benefits to which the Executive might otherwise be entitled, including any benefits under the Company's Severance Program for Salaried Associates. 14. Termination After Change in Control. If within 12 months following a Change in Control, as defined below, the employment of the Executive is terminated by the Company or by the Executive, for any reason whatsoever, then the provisions of Section 13 shall not apply and 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 multiplied by the average percentage bonus attainment of the Executive over the preceding three (3) fiscal years, (B) divided by twelve (12) and (C) multiplied by 24; b. The Company shall (i) 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, and (ii) continue to pay the Company's matching portion of the Executive's Investment For Retirement Agreement with the Company (or such retirement arrangement, if any, as may replace it), in both cases for up to a maximum of 24 months. 7 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 on the 10th business day following the effective date of such termination 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 Target Levels. d. Participation by the Executive in all compensation and benefit plans of the Company will cease upon the effective date of termination 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. e. The Executive shall be bound by the non-competition provisions of Section 10, which shall remain in full force and effect for a period of 24 months following the effective date of Executive's termination. f. In the event of a Change in Control, if the total amount payable by the Company to the Executive pursuant to this Section 14 (the "Section 14 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 Section 14 Amount, or (ii) the Section 14 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. 15. Definitions Related to Change in Control. 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 8 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 the Company'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. 16. Arbitration of Disputes. a. Any dispute or claim arising out of or relating to this Agreement or any termination of the Executive's employment, other than with respect to Sections 8 through 12, shall be settled by final and binding arbitration in the greater Kansas City metropolitan area in accordance with the Commercial Arbitration rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. b. In the event that the Company does not submit to arbitration hereunder or submits to arbitration but seeks to nullify or reverse the effect of such arbitration by alleging that arbitration is unenforceable against it, the Company shall pay all costs (including expenses and attorneys' fees) incurred by the Executive as a result of such action by the Company and if the Company is successful in such attempt, it shall bear all legal costs incurred by the Executive in any resulting litigation relating to this Agreement or any termination of the Executive's employment. c. The fees and expenses of the arbitration panel shall be borne by the Company. d. If the Company breaches its obligations hereunder following a Change in Control and the Executive is successful in a claim brought by him in arbitration for damages or other relief against the Company related to such breach, the Executive shall be entitled to an award of his costs (including expenses and attorneys' fees), incurred in such arbitration. 17. 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. 18. 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: 9 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: Steven K. Lumpkin 6811 West 132nd Terrace Overland Park, KS 66209 Either party may change its address for notice by giving notice in accordance with the terms of this Section 18. 19. General Provisions. a. Law Governing. This Agreement shall be governed by and construed in accordance with the laws of the State of Kansas. b. Invalid Provisions. If any provision of this Agreement is held to be illegal, invalid, or unenforceable, then 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. c. 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 the subject matter hereof other than the Indemnification Agreement between the Company and the Executive dated May 1, 1995; the Nondisclosure Agreement between the Company and the Executive dated May 1, 1995, and all agreements, acknowledgments, designations and directions of the Executive made or given under any Company policy statement or benefit program. 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. d. 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, but may be assigned by the Company to any person or entity that succeeds to the ownership or operation of the business in which the Executive is primarily employed by the Company. 10 e. 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. f. 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. g. 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. IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date and year first above written. THIS AGREEMENT CONTAINS AN ARBITRATION CLAUSE. EXECUTIVE: APPLEBEE'S INTERNATIONAL, INC. By: - ------------------------- ------------------------------------- Steven K. Lumpkin Lloyd L. Hill Chairman and Chief Executive Officer 11 Exhibit A - Duties and Responsibilities 1. Position: Executive Vice President and Chief Financial Officer. 2. Reports to: Lloyd L. Hill, Chairman and CEO. 3. Duties: (a) member of Applebee's senior management team; (b) acting in the role of Chief Financial Officer; (c) Senior Advisor to the CEO and Chairman. 4. Responsibilities: (a) Corporate Controllership and Internal Reporting for all entities; (b) Tax Management; (c) Internal Audit Services; (d) Treasury Services; (e) Financial operations and analysis; and (f) Investor Relations and External Reporting. 12 EX-10 6 appleagreement.txt APPLE CAPITOL PURCHASE AGREEMENT APPLEBEE'S INTERNATIONAL, INC. AND APPLE CAPITOL GROUP, LLC ASSET PURCHASE AGREEMENT JULY 16, 2002
TABLE OF CONTENTS Page ARTICLE I: PURCHASE AND SALE OF ASSETS.....................................................................1 Section 1.1 Purchased Assets................................................................................1 Section 1.2 Excluded Assets.................................................................................3 Section 1.3 Mechanism of Sale...............................................................................3 Section 1.4 Commencement of Bankruptcy Proceeding...........................................................3 ARTICLE II: PURCHASE PRICE OF ASSETS........................................................................4 Section 2.1 Purchase Price, Deposit and Additional Purchase Price...........................................4 Section 2.2 Adjustment of Purchase Price....................................................................5 Section 2.3 [Reserved]......................................................................................5 Section 2.4 Certain Liabilities and Obligations.............................................................5 Section 2.5 Taxes...........................................................................................6 Section 2.6 Allocation of Purchase Price....................................................................6 ARTICLE III: CLOSING.........................................................................................6 Section 3.1 Date, Time and Place of Closing.................................................................6 Section 3.2 Deliveries by Sellers at Closing................................................................6 Section 3.3 Deliveries by Buyer at Closing..................................................................7 Section 3.4 Transfer of Operations..........................................................................8 Section 3.5 Assignment by Buyer.............................................................................8 ARTICLE IV: REPRESENTATIONS AND WARRANTIES OF SELLERS.......................................................8 Section 4.1 Existence.......................................................................................8 Section 4.2 Power and Authority.............................................................................8 Section 4.3 Execution and Delivery Permitted; Consents......................................................9 Section 4.4 The Purchased Assets............................................................................9 Section 4.5 Binding Effect..................................................................................11 Section 4.6 Condition of Purchased Assets...................................................................11 Section 4.7 Absence of Other Assets.........................................................................11 Section 4.8 Ownership of Assets.............................................................................12 Section 4.9 Real Property...................................................................................12 Section 4.10 [Reserved]......................................................................................12 i Section 4.11 Documents Sufficient............................................................................12 Section 4.12 Litigation or Condemnation......................................................................12 Section 4.13 Taxes...........................................................................................13 Section 4.14 Assumed Contracts...............................................................................13 Section 4.15 Accuracy of Information and Representations and Warranties......................................14 Section 4.16 Employment Matters..............................................................................14 Section 4.17 Employee Benefit Plans..........................................................................14 Section 4.18 Licensure.......................................................................................16 Section 4.19 Insurance Coverage..............................................................................16 Section 4.20 Environmental Matters...........................................................................16 Section 4.21 Restaurant Operations...........................................................................18 Section 4.22 [Reserved]......................................................................................18 Section 4.23 Affiliated Transactions.........................................................................18 Section 4.24 Subsidiaries....................................................................................18 Section 4.25 [Reserved]......................................................................................19 Section 4.26 Financial Statements............................................................................19 Section 4.27 Right to Inspect................................................................................19 Section 4.28 Development Rights..............................................................................19 ARTICLE V: COVENANTS OF SELLERS............................................................................20 Section 5.1 Employee Benefit Plans..........................................................................20 Section 5.2 Performance of Real Property Leases and Assumed Contracts.......................................21 Section 5.3 Transfer of Licenses and Permits................................................................21 Section 5.4 Liabilities of Seller...........................................................................21 Section 5.5 Agreements Respecting Employees of Sellers......................................................21 Section 5.6 Conduct of Business.............................................................................21 Section 5.7 Broker's Fees...................................................................................23 Section 5.8 Access to Information...........................................................................23 Section 5.9 Bankruptcy Motion...............................................................................23 Section 5.10 [Reserved]......................................................................................24 Section 5.11 [Reserved]......................................................................................24 Section 5.12 [Reserved]......................................................................................24 Section 5.13 Change of Name..................................................................................24 ii Section 5.14 Insurance.......................................................................................24 Section 5.15 Renegotiation of Assumed Leases.................................................................24 Section 5.16 Confidentiality.................................................................................24 Section 5.17 [Reserved]......................................................................................24 Section 5.18 Employee Receivables............................................................................24 Section 5.19 Survey and Title Report.........................................................................25 Section 5.20 Reporting Requirements..........................................................................25 Section 5.21 Cooperation.....................................................................................25 Section 5.22 Subsequent Contracts............................................................................26 Section 5.23 Prorations and Purchase Price Adjustment Data...................................................26 Section 5.24 Continued Compliance with Franchise Agreements..................................................26 Section 5.25 Repairs and Replacements........................................................................26 ARTICLE VI: REPRESENTATIONS AND WARRANTIES OF BUYER.........................................................27 Section 6.1 Corporate Existence.............................................................................27 Section 6.2 Corporate Power and Authority...................................................................27 Section 6.3 Execution and Delivery Permitted................................................................27 Section 6.4 Adequate Assurances Regarding Executory Contracts...............................................28 Section 6.5 Availability of Funds, etc......................................................................28 ARTICLE VII: COVENANTS OF BUYER..............................................................................28 Section 7.1 Buyer Performance...............................................................................28 Section 7.2 Confidentiality.................................................................................28 Section 7.3 Sellers' Employees..............................................................................28 Section 7.4 Cooperation.....................................................................................29 Section 7.5 Liquor Licenses.................................................................................29 Section 7.6 Broker's Fees...................................................................................29 ARTICLE VIII: ESCROWED AMOUNTS; PURCHASE PRICE ADJUSTMENTS; CONDITIONS TO CLOSING.............................29 Section 8.1 Escrowed Amounts................................................................................29 Section 8.2 Purchase Price Adjustments/Gift Certificate True-Up.............................................30 Section 8.3 Buyer's Conditions to Closing...................................................................32 Section 8.4 Sellers' Conditions to Closing..................................................................33 iii ARTICLE IX: MISCELLANEOUS...................................................................................34 Section 9.1 Notices.........................................................................................34 Section 9.2 Applicable Law..................................................................................35 Section 9.3 Binding on Successors; Assignment...............................................................35 Section 9.4 Payment of Costs; Post-Closing Payments.........................................................36 Section 9.5 Closing Not to Prejudice Claim for Damages......................................................37 Section 9.6 Additional Documents............................................................................37 Section 9.7 Time is of the Essence..........................................................................37 Section 9.8 Interpretation..................................................................................37 Section 9.9 Entire Agreement................................................................................37 Section 9.10 Counterparts....................................................................................38 Section 9.11 Termination.....................................................................................38 Section 9.12 Sellers' Representative.........................................................................39 LIST OF EXHIBITS AND SCHEDULES....................................................................................42
iv ASSET PURCHASE AGREEMENT This Asset Purchase Agreement (the "Agreement") is made and entered into this 16th day of July 2002 by and among Apple Capitol Group, LLC, a Florida limited liability company ("Apple Capitol Group"), Apple Prince Georges Maryland Group, LLC, a Florida limited liability company ("Apple Prince Georges"), Apple Washington MD Group, LLC, a Florida limited liability company ("Apple Washington"), Apple St. Marys MD Group, LLC, a Florida limited liability company ("Apple St. Marys"), Apple Calvert MD Group, LLC, a Florida limited liability company ("Apple Calvert"), Apple Charles MD Group, LLC, a Maryland limited liability company ("Apple Charles"), and Berkeley WVA, LLC, a West Virginia limited liability company ("Berkeley WVA" and together with Apple Capitol Group, Apple Prince Georges, Apple Washington, Apple St. Marys, Apple Calvert, and Apple Charles are referred to herein individually as a "Seller" and collectively as the "Sellers"), and Applebee's International, Inc., a Delaware corporation ("Buyer"); WHEREAS, Sellers own various items of personal property and interests in real property (the "Purchased Assets," as more fully defined in Section 1.1 below) used in the operation and development of Applebee's Neighborhood Grill & Bar restaurants listed on Exhibit 1.1 (the "Restaurants") pursuant to the Franchise Agreements (the "Franchise Agreements") listed on Exhibit 1.1(a) to this Agreement; WHEREAS, Sellers desire to sell the Purchased Assets to Buyer; WHEREAS, Buyer desires to purchase the Purchased Assets from Sellers; and WHEREAS, Buyer and Sellers have agreed upon the terms and conditions of such sale and desire to reduce the same to writing. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, covenants, representations, warranties and promises set forth herein, and in order to prescribe the terms and conditions of such purchase and sale, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.1 Purchased Assets. Subject to the terms and conditions set forth in this Agreement, Sellers hereby agree that at the Closing (as defined in Section 3.1, below) they shall sell, transfer, convey, and assign to Buyer free and clear of all mortgages, taxes, liens, security interests, pledges, encumbrances and Claims (other than Permitted Liens and Encumbrances as defined on Schedule 1.1), and Buyer hereby agrees at the Closing to purchase and accept from Sellers all of Sellers' right, title and interest in and to all items of personal property, whether tangible or intangible, and all interests in real estate, whether owned in fee or held under lease or license, used in the operation of the Restaurants, held or used for Restaurants under development, or located in the Restaurants (the "Purchased Assets"), including but not limited to the following: (a) The Franchise Agreements listed on Exhibit 1.1(a) and the items described in Section 3.2(f), below; 1 (b) Each Seller's interest as lessee in and to the Real Property Leases (as defined in Section 4.4(c), below), including all of each such Seller's interest under the Real Property Leases in the buildings, fixtures, signs, parking facilities, trash facilities, fences, utilities, other leasehold improvements, and any and all easements, rights, privileges, tenements, appurtenances and hereditaments related to such Real Property Leases; (c) All Owned Real Property (as defined in Section 4.4(a), below), including all of Sellers' interest in the buildings, fixtures, signs, parking facilities, trash facilities, fences, utilities, other improvements, and any and all easements, rights, privileges, tenements, appurtenances and hereditaments related to the Owned Real Property; (d) All Assumed Contracts (as listed on Schedule 4.4(j)); (e) All equipment and leasehold improvements used in the normal and customary operations of the Restaurants (whether or not located or installed in a Restaurant), including but not limited to the furniture, machinery, equipment, tables, chairs, cash registers, computer equipment, ovens, refrigerators, display cases, shelves, utensils, tools, pans, lights, uniforms, signs, menus, glasses, plates, dishes, silverware, pitchers, smallwares, books, cabinets, racks, towels, decor, bars, and bar equipment (the "Equipment"); (f) All inventories of foodstuffs, beverages (including liquor), paper products, cleaning supplies and other supplies (the "Inventories") which are in the Restaurants on the Closing Date (as defined in Section 3.1, below); (g) All of Sellers' other rights and property interests of any nature which are customarily used in the operation of the Restaurants, including, but not limited to rights to use existing Restaurant telephone numbers and rights arising under equipment warranties to the extent assignable; (h) All assignable computer software and related manuals, data transmission equipment and related software, software licenses ("Transferred Licenses"), and portable computers used by field personnel and used in connection with the operation of the Restaurants, including those items set forth on Schedule 1.1(h) hereto; (i) Stock in any entity (other than a Seller) owned by any Seller which holds assets related to the Restaurants; (j) All original records and files (the Sellers may retain copies thereof) related to the Real Property (as defined in Section 4.4(b) below) such as rent calculations, landlord correspondence, purchase agreements, deeds, construction documents, title reports, environmental and engineering reports, appraisals, surveys, etc.; (k) All original accounting records and files (the Sellers may retain copies thereof) related to Retained Employees (as defined in Section 5.5(a)) in or assigned to the Restaurants who accept employment with Buyer as of the Effective Time (as defined in Section 3.4 below); 2 (l) All rights under all warranties, express or implied, or other claims for damages or loss (unless any such Purchased Assets are replaced prior to the Closing Date or the Purchase Price has been reduced to reflect the loss of any such Purchased Asset) related to any of the Purchased Assets; and (m) All cash in amounts normally used to open the Restaurants (not including prior day's receipts held for deposit), provided that in no event shall such cash be more or less than $1,000 per Restaurant. Section 1.2 Excluded Assets. Excluded from sale under this Agreement are the assets of Sellers listed or described on Schedule 1.2 to this Agreement. At any time prior to the entry of the Sale Order (as defined in Section 1.3 below), Buyer may, in its sole discretion, elect to add any Real Property Leases as it so determines to Schedule 1.2, provided that there shall be no adjustment to the Purchase Price as a result of such election. If Buyer so elects, Buyer will nevertheless purchase the Purchased Assets related to such Restaurant located on the property subject to such Lease and the removal of such assets from such Restaurant shall be at Buyer's expense and risk of loss. Section 1.3 Mechanism of Sale. Under the terms of this Agreement, Buyer's obligation to acquire and Sellers' obligation to sell the Purchased Assets is conditioned upon, among other things, Sellers' filing of a Chapter 11 petition (the "Bankruptcy") in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") as more specifically set forth in Section 1.4 hereof and the entry of an order (or orders) pursuant to 11 U.S.C. ss. 363 approving the sale of the Purchased Assets to Buyer and the assumption and assignment to Buyer of the Real Property Leases and Assumed Contracts, upon the terms and conditions of this Agreement (the "Sale Order") as set forth in Exhibit 1.3, or as otherwise modified, in form and substance reasonably satisfactory to Buyer, Sellers and Lehman Brothers Holdings, Inc. or its designee or assignee ("Lehman"). Section 1.4 Commencement of Bankruptcy Proceeding. Subject to, and as part of, the terms and conditions set forth in this Agreement, Sellers shall file a Chapter 11 petition in the Bankruptcy Court (the "Bankruptcy Proceeding") immediately following the execution of this Agreement. ARTICLE II PURCHASE PRICE OF ASSETS Section 2.1 Purchase Price, Deposit and Additional Purchase Price. (a) Purchase Price. The purchase price paid for the Purchased Assets shall be Thirty Two Million Seven Hundred and Fifty Thousand Dollars ($32,750,000), adjusted as set forth in Section 2.2, below (the "Purchase Price"). Upon the Bankruptcy Court's approval of Sellers' motion to approve the bidding procedures (the "Bidding Procedures Motion"), as set forth in Exhibit 2.1(a)(i), Buyer shall provide a deposit, consistent with the Order approving the Bidding Procedures Motion, in the amount of Three Million Dollars ($3,000,000) (the "Deposit"), which sum shall be held in escrow by UMB Bank, n.a., (the "Escrow Agent") pursuant to an Escrow Agreement substantially in the form attached hereto as Exhibit 8.1, and paid to Sellers upon the 3 Closing of this transaction; otherwise, such Deposit shall be fully refundable (including interest thereon) to Buyer except as provided in Section 9.11(b). The Purchase Price shall be paid at Closing, subject to the Bankruptcy Court's issuance of a final, nonappealable, unstayed Sale Order (or orders) as set forth in Section 8.3(n), by wire transfer of federal funds to Seller by (i) the Escrow Agent in the case of the Deposit and (ii) Buyer, in the case of the balance of the Purchase Price (less the Escrowed Amounts described in Section 8.1), in each case at and in favor of Lehman, up to the extent of the amount of Sellers' then outstanding indebtedness to Lehman, but subject to disgorgement in the event Lehman's security interest in the Purchased Assets is determined to be invalid. Buyer and Sellers agree that the Purchase Price shall be allocated to the Purchased Assets as set forth in Exhibit 2.1(a)(ii). (b) Additional Purchase Price. (i) In addition to the adjusted purchase price as determined in accordance with Sections 2.1(a) and 2.2, Buyer shall pay to Sellers an additional purchase price (the "Additional Purchase Price") equal to 50% of the excess, if any, of the 12 Month EBITDA over $8.15 million ($8.15 million, as adjusted as provided in Schedule 2.1(b), "Threshold EBITDA"). The "12 Month EBITDA" shall be determined in accordance with Schedule 2.1(b). The "Measurement Period" shall be the 12 monthly accounting periods of Buyer beginning with the first such period following the end of the sixth full monthly accounting period of Buyer following Closing. Any Additional Purchase Price shall be paid within sixty (60) days following the Measurement Period by wire transfer of federal funds to Sellers (for purposes of this Section 2.1(b) and Schedule 2.1(b), Sellers shall include any assignee of Sellers entitled to receive amounts due to Sellers under this Section 2.1(b)), at and in favor of Lehman, up to the extent of the amount of Sellers' then outstanding indebtedness to Lehman, but subject to disgorgement in the event Lehman's security interest in the Purchased Assets is determined to be invalid. (ii) In the event that Buyer or any affiliate of Buyer sells all or substantially all of the assets of one (1) or more Restaurants, whether in one or a series of good faith arms length transactions, prior to or during the Measurement Period, and receives sale consideration therefor (and for any related territory rights) in the aggregate of $5,000,000 or more, Buyer will pay to Sellers by wire transfer of funds to Sellers, an amount equal to 5% of the first $10,000,000 of total sale consideration received by Buyer and 10% of the total sale consideration received by Buyer in excess of $10,000,000; provided, that no amounts will be payable by Buyer under this Section 2.1(b)(ii) unless the total sale consideration received by Buyer for all Restaurants (and for any related territory rights) sold during the Measurement Period, when divided by the total number of Restaurants sold, equals more than $1,725,000. Any amounts due Sellers under this Section 2.1(b)(ii) shall be calculated in the aggregate at the end of the Measurement Period and shall be paid to Sellers within sixty (60) days following the 4 Measurement Period by wire transfer of federal funds to Sellers and in favor of Lehman, up to the extent of the amount of Sellers' then outstanding indebtedness to Lehman, but subject to disgorgement in the event Lehman's security interest in the Purchased Assets is determined to be invalid. (iii) Buyer shall provide Sellers with such back-up and supporting information as Sellers shall reasonably request in order to review the calculation of any amounts due to Sellers pursuant to Section 2.1(b). Section 2.2 Adjustment of Purchase Price. At the Closing, Sellers shall deliver to Buyer an itemized statement of purchase price adjustments and prorations as set forth in Section 8.2 of this Agreement for Buyer's and Lehman's review and approval and the Purchase Price shall be adjusted accordingly. Section 2.3 [Reserved]. Section 2.4 Certain Liabilities and Obligations. (a) Liabilities Not Assumed. Except for the liabilities and obligations specifically assumed pursuant to and referred to in Section 2.4(b), Buyer shall not assume, take subject to and shall not be liable for, any liabilities or obligations of any kind or nature, whether absolute, contingent, accrued, known or unknown, of Sellers. (b) Assumed Liabilities. On the Closing Date, Sellers shall assign to Buyer, and Buyer shall assume: (i) all of Sellers' post-closing obligations with respect to the Real Property Leases and the Assumed Contracts; however, Buyer shall not be responsible for any obligation, whether under the Real Property Leases, the Assumed Contracts, or otherwise, relating to events or operation of the Restaurants occurring on or prior to the Closing Date, except as expressly provided for in this Agreement; (ii) all liabilities incurred by Sellers prior to the Closing in the ordinary course of business and consistent with Sellers' past practice for goods and services that are delivered and performed after the Closing for the direct benefit of the operation of the Restaurants; (iii) all liabilities of Sellers for outstanding gift certificates; and (iv) the value of all vacation and other paid time off benefits, accrued in accordance with Sellers' standard policy, and unused as of the Closing, of all Retained Employees of Seller who are hired by Buyer but only to the extent of any Purchase Price adjustment occurring pursuant to Section 8.2(a)(v) (collectively, (i), (ii), (iii) and (iv) are referred to as the "Assumed Liabilities.") Section 2.5 Taxes. Sellers and Buyer shall share equally all use, transfer taxes, sales taxes or fees, in accordance with Section 9.4(c), payable in connection with the purchase, sale or transfer of the Purchased Assets to, and the assumption of the Assumed Liabilities by, Buyer pursuant to this Agreement. Sellers shall use their Reasonable Best Efforts to assist Buyer in minimizing such taxes or fees, consistent with the other terms of this Agreement. Section 2.6 Allocation of Purchase Price. Buyer and Sellers agree that the Purchase Price shall be allocated in a manner as reasonably determined by Buyer. Such allocation shall be binding on Buyer and Sellers for purposes of reporting gain or loss and determination of basis for income tax purposes, and 5 each of the parties hereto agrees that it or they will file a statement setting forth such allocation with its or their federal income tax returns and will also file such further information or take such further actions as may be necessary to comply with the Treasury Regulations that have been promulgated pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). ARTICLE III CLOSING Section 3.1 Date, Time and Place of Closing. The consummation of the transactions contemplated hereby (the "Closing") shall be held on the first Monday following or coinciding with, at Buyer's option, the later of (i) the eleventh (11th) day after the Sale Order is issued by the Bankruptcy Court; or (ii) the day on which all closing conditions have been met, satisfied or waived. Section 3.2 Deliveries by Sellers at Closing. At the Closing, and thereafter as may be reasonably requested by Buyer, Sellers shall convey, transfer, assign, and deliver all of their right, title and interest in and possession of the Purchased Assets to Buyer, and shall also deliver to Buyer the following: (a) Such bills of sale, easements, assignments, leases, subleases, lease assignments, special warranty deeds regarding the real property and improvements to be conveyed in fee simple, and other appropriate instruments of transfer as Buyer has requested, all in recordable form, of content reasonably acceptable to Buyer and Buyer's counsel and sufficient to vest in Buyer good and marketable title to all of the Purchased Assets which, (i) with regard to interests in real property, is subject to no exception to title insurance coverage which could, in Buyer's sole reasonable discretion, substantially affect the value of the Purchased Assets taken as a whole, and (ii) with regard to both real and personal property, is free and clear of all mortgages, deeds of trust, liens, security agreements, charges, encumbrances or Claims (other than Permitted Liens and Encumbrances); (b) Certified copies of duly adopted resolutions of each Seller's Board of Advisers authorizing, approving, and consenting to the execution and delivery of this Agreement, to the consummation of the transactions contemplated herein, and to performance of the agreements set forth herein; (c) Proof that all real and personal property taxes have been paid that could create a lien on the Purchased Assets after their sale to Buyer pursuant to the Sale Order; (d) A duly executed Cross-Receipt; (e) A duly executed Release and Waiver in favor of Buyer from Sellers, substantially in the form of Exhibit 3.2(e) to this Agreement; (f) All operating manuals, recipes, proprietary information and similar documents and information held by Sellers in connection with Sellers' status as a franchisee of Buyer and all copies and extracts therefrom; 6 (g) Duly executed Liquor Service and Operating Agreements as reasonably agreed to among the parties; (h) A certified final, nonappealable, unstayed Sale Order (or orders); (i) A copy on computer disk, or other electronic medium acceptable to Buyer, of Sellers' detailed fixed asset records related to the Purchased Assets updated through the Closing Date; and (j) The original payroll and human resources records and files (the Sellers may retain a copy thereof) of Retained Employees, as defined in Section 5.5(a), below. Section 3.3 Deliveries by Buyer at Closing. Upon receipt, review and acceptance by Buyer's counsel of all of the documents specified in Section 3.2 above, duly authorized and validly executed, Buyer shall deliver to Sellers at Closing: (a) The Purchase Price; (b) A duly executed Cross-Receipt; (c) Certified copies of duly adopted resolutions of Buyer's Board of Directors authorizing, approving, and consenting to the execution and delivery of this Agreement, to the consummation of the transactions contemplated herein, and to performance of the agreements set forth herein; (d) A duly executed Release and Waiver in favor of Sellers under the Franchise Agreements, substantially in the form of Exhibit 3.2(e) to this Agreement; and (e) Duly executed Liquor Service and Operating Agreements as reasonably agreed to among the parties. Section 3.4 Transfer of Operations. Buyer shall be entitled to immediate possession of, and to exercise all rights arising under, the Purchased Assets from and after the time that the Restaurants open for business on the Closing Date, and operation of the Restaurants shall transfer at such time (the "Effective Time"). Except as provided hereby, all profits, losses, liabilities, claims, or injuries arising before such transfer shall be solely to the benefit or the risk of Sellers. All such occurrences after transfer shall be solely to the benefit or the risk of Buyer. The risk of loss or damage by fire, storm, flood, theft, or other casualty or cause shall be in all respects upon Sellers prior to such transfer and upon Buyer thereafter. Section 3.5 Assignment by Buyer. (a) Buyer may assign any or all of its rights and benefits under this Agreement to any entity or entities that control, are controlled by or are under common control with Buyer, upon written notice to Sellers of such assignment. (b) No assignment by Buyer pursuant to this Section shall relieve Buyer of its obligations under this Agreement. 7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLERS As an inducement to Buyer to enter this Agreement and to consummate the transactions contemplated hereby, each Seller, jointly and severally, represents and warrants to Buyer as follows: Section 4.1 Existence. Each of the Sellers is duly organized, validly existing, and in good standing under the laws of the State of Florida or the State of West Virginia respectively, and each is qualified to do business and is in good standing in the respective states listed in Schedule 4.1, which Schedule includes all jurisdictions where Sellers' activities require such qualification, except where the failure to be so qualified, licensed, or in good standing would not reasonably be expected to have (a) a material adverse effect on the business, results of operations, or condition (financial or otherwise) of the business operated by Sellers (taken as a whole), or (b) a material adverse effect on (i) the transactions contemplated by this Agreement, (ii) the legality, validity, or enforceability of this Agreement and the agreements and instruments to be entered into in connection herewith, or (iii) the ability of Sellers to perform their obligations under this Agreement (each, a "Material Adverse Effect"). Section 4.2 Power and Authority. Each Seller has the corporate power and authority to own its properties and Purchased Assets and to carry on its business as now conducted. Subject to the Bankruptcy Code and the Sale Order, Sellers have the requisite corporate power and authority to convey, assign, and transfer the Purchased Assets as set forth in this Agreement. Section 4.3 Execution and Delivery Permitted; Consents. The execution, delivery and performance of this Agreement will not violate or result in a breach of any term of each Seller's Operating Agreement, result in a breach of or constitute a default under any term in any agreement or other instrument to which each Seller is a party, such default having not been previously waived by the other party to any such agreement or otherwise resolved by order of the Bankruptcy Court in such a manner as to not materially adversely affect the rights and assets of Sellers or the ability of Sellers to complete the transactions contemplated by this Agreement, or violate any law or any order, rule or regulation applicable to Sellers, of any court or of any regulatory body, administrative agency or other governmental instrumentality having jurisdiction over Sellers or their properties; and will not result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the Purchased Assets after their sale to Buyer pursuant to the Sale Order. The Board of Advisers of each Seller has taken all action required by law (other than any action required by the Bankruptcy Court) and by each Seller's Operating Agreement to authorize the execution and delivery of this Agreement, and the transfer of the Purchased Assets to Buyer in accordance with this Agreement. With respect to each Seller, except as set forth on Schedule 4.3, the execution, delivery and performance of this Agreement and the other agreements executed in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not require any filing with, notice to or consent, waiver or approval of any third party, including but not limited to, any governmental body or entity. Schedule 4.3 identifies separately each notice, consent, waiver or approval by reference to each Real Property Lease and to each Assumed Contract to which it is applicable. Section 4.4 The Purchased Assets. Except for the Excluded Assets: 8 (a) Attached hereto as Schedule 4.4(a) is a complete and accurate list of each parcel of real property owned by Sellers on which a Restaurant is located or which is being held for development of a Restaurant (the "Owned Real Property"), separated by Restaurant location and listing the street address; (b) Attached hereto as Schedule 4.4(b) is a complete and accurate list of each parcel of real estate leased by Sellers or in which it has a leasehold or other interest on which a Restaurant is located or which is being held for development of a Restaurant (the "Leased Real Property"), separated by Restaurant location, listing the street address of such property and the name and address of the landlord's agent to which Sellers are obligated to provide notices regarding the Leased Real Property (collectively, the Owned Real Property and the Leased Real Property are referred to as the "Real Property"); (c) Attached hereto as Schedule 4.4(c) is a complete and accurate list of all agreements or documents under which Sellers claim or hold such leasehold or other interest or right to the use of the Leased Real Property (the "Real Property Leases") separated by Restaurant location and showing the street address, each amendment, modification or extension thereof, and the dates of each such amendment, modification or extension; (d) Attached hereto as Schedule 4.4(d) is a complete and accurate list by Restaurant of the original basis and accumulated depreciation for financial and tax reporting purposes of (i) fixed assets (other than inventory and supplies) being conveyed hereunder as of the month end immediately preceding the date of this Agreement, and (ii) land, buildings and leaseholds being conveyed hereunder as of the month end immediately preceding the date of this Agreement; (e) Attached hereto as Schedule 4.4(e) is a complete and accurate list of all liens, claims, encumbrances and restrictions on the Equipment; (f) Attached hereto as Schedule 4.4(f) is a complete and accurate list of all leases of personal property used in the operation of the Restaurants (the "Equipment Leases"), identified by parcel of Owned Real Property or Leased Real Property where the leased equipment is located, separated by Restaurant location and identifying the parties thereto, the property leased thereunder; (g) Attached hereto as Schedule 4.4(g) is a complete and accurate list of all loan agreements, indentures, mortgages, pledges, security agreements, guarantees, leases or lease purchase agreements (not listed on Schedule 4.4(c) or 4.4(f)) to which each Seller is a party and by which any of the Purchased Assets are bound; (h) Attached hereto as Schedule 4.4(h) is a complete and accurate list of all other contracts, agreements, commitments or other understandings or arrangements to which each Seller is a party and by which any of the Purchased Assets are bound or affected, other than such contracts, agreements or commitments terminable at will, identified by parcel of Owned Real Property or Leased Real Property to which such is applicable; and each item on such Schedule that applies to any restaurants or assets of Sellers that are not being conveyed to Buyer hereunder is so noted; 9 (i) Attached hereto as Schedule 4.4(i) is a complete and accurate list of all contracts, agreements, commitments, understandings or arrangements affecting or relating to the Purchased Assets or the Restaurants to which any Affiliate of Sellers is a party or by which any such Affiliate is bound; (j) The items listed in the above Schedules constitute all of the matters required to be shown on such Schedules. A true and complete copy, or with respect to oral agreements an accurate summary, of each item listed on the above Schedules has been delivered to Buyer. Each Real Property Lease separately is acknowledged by Sellers to be material to operation of the applicable Restaurant, and to the Purchased Assets, business and financial condition of Sellers. The contracts listed on Schedule 4.4(j) constitute the "Assumed Contracts"; and (k) With respect to the Assumed Contracts, Sellers shall provide notice to all other parties to the Assumed Contracts in the Sale Motion (referenced in Section 5.9) of the amounts necessary to cure any defaults currently existing under the Assumed Contracts (the "Cure Amounts") through Closing and will, upon Closing, promptly cure such defaults, including, without limitation, any and all unpaid royalties, advertising fees and finance charges due and owing under the Franchise Agreements as of the Closing Date, being approximately $1,570,000 as of July 10, 2002. Section 4.5 Binding Effect. This Agreement and each other agreement required to be executed and delivered by Sellers in connection herewith, when executed and delivered, will be the legal, valid and binding obligation of Sellers, enforceable against each of them in accordance with its terms, except as enforceability may be limited by (i) the Bankruptcy Proceeding and the applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally, and (ii) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 4.6 Condition of Purchased Assets. Except as set forth in Schedule 4.6, (a) Each Restaurant contains all Equipment required by the applicable Franchise Agreement and necessary to operate the Restaurant in accordance with Sellers' historical practices. Except as set forth in the initial inspection list (the "Initial Inspection List") prepared by Buyer and acknowledged by Sellers, a copy of which is attached hereto as Schedule 4.6(a), each Restaurant's Equipment is in operating condition, no major repairs are necessary concerning the Equipment, and to Sellers' Knowledge (as defined in Schedule 1.1), the Equipment complies in all material respects with all federal, state and local laws, rules and regulations, and all occupational safety and health act regulations. (b) To Sellers' Knowledge, all Inventories are saleable or usable in the ordinary course of business for their intended use (except for normal spoilage) and exist in such quantity as necessary to operate the Restaurants in accordance with Sellers' historical practices. 10 (c) The buildings, fixtures, parking facilities, trash facilities, fences, utilities and other improvements, appurtenances and hereditaments at or on each Restaurant are in operating condition and to Sellers' Knowledge, in compliance in all material respects with all federal, state and local laws, rules and regulations and leases and lease provisions. Section 4.7 Absence of Other Assets. Except as specifically provided in this Agreement or on Schedule 4.7, there is no asset, property, or right of any nature which is not being transferred to Buyer hereunder that has been customarily employed, owned, held, or used in connection with the operation or ownership of any Restaurant (except as listed on Schedule 4.7), other than permits that are not transferable or assignable, all of which permits are listed on Schedule 4.7. All Equipment and Inventories used in the operation of any Restaurant are situated entirely upon the premises of such Restaurant (except as listed on Schedule 4.7). All assets located at the Restaurants are being conveyed to Buyer pursuant to this Agreement. Section 4.8 Ownership of Assets. Sellers have good and marketable title to the Purchased Assets, which title is, or will be at Closing, free and clear of all mortgages, taxes (except for taxes that are prorated pursuant to Section 8.2(e)), liens, security interests, pledges, encumbrances and Claims (other than Permitted Liens and Encumbrances); Sellers have the full, absolute and unrestricted right to assign, transfer and convey to Buyer the Purchased Assets, subject only to Bankruptcy Court orders and such consents as Sellers shall deliver to Buyer at Closing; no person or entity other than Sellers has any interest in the Purchased Assets other than the lessors under Real Property Leases or the Assumed Contracts; and all Equipment employed in the operation of the Restaurants which is leased under leases other than Assumed Contracts has been acquired and the purchase price therefor fully paid, or arrangements satisfactory to Buyer have been made to apply such amount of the Purchase Price as may be necessary to fully pay the purchase price therefor. Section 4.9 Real Property. Sellers have good and marketable title to all of the Owned Real Property and to all of the lessee's interests in and under the Real Property Leases and has the full, absolute and unrestricted right to assign, transfer and convey to Buyer said Real Property, subject only to (a) Bankruptcy Court orders, (b) such consents as Sellers shall deliver to Buyer at Closing, and (c) any Permitted Liens, Encumbrances and Claims. Each Real Property Lease is in full force and effect; the terms contained in the Real Property Leases have not been modified or amended in any respect except as disclosed on Schedule 4.4(c), and each constitutes the legal, valid and binding obligation of the parties thereto (to Sellers' Knowledge with respect to any party other than Sellers), enforceable against them in accordance with their terms, except as enforceability may be limited by (i) applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally, and (ii) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or in law). Sellers are current in all obligations under each Real Property Lease. The consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any material rights of, or accelerate or increase any material obligation of Sellers under any Real Property Lease. 11 Section 4.10 [Reserved]. Section 4.11 Documents Sufficient. The documents delivered by Sellers to Buyer pursuant to Section 3.2 of this Agreement will be valid, sufficient and effective to completely transfer to Buyer good and marketable title to all of the Purchased Assets. Section 4.12 Litigation or Condemnation. Except as set forth on Schedule 4.12(a) to this Agreement, there are no suits, actions, condemnation actions, investigations, complaints, or other proceedings of any nature whatsoever in law or in equity, which are pending or, to the best of each Seller's Knowledge, threatened against, or which affect in any manner, any of the Purchased Assets, by or before any federal, state, municipal, or other governmental court, department, commission, board, bureau, agency, or other instrumentality (whether domestic or foreign). No Seller is in default in any material respect with respect to any order, writ, injunction, garnishment, levy, or decree of any federal, state, municipal, or other governmental court, department, commission, board, bureau, agency, or instrumentality, and the use, occupancy, ownership, or transfer of the Purchased Assets do not constitute a default thereunder. To Sellers' Knowledge, the operation of the Restaurants and the condition of the Purchased Assets do not violate in any material respect any federal, state, or municipal law, regulation or rule (including any applicable zoning or similar use regulation or law). Except as set forth on Schedule 4.12(b), during Sellers' operation of the Restaurants no Restaurant has received a citation, warning, or reprimand for, or otherwise been notified of, any material violation of any law, rule or regulation governing alcoholic beverages, or any health, environmental, or similar municipal, state, or federal law or regulation. To Sellers' Knowledge, since Sellers' operation of the Restaurants Sellers have not served any food or foodstuff which is adulterated, spoiled, or contains foreign substances, nor has any Seller served any food item which has or, except as set forth on Schedule 4.12(c) to this Agreement, is claimed to have caused any illness or injury to the consumer thereof. Section 4.13 Taxes. All ad valorem and other property taxes relating to the Purchased Assets have been fully paid for 2001 and all prior tax years and there are no delinquent property tax liens or assessments that will result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the Purchased Assets. Sellers have also timely filed (or will timely file) all federal, state, local and other tax returns and reports of whatever kind required to be filed by Sellers for all periods up to and including the Closing Date, and no request (other than extensions filed by Sellers with respect to their federal tax returns with respect to calendar year 2001) has been made for any extension of time within which to file such returns and reports. Sellers have paid (or will timely pay) all taxes of whatever kind, including any interest, penalties, governmental charges, duties, fees, and fines imposed by the United States, foreign countries, states, counties, municipalities, and subdivisions, and by all other governmental entities or taxing authorities, which are due and payable (or which relate to any period prior to, and including, the Closing Date) or for which assessments have been received, the nonpayment of which would result in a lien on any of the Purchased Assets. Except as set forth on Schedule 4.13, there are no audits, suits, actions, claims, investigations, inquiries, or proceedings pending or to Sellers' Knowledge, threatened against any Seller with respect to taxes, interest, penalties, governmental charges, duties, or fines, nor are any such matters under discussion with any governmental authority, nor have any claims for additional taxes, interest, penalties, charges, fines, fees or duties been received by, or to Sellers' Knowledge, assessed against any Seller. 12 Section 4.14 Assumed Contracts. Subject to the consents delivered to Buyer at Closing, or the entry of an order by the Bankruptcy Court approving the assumption and assignment of the Assumed Contracts to Buyer, Sellers have full, absolute and unrestricted right to assign, transfer and convey to Buyer the Assumed Contracts. Each Assumed Contract is in full force and effect; the terms contained in the Assumed Contracts have not been modified or amended in any respect except as disclosed on Schedule 4.4(j) and to the Sellers' Knowledge, each constitutes the legal, valid and binding obligation of the parties thereto, enforceable against them in accordance with their terms, except as enforceability may be limited by (i) applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally, and (ii) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or in law). To Sellers' Knowledge, except as set forth on Schedule 4.14, there have been no events of default, and no state of facts exists which with notice or the passage of time, or both, would constitute an event of default under any Assumed Contract. The consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any rights of, or accelerate or increase any obligation of any Seller under any Assumed Contract. Section 4.15 Accuracy of Information and Representations and Warranties. All representations and warranties made by Sellers in this Agreement or any Schedule or Exhibit hereto or in any certificate or other document furnished by any of them pursuant to this Agreement are true and correct in all material respects on and as of the date hereof. Section 4.16 Employment Matters. (a) No employees of the Restaurants are on strike, nor are such employees threatening to strike, and there is no strike in progress in any collective bargaining unit of any union to which each Seller's employees belong. To Sellers' Knowledge, no labor union has recently attempted, or is presently attempting, to organize the Restaurants' employees into a collective bargaining unit, and no group of the Restaurants' employees is presently organized into a collective bargaining unit. (b) Schedule 4.16(b) hereto is a true and complete list as of June 25, 2002, (i) of each person employed in connection with the operation of the Restaurants from and including each assistant manager and assistant kitchen manager up through area director; and (ii) of each other employee whose duties are primarily related to Sellers' Restaurant operations. For each such person, Schedule 4.16(b) shows the full name, job title or duty, wages or salary and estimated bonus. (c) Sellers have, to their Knowledge, operated all Restaurants in accordance with all local, state and federal laws and regulations related to employment matters including, but not limited to, payment of wages and benefits and employee discrimination. 13 Section 4.17 Employee Benefit Plans. (a) Schedule 4.17(a) contains a true and complete list of each pension, profit sharing, other deferred compensation, bonus, incentive compensation, stock purchase, stock option, supplemental retirement, severance or termination pay, medical, hospitalization, life insurance, dental, disability, salary continuation, vacation, supplemental unemployment benefits plan, program, arrangement or contract, and each other employee benefit plan, program, arrangement or contract, maintained, contributed to, or required to be contributed to, by each Seller or any Related Party (hereinafter defined) for the benefit of any current or former employee, director or agent of Sellers or any Related Party, whether or not any of the foregoing is funded, whether formal or informal, whether or not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and whether legally binding or not (collectively, the "Benefit Plans"). Sellers and their Related Parties do not have any express or implied plan or contract, whether legally binding or not, to create any additional Benefit Plan or modify any existing Benefit Plan, other than as may be required to comply with the Tax Reform Act of 1986. Sellers have delivered to Buyer, with respect to each applicable Benefit Plan (1) true and complete copies of all documents embodying or relating to each Benefit Plan including, without limitation, the plan and trust or other funding arrangement relating thereto, summary plan descriptions, employee handbooks or personnel manuals and all amendments and supplements thereto; (2) the most recent annual report (Series 5500 and all schedules thereto), if any, required by ERISA; and (3) the most recent determination letter received from the Internal Revenue Service ("IRS"), if any. "Related Party" means any member of a controlled group of corporations, a group of trades or businesses under common control or an affiliated service group, within the meaning of Section 414(b), (c), (m) or (o) of the Code, of Sellers; (b) The Benefit Plans that are intended by Sellers or any Related Party to meet the requirements of Section 401(a) of the Code now meet and since their inception have met, the requirements for qualification under Section 401(a) of the Code and the related trusts are now, and since their inception have been, exempt from taxation under Section 501(a) of the Code and nothing has occurred or, in connection with the transaction contemplated by this Agreement, will occur that has or could have an adverse affect on the qualified status of any such Benefit Plan. (c) Sellers and any Related Party have performed in all material respects obligations required to be performed by them under, and are not in default under or in violation of, any and all of the Benefit Plans, and each Benefit Plan has been operated in all material respects in accordance with its provisions and in compliance with all applicable laws and regulations. Neither any Benefit Plan or fiduciary nor Sellers or any Related Party has taken any action, or failed to take any action, that could subject it or any other person to any liability for any excise tax under Chapter 43 of the Code or for breach of fiduciary duty with respect to or in connection with a Benefit Plan; (d) At no time have Sellers or any Related Party been required to contribute to any "multiemployer plan" (within the meaning of Section 3(37) of ERISA) and Sellers and their Related Parties have no liability (contingent or otherwise) relating to the withdrawal or partial withdrawal from a multiemployer plan. Sellers and their Related Parties do not participate in any "multiple employer plans," within the meaning of ERISA; 14 (e) No Benefit Plan provides or is required to provide group health, medical, death or survivor benefits to any former or retired employee of Sellers or beneficiary thereof, except to the extent (1) required under any state insurance law providing for a conversion option under a group insurance policy or (2) under Section 601 of ERISA; (f) No "reportable event" (as defined in ERISA) has occurred with respect to any Benefit Plan. No liability to the Pension Benefit Guaranty Corporation ("PBGC") has been incurred, or is expected by Sellers or any Related Party to be incurred, by Sellers or any Related Party with respect to any Benefit Plan and no Benefit Plan has "unfunded benefit liabilities" within the meaning of Title IV of ERISA. No steps have been taken to terminate any Benefit Plan which is subject to Title IV of ERISA and no proceeding has been initiated by the PBGC to terminate any such Benefit Plan or to appoint a Trustee to administer any such Benefit Plan; (g) Neither any Benefit Plan or fiduciary nor Sellers or any Related party has any liability to any participant, beneficiary or other person under any provision of ERISA or any other applicable law by reason of any payment of, or failure to pay, benefits or other amounts with respect to or in connection with any Benefit Plan; (h) Subject to Section 5.1(e), each Benefit Plan may be terminated by Sellers or their Related Parties on the Closing Date without acceleration or additional vesting of any benefits (other than vesting of contributions made by Sellers on behalf of certain employees to Sellers' 401(k) plan) and without payment of any amount as a penalty, bonus, premium, severance pay or other compensation or amount; and (i) Sellers do not have any ESOP and have not granted any employee any option or right to acquire an equity interest in any Seller. Section 4.18 Licensure. All governmental permits and licenses necessary to operate each Restaurant are listed on Schedule 4.18 hereto, identified by Restaurant and separated by Restaurant location ("Licenses"). Sellers have all such Licenses and are in compliance with all requirements and limitations set forth in such Licenses in all respects, except where the failure to have any such License or be in compliance will not have a Material Adverse Effect as defined in Section 4.1 hereof. All Licenses are now, and at Closing will be, in full force and effect, except where the failure to be in full force and effect will not have a Material Adverse Effect. Section 4.19 Insurance Coverage. Schedule 4.19 is a true and accurate list and brief description of all property, fire, casualty, liability, life, worker's compensation, and other forms of insurance of any kind owned or held by Sellers regarding the Purchased Assets or the Restaurants. All such policies (a) are in full force and effect, (b) are valid and outstanding policies, (c) insure against risks of the kind customarily insured against and in the amounts customarily carried by entities similarly situated, and (d) provide that they will remain in full force and effect through the Closing Date. 15 Section 4.20 Environmental Matters. (a) To Sellers' Knowledge, Hazardous Materials (as defined below), except for de minimis quantities of Hazardous Materials which have been utilized in the ordinary course of Sellers' operation of the Restaurant and which have not resulted in any violation of applicable Environmental Laws (as defined below), have not been at any time during Sellers' ownership of the Owned Real Property or Sellers' possession of the Leased Real Property, and to Sellers' Knowledge and belief have not been during any other time, generated, stored, discharged, disposed of, spilled, dumped, poured, emptied, or released and are not currently present at, on, in, beside, above, or under the real estate underlying or used in connection with the Restaurant locations (the "Real Estate"). Underground storage tanks are not and have not been at any time during Sellers' ownership of the Owned Real Property or Sellers' possession of the Leased Real Property, and to Sellers' Knowledge and belief have not been during any other time, located on the Real Estate. Sellers have at all times operated the Real Estate in compliance with all Environmental Laws (as defined below). (b) Each Seller, jointly and severally, unconditionally agrees to indemnify and hold harmless Buyer, for any and all losses, claims, damages, penalties, liabilities, costs and expenses (including attorney's fees, administrative expenses, prejudgment interest and court costs), fines, injuries, penalties, response costs (including the cost of any required or necessary investigation, testing, monitoring, repair, clean up, detoxification, decontamination, preparation of any closure or other required plans, removal, response or remedial action at or relating to the Real Estate) (collectively, "Claims and Costs"), with respect to, as a direct or indirect result of, or arising out of any contamination, requirement, lawsuit, notice of violation, notice letter, warning letter, administrative order, compliance order, enforcement action, settlement, agreement, consent order, decree or judgment, injunction, restraining order or prohibition (collectively "Action") relating to the generation, presence, storage, management, disposal, release, discharge, escape, emission, spilling, seepage, leakage, dumping, pumping, pouring, emptying or clean up of Hazardous Materials (as herein defined) at, on, in, beside, above, from or under all or a portion of the Real Estate which occurs from activities undertaken during Sellers' ownership or possession of the Real Estate prior to Closing. (c) For the purpose of this Agreement, the term "Hazardous Materials" shall include, but not be limited to: any substance defined as "hazardous substances," "hazardous air pollutant," "pollutants," "contaminants," "hazardous materials," "hazardous wastes," "toxic chemicals," "petroleum or petroleum products," "toxics," "hazardous chemicals," "extremely hazardous substances," "pesticides" or related materials, including but not limited to radon and asbestos, as now, in the past, or hereafter defined in any applicable federal, state or local law, regulation, ordinance, policy or directive, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.ss. 9601 et. seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C.ss.1101 et. seq.; 16 the Resource Conservation and Recovery Act, 42 U.S.C.ss.6901 et. seq.; the Hazardous Materials Transportation Act of 1974, 49 U.S.C.ss. 1801 et. seq.; the Federal Water Pollution Control Act, 33 U.S.C.ss. 1251 et. seq.; the Clean Air Act, 42 U.S.C.ss. 4701 et. seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.ss.136 et. seq.; the Safe Drinking Water Act, 42 U.S.C.ss.3001 et. seq.; the Toxic Substances Control Act, 15 U.S.C.ss. 2601 et. seq.; the Oil Pollution Act of 1990, 33 U.S.C.ss. 2701 et. seq.; and any laws regulating the use of biological agents or substances including medical or infectious wastes and the corresponding State laws, regulations and local ordinances, etc. which may be applicable, ("Environmental Laws") as any such acts may be amended. (d) Sellers agree and consent to the performance of environmental testing on the Real Estate at Buyer's expense; provided, however, that neither the performance of nor failure to perform such tests by Buyer will negate or affect Sellers' representations or warranties or agreement to indemnify contained herein. Section 4.21 Restaurant Operations. To Sellers' Knowledge, in all material respects the activities carried on in all buildings, structures or improvements included as part of, or located on or at the Restaurants, and the buildings, structures and improvements themselves, are not in violation of, or in conflict with, any applicable zoning or health regulation or ordinance or any other similar law. There is no pending, or to the best of each Seller's Knowledge, threatened or proposed proceeding or governmental action to modify the zoning classification of, or to condemn or take by the power of eminent domain (or to purchase in lieu thereof), or to impose special assessments on, or otherwise to take or restrict in any way the right to use, alter or occupy all or any part of any of the Restaurants in any material respect. Section 4.22 [Reserved]. Section 4.23 Affiliated Transactions. Except as set forth on Schedule 4.23, Sellers have not been a party to, and there does not now exist, any transaction affecting the Restaurants or the Purchased Assets (including without limitation the purchase, sale or exchange of property or the rendering of any service) with any Affiliate of Sellers or any entity in which any of them owns a beneficial interest. For purposes of this Agreement, "Affiliate" means any person or entity that owns or controls more than a 10% interest in any Seller (a "Controlling Affiliate") or in which any Seller or a Controlling Affiliate owns or controls more than a 5% interest. Nothing in this Agreement is intended to preclude any Affiliate of Seller from bidding to acquire the Purchased Assets. Section 4.24 Subsidiaries. (a) Schedule 4.24 is a correct and complete list of each entity in which any Seller has a direct or indirect interest that has any direct or indirect interest in any of the Purchased Assets, showing the following as of the date of this Agreement with respect to each such entity: 17 (i) the jurisdiction of its organization; (ii) the title of each authorized class or series of voting interests or securities; (iii) the number of those voting interests or securities outstanding; (iv) the number of such outstanding interests or securities owned directly or indirectly by Sellers; (v) the percentage of such outstanding interests or securities owned directly or indirectly by Sellers; and (vi) the Purchased Assets in which such entity has an interest and the extent of such interest. Section 4.25 [Reserved]. Section 4.26 Financial Statements. Attached hereto as Schedule 4.26, are unaudited financial statements of Sellers' business, including (i) consolidated statement of operations and related statement of cash flows for, and balance sheet as of the end of fiscal year 2000 as reviewed by Agatheas & Wagner, P.A., including explanatory notes; (ii) consolidated statement of operations and balance sheet as of the end of fiscal year 2001; (iii) consolidated monthly statements of operations and balance sheets from January 2000 through and up to the month end prior to signing this Agreement, and updated at Closing; and (iv) monthly individual Restaurant profit and loss statements for the same period. All such financial statements set forth in this Section 4.26 (the "Financial Statements") shall be prepared in accordance with generally accepted accounting principles, except in the case of (ii), (iii) and (iv) for the absence of explanatory notes and except as otherwise expressly described therein. The Financial Statements accurately reflect the operations and financial condition of Sellers for the periods presented and as of their respective dates, and the books and records of Sellers from which the Financial Statements were prepared are true, correct and complete in all material respects. Section 4.27 Right to Inspect. Buyer shall have the right to inspect each Restaurant location at or prior to the Closing Date hereof (the "Final Inspection"). Buyer's Final Inspection shall be conducted in order to review, revise and add to the Initial Inspection List attached hereto as Schedule 4.6(a). The Final Inspection list (the "Final Inspection List") shall be prepared by an inspection that is consistent in scope to the inspection used to prepare the Initial Inspection List (attached hereto as Schedule 4.27 is a "Master Inspection List" used in connection with such inspection), and shall identify equipment and facilities that are not in working order and that are in need of repair or replacement. A management-level representative of Sellers' for each Restaurant location shall review and acknowledge in writing Buyer's completed list after the Final Inspection. In the event of any dispute between Buyer and Sellers regarding the contents of the Final Inspection List with respect to a particular Restaurant(s), at Sellers' request Buyer will provide Sellers with a copy of the original report prepared by Buyer with respect to such Restaurant(s) utilizing the Master Inspection List referenced above. Any such dispute shall be resolved in accordance with the procedures set forth in Section 5.25(d). 18 Section 4.28 Development Rights. Sellers acknowledge (i) that Apple Capitol Group defaulted in its obligations under the Development Agreement between Apple Capitol Group and Buyer, (ii) that based on such defaults Buyer properly and validly terminated said agreement effective on or before June 27, 2001, and (iii) that said agreement is of no force and effect and Sellers have no rights whatsoever under said agreement, or under any other agreement, document, or legal or equitable claim, to develop, open or operate any Applebee's restaurant other than the 21 Restaurants listed on Exhibit 1.1. ARTICLE V COVENANTS OF SELLERS Each Seller, jointly and severally, covenants and agrees as follows: Section 5.1 Employee Benefit Plans. (a) Buyer is not obligated to assume any liability, obligation or other responsibility under any Benefit Plan. With respect to any "defined benefit" Benefit Plan, Sellers shall treat all employees who are hired by Buyer at the Closing as if they terminated employment with Sellers on the Closing Date. With respect to any "defined contribution" Benefit Plan, Sellers shall pay all amounts owed to the related trust with respect to each transferred employee as of the Closing Date as soon as reasonably practicable thereafter. Sellers shall remain responsible and liable for all payments required under the terms of any "employee welfare benefit plan" as defined in Section 3(1) of ERISA for claims incurred and expenses and payments accrued on and prior to the Closing Date. (b) Sellers and their Related Parties agree to pay and be liable to Buyer and shall indemnify and hold harmless Buyer from and against all losses, expenses and liabilities, arising under Section 4980B of the Code arising from the failure to comply with the continuation requirements of Section 4980B of the Code and sections 601 through 608 of ERISA occurring on or prior to the date of Closing. (c) Sellers and their Related Parties (as defined in Section 4.17) shall not permit any event or condition to exist or occur that would give rise to a "reportable event" (as defined in ERISA) or to liabilities or taxes under ERISA or the Code with respect to any Benefit Plan or incur any commitment to increase their obligation under any Benefit Plan. Upon becoming aware of the occurrence or forthcoming occurrence of any of the above, Sellers shall provide a written notice to Buyer specifying the nature of the event and action taken or proposed or threatened to be taken by Sellers, their Related Parties, or any governmental body with respect to such events. (d) With respect to all employees of Sellers who are hired by Buyer, Sellers shall cause all retirement plan benefits and other benefits, to fully vest as of the Closing Date. 19 (e) Notwithstanding Section 4.17(h) above, Sellers shall not cancel, for a period of at least 90 days after the Closing Date, any of the Company's existing medical plans to the extent necessary in order to allow Sellers' employees to obtain COBRA insurance coverage. Section 5.2 Performance of Real Property Leases and Assumed Contracts. From the date hereof through the Closing Date, except as provided for in this Agreement (including Section 5.24, which governs the Franchise Agreements), Sellers shall in all material respects continue to faithfully and diligently perform each and every continuing obligation of Sellers, if any, under each of the Real Property Leases and the Assumed Contracts arising after commencement of the Bankruptcy Proceedings. Section 5.3 Transfer of Licenses and Permits. Subject to the terms of Section 7.5, Sellers shall use their Reasonable Best Efforts and cooperate fully in assisting Buyer with the assumption, transfer or reissuance of any and all required state, county or city licenses or permits required for the operation of the Restaurants, including those shown on Schedule 4.18. Section 5.4 Liabilities of Seller. From the date hereof through the Closing Date, all liabilities of Sellers related to the Purchased Assets and Restaurants arising after the commencement of the Bankruptcy Proceedings will be promptly paid by Sellers as they come due in accordance with the Bankruptcy Code, including all trade payables, employee wages, benefits, and other such compensation, and royalties and advertising fees, miscellaneous expenses and finance charges, except (i) to the extent that any such amounts are being disputed in good faith by any Seller; and (ii) to the extent Sellers are not permitted to pay such amounts, or such amounts are modified, by the Bankruptcy Court. Section 5.5 Agreements Respecting Employees of Sellers. (a) From the date hereof through the Closing Date, without the prior written approval of Buyer, Sellers shall not transfer or reassign any employee involved in the operation or supervision of the Restaurants, including supervisory personnel through the director of operations level ("Restaurant Personnel"), other than in the ordinary course of business. Through the Closing, Sellers will maintain employment staffing at historic levels. At the Effective Time, Sellers shall terminate Restaurant Personnel who have accepted positions with Buyer (the "Retained Employees"). For a period of 12 months from the Closing Date, no Seller will solicit, offer to employ or employ any Restaurant Personnel without the prior written approval of Buyer. (b) From the date hereof through the Closing Date, Sellers shall be solely responsible for, and at Closing shall pay, any severance payments, employee wages or other such benefits (except accrued and unused vacation) in the amounts due or granted by Sellers to any of Sellers' employees and Restaurant Personnel, except to the extent Sellers are not obligated to pay such amounts under the Bankruptcy Code, or such amounts are modified, by the Bankruptcy Court. Section 5.6 Conduct of Business. From the date hereof through the Closing Date, Sellers shall operate the Restaurants as they are currently being operated and only in the ordinary course, using their Reasonable Best Efforts to 20 preserve and maintain the services of their employees, their relationships with suppliers and customers, and to preserve their current level of sales volume, and shall continue to insure the Purchased Assets under existing policies of insurance at current levels. Sellers shall pay all bills and debts incurred by them and related to the operation of the Restaurants arising after the commencement of the Bankruptcy Proceedings promptly as they become due, except (i) to the extent that any such amounts are being disputed in good faith by any Seller, and (ii) to the extent Sellers are not permitted to pay such amounts, or such amounts are modified, by the Bankruptcy Court. Sellers shall consult in advance with Buyer on all decisions relating to the Purchased Assets or the Restaurants that are not in the ordinary course of business, not consistent with Sellers' past practices, or not contemplated in the Operating Budget attached as Schedule 5.6. (a) In particular, and without limiting the foregoing, with respect to the Restaurants, Sellers shall: (i) continue to conduct the advertising activities and efforts as set forth on Schedule 5.6(a)(i); (ii) continue to repair and replace the Purchased Assets in accordance with the maintenance operating expenditure budget set forth on Schedule 5.6(a)(ii); (iii) continue to conduct on a timely basis all normal periodic asset maintenance; (iv) continue to purchase and maintain inventories for each Restaurant in such quantities and quality as necessary to operate the Restaurants in accordance with Sellers' historical practice, but in no case less than 7 days inventory at each Restaurant (except perishable items in the normal course of business); (v) continue to operate the Restaurants in accordance with all material applicable local, state and federal laws and regulations; and (vi) consistent with the requirements of the Bankruptcy Code, continue to use its Reasonable Best Efforts to preserve and maintain its business relationships with its critical trade creditors. (b) Further, with respect to the Restaurants, Sellers shall not, without the express prior written approval of Buyer: (i) change in any manner the ownership of the Purchased Assets; (ii) other than as described on Schedule 5.6(b)(ii), increase the rate of compensation to its officers or employees beyond the usual and customary annual merit increases or bonuses under established compensation plans; 21 (iii) except pursuant to an order of the Bankruptcy Court (including, without limitation, in connection with any debtor-in-possession financing obtained by Sellers or any adequate protection order of the Bankruptcy Court), mortgage, pledge or subject to lien any of the Purchased Assets; (iv) sell or otherwise dispose of any Purchased Asset except in the ordinary course of business; (v) enter into or commit to enter into any contract, agreement or commitment that would be required to be set forth on Schedule 4.4(h) hereto except in the ordinary course of business; and (vi) Other than in the ordinary course of business, cancel or terminate or consent to or accept any cancellation or termination of any Assumed Contract or any Real Property Lease, amend or otherwise modify any of its material terms or provisions or give any consent, waiver or approval with respect to the agreement, waive any breach of any of its material terms or provisions or take any other action in connection with any Assumed Contract or any Real Property Lease that would materially impair the interests or rights of Sellers to be transferred to Buyer hereunder. Section 5.7 Broker's Fees. Each Seller shall, jointly and severally, indemnify and hold Buyer harmless in respect to any claim for brokerage or finder's fees or commissions with respect to the transactions contemplated herein by anyone claiming to have acted on behalf of Sellers. Section 5.8 Access to Information. Sellers shall afford Buyer, its counsel, financial advisors, auditors, lenders, lenders' counsel and other authorized representatives reasonable access for any purpose consistent with this Agreement from the date hereof until the Closing, during normal business hours, to the offices, properties, books, and records of Sellers with respect to the Purchased Assets and the Restaurants and shall furnish to Buyer such additional financial and operating data and other information as Sellers may possess and as Buyer may reasonably request, subject to Buyer's obligations regarding the confidentiality of such information as set forth in Section 7.2 hereof. Section 5.9 Bankruptcy Motion. Simultaneous with the Chapter 11 petition in Section 1.3 above, Sellers shall file a motion with the Bankruptcy Court (the "Sale Procedures Motion"), in the form set forth in Exhibit 5.9, or as otherwise modified in form and substance reasonably satisfactory to Buyer, Sellers and Lehman, and the Bidding Procedures Motion requesting orders that (i) a hearing regarding the Section 363 sale be scheduled within forty-three (43) days of the commencement of the Bankruptcy Proceeding; (ii) this Agreement be the sole agreement that any other potential bidders in the Bankruptcy Proceeding be allowed to bid on; and (iii) the Buyer, if Buyer is not the successful bidder for the Purchased Assets, be allowed reimbursement for actual out-of-pocket expenses incurred by Buyer in an amount up to and including Four Hundred Thousand Dollars ($400,000), in relation to the negotiation and preparation of this Agreement and its due diligence investigation related thereto and in preparing, submitting and pursuing any bid Buyer may make in the Bankruptcy Proceeding. 22 Section 5.10 [Reserved]. Section 5.11 [Reserved]. Section 5.12 [Reserved]. Section 5.13 Change of Name. Seller shall change its corporate name and shall cause to be changed the name of any affiliated entities upon the Closing to delete the use of the name "Apple," "Applebee's" and other similar or derivative names. Immediately upon the Closing, Sellers shall cease using the name "Apple" and "Applebee's" in all of their activities, promotions, brochures, stationery, products, and in all other respects (except in Bankruptcy Proceedings) and thereafter Sellers agree not to use the names "Apple" and "Applebee's" in any business. Notwithstanding the foregoing, Buyer hereby grants to Sellers a limited license and right to use the "Apple" and "Applebee's" names solely (A) as required for the Case including without limitation the publication of any notices required by the Bankruptcy Court or (B) for the purposes of (i) pursuing rights and claims against third parties, (ii) filing of tax returns, insurance claims and any other necessary filings; and (iii) selling any of the Excluded Assets. Section 5.14 Insurance. Sellers shall continuously keep in force through the Closing Date the insurance policies listed on Schedule 4.19 at Sellers' sole cost. Section 5.15 Renegotiation of Assumed Leases. Sellers will provide reasonable assistance as requested by Buyer in Buyer's efforts to renegotiate the Real Property Leases. Section 5.16 Confidentiality. Sellers shall maintain all Confidential Information (as defined below) gained from Buyer in strict confidence, and shall take all precautions necessary to prevent disclosure, access to, or transmission of the Confidential Information, or any part thereof, to any third party, except as required by order of any court having competent jurisdiction or as may be otherwise required by law, the Bankruptcy Court, or as may be necessary to consult with their professional advisors in their capacity as such (provided that they shall use their best efforts to ensure that their professional advisors shall keep the Confidential Information confidential), regardless of the availability of any such information from any other source. In the event the Closing does not occur for any reason, Sellers shall, immediately upon Buyer's request, return all copies and recordings of the Confidential Information in their possession or under their control and delete all records thereof in any data storage system maintained by or for Sellers. The term "Confidential Information" means the negotiations, discussions and any valuation methodology used in connection with the transactions contemplated hereunder or thereunder. Section 5.17 [Reserved]. Section 5.18 Employee Receivables. As of the Closing Date, there will be no employee receivables in existence with respect to any Restaurant employees or Restaurant Personnel in excess of $5,000 in the aggregate. Section 5.19 Survey and Title Report. Buyer has received (i) current ALTA/ACSM "as-built" surveys of each free-standing Restaurant (collectively, the "Surveys" and each, a "Survey"), and (ii) current ALTA title commitments issued by the Title Company for each parcel of Owned Real Property and Leased Real Property (collectively, the "Title Reports" and each, a "Title Report"). 23 Section 5.20 Reporting Requirements. Through the Closing Date, Sellers shall furnish to Buyer: (a) Adverse events. Promptly after the occurrence, or failure to occur, of any such event, information with respect to any event (i) which materially adversely affected, or is reasonably likely to materially adversely affect, the Purchased Assets, the operations, business prospects or condition (financial or otherwise) of the Restaurants or the ability of Sellers to perform any of their material obligations hereunder, (ii) which, if known as of the date of this Agreement, would have been required to be disclosed to Buyer or (iii) which causes any representation or warranty contained herein to be untrue or inaccurate in any material respect; (b) Monthly Financial Statements. As soon as available and in any event within twenty (20) business days after the end of each month, the statement of operations and balance sheets on a consolidated basis, all in reasonable detail and stating in comparative form the respective consolidated figures for the corresponding date and period in the previous fiscal year and unaudited but certified by the chief executive manager and the controller of Sellers, and all normally prepared monthly or periodic management analytical reports with respect to each Restaurant, including monthly profit and loss statements; (c) Management letters. Promptly upon receipt, copies of all reports submitted to Sellers by independent certified public accountants in connection with examination of the financial statements of Sellers made by such accountants; (d) Notice of litigation. Promptly after the commencement of each such matter, notice of all actions, charges, orders or other directives affecting any Restaurant that, if adversely determined, could materially adversely affect the Purchased Assets, the operations, business, prospects or condition (financial or otherwise) of the Restaurants or the ability of Sellers to perform their obligations hereunder; (e) General Information. Such other information respecting the Purchased Assets or the operations, business prospects or condition (financial or otherwise) of the Restaurants as Buyer may from time to time reasonably request; and (f) Operating Budget. Promptly, and simultaneous with, any provision (whether voluntary or involuntary) of an operating budget to the Bankruptcy Court or any lender, Sellers shall also provide a copy of such operating budget to Buyer. Section 5.21 Cooperation. Upon approval of this Agreement by the Bankruptcy Court, Sellers will use their respective Reasonable Best Efforts to facilitate and cause the consummation of the transactions contemplated hereby; and obtain from all persons, and take all other actions with respect to, all consent or approvals required on the part of such party with respect to the consummation of those transactions. 24 Section 5.22 Subsequent Contracts. From the date of this Agreement to the Closing Date, Sellers shall (a) include in any written agreements entered into by Sellers relating in any way to the Restaurants ("Subsequent Contracts") a provision permitting the assignment of any such Subsequent Contract to Buyer and providing that upon such assignment, Buyer shall succeed to all of Sellers' rights, title and interests thereunder subject to Buyer's assumption of all of Sellers' duties, powers and obligations under such Subsequent Contract, and (b) ensure that no Subsequent Contract contains any provision which would limit in any way the rights, title and interests of Sellers in the Purchased Assets. Section 5.23 Prorations and Purchase Price Adjustment Data. At least 3 days prior to the Closing Date, Sellers shall deliver to Buyer all information and documents necessary for Buyer to review the itemized statement required under Section 2.2, above, regarding the prorations and Purchase Price adjustments set forth in Section 8.2 below. Section 5.24 Continued Compliance with Franchise Agreements. Until the Closing, Sellers shall continue to be bound by and to use their Reasonable Best Efforts to comply with the operational provisions of the Franchise Agreements in a manner reasonably designed to maintain the current operations, provided that the foregoing shall not require Sellers to cure any defaults existing on the date hereof under the Franchise Agreements, except as specifically required by Sections 4.4(k) and 8.3(l) hereof. Section 5.25 Repairs and Replacements. (a) Initial Inspection: Repairs and Replacements. Sellers shall repair or replace any and all items identified on the Initial Inspection List as not in good working order. The value or cost of repair or replacement of items identified on the Initial Inspection List not repaired or replaced within three (3) days prior to the Closing Date shall be a corresponding reduction to the Purchase Price in accordance with Section 8.2. (b) Final Inspection: Repairs and Replacements. Buyer shall have the right to conduct a Final Inspection of each Restaurant location. The value or cost of repair or replacement identified on Buyer's Final Inspection List shall be a corresponding reduction to the Purchase Price in accordance with Section 8.2. (c) Valuation of Repairs and Replacements. The value of a repair or replacement identified on Buyer's Initial Inspection List and Final Inspection which is not repaired or replaced prior to Closing, shall be agreed to by Buyer and Sellers at or prior to Closing. (d) Dispute Procedure. If the parties cannot agree to the amount of the value or cost of a repair or replacement (and corresponding reduction to the Purchase Price) in subsection (a) or (b) of this Section, (i) the amount that is agreed upon (the "Undisputed Amount") shall be reduced from the Purchase Price, and (ii) the remaining amount (the "Disputed Amount") shall be a disputed claim against the General Escrowed Amount pursuant to Section 8.1. Resolution of a Disputed Amount shall be settled in good faith and by mutual agreement between authorized representatives, one each from Buyer and Sellers prior to thirty (30) business days after Closing. Any determination by the 25 authorized representatives that all or a portion of a Disputed Amount is to be paid in favor of Buyer shall be a corresponding reduction of the General Escrowed Amount as set forth in Section 8.1. If the authorized representatives cannot agree on a Disputed Amount, after a good faith attempt within the thirty (30) days, each party shall be charged with obtaining in good faith either a reasonable, bona fide bid for repair or a reasonable, bona fide quote of replacement costs, as the case may be, and submitting such bid (or quote) to the other party within twenty (20) business days after the initial thirty (30) day period has expired. The average of the two bids (or quotes), after subtracting the Undisputed Amount, will be the "Settlement Amount." The Settlement Amount, if positive, shall be paid to Buyer from the General Escrowed Amount. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to Sellers to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer represents and warrants to Sellers as follows: Section 6.1 Corporate Existence. Buyer is a corporation validly existing and in good standing under the laws of the State of Delaware and as of the Closing Date will be qualified to do business and in good standing in each of the states where the Purchased Assets are located. Section 6.2 Corporate Power and Authority. Buyer has all requisite corporate power and authority to own its properties and assets, and to carry on the business in which it is now engaged. Buyer has the corporate power and authority to purchase the Purchased Assets, take assignment of the Real Property Leases and Assumed Contracts, and perform the respective covenants of Buyer set forth in this Agreement. Section 6.3 Execution and Delivery Permitted. The execution, delivery and performance of this Agreement will not violate or result in a breach of any term of Buyer's Certificate of Incorporation or Bylaws or result in a breach of or constitute a default under any term in any agreement or other instrument to which Buyer is a party, such default having not been previously waived by the other party to such agreements, or violate any law or any order, rule or regulation applicable to Buyer, of any court or of any regulatory body, administrative agency or other governmental instrumentality having jurisdiction over Buyer or its properties, or result in the creation or imposition of any mortgage, lien, charge, or encumbrance of any nature whatsoever upon any of the Purchased Assets purchased by Buyer hereunder. Buyer's Board of Directors, or authorized committees thereof, has taken all action required by law, and by Buyer's Certificate of Incorporation, Bylaws, and otherwise to authorize the purchase of the Purchased Assets in accordance with this Agreement. Except as set forth on Schedule 6.3, the execution, delivery and performance of this Agreement and the other agreements executed in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not require any filing with, notice to or consent, waiver or approval of any third party, including but not limited to, any governmental body or entity. Section 6.4 Adequate Assurances Regarding Executory Contracts. As of the Bankruptcy Court hearing on approval of entry of the Sale Order, Buyer will be capable of satisfying the conditions contained in sections 365(b)(1)(c) and (f) of the Bankruptcy Code with respect to the Assumed Contracts and Real Property Leases. 26 Section 6.5 Availability of Funds, etc. Buyer will at Closing have available funds sufficient to allow it to pay its obligations pursuant to Section 2.1 at the times and in the manner set forth in this Agreement. In furtherance and not in limitation of the foregoing, Buyer hereby represents, covenants and agrees that as of the date hereof and through the Closing Date: (i) it has and will maintain cash, cash equivalents and availability under lines of credit in an amount greater than the Purchase Price (free and clear of any liens and restrictions) and such funds or the applicable portion thereof will be available (free and clear of any liens or restrictions) to pay the Purchase Price on the Closing Date and (ii) its net worth (i.e., the fair value of all of Buyer's assets minus all its liabilities) is and will be at least $35 million. Buyer acknowledges and agrees that Sellers are relying on the foregoing representation and covenant in connection with their execution of this Agreement. ARTICLE VII COVENANTS OF BUYER Section 7.1 Buyer Performance. Buyer hereby covenants and agrees to accept conveyance of the Purchased Assets and assignment of the Real Property Leases, and to assume and perform the obligations of Sellers under the Assumed Contracts after the Closing Date. Section 7.2 Confidentiality. Buyer shall maintain all information gained from Sellers in connection with its evaluation of the transactions contemplated by this Agreement (the "Confidential Information") in strict confidence, and shall take all precautions necessary to prevent disclosure, access to, or transmission of the Confidential Information, or any part thereof, to any third party, except for the exclusive purpose of evaluating the Purchased Assets and the business of Sellers. In the event the Closing does not occur for any reason, Buyer shall, immediately upon Sellers' request, return all copies and recordings of the Confidential Information in its possession or under its control and delete all records thereof in any data storage system maintained by or for Buyer. Section 7.3 Sellers' Employees. Buyer shall offer employment to such Restaurant employees as Buyer may determine, upon terms and conditions substantially equivalent to those provided by Sellers prior to the Bankruptcy Proceeding of which Buyer has been informed in writing and, with respect to each of the Retained Employees, Buyer shall grant an immediate right of participation under Buyer's employee pension, health and welfare benefit plans, as such terms are defined in Sections 3(1) and (2) of ERISA, for purposes of eligibility to participate under such plans for all such Retained Employee's service with Sellers. In addition, Buyer will provide vacation and other paid time off benefits to each Retained Employee equal to the amount accrued for such employee included in the accrual amount provided for in Section 8.2(a)(v). Section 7.4 Cooperation. Upon approval of this Agreement by the Bankruptcy Court, Buyer will use its Reasonable Best Efforts to: (a) facilitate and cause the consummation of the transactions contemplated hereby; (b) obtain from all persons, and take all other actions with respect to, all consent or approvals required on the part of such party with respect to the consummation of those transactions; and (c) encourage Sellers' trade creditors to continue providing goods and services to the Sellers after the commencement of the Bankruptcy Proceedings, provided Sellers are paying such creditors consistent with the terms of Section 5.6 of this Agreement. 27 Section 7.5 Liquor Licenses. Buyer will not submit any applications for liquor licenses prior to the issuance of the Sale Procedures Order. In addition, Buyer will promptly withdraw any applications for liquor licenses submitted with respect to any of the Restaurants after the date this Agreement is signed in the event the Bankruptcy Court enters an order approving a bidder other than Buyer or requiring such withdrawal. Notwithstanding anything to the contrary contained herein, no transfer of any liquor license held by Sellers shall occur prior to the Closing. Section 7.6 Broker's Fees. Buyer shall indemnify and hold Sellers harmless in respect to any claim for brokerage or finder's fees or commissions with respect to the transactions contemplated herein by anyone claiming to have acted on behalf of Buyer. ARTICLE VIII ESCROWED AMOUNTS; PURCHASE PRICE ADJUSTMENTS; CONDITIONS TO CLOSING Section 8.1 Escrowed Amounts. At Closing, Buyer shall deliver to the Escrow Agent, pursuant to an Escrow Agreement substantially in the form attached hereto as Exhibit 8.1, the sum of 95% of the face amount of all outstanding, untendered gift certificates issued by Sellers through the Closing (the "Gift Certificate Escrowed Amount") and (ii) Five Hundred Thousand Dollars ($500,000) (the "General Escrowed Amount"). Claims against the General Escrowed Amount shall be limited to claims made by Buyer under Sections 1.1, 4.6 through 4.9, 4.12, 4.13, 4.14, 4.17, 4.21, Article V, and Section 8.2(a). (a) Escrowed Amounts Dispute Procedures. Any disputes between the parties with regard to the Gift Certificate Escrowed Amount, the General Escrowed Amount or the Deposit shall be resolved in accordance with the dispute procedures set forth in the Escrow Agreement. Section 8.2 Purchase Price Adjustments/Gift Certificate True-Up. The items listed below shall be prorated between Buyer and Sellers as of the Closing Date, or paid by one party on or after the Closing Date, in each case as set forth below, and shall constitute an adjustment to the Purchase Price. (a) The Purchase Price will be reduced, without duplication, by the following: (i) The face amount of any gift certificates redeemed prior to 12 months after Closing and paid to Buyer from the Gift Certificate Escrowed Amount (any such redemption will be deducted from the Gift Certificate Escrowed Amount and any amounts remaining in the Gift Certificate Escrow after such 12 month period will be paid to Sellers or at and in favor of Lehman, up to the extent of the amount of the Sellers' then outstanding indebtedness to Lehman); 28 (ii) The amount of any claim against the General Escrowed Amount made within 120 days after Closing that is determined to be a resolved claim (any amounts above all resolved claims paid from and the amount of all claims still pending against the General Escrowed Amount remaining after such 120 day period will be paid to Sellers or at and in favor of Lehman, up to the extent of the amount of the Sellers' then outstanding indebtedness to Lehman); (iii) The value or cost of any Undisputed Amount for the repair or replacement of items identified on (a) Buyer's Initial Inspection List not repaired or replaced within three (3) days prior to of the Closing Date, and (b) Buyer's Final Inspection; (iv) The amount of the Apportioned Obligations (as hereafter defined), if any, for which Sellers are responsible pursuant to the proration provisions of Section 8.2(e) below; (v) The value of all vacation and other paid time off benefits, accrued in accordance with Sellers' standard policy, and unused as of the Closing, of all Retained Employees of Seller who are hired by Buyer; (vi) Any and all outstanding sums due and owing as of the Closing Date pursuant to Section 5.4; (vii) Any and all of Sellers' portion of the shared costs as set forth in Section 9.4(c), not previously paid by Sellers; (viii) Any Cure Amount under the Assumed Contracts not paid by Sellers prior to the Closing; and (ix) Any Gift Certificate True-Up amount owed to Buyer or other franchisees of Buyer by Sellers as calculated in accordance with subsection (d) hereof. (b) The Purchase Price will be increased by the following: (i) All rentals or other amounts paid by Sellers with respect to the Real Property Leases which apply to periods past the Closing Date, including prepaid rentals, percentage rents, and common area maintenance charges; (ii) All prepaid insurance premiums on insurance policies covering the Purchased Assets and regarding welfare benefit programs, but only if Buyer elects to have said coverage remain in effect; (iii) Any Gift Certificate True-Up amount owed to Sellers by Buyer as calculated in accordance with subsection (d) hereof; (iv) Any amounts paid by Sellers with respect to the Assumed Contracts for services extending beyond the Closing Date; 29 (v) Any prepaid expenses including deposits, associated with the operation of a Restaurant which were paid by Sellers in the ordinary course of business, including, without limitation, items such as deposits, service contracts, telephone expenses, real estate taxes and utility charges, but only to the extent Buyer receives the benefit of such item after Closing; and (vi) The amount of the Apportioned Obligations, if any, for which Buyer is responsible pursuant to the proration provisions of Section 8.2(e) below. (c) In addition to the above, the Purchase Price shall be increased for any petty cash amounts in excess of $1,000 per Restaurant by the amount of the total of the excess and, alternatively, the Purchase Price shall be decreased for any petty cash amounts less than $1,000 per Restaurant by the amount of the shortfall at the Effective Time. (d) In addition to the above, at the Closing the Purchase Price will be adjusted upward or downward, as applicable, by the net difference between (i) any amounts owed by Sellers to Buyer or other franchisees of Buyer for gift certificates issued by Sellers and redeemed at other franchisee or Buyer restaurants and (ii) any amounts due to Sellers from Buyer or other franchisees of Buyer for gift certificates issued by Buyer or such other franchisees and redeemed at the Restaurants (a "Gift Certificate True-Up"), for redemptions occurring through the end of the month prior to the month in which the Closing occurs. The preceding adjustment amount shall be calculated and presented by Sellers to Buyer at Closing. Further, within twenty (20) business days following the Closing a Gift Certificate True-Up Amount shall be calculated and presented by Sellers to Buyer for the time period from the month's end prior to Closing through the Closing Date, and Buyer or Sellers, as applicable, will pay to the other the amount shown due by such calculation within twenty (20) business days, unless otherwise disputed in accordance with this Section 8.2(d). Buyer shall have twenty (20) business days after receipt of such Gift Certificate True-Up Amount to provide written notice to Sellers that it disputes such Gift Certificate True-Up Amount. Buyer and Sellers shall attempt to resolve the dispute in good faith and by mutual agreement within twenty (20) business days of Sellers' receipt of Buyer's notice of dispute. If the parties cannot resolve the dispute, after a good faith attempt, within the twenty (20) business days, the parties will submit the dispute to the Bankruptcy Court, which shall make a final determination with respect to such dispute. The Bankruptcy Court's decision will be conclusive and binding on the parties. Each party will bear its own costs in connection with any such dispute. (e) All ad valorem, real and personal property taxes, general and special assessments, and any other property taxes on the Purchased Assets for a taxable period that includes (but does not end on) the date preceding the Closing Date (collectively, the "Apportioned Obligations"), shall be apportioned between Sellers and Buyer based on (x) the number of days of such taxable period up to the Closing Date (with respect to any such taxable period, the "Pre-Closing Tax Period") and (y) the number of days of such taxable period including and after the Closing Date (with respect to any such taxable period, the 30 "Post-Closing Tax Period"). Sellers shall be liable for the proportionate amount of such taxes that is attributable to the Pre-Closing Tax Period, and Buyer shall be liable for the proportionate amount of such taxes that is attributable to the Post-Closing Tax Period. The aggregate amount of Apportioned Obligations shall be calculated by Sellers and presented to Buyer prior to or on the Closing Date, as provided in Section 2.2 hereof. If the amounts of any such Apportioned Obligation for such periods is not determinable at Closing, then such Apportioned Obligation shall be prorated on the basis of the tax for the corresponding period in the immediately preceding tax year and if, within 120 days after Closing the actual tax assessment (i) is determined and (ii) is different from the amount in the corresponding period in the immediately preceding tax year, the appropriate party shall pay such difference to the other party. Section 8.3 Buyer's Conditions to Closing. The obligations of Buyer hereunder are subject to satisfaction of each of the following conditions at or before Closing, the occurrence of which may, at the option of Buyer, be waived: (a) All representations and warranties of Sellers in this Agreement shall be true in all material respects on and as of the Closing as if made as of the Closing, and Sellers shall have delivered to Buyer a certificate to such effect dated as of the Closing Date; (b) The Purchased Assets, taken as a whole, shall not have been substantially damaged as a result of fire, explosion, earthquake, disaster, accident, any action by the United States or any other governmental authority, earthquake, flood, drought, embargo, riot, civil disturbance, uprising, activity of armed forces, act of God, or public enemies; (c) There shall be no material adverse change in the Purchased Assets, taken as a whole, or the operations of Sellers, taken as a whole, at the Restaurants from the date hereof to the Closing Date; (d) Each Seller shall have performed and complied in all material respects with all of its covenants and obligations under this Agreement which are to be performed or complied with by such Seller prior to or on the Closing Date; (e) Sellers shall be willing and able to deliver all of the items required to be delivered by them pursuant to Section 3.2 of this Agreement; (f) Buyer and Buyer's counsel and Lehman and Lehman's counsel, shall have approved the form and substance of the documents delivered by Sellers pursuant to this Agreement, such approval not to be unreasonably withheld; (g) Sellers shall have terminated the employment of all employees as described in Section 5.5; (h) Buyer shall have obtained, either from Sellers or directly from the issuing authority, all permits, licenses, including liquor licenses, and approvals of all governmental and quasi-governmental authorities necessary for the operation of the Restaurants as intended by Buyer; provided, however, that if Buyer is unable to obtain from local municipal or county authorities a permit necessary for such operation of the Restaurants, and Buyer reasonably believes that it will be able to obtain such a permit within two (2) months of the Closing Date, Closing of the transactions contemplated hereunder will not be delayed if Sellers deliver to Buyer a duly executed Liquor Service and Operating Agreement as reasonably agreed to among the parties; 31 (i) There shall be no claims, actions or suits pending or threatened by any governmental agency that would restrict or prohibit the consummation of the transactions contemplated herein; (j) Sellers shall have paid all outstanding trade payables as provided for in Section 5.4 incurred during Sellers' Bankruptcy Proceeding (as described in Section 1.4) in a timely manner or, alternatively, as soon as practicable, as agreed to by the parties hereto, after the Closing Date; (k) All obligations of Sellers to Retained Employees as of the Closing Date shall be paid through Closing (other than unused vacation and other paid time off the value of which has been accrued by Sellers and offset against the Purchase Price under Section 8.2(a)(v)), including salaries, benefits and any other such compensation, except to the extent Sellers are not obligated to pay such amounts under the Bankruptcy Code, or such amounts are modified, by the Bankruptcy Court; (l) Sellers shall have paid any and all royalties, advertising fees and finance charges required to be paid under the Franchise Agreements for the month of June by July 12, 2002 and shall have paid all such amounts accruing thereafter on a timely basis up and until the Closing Date; (m) Sellers shall have satisfied all obligations under Section 5.19; and (n) The Bankruptcy Court shall have issued a final, nonappealable, unstayed, Sale Order. Section 8.4 Sellers' Conditions to Closing. The obligations of Sellers hereunder are subject to satisfaction of each of the following conditions at or before Closing, the occurrence of which may, at the option of Sellers, be waived: (a) All representations and warranties of Buyer in this Agreement shall be true on and as of the Closing in all material respects, and Buyer shall have delivered to Sellers a certificate to such effect dated as of the Closing Date; (b) Buyer shall have performed and complied in all material respects with all of its obligations under this Agreement which are to be performed or complied with by Buyer prior to or on the Closing Date; (c) Buyer shall be willing and able to deliver the Purchase Price and all of the documents required to be delivered by it under Section 3.3 of this Agreement; (d) Sellers shall have approved the form and substance of the documents delivered by Buyer pursuant to this Agreement; and 32 (e) The Bankruptcy Court shall have issued a final, nonappealable, unstayed, Sale Order. ARTICLE IX MISCELLANEOUS Section 9.1 Notices. Except as otherwise expressly provided, all notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by facsimile transmission with confirmation of receipt, sent by commercial overnight delivery service with confirmed receipt, or sent by certified U.S. mail, return receipt requested, with first class postage prepaid, and in all cases, addressed as follows: (a) If to Seller: Apple Capitol Group, LLC 490 Sawgrass Parkway Suite 330 Sunrise, Florida 33325 Attn: Jay Gillespie Fax: (954) 835-1577 Phone: (954) 851-9494 With copies to: Akerman, Senterfitt & Edison, P.A. 350 East Las Olas Boulevard Suite 1600 Fort Lauderdale, Florida 33301 Attn: David Peck Fax: (954) 463-2224 Phone: (954) 463-2700 Krass Monroe, P.A. 1650 West 82nd Street Southpoint Office Center, Suite 1100 Bloomington, Minnesota 55431 Attn: John Berg Fax: (952) 885-5969 Phone: (952) 885-5965 Lehman, at the address set forth below. (b) If to Buyer: Applebee's International, Inc. 4551 West 107th St., Suite 100 Overland Park, KS 66207 Attention: Robert T. Steinkamp Fax: (913) 341-1696 Phone: (913) 967-4038 33 With a copy to: James M. Ash, Esq. Blackwell Sanders Peper Martin LLP 2300 Main Street, Suite 1100 Kansas City, MO 64108 Fax: (816) 983-9137 Phone: (816) 983-8317 (c) If to Lehman: Lehman Brothers Holdings, Inc. 745 Seventh Avenue, 7th Floor New York, New York 10019 Attn: George Janes and Hal Hayward Fax: (646) 758-2115 Phone: (212) 526-5129 With a copy to: Jeffrey L. Schwartz, Esq. Hahn & Hessen LLP 350 Fifth Avenue New York, New York 10118-0075 Fax: (212) 594-7167 Phone: (212) 946-0221 or to such other address as Buyer or Sellers shall have last designated by notice to the other parties. Section 9.2 Applicable Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of New York. Section 9.3 Binding on Successors; Assignment. All of the terms, provisions and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors, assigns and legal representatives. Buyer may assign this Agreement and any or all of its rights or obligations as described in Section 3.5, above. Sellers shall have the right to assign all or a portion of their rights to receive payments due and owing pursuant to the terms of this Agreement, but no such assignment shall relieve Sellers of their obligations hereunder and any such assignee shall receive such assignment subject to all claims and defenses Buyer may have against Sellers. Section 9.4 Payment of Costs; Post-Closing Payments. (a) Sellers' Costs. In addition to all other matters payable by Sellers hereunder, Sellers shall pay: (1) All of Sellers' legal expenses; (2) All other costs and expenses incurred by Sellers in negotiating this Agreement and in consummating the transactions contemplated hereby, including any costs associated with obtaining any consent, waiver or approval shown on Schedule 4.3, and fees or commissions payable to any party representing Sellers in connection with arranging or negotiating this Agreement and the transactions contemplated hereby, including without limitation all investment banker or financial advisor fees; 34 (3) The costs required for Sellers to perform any of their covenants under Article V, hereof; and (4) Its portion of the costs identified in subsection (c) of this Section. (b) Buyer Costs. In addition to all other matters payable by Buyer hereunder, Buyer shall pay: (1) All of Buyer's legal expenses; (2) The cost of any environmental investigations required by Buyer with respect to the Real Property; (3) Its portion of the costs identified in subsection (c) of this Section; and (4) All other costs and expenses incurred by Buyer in negotiating this Agreement and in consummating the transactions contemplated hereby, including any fees or commissions payable to any party representing Buyer in connection with arranging or negotiating this Agreement and the transactions contemplated hereby, including without limitation all investment banker or financial advisor fees. (c) Shared Costs. Buyer and Sellers, by way of an adjustment to the Purchase Price, shall equally pay the following costs up to an amount equal to $250,000 (up to $125,000 by each of Sellers and Buyer), with any amount hereunder in excess of $250,000 to be paid by Buyer: (1) All fees, costs and expenses incurred in recording all real estate documents related to the transactions contemplated hereby; (2) The cost of surveys, the cost of the commitments to provide and the costs of obtaining title insurance on the Real Property for benefit of Buyer, with endorsements for surveys and mechanics' lien, except for costs related to extraordinary endorsements required by Buyer's lenders; and (3) All sales, use or transfer taxes or fees arising from the transactions contemplated hereby arising under state law. Section 9.5 Closing Not to Prejudice Claim for Damages. Closing of the transactions contemplated by this Agreement shall not prejudice any claim for damages which any party may have hereunder, in law or in equity, due to a 35 material default in observance in the due and timely performance of any of the covenants and agreements herein contained or for the breach of any warranty or representation hereunder, unless such observance, performance, warranty, or representation is specifically waived in writing by the party making such claim. Section 9.6 Additional Documents. After Closing, each party agrees to furnish such additional documents as are necessary to complete the transactions contemplated hereby. Section 9.7 Time is of the Essence. Time is of the essence in the performance of the obligations of the parties hereunder. Section 9.8 Interpretation. The title of the sections of this Agreement are for convenience of reference only, and are not to be considered in construing this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. Section 9.9 Entire Agreement. This Agreement, the Exhibits and Schedules, attached hereto and incorporated herein by this reference, and the Sale Order and Sale Motion contain the entire Agreement of the parties hereto with respect to the transactions contemplated hereby and supersede any and all prior agreements, arrangements, and understandings between the parties with respect to such transaction. No inducements contrary to the terms of this Agreement exist. No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be construed as a further or continuing waiver of any such term, provision or condition or any other term, provision or condition of this Agreement. This Agreement may not be modified orally and may only be amended in a writing executed by all parties hereto. Section 9.10 Counterparts. This Agreement may be executed in one or more counterparts which in the aggregate shall comprise one Agreement. Section 9.11 Termination. (a) This Agreement may be terminated prior to the Closing as follows: (i) At any time by the mutual consent of Sellers and Buyer; (ii) by either Buyer or Sellers, upon written notice in the event of a material breach of any representation or warranty of the other party contained in this Agreement or any covenant or agreement to be performed or complied with by such party pursuant to the terms of this Agreement ("Material Breach"), which Material Breach remains uncured for a period of ten (10) days following notice thereof to the breaching party by the non-breaching party and would result in a condition to Closing set forth in Sections 8.3 or 8.4 hereof, as the case may be, not being satisfied on or before November 30, 2002 (the "Drop Dead Date"), which condition has not been waived in writing by the non-breaching party; provided, however, that Buyer or Sellers, as the case may be, may not elect to terminate this Agreement pursuant to this Section 9.11(a)(ii) if the terminating party is itself in Material Breach; 36 (iii) by either Buyer or Sellers if the Closing shall not have occurred on or before the Drop Dead Date, unless the failure of the Closing to occur by such date shall have been as a result of the Material Breach by a party hereto, in which case Section 9.11(a)(ii) shall apply; provided further, however, that the right to terminate this Agreement under this Section 9.11(a)(iii) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date; or (iv) By either Buyer or Sellers if Sellers shall have accepted or selected, and the Bankruptcy Court shall have approved, the bid or bids of any bidder other than Buyer to purchase all or any portion of the Purchased Assets (whether or not any transaction contemplated by any such bid or bids shall be consummated). (b) In the event of the termination of this Agreement pursuant to subparagraph 9.11 (a) (ii) above because of a Material Breach committed willingly or in bad faith by Sellers or Buyer, as the case may be, the other party shall be entitled to pursue, exercise, and enforce any and all remedies, rights, powers, and privileges available to it at law or in equity. In addition to and not in lieu of the foregoing, Sellers shall be entitled to receive the Deposit out of escrow only in the event of the termination of this Agreement by Sellers pursuant to Section 9.11(a)(ii) by reason of (i) Buyer's failure (caused by Buyer's bad faith) to satisfy Sections 8.4(a), (b) or (c) or (ii) Buyer's failure to consummate the Closing on the Closing Date notwithstanding the satisfaction of Buyer's closing conditions in Section 8.3 or where all conditions in Section 8.3 are satisfied other than Sections 8.3(f) or (h) and if the failure of such conditions to be satisfied results from the bad faith of Buyer. Upon any other termination of this Agreement Buyer shall be entitled to receive the Deposit out of escrow. Section 9.12 Sellers' Representative. Each Seller hereby irrevocably appoints Apple Capitol Group as its representative and attorney-in-fact to act for and on its behalf, with full power and authority, including power of substitution, to execute and deliver any and all agreements, waivers, compromises, settlements and claims arising out of or related to the terms and provisions of this Agreement. Remainder of Page Left Intentionally Blank 37 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day, month, and year first above written. BUYER: APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- SELLERS: APPLE CAPITOL GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE PRINCE GEORGES MARYLAND GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE WASHINGTON MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 38 APPLE ST. MARYS MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE CALVERT MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE CHARLES MD GROUP, LLC, a Maryland limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- BERKELEY WVA, LLC, a West Virginia limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 39 LIST OF EXHIBITS AND SCHEDULES Exhibit 1.1 Restaurants 1.1(a) Franchise Agreements 1.3 Sale Order 2.1(a)(i) Bidding Procedures Motion 2.1(a)(ii) Allocation of Purchase Price 3.2(e) Release and Waiver 5.9 Sale Motion 8.1 Escrow Agreement Schedules 1.1 Certain Definitions 1.1(h) Transferred Licenses 1.2 Excluded Assets 2.1(b) 12-Month EBITDA and Adjustment 4.1 Sellers' Jurisdictions 4.3 Consents 4.4(a) Owned Real Property 4.4(b) Leased Real Property 4.4(c) Real Property Leases 4.4(d) Fixed Asset Data 4.4(e) Equipment Liens 4.4(f) Equipment Leases 4.4(g) Loan Agreements, Indentures, Mortgages, Etc. 4.4(h) Contracts 4.4(i) Affiliate Contracts 4.4(j) Assumed Contracts 4.6(i) Condition of Purchased Assets 4.6(a) Initial Inspection List 4.7 Nontransferable Permits 4.12(a) Pending Claims and Litigation 4.12(b) Citations, Warnings and Reprimands 4.12(c) Food Items 4.13 Taxes 4.14 Events of Default 4.16(b) Employee List 4.17(a) Employee Benefit Plans 4.18 Licenses and Permits 4.19 Insurance Coverage 4.23 Affiliated Transactions 4.24 Subsidiaries 4.26 Financial Statements 4.27 Master Inspection List 40 Schedules 5.6 Operating Budget 5.6(a)(i) Advertising Activities 5.6(a)(ii) Maintenance Capital Expenditure Budget 5.6(b)(ii) Compensation Matters 6.3 Buyer Consents 41 Exhibit 1.1(a) Franchise Agreements
- ------------------------------------ ----------------------------------------------- ----------------------- DOCUMENT * LOCATION DATE - ------------------------------------ ----------------------------------------------- ----------------------- Franchise Agreement 14441 Brookfield Tower Drive 05/03/99 Chantilly, VA 22021 Franchise Agreement 12970 Fair Lakes Shopping Center 05/03/99 Fairfax, VA 22033 Franchise Agreement 6310 Richmond Highway 05/03/99 Alexandria, VA 22306 Franchise Agreement 4100 N.W. Crain Highway 05/03/99 Bowie, MD 20716 Franchise Agreement 3610 Crain Highway 05/03/99 Waldorf, MD 20611 Franchise Agreement 755 Foxcroft Drive 05/03/99 Martinsburg, WV 25401 Franchise Agreement 13850 Noblewood Plaza 05/03/99 Woodbridge, VA 22193 Franchise Agreement 45480 Miramar Way 05/03/99 California, MD 20619 Franchise Agreement 1050 Wayne Avenue 05/03/99 Chambersburg, PA 17201 Franchise Agreement 1481 Wesel Boulevard (CLOSED) Hagerstown, MD 21740 Franchise Agreement 5613 Spectrum Drive 05/03/99 Frederick, MD 21703 Franchise Agreement 7272 Baltimore Avenue 05/03/99 College Park, MD 20740 Franchise Agreement 2851 Plank Road 05/03/99 Fredericksburg, VA 22404 Franchise Agreement 1000 Largo Center Drive 05/03/99 Largo, MD 20772 Franchise Agreement 127 E. Broad Street 05/03/99 Falls Church, VA 22046 Franchise Agreement 21048 Frederick Road 05/03/99 Germantown, MD 20876 Franchise Agreement 45979 Denizen Plaza 05/03/99 Sterling, VA 20165 Franchise Agreement 791 N. Dual Highway 05/03/99 Seaford, DE 19973 Franchise Agreement 105 West Lee Highway 05/03/99 Warrenton, VA 20186 Franchise Agreement 555 N. Solomons Island Road 05/03/99 Prince Frederick, MD 20678 Franchise Agreement 1270 Ocean Outlet 05/03/99 Rehoboth Beach, DE 19971 Franchise Agreement 3447 Donnell Drive 05/03/99 Forestville, MD 20747
* Each document specified includes the original document plus all amendments or addendums thereto. Exhibit 2.1(a)(ii) Allocation of Purchase Price Lehman Tranche #1 $6,570,048 Lehman Tranche #2 7,484,862 Lehman Tranche #3 6,521,170 Lehman Tranche #4 4,857,882 Lehman Tranche #5 7,316,038 ------------ Total $32,750,000* * Total and individual Tranche allocations are subject to change as a result of purchase price adjustments in accordance with the Agreement. Exhibit 3.2(e) RELEASE AND WAIVER THIS RELEASE AND WAIVER (the "Release") is entered into this __ day of ______, 2002, by and among Apple Capitol Group, LLC, a Florida limited liability company, Apple Prince Georges Maryland Group, LLC, a Florida limited liability company, Apple Washington MD Group, LLC, a Florida limited liability company, Apple St. Marys MD Group, LLC, a Florida limited liability company, Apple Calvert MD Group, LLC, a Florida limited liability company, Apple Charles MD Group, LLC, a Maryland limited liability company, and Berkeley WVA, LLC, a West Virginia limited liability company (collectively, "Sellers"), and Applebee's International, Inc., a Delaware corporation ("Buyer"); WHEREAS, Buyer and Sellers have entered into a number of Franchise Agreements as listed on Schedule I (collectively and as amended from time to time, the "Franchise Agreements"), relating to the development and operation of certain Applebee's Neighborhood Grill & Bar restaurants (the "Restaurants"); and WHEREAS, Buyer and Sellers have executed that certain Asset Purchase Agreement dated as of July 16, 2002, (the "Acquisition Agreement"), pursuant to which Sellers shall sell to Buyer, and Buyer shall purchase from Sellers all of the Purchased Assets; WHEREAS, in connection with the Acquisition Agreement, Buyer and Sellers are willing to release each other from any claims or obligations relating to the Franchise Agreements, as set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Release. a. Buyer, on behalf of itself, its affiliates, predecessors, successors and assigns, hereby fully releases and forever discharges Sellers and their officers, agents, advisors, employees, predecessors, successors and assigns (other than Bruce Frazey, Jason Kirschner, Andy Typaldos and any person or entity affiliated with these three (3) individuals other than Sellers (the Nonreleased Parties)), of and from any and all liability, actions, claims, causes of action, complaints and demands, known or unknown, fixed or contingent, whatsoever which Buyer now has or may hereafter have arising directly or indirectly out of or in any way related to (i) the operation of the Restaurants or performance by Sellers under the Franchise Agreements and (ii) the transfer of the Restaurants and the Franchise Agreements to Buyer pursuant to the Acquisition Agreement. b. Sellers, on behalf of themselves, their predecessors, successors and assigns, hereby fully release and forever discharge Buyer and its predecessors, successors, assigns, agents, officers, directors and affiliated entities, all other persons, firms and corporations whatsoever and whomsoever of and from any and all liability, actions, claims, causes of action, complaints and demands, known or unknown, whatsoever which 1 Sellers now have or may hereafter have arising directly or indirectly out of or in any way related to the transfer of the Restaurants and the Franchise Agreements to Buyer pursuant to the Acquisition Agreement. c. In addition, Buyer, on behalf of itself, its affiliates, predecessors, successors and assigns, will release and forever discharge any Nonreleased Party of and from any and all liability, actions, claims, causes of action, complaints and demands, known or unknown, fixed or contingent, whatsoever which Buyer now has or may hereafter have arising directly or indirectly out of or in any way related to (i) the operation of the Restaurants or performance by each such officer, director or shareholder under the Franchise Agreements and (ii) the transfer of the Restaurants and the Franchise Agreements to Buyer pursuant to the Acquisition Agreement only if and to the extent that any such Nonreleased Party executes a release and waiver in favor of Buyer and its affiliates substantially similar to this Release. 2. No Admission of Liability. Nothing in this Release is to be construed as an admission of liability on the part of Buyer or Sellers. 3. Representations and Warranties of Buyer. Buyer hereby represents and warrants as follows: a. Buyer has not assigned or transferred or purported to assign or transfer any claim or right as against any Seller, and Buyer is fully entitled to release the same. b. Buyer has not entered into any agreement with any person or entity, other than this Release, which would affect any matter referred to in this Release. Buyer hereby indemnifies and agrees to hold harmless Sellers from and against any claim, debt, liability, demand, obligation, cost, expense, damage, action, or cause of action, including attorneys' fees and costs incurred (i) arising out of or in connection with any breach of the representations of Buyer contained in this Release or (ii) in any action brought by Sellers to enforce the terms of this Release. 4. Representations and Warranties of Sellers. Sellers hereby individually and collectively represent and warrant as follows: a. Sellers have not assigned or transferred or purported to assign or transfer any claim or right as against Buyer, and Sellers are fully entitled to release the same. b. Sellers have not entered into any agreement with any person or entity, other than this Release, which would affect any matter referred to in this Release. Sellers hereby indemnify and agree to hold harmless Buyer from and against any claim, debt, liability, demand, obligation, cost, expense, damage, action, or cause of action, including attorneys' fees and costs incurred (i) arising out of or in connection with any breach of the representations of Sellers contained in this Release or (ii) in any action brought by Buyer to enforce the terms of this Release. 2 5. Effectiveness. The release set forth in Section 1 hereof shall be effective on and as of the Closing Date as defined in the Acquisition Agreement. 6. Miscellaneous. a. Should any provision of this Release be held invalid or illegal, such invalidity or illegality will not invalidate the whole of this Release, but rather the Release shall be construed as if it did not contain any invalid or illegal parts and the rights and obligations of the parties shall be construed and enforced accordingly. b. This Release may be executed in one or more counterparts that in the aggregate shall comprise one Release. c. This Release shall be binding on and inure to the benefit of the parties hereto and their respective predecessors, successors, assigns, agents, directors, officers and affiliated entities. d. This Release shall be construed under, and any disputes arising hereunder shall be determined by, the internal laws of the State of Kansas. Remainder of Page Intentionally Blank 3 IN WITNESS WHEREOF, the parties hereto have executed this Release as of the day and year first above written. BUYER: APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- SELLERS: APPLE CAPITOL GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ----------------------------------------- APPLE PRINCE GEORGES MARYLAND GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE WASHINGTON MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 4 APPLE ST. MARYS MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE CALVERT MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE CHARLES MD GROUP, LLC, a Maryland limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- BERKELEY WVA, LLC, a West Virginia limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 5 SCHEDULE I Franchise Agreements 6 Exhibit 8.1 ESCROW AGREEMENT THIS ESCROW AGREEMENT is made and entered into this 16th day of July, 2002, by and among Apple Capitol Group, LLC, a Florida limited liability company, Apple Prince Georges Maryland Group, LLC, a Florida limited liability company, Apple Washington MD Group, LLC, a Florida limited liability company, Apple St. Marys MD Group, LLC, a Florida limited liability company, Apple Calvert MD Group, LLC, a Florida limited liability company, Apple Charles MD Group, LLC, a Maryland limited liability company, and Berkeley WVA, LLC, a West Virginia limited liability company (collectively, "Sellers"), and Applebee's International, Inc., a Delaware corporation ("Buyer") and UMB Bank, n.a., a national banking organization, as escrow agent ("Escrow Agent"); R E C I T A L S WHEREAS, Buyer and Sellers have entered into an Asset Purchase Agreement dated as of even date herewith (the "Purchase Agreement"), which Purchase Agreement provides, among other things, for the delivery to the Escrow Agent of the deposit provided for in Section 2.1(a) of the Purchase Agreement in the sum of Three Million Dollars ($3,000,000) (the "Deposit"), which sum shall be held and paid to Sellers upon the closing of the transaction contemplated by the Purchase Agreement; and WHEREAS, pursuant to Section 8.1 of the Purchase Agreement, Buyer shall also deliver to the Escrow Agent hereunder the sum of the Gift Certificate Escrowed Amount and the General Escrowed Amount (collectively referred to herein as the "Escrow Funds"); and WHEREAS, this Escrow Agreement is the escrow agreement contemplated by the Purchase Agreement; and WHEREAS, all defined terms used in this Escrow Agreement and not otherwise defined shall have the meaning assigned in the Purchase Agreement. NOW, THEREFORE, in consideration of the above recitals and the mutual covenants contained herein, the parties agree as follows: 1. Escrow Agent Designation. Buyer and Sellers (together, the "Principal Parties") hereby jointly designate the Escrow Agent to receive, hold and disburse the Deposit and Escrow Funds in accordance with the provisions of the Purchase Agreement and this Escrow Agreement, and Escrow Agent hereby accepts such designation, upon the terms, and subject to the conditions, set forth in this Escrow Agreement. 2. Delivery of Deposit and Escrow Funds. As provided in Section 2.1(a) of the Purchase Agreement, upon the Bankruptcy Court's Order approving the Bidding Procedures Motion, Buyer shall deliver the Deposit to the Escrow Agent. And, as provided in Section 8.1 of the Purchase Agreement, at Closing, Buyer shall deliver the Escrow Funds to the Escrow Agent. The Deposit and Escrow Funds shall be delivered by electronic funds transfer to Escrow Agent to be held in subaccounts, including subaccounts for the Deposit (the "Deposit Account"), the Gift Certificate Escrowed Amount (the "Gift Certificate Escrowed Account") and the General Escrowed Amount (the "General Escrowed Account")(collectively, the "Accounts") in accordance with the Escrow Agent's instructions as set forth on 1 Exhibit A attached hereto. Such Accounts shall be interest-bearing accounts. The Escrow Agent shall invest and reinvest monies, and earnings thereon, held pursuant to this Escrow Agreement in the Federated Treasury Obligations - C overnight sweep money market mutual fund or as otherwise directed in writing by the Principal Parties. The Principal Parties shall each furnish Escrow Agent with completed Internal Revenue Service Form W-9 contemporaneously upon the Bankruptcy Court's Order approving the Bidding Procedures Motion and Buyer's delivery to the Escrow Agent of the Deposit. 3. Deposit. Disbursement of the Deposit Account shall be made from the Account as follows: a. Release Notice and Disbursement. Promptly after (i) all of the conditions that must be fulfilled prior to the Closing, as set forth in Sections 8.3 and 8.4 of the Purchase Agreement, have been fulfilled or waived by Buyer or Sellers, as applicable, or (ii) the Purchase Agreement has been terminated pursuant to Section 9.11 thereof, the Principal Parties shall give joint written notice to the Escrow Agent (the "Release Notice"), with a copy to Lehman, of such fact and shall direct the Escrow Agent to disburse, at the time designated in the Release Notice, the Deposit by electronic funds transfer to an account designated in the Release Notice. A disbursement of the Deposit pursuant to (i) above shall constitute the payment of a portion of the Purchase Price equal to the amount of the Deposit. The Escrow Agent shall disburse all accrued interest on the Deposit by electronic funds transfer to such bank account as Buyer shall designate in writing. b. Final Disbursement. The Escrow Agent shall continue to hold the Deposit in escrow pending its receipt of either (i) a Release Notice or (ii) a certified copy of an order of the Bankruptcy Court, which shall be a final order, directing the disposition of the Deposit and interest accrued thereon by the Escrow Agent (any such order, a "Disposition Order"). Upon receipt of a Disposition Order, the Escrow Agent is directed to disburse the deposit and accrued interest thereon as provided in such Disposition Order. 4. Escrow Funds. Disbursements of the Gift Certificate Escrowed Amount and the General Escrowed Amount shall be made from the Gift Certificate Escrowed Account as follows: a. Gift Certificate Escrowed Amount Reimbursement. i. Time Period. Subject to Section 4(a)(iii) below and disbursements made in accordance with Section 4(a)(ii), the Gift Certificate Escrowed Amount shall be held by Escrow Agent for a period of twelve (12) months and up to forty (40) days after the Closing. 2 ii. Claims. Within twenty (20) days after the end of each of the first twelve (12) months after Closing, Buyer shall submit to Escrow Agent and Sellers a claim (with a copy to Lehman), with reasonable supporting evidence substantially in the form of Exhibit B attached hereto, for the face amount of any Seller Gift Certificate that was redeemed within the preceding month (the "Monthly Gift Certificate Claim"). Unless, within twenty (20) days after receipt by Sellers of a Monthly Gift Certificate Claim, Escrow Agent has received from Sellers a notice, a copy of which shall be sent by Sellers to Buyer (with a copy to Lehman), disputing the amount of the Monthly Gift Certificate Claim (the "Gift Certificate Dispute Notice"), Escrow Agent shall promptly deduct such Monthly Gift Certificate Claim from the then existing balance in the Gift Certificate Escrowed Account and promptly pay such amount to Buyer. At any time, upon request of Buyer, Sellers or Lehman, Escrow Agent shall provide the requesting party with the current balance in the Gift Certificate Escrowed Account. iii. Final Balance and Disbursement. After receipt of Buyer's final Monthly Gift Certificate Claim (and the expiration of Sellers' twenty (20) day Gift Certificate Dispute Notice period or receipt of notice from Sellers that they will not be disputing the amount of such final Monthly Gift Certificate Claims) and Escrow Agent's corresponding deduction as set forth in subsection 4(a)(ii) above, Escrow Agent shall disburse to Sellers (or at and in favor of Sellers', Sellers' assignee or Seller's designee) any remaining and undisputed balance of the Gift Certificate Escrowed Account, and all accrued interest thereon. Any amounts disputed pursuant to a Gift Certificate Dispute Notice shall remain in the Gift Certificate Escrowed Account until settled in accordance with this Escrow Agreement. b. General Escrowed Amount Reimbursement. i. Claims. At any time and from time to time from the Closing Date until the 120th day following Closing, Buyer may submit to Escrow Agent and Sellers a notice of any claim (with a copy to Sellers, Sellers' assignee or Sellers' designee and Lehman), including a summary of the relevant facts concerning and the amount of the claim (a "Buyer General Claim"), against the General Escrowed Account under Sections 1.1, 4.6 through 4.9, 4.12, 4.13, 4.14, 4.17, 4.21, Article V, and Section 8.2(a) of the Purchase Agreement. Sellers shall have twenty (20) business days after receipt of any Buyer General Claim, to provide written notice to Escrow Agent and Buyer (with a copy to Lehman) that it (i) disputes the facts or the amount of such Buyer General Claim and the reason therefor (the "General Escrow Dispute Notice") or (ii) it has cured the matter for which such Buyer General Claim has been made, together with such supporting documentation, if any, as is reasonably necessary to evidence such cure. If Sellers do not, during the twenty (20) business day period above, provide a General Escrow Dispute Notice or written notice of cure as specified herein, Escrow Agent shall deduct from the General Escrowed Account the amount of the Buyer General Claim and promptly disburse such amount to Buyer. 3 ii. Final Balance and Disbursements. On the 121st day following the Closing Date Sellers shall be paid, at and in favor of Lehman, up to the extent of the amount of the Sellers' then outstanding indebtedness to Lehman, all amounts remaining of the General Escrowed Account, less the aggregate amount of all then pending unresolved Buyer General Claims, with the balance paid thereafter upon and in accordance with the resolution of such unresolved Buyer General Claims. In addition, if the aggregate amount of Buyer General Claims made prior to the 61st day following the Closing Date is less than $100,000, then on such 61st day Sellers shall be paid, at and in favor of Lehman, all amounts remaining of the General Escrowed Account in excess of the sum of $300,000 plus the amount of all Buyer General Claims unresolved as of such 61st day. Any amounts disputed or unresolved pursuant to a General Escrow Dispute Notice shall remain in the General Escrowed Account until settled in accordance with this Escrow Agreement. 5. Dispute Procedure. a. General Escrow. In the event that Sellers provide Escrow Agent and Buyer a General Escrow Dispute Notice as set forth in Section 4(b)(i) above, Buyer and Sellers shall attempt to resolve the dispute in good faith and by mutual agreement between authorized representatives, one each from Buyer and Sellers, within twenty (20) business days of Buyer's receipt of Sellers' General Escrow Dispute Notice. If the authorized representatives cannot resolve the dispute, after a good faith attempt, within the twenty (20) business days, the parties will submit the dispute to the Bankruptcy Court, which shall make a final determination with respect to such dispute. The Bankruptcy Court's decision will be conclusive and binding on the parties. Each party will bear its own costs in connection with any such dispute. b. Gift Certificate Escrow. In the event that Sellers dispute a disbursement from the Gift Certificate Escrowed Account, Sellers shall provide to the other party and the Escrow Agent (with a copy to Lehman) a Gift Certificate Dispute Notice in accordance with Section 4(a)(ii). Buyer and Sellers shall attempt to resolve the dispute in good faith and by mutual agreement within twenty (20) business days of Buyer's receipt of Sellers' Gift Certificate Dispute Notice. If the parties cannot resolve the dispute, after a good faith attempt, within the twenty (20) business days, the parties will submit the dispute to the Bankruptcy Court, which shall make a final determination with respect to such dispute. The Bankruptcy Court's decision will be conclusive and binding on the parties. Each party will bear its own costs in connection with any such dispute. c. Deposit. Any dispute with regard to the Deposit shall be settled by (i) Buyer and Sellers in good faith and by mutual agreement as evidenced by an executed and delivered Release Notice pursuant to Section 3(b)(i), or (ii) a Disposition Order pursuant to Section 3(b)(ii). 6. Duties/Responsibilities of Escrow Agent. The Escrow Agent shall not have any duties or responsibilities, except those expressly set forth in this Escrow Agreement, which the parties agree are ministerial in nature. The Escrow 4 Agent shall not incur any liability by reason of its action or omission to act in reliance upon any notice, instructions or other document believed by the Escrow Agent to be genuine and duly authorized, and shall have no liability to any party, except for liability based on its own willful misconduct or gross negligence. The Escrow Agent shall not be responsible for the validity or sufficiency of any notice, instructions or other document which may be delivered to it hereunder. The Escrow Agent shall not be required to take any action hereunder involving any expense, unless the payment of such expense shall be made or provided for in a manner satisfactory to it. The Escrow Agent shall have no responsibility for the performance by Buyer or Sellers of this Agreement. The Principal Parties agree to and hereby do waive any suit, claim, demand or cause of action of any kind which it or they may have or may assert against the Escrow Agent arising out of or relating to the execution or performance by the Escrow Agent under this Escrow Agreement, unless such suit, claim, demand or cause of action is based upon the gross negligence or willful misconduct of the Escrow Agent. Buyer (on the one hand) and Sellers (on the other hand) further agrees to indemnify and hold harmless the Escrow Agent from one-half of any and all claims, demands, costs, liabilities and expenses, including reasonable attorneys fees and expenses, which may be asserted against it or to which it may be exposed or which it may incur by reason of its execution or performance under this Agreement, except if such claims, demands, costs, liabilities, expenses or attorneys fees (or expenses) result from the Escrow Agent's gross negligence or willful misconduct. This Section shall survive the termination of this Escrow Agreement for any reason. The Escrow Agent shall be entitled to fees and expenses for its regular services as Escrow Agent as set forth on Exhibit C attached hereto. Sellers shall pay all of Escrow Agent's compensation, costs and expenses. In the event such fees are not paid within thirty (30) days after the invoice for such fees has been delivered by the Escrow Agent, such fees shall be payable from and may be deducted by the Escrow Agent from interest and/or principal of any monies held by the Escrow Agent. 7. Escrow Agent's Right To Rely. As to any questions arising in connection with the administration of this Agreement and performance of its obligations hereunder, Escrow Agent may rely absolutely upon the opinions given to it by its counsel and shall be free of liability for acting or failing to act in reliance on the good faith opinion and instruction of such independent counsel. 8. Escrow Agent's Liability. In the event Escrow Agent, in good faith, should be in doubt as to what action it should take hereunder, at its option, the Escrow Agent may refuse to comply with any requests or demands made upon the Escrow Agent, or refuse to take any other action hereunder so long as such doubt exists; and in such event, the Escrow Agent shall not be or become liable in any manner to any person for its failure or refusal to act and shall be entitled to continue to refrain from action until (i) the rights of all parties shall have been fully and finally adjudicated by the Bankruptcy Court or only in the event the Bankruptcy Court refuses to hear such dispute, by a court of competent jurisdiction, or (ii) all differences shall have been adjusted and all doubts resolved by agreement among all interested parties and the Escrow Agent shall be notified thereof in writing by all such persons. 9. Resignation of Escrow Agent. Notwithstanding anything to the contrary contained in this Escrow Agreement, the Escrow Agent may resign from its duties hereunder for any reason whatsoever by giving prior written notice of 5 such resignation to the Principal Parties (with a copy to Lehman) effective on the earlier of the effectiveness of the appointment of a replacement or thirty days after such notice was given. Upon receiving the foregoing notice, the Principal Parties shall designate within thirty (30) days a new escrow agent mutually acceptable to them. If the Principal Parties cannot agree on a new escrow agent within such thirty day period, the Escrow Agent may petition a court of competent jurisdiction for appointment of a successor escrow agent. 10. Term. This Escrow Agreement shall remain in full force and effect until terminated in accordance with the applicable terms of the Purchase Agreement. 11. Compliance with Bankruptcy Court Orders. The Escrow Agent is hereby authorized and directed by the Principal Parties to comply with each Disposition Order and any other order of the Bankruptcy Court which is a Final Order relating to the Deposit or Escrow Funds and accrued interest, if any, thereon and/or this Escrow Agreement, and if the Escrow Agent complies with any such order, it shall not be liable to the Principal Parties or to any other person by reason of such compliance. 12. Amendments Binding Escrow Agent. The Escrow Agent shall not be bound by any amendment, modification, cancellation or rescission of this Escrow Agreement, unless and until the same is in writing and signed by all of the parties hereto and a duly executed original or counterpart thereof has been received by the Escrow Agent. In no event, however, shall any modification of this Escrow Agreement which shall affect the rights or duties of the Escrow Agent be binding on the Escrow Agent, unless the Escrow Agent shall have given its prior written consent thereto. 13. Notice. Any notice, instruction or other communication required or permitted to be given under this Escrow Agreement shall be in writing and shall be sent by certified or express mail, postage prepaid, return receipt requested, or by personal delivery, receipt requested, or by a nationally recognized overnight courier guaranteeing next day delivery, receipt requested, if to either of the Principal Parties (or Lehman) to its address set forth in Section 9.1 of the Purchase Agreement and if to the Escrow Agent, to UMB Bank, n.a., Corporate Trust Department, Attention: K. Scott Mathews, 2401 Grand Blvd., 2nd Floor, Kansas City, Missouri 64108, with a copy of each communication sent in like manner to the Persons indicated in the Purchase Agreement, or to such other address(es) as a party may from time to time designate to the others by notice given in accordance with the terms of this Paragraph 13. Communications hereunder shall be deemed to have been duly given when received by the recipient, as evidenced by an executed receipt. A notice given by counsel for Sellers or Buyer shall be deemed a valid notice, if made and addressed in accordance with the provisions of this Paragraph 13. 14. Entire Understanding. This Escrow Agreement contains the entire understanding of the Escrow Agent, and this Escrow Agreement and the Purchase Agreement contains the entire understanding of the Principal Parties hereto, with respect to the subject matter contained herein and therein. This Escrow Agreement supersedes all prior agreements and understandings between or among the parties with respect to such subject matter. In the event of a conflict between the terms of this Escrow Agreement and the Purchase Agreement, the Purchase Agreement shall prevail. 6 15. Amendments. This Escrow Agreement may not be orally cancelled, changed, modified or amended, and no cancellation, change, waiver, modification or amendment shall be effective or binding, unless in writing and signed by all the parties to this Escrow Agreement. No waiver shall be deemed a continuing waiver or waiver in respect of any subsequent breach or default, whether of similar or different nature, unless expressly so stated in writing. 16. Enforceability. If any provision of this Escrow Agreement is found to be void and unenforceable by the Bankruptcy Court, the remaining provisions of this Escrow Agreement shall, nevertheless, be binding upon the parties with the same effect as though the void or unenforceable part had been severed and deleted. 17. Governing Law. This Escrow Agreement shall be governed by, and construed in accordance with, the internal substantive laws of the State of New York, without giving effect to the choice of law rules thereof. The parties hereby irrevocably consent to (i) the jurisdiction of the Bankruptcy Court, and (ii) service of process upon each of the parties hereto by the method prescribed for the giving of notice pursuant to Paragraph 13 above. 18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement as of the day and year first above written. BUYER: APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- SELLERS: APPLE CAPITOL GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ----------------------------------------- 7 APPLE PRINCE GEORGES MARYLAND GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE WASHINGTON MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE ST. MARYS MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- APPLE CALVERT MD GROUP, LLC, a Florida limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 8 APPLE CHARLES MD GROUP, LLC, a Maryland limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- BERKELEY WVA, LLC, a West Virginia limited liability company By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- ESCROW AGENT: UMB BANK, N.A. By: ------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- 9 EXHIBIT A The escrow wiring instructions are: UMB Bank, n.a., Kansas City, Missouri ABA No. 101000695 Account No. 9800006823 Ref: Apple Capitol Escrow Attention: Scott Mathews, ext. 3008 10 EXHIBIT B
Form of Gift Certificates/Gift Card Claim Total of Apple Capitol gift certificates redeemed current fiscal month: (attach copies of actual gift certificates.) $ ------------------- Total of Apple Capitol gift cards redeemed current fiscal month: (Attach Settlement Manager Inter-Divisional Recap Report for Apple Capitol) $ ------------------- Total Claim Amount: $ ===================
* Note: Gift Card claims shall be submitted pursuant to a computer generated Settlement Manager Report in substantially the form attached hereto. 11 EXHIBIT C ESCROW AGENT FEES AND EXPENSES Acceptance Fee Review escrow agreement and establish account $400.00 Annual Fee Maintain account, year or any part thereof $1,000.00 Transaction Fees (a) Deposit or Escrow Funds Disbursement, per item $10.00 (b) Wire Transfer Fee $15.00 (c) Per Form 1099 (Int., B or Misc.) $5.00 In addition to the specified fees, all reasonable out-of-pocket expenses related to the administration of the Escrow Agreement (other than normal overhead expenses of the regular staff) such as, but not limited to, travel, postage, shipping, courier, telephone, facsimile, supplies, legal fees, accounting fees, etc., will be reimbursable. Monies invested in money market funds and deposits will be subject to a 25 basis point cash management fee. 12
EX-10 7 lehmanassignment.txt LEHMAN ASSIGNMENT AGREEMENT ASSIGNMENT AGREEMENT This Assignment Agreement (this "Agreement") is made and entered into this 1st day of October, 2002, by and between Lehman Brothers Holdings, Inc., d/b/a Lehman Capital, a division of Lehman Brothers Holdings, Inc. ("Lehman"), and Applebee's International, Inc. ("Buyer"). WHEREAS, Lehman owns the Assigned Claims (as hereafter defined in Section 1 below); WHEREAS, Lehman desires to sell and assign the Assigned Claims to Buyer; WHEREAS, Buyer desires to purchase the Assigned Claims from Lehman; and WHEREAS, Buyer and Lehman have agreed upon the terms and conditions of such sale and assignment, and desire to reduce the same to writing. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, covenants, representations, warranties and promises set forth herein, and in order to prescribe the terms and conditions of such assignment, the parties hereto agree as follows: 1. Definitions. For the purposes of this Agreement, the following terms shall have the meanings set forth below: A. Asset Purchase Agreement: The Asset Purchase Agreement dated July 16, 2002, among the Debtors and Buyer. B. Assigned Claims: The Lehman Senior Claims. C. APA Closing Date: The date of the closing of the sale of the Purchased Assets, as defined in the Asset Purchase Agreement, to Buyer or to any other purchaser. D. Buyer: Applebee's International, Inc. E. Bankruptcy Court: The United States Bankruptcy Court for the Southern District of Florida, Fort Lauderdale Division. F. Closing Date: The date of the closing of the assignment and sale contemplated by this Agreement, upon which the second installment of the Purchase Price is received by Lehman, which date shall in no event be later than the APA Closing Date. G. Debtors: Apple Capitol Group, LLC and certain subsidiaries, which are debtors and debtors-in-possession in Chapter 11 proceedings in the Bankruptcy Court. H. Financing Order: The Financing Order ordered on September 4, 2002 by the Bankruptcy Court that, among other things, authorized the Post-Petition Loan and Security Agreement, dated as of July 16, 2002, among the Debtors and Lehman. 1 I. Interest: Interest shall be calculated at a rate per annum based on the floating LIBOR rate. J. Lehman: Lehman Brothers Holdings, Inc., d/b/a Lehman Capital, a division of Lehman Brothers Holdings, Inc., which is the owner and holder of the Assigned Claims. K. Lehman DIP Claims: All amounts owing to Lehman under the Post-Petition Loan and Security Agreement, dated as of July 16, 2002, which was executed and delivered by the Debtors in favor of Lehman under the Financing Order and which evidences the Lehman DIP Claims. L. Lehman Mezzanine Claims: All amounts that remain owing under the Mezzanine Loan and Security Agreements between the Debtors and Lehman, each dated as of May 3, 1999, and the related promissory notes and other documents, which evidence the Lehman Mezzanine Claims and pursuant to which, among other things, Lehman made secured mezzanine term loans and other financial accommodations to the Debtors and the Debtors granted Lehman security interests in substantially all of their assets. M. Lehman Senior Claims: All amounts that remain owing under the Senior Loan and Security Agreements between the Debtors and Lehman, each dated as of May 3, 1999, and the related promissory notes and other documents, which evidence the Lehman Senior Claims and pursuant to which, among other things, Lehman made secured senior term loans and other financial accommodations to the Debtors and the Debtors granted Lehman security interests in substantially all of their assets. N. Pre-Petition Collateral: The collateral described in the Senior Loan and Security Agreements between the Debtors and Lehman. O. Purchase Price: $34,250,000 (the "Base Purchase Price"), subject to adjustment as set forth in Section 2 below, and payable in two installments. P. Sale Motion: The motion of Debtors for an order approving, among other things, proposed sale procedures and bidding protections in connection with the Debtors' proposed sale of certain of their assets, filed by the Debtors in the Bankruptcy Court. Q. Settlement Term Sheet: The Settlement Term Sheet, dated September 4, 2002, among the Debtors, Lehman and the Official Committee of Unsecured Creditors of Apple Capitol Group, LLC. R. Termination Date: November 30, 2002, which will be extended to be coterminous with the Drop Dead Date in the Asset Purchase Agreement, except that any such extension will not be binding (i) on Lehman if the delay in closing hereunder or the extension in the Drop Dead Date was caused by a Material Breach of Buyer under the Asset Purchase Agreement or (ii) on either party hereto if the extension in the Drop Dead Date hereunder was caused by a breach by the other party of any material provision hereof. 2 2. Assignment and Purchase. (a) Subject to the terms and conditions of this Agreement, Lehman hereby agrees to sell, transfer and assign to Buyer on the Closing Date, and Buyer hereby agrees to purchase from Lehman on the Closing Date, all of Lehman's rights, title and interest in the Assigned Claims in exchange for (i) payment to Lehman of the Purchase Price, (ii) the performance by Buyer of its covenants and obligations under this Agreement, and (iii) the performance by Lehman of its covenants and obligations under this Agreement. Buyer shall pay the first installment of $17,125,000 (the "First Installment Amount") on the date hereof by wire transfer of federal funds to Lehman and a second payment of $17,125,000 (the "Second Installment Amount"), subject to adjustment as provided below, on the Closing Date by wire transfer of federal funds to Lehman. On the Closing Date, Lehman shall deliver to Buyer an Assignment of Claims. The parties acknowledge and agree that Lehman shall not sell, transfer or assign, and Buyer is not buying, the Lehman Mezzanine Claims and the Lehman DIP Claims. (b) The Purchase Price shall be adjusted upward, and the Second Installment Amount increased, by the following amounts: (i) 8% of the amount in excess of $35,000,000.00 and less than $37,000,000.01 that is paid to the Debtors by Buyer for the Purchased Assets (as defined in the Asset Purchase Agreement) and (ii) 12% of the amount in excess of $37,000,000.00 that is paid to the Debtors by Buyer for the Purchased Assets. To the extent that amounts are paid to the Debtors after the APA Closing Date that result in an upward adjustment to the Purchase Price under clause (i) or (ii), above, such additional Purchase Price amount shall be paid promptly by Buyer to Lehman, by wire transfer of federal funds. (c) In the event that Buyer is the purchaser of the Purchased Assets, then to the extent that such amounts are not paid to Buyer by wire transfer of federal funds or by cashiers check at the closing of the Asset Purchase Agreement by, in the case of (i) and (ii), the Escrow Agent, and in the case of (iii) through (v), the Debtors, but are only used as an offset against the purchase price paid by Buyer for the Purchased Assets, then the Purchase Price shall be adjusted downward, and the Second Installment Amount decreased, by the following amounts: (i) the Deposit (as defined in the Asset Purchase Agreement); (ii) (A) the Gift Certificate Escrowed Amount and (B) the General Escrowed Amount (both as provided in the Asset Purchase Agreement and in the Escrow Agreement among Debtors and Buyer dated July 16, 2002); (iii) the amounts necessary to satisfy the conditions to Buyers' closing of the Asset Purchase Agreement under Sections 8.3(k) and (l); (iv) the amount determined by Section 9.4(c) of the Asset Purchase Agreement; and (v) the amount necessary for Debtors to deliver the Purchased Asset under Section 1.1(m) of the Asset Purchase Agreement. In the event any of (i) through (v), above, is deducted from the Purchase Price and such amount is later paid to Buyer, Buyer will immediately forward such amount to Lehman by wire transfer of federal funds or by cashiers check. 3 3. Representations and Warranties. (a) Lehman represents and warrants to Buyer that as of the date of this Agreement and as of the Closing Date: (i) the Assigned Claims are not subject to any prior assignment, in whole or part; (ii) Lehman is the sole and lawful owner of the Assigned Claims, free and clear of adverse claims, liens, interests and encumbrances; (iii) Lehman has the full corporate and legal power and authority to execute this Agreement and to consummate the transactions contemplated herein; (iv) the outstanding amount of the Lehman Senior Claims on the date hereof is not less than $42,000,000; (v) the outstanding amount of the Lehman Senior Claims will, at the Closing Date, be not less than $42,000,000 minus the amount of any Adequate Protection Claim payments each in the amount of $458,000 made by the Debtors pursuant to the Financing Order, from September 30, 2002 through the Closing Date (the "Closing Value"); (vi) the Lehman Senior Claims are secured by valid and properly perfected security interests on the date hereof (which shall be first priority security interests as of the Closing Date) in the Pre-Petition Collateral; (vii) if Buyer purchases the Purchased Assets, Buyer will not be prohibited from offsetting the Assigned Claims against the purchase price of the Purchased Assets or from paying to itself, or retaining as a credit against, the purchase price of the Purchased Assets in satisfaction of an equivalent amount of the Assigned Claims (unless the Bankruptcy Court orders otherwise, in which case the provisions of Section 5 (a) below shall apply); and (viii) it has disclosed to Buyer any and all agreements or arrangements made or approved by Lehman regarding the payment of any amount owed by Lehman or the Debtors to the unsecured creditors of Debtors or to Phoenix Management Services, Inc. By its acceptance of this Agreement, Buyer acknowledges that, except for the above representations and warranties, (i) Lehman has not made and does not make any representation or warranty, whether express or implied, of any kind or character in connection with this Agreement, any aspect of the underlying transactions, the financial condition of the Debtors, or the aforesaid documents and (ii) the assignment by Lehman of the Assigned Claims to Buyer shall be irrevocable and without recourse to Lehman. (b) Buyer represents and warrants to Lehman that as of the date of this Agreement: (i) Buyer has the full corporate and legal power and authority to execute this Agreement and to consummate the transactions contemplated herein; and (ii) Buyer has and will maintain cash, cash equivalents and availability under lines of credit in an amount greater than the Base Purchase Price (free and clear of any liens and restrictions) and such funds or the applicable portion thereof will be available (free and clear of any liens or restrictions) to pay the First Installment Amount on the date hereof and the Second Installment Amount on the Closing Date, as well as any upward adjustments to the Purchase Price. The obligations of Lehman hereunder are subject to the condition that the foregoing representations and warranties of Buyer shall be true on and as of the Closing Date in all material respects. 4. Assignment and Assumption. (a) On the Closing Date, Lehman shall assign to Buyer all of Lehman's rights under (i) the Senior Loan and Security Agreements among the Debtors and Lehman, each dated as of May 3, 1999 and 4 all other agreements or arrangements as necessary to vest full ownership of the Assigned Claims and all related security interests; and (ii) the Asset Purchase Agreement other than Lehman's rights under Section 2.1(b) thereof. Except as specifically set forth in Sections 4 (b) and 4 (c) below, Buyer shall not assume, take subject to and shall not be liable for any liabilities or obligations of any kind or nature, whether absolute, contingent, accrued, known or unknown, of Lehman. Specifically, but without limitation of any kind, Lehman will retain all rights in, and be solely liable for all of Lehman's obligations under (i) the Post- Petition Loan and Security Agreement and all other agreements supporting the Lehman DIP Claims; (ii) the Mezzanine Loan and Security Agreements and all other agreements supporting the Lehman Mezzanine Loan Claims; (iii) the Letter Agreement between Lehman and Jay Gillespie dated July 16, 2002; and (iv) any agreement or arrangement made or approved by Lehman regarding the payment of any amount owed by Lehman or the Debtors to third parties (it being understood and agreed that the foregoing creates no obligation on the part of Lehman that it would not otherwise have). (b) Notwithstanding the assignment of the Assigned Claims to Buyer, Buyer acknowledges and agrees that (i) any Adequate Protection Claim payments paid by the Debtors pursuant to the Financing Order shall be paid directly for the account of Lehman; (ii) any Proceeds of Collateral (as defined in the Financing Order) other than Proceeds of Purchased Assets (as defined in the Asset Purchase Agreement) shall be the sole property of Lehman and may be retained and applied by Lehman in repayment of the Lehman DIP Claims and/or the Lehman Mezzanine Claims; and (iii) any amounts payable under Section 2.1(b) of the Asset Purchase Agreement, as between Buyer and Lehman, shall be the sole property of Lehman. Except as set forth in the preceding sentence, after the Closing Date all amounts due pursuant to the Assigned Claims shall be paid directly to Buyer. (c) Buyer hereby consents to and agrees to comply with the terms of (i) the Settlement Term Sheet among the Debtors, Lehman and the Official Committee of Unsecured Creditors of Apple Capitol Group, LLC and (ii) any Settlement Agreement that is in accordance in all material respects with, and in furtherance of, the Settlement Term Sheet and that is approved by the Bankruptcy Court. Notwithstanding the preceding sentence, as between Lehman and Buyer, Buyer shall have no obligation to fund any obligation under the Settlement Term Sheet, including, but not limited to, the Creditor Fund, the Minimum Distribution, any Additional Distribution (as such terms are defined in the Settlement Term Sheet) and the fees and expenses of the Committee's professionals. Lehman hereby agrees that its representations to Buyer in Section 3(a)(iii), (iv), (v) and (vi) regarding the amount and priority of the Assigned Claims are not conditioned on the effectiveness of a final Settlement Agreement or on any assignment of the Settlement Term Sheet or any settlement agreement to Buyer. 5. Further Covenants and Assurances. (a) Lehman shall execute and deliver such further assignments, releases or other instruments as Buyer reasonably requests to effectuate the transfer and assignment of the Lehman Senior Claims to Buyer, including, if Lehman files any proofs of claim with respect to the Assigned Claims prior to the Closing Date, an assignment of all proofs of claim filed by Lehman in the Chapter 5 11 proceedings with respect to the Assigned Claims. In the event that, as a result of Lehman's breach of any representation or warranty under Section 3 (a) above Buyer is not permitted to use the Assigned Claims as an offset to the purchase price on a dollar-for-dollar basis in Buyer's purchase of the Purchased Assets up to the Closing Value or to pay to itself, or retain as a credit against, the purchase price of the Purchased Assets in satisfaction of an equivalent amount of the Assigned Claims, Buyer's exclusive remedy shall be to, at its option, either (i) reduce the Purchase Price and decrease the Second Installment Amount payable to Lehman by the requisite amount of the purchase price of the Purchased Assets that Buyer must fund otherwise than by such offset (and, if such reduction is insufficient to meet such deficit in full, require that Lehman pay to Buyer the balance necessary to fund such deficit, with Interest), or (ii) cancel this Agreement in its entirety and thereupon this Agreement will be deemed void ab initio and Lehman shall refund all amounts paid to it hereunder, with Interest. In the event that the preceding sentence does not apply and pursuant to an order of the Bankruptcy Court, Buyer is not permitted to use the Assigned Claims as an offset to the purchase price on a dollar-for-dollar basis in Buyer's purchase of the Purchased Assets up to the Closing Value or to pay to itself, or retain as a credit against, the purchase price of the Purchased Assets in satisfaction of an equivalent amount of the Assigned Claims, Buyer's exclusive remedy shall be to cancel this Agreement in its entirety and thereupon this Agreement will be deemed void ab initio and Lehman shall refund all amounts paid to it hereunder, with Interest. In the event a partial or full refund of amounts paid by Buyer to Lehman hereunder is required by virtue of the preceding sentence, Lehman will immediately deliver such payment by wire transfer of federal funds to Buyer or as Buyer may direct. The parties agree that Buyer shall not be entitled to a refund or payment hereunder unless it must pay cash (other than to itself) at the closing of the purchase of the Purchased Assets rather than receiving the benefit of the Assigned Claims. In the event Buyer receives a refund or payment from Lehman under this Section 5 and thereafter Buyer is permitted to use the Assigned Claims as an offset to the purchase price on a dollar-for-dollar basis in Buyer's purchase of the Purchased Assets up to the Closing Value or to pay to itself, or retain as a credit against, the purchase price of the Purchased Assets in satisfaction of an equivalent amount of the Assigned Claims, Buyer will promptly reimburse Lehman the amount of such refund or payment, with Interest, to which Buyer would not have been entitled. (b) In the event Buyer purchases the Assigned Claims, unless and until Lehman's Senior Claims are paid in full, Lehman will not assert any claims, liens and encumbrances against the Purchased Assets or the proceeds of the Purchased Assets, including those related to the Lehman DIP Claims and the Lehman Mezzanine Claims and will not transfer any interest in the Lehman DIP Claims or the Lehman Mezzanine Claims unless the transferee agrees with Buyer in writing also not to assert any claims, liens or encumbrances against the Purchased Assets or the proceeds of the Purchased Assets. (c) Buyer hereby agrees that it will not (i) sell or assign the Assigned Claims or its right to acquire the Assigned Claims other than to a wholly-owned affiliate (in which event Buyer will not 6 be relieved of its obligations hereunder), or (ii) sell or assign its right to purchase the Purchased Assets prior to the APA Closing Date other than to a wholly-owned affiliate (in which event Buyer will not be relieved of its obligations hereunder). 6. Future Payments. If on the Closing Date, Debtors do not pay to Buyer by cashiers check or wire transfer of federal funds the amount of $1,691,633.30 in payment of unpaid royalties, advertising fees, finance charges and other amounts owed by Debtors to Buyer, Lehman shall honor any request of Debtor to draw under the Post-Petition Loan and Security Agreement dated as of July 16, 2002, the amounts necessary to make such payment. To the extent Debtors do not make such payment the Purchase Price and Second Installment Amount will be reduced by such unpaid amount. 7. Gift Certificate and General Escrowed Amounts. (a) On the Closing Date, Buyer will (i) fund the Gift Certificate Escrowed Amount and the General Escrowed Amount (as provided in the Asset Purchase Agreement and in the Escrow Agreement among the Debtors and Buyer dated July 16, 2002); (ii) immediately waive any and all rights to the Gift Certificate Escrowed Amount and to the General Escrowed Amount and direct the escrow agent to immediately release the Gift Certificate Escrowed Amount and the General Escrowed Amount to the Debtors in accordance with the terms of such Escrow Agreement; (iii) immediately waive any and all claims for damages, in law or in equity, that Buyer could assert against the Debtors for breaches of or defaults in the performance of any representations, warranties, agreements or covenants of Debtors under the Asset Purchase Agreement; and (iv) waive the Debtor's obligation to pay all vacation and other paid time off benefits, accrued in accordance with Debtor's standard policy, and unused as of the APA Closing Date, of all Retained Employees of Seller who are hired by Buyer and waive Buyer's right to reduce the purchase price for the Purchased Assets under Section 8.2 (a) (v) of the Asset Purchase Agreement. 8. Certain Payments. In the event Buyer does not purchase the Purchased Assets: (a) Because Lehman has materially breached and failed to cure any representation, warranty or covenant hereunder, Buyer may notify Lehman of such breach, Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder, and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest. (b) Because a condition under Section 8.3(a), (b), (c), (d), (i), or (n) of the Asset Purchase Agreement was not met, Buyer may notify Lehman of such fact, Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder, and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest. (c) If neither (a) nor (b), above, is applicable and the Purchased Assets are purchased by another party for more than 7 $35,500,000.00, Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder, and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest. (d) If none of (a), (b) or (c) above, is applicable, (A) and the Purchased Assets are purchased by another party for less than $34,250,000.00, Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest, but shall retain an amount equal to the difference between the purchase price paid by such other party and $34,250,000.00, with Interest; or (B) and the Purchased Assets are purchased by another party for more than $34,250,000.00 but less than $35,500,000.00, Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest, but shall retain $500,000. (e) If none of (a), (b), (c) or (d), above, is applicable and Buyer does not purchase the Purchased Assets, then as of Termination Date (or if earlier, if the Buyer does not purchase the Purchased Assets because of its breach of the Asset Purchase Agreement or any other condition in Section 8.3 thereof is not satisfied, on the date the Asset Purchase Agreement is terminated), Buyer will not purchase the Assigned Claims and will have no payment liability to Lehman hereunder, and Lehman will refund to Buyer all amounts paid to Lehman hereunder, with Interest, but shall retain $500,000. Any refunds due from Lehman under this Section shall be made by wire transfer of federal funds within two business days after the notice (if under (a) or (b) above) or the closing of the asset purchase (if under (c) or (d) above) or the Termination Date (if under (e) above). 9. Waivers. A waiver of any term or condition of this Agreement shall be valid only if it is in writing and executed by the party so waiving. The failure of any of the parties in any one or more instances to insist upon performance of any terms, covenant or conditions of this Agreement shall not be construed to be a waiver of future performance of any such term, covenant or condition but the obligation of either party with respect thereto shall continue in full force and effect. 10. Governing Law. This Agreement and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of the State of New York notwithstanding any reference in such laws to the laws of another jurisdiction. 11. Notices. All notices, demands or other communications hereunder shall be in writing and shall be given by (1) deposit in United States mail, sent by certified or registered mail, postage prepaid, (2) nationally recognized overnight courier service, service prepaid, which requires written acknowledgement or receipt, or (3) personal delivery, to the following parties: If to Buyer: Applebee's International, Inc. 4551 West 107th St., Suite 100 Overland Park, KS 66207 Attention: Robert T. Steinkamp Fax: (913) 341-1696 Phone: (913) 967-4038 8 With a copy to: James M. Ash, Esq. Blackwell Sanders Peper Martin LLP 2300 Main Street, Suite 1100 Kansas City, MO 64108 Fax: (816) 983-9137 If to Lehman: Lehman Brothers Holdings, Inc. 745 Seventh Avenue, 7th Floor New York, New York 10019 Attn: George Janes Fax: (646) 758-2115 Phone: (212) 526-5129 With a copy to: Jeffrey L. Schwartz, Esq. Hahn & Hessen LLP 350 Fifth Avenue New York, New York 10118-0075 Fax: (212) 594-7167 Phone: (212) 946-0221 or to such other address as Buyer or Lehman shall have last designated in writing to the other party in a notice meeting the requirements of this Section 9. 12. Entire Agreement; Construction. This Agreement contains the entire understanding and agreement between the parties with respect to the subject matter hereof and cannot be amended, modified, or supplemented in any respect except by a subsequent written agreement executed by the parties hereto. This Agreement has been negotiated at arm's-length by the parties and their respective advisors. This Agreement shall not be construed as having been "drafted" by any one party and shall not be construed against any party as a drafting party. The interpretation, application, meaning or construction of any of the terms or provisions of this Agreement shall be construed pursuant to the terms hereof, without bias in favor of or against any party hereto, and regardless of the party who drafted or prepared such term or provision. 13. Assignment. Neither this Agreement nor any rights or obligations of either party hereunder may be assigned to any other person without the prior written consent of the other party. Notwithstanding the immediately preceding sentence, Buyer may assign its rights or obligations to a wholly-owned affiliate without the prior written consent of Lehman (in which event Buyer will not be relieved of its obligations hereunder). Subject to the foregoing, the provisions hereof shall inure to the benefit of and be binding upon the successors and assigns of the parties. 14. Counterparts. This Agreement may be signed in counterparts, each of which shall constitute an original and which together shall constitute one and the same Agreement. 9 15. Legal Costs. Each party shall bear its own costs and expenses incurred in negotiating this Agreement and in consummating the transactions contemplated hereby. 16. Termination. Either party may terminate this Agreement if the purchase and assignment contemplated hereunder shall not have occurred on or before the Termination Date; provided that Buyer may not so terminate this Agreement unless it is also simultaneously terminating the Asset Purchase Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day, month, and year first above written. BUYER: APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- LEHMAN: LEHMAN BROTHERS HOLDINGS, INC., D/B/A/ LEHMAN CAPITAL, A DIVISION OF LEHMAN BROTHERS HOLDINGS, INC. By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- 10 EX-99 8 cert906exhibit.txt SECTION 906 CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Applebee's International, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 29, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and dates indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2002 By: /s/ Lloyd L. Hill ------------------ ------------------------------------ Lloyd L. Hill Chairman and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Applebee's International, Inc. (the "Company") on Form 10-Q for the quarterly period ended September 29, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and dates indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 8, 2002 By: /s/ Steven K. Lumpkin ------------------ ------------------------------------ Steven K. Lumpkin Chief Financial Officer 1
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