-----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, UWuFBZ83AVJf+Wwwa0dT5rKcWsev+8AwLJ/knqsmDOx7ONyMQwnKhrTq1FSHe4Iv GidTbLEllVaCMnvqmsjKwg== 0000853665-04-000164.txt : 20041028 0000853665-04-000164.hdr.sgml : 20041028 20041027200354 ACCESSION NUMBER: 0000853665-04-000164 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040926 FILED AS OF DATE: 20041028 DATE AS OF CHANGE: 20041027 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: 041100699 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 q30410q.txt Q3 2004 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 26, 2004 ------------------------------------------------- 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, 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 ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes X No ------- ------- The number of shares of the registrant's common stock outstanding as of October 25, 2004 was 81,075,984. -1- APPLEBEE'S INTERNATIONAL, INC. FORM 10-Q FISCAL QUARTER ENDED SEPTEMBER 26, 2004 INDEX
Page Part I Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of September 26, 2004 and December 28, 2003................................................................ 3 Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks Ended September 26, 2004 and September 28, 2003...................................... 4 Consolidated Statement of Stockholders' Equity for the 39 Weeks Ended September 26, 2004.................................................... 5 Consolidated Statements of Cash Flows for the 39 Weeks Ended September 26, 2004 and September 28, 2003...................................... 6 Notes to Consolidated Financial Statements................................................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 26 Item 4. Controls and Procedures................................................................... 26 Part II Other Information Item 1. Legal Proceedings......................................................................... 27 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................... 27 Item 6. Exhibits.................................................................................. 27 Signatures .................................................................................................. 28 Exhibit Index................................................................................................ 29
-2- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts)
September 26, December 28, 2004 2003 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 441 $ 17,867 Short-term investments, at market value.......................................... 281 27 Receivables (less allowance for bad debts of $4,290 in 2004 and $4,117 in 2003).. 37,079 31,950 Receivables related to captive insurance subsidiary.............................. 3,107 450 Inventories...................................................................... 33,950 20,799 Prepaid income taxes............................................................. 7,704 5,800 Other current assets related to captive insurance subsidiary..................... 850 657 Prepaid and other current assets................................................. 9,943 9,072 ---------------- ---------------- Total current assets........................................................ 93,355 86,622 Property and equipment, net.......................................................... 457,071 421,536 Goodwill............................................................................. 116,344 105,326 Restricted assets related to captive insurance subsidiary............................ 18,311 10,763 Other intangible assets, net......................................................... 5,564 1,137 Other assets......................................................................... 23,403 18,617 ---------------- ---------------- $ 714,048 $ 644,001 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................................................ $ 213 $ 192 Notes payable.................................................................... 3,000 -- Accounts payable................................................................. 36,870 37,633 Accrued expenses and other current liabilities................................... 81,678 96,637 Loss reserve and unearned premiums related to captive insurance subsidiary....... 20,864 11,007 Accrued dividends................................................................ -- 3,863 ---------------- ---------------- Total current liabilities................................................... 142,625 149,332 ---------------- ---------------- Non-current liabilities: Long-term debt - less current portion............................................ 43,529 20,670 Deferred income taxes............................................................ 32,141 5,880 Other non-current liabilities.................................................... 11,286 8,387 ---------------- ---------------- Total non-current liabilities............................................... 86,956 34,937 ---------------- ---------------- Total liabilities........................................................... 229,581 184,269 ---------------- ---------------- Commitments and contingencies (Note 3) 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 - 108,503,243 shares................................................... 1,085 1,085 Additional paid-in capital....................................................... 213,928 200,574 Retained earnings................................................................ 609,925 523,954 ---------------- ---------------- 824,938 725,613 Treasury stock - 27,514,031 shares in 2004 and 25,715,767 shares in 2003, at cost.......................................................................... (340,471) (265,881) ---------------- ---------------- Total stockholders' equity.................................................. 484,467 459,732 ---------------- ---------------- $ 714,048 $ 644,001 ================ ================
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 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Revenues: Company restaurant sales.......................... $ 247,173 $ 222,429 $ 738,502 $ 650,946 Franchise royalties and fees...................... 30,105 27,594 91,656 82,088 Other franchise income............................ 3,913 2,972 10,427 8,881 ------------- ------------- ------------- ------------- Total operating revenues..................... 281,191 252,995 840,585 741,915 ------------- ------------- ------------- ------------- Cost of company restaurant sales: Food and beverage................................. 65,115 57,200 195,277 169,086 Labor............................................. 79,599 73,018 240,344 213,186 Direct and occupancy.............................. 61,642 55,869 180,951 160,816 Pre-opening expense............................... 998 576 1,939 1,131 ------------- ------------- ------------- ------------- Total cost of company restaurant sales....... 207,354 186,663 618,511 544,219 ------------- ------------- ------------- ------------- Cost of other franchise income........................ 3,521 2,837 11,493 8,510 General and administrative expenses................... 26,669 23,589 77,118 69,096 Amortization of intangible assets..................... 199 87 443 278 Loss on disposition of restaurants and equipment...... 441 116 1,520 1,314 ------------- ------------- ------------- ------------- Operating earnings.................................... 43,007 39,703 131,500 118,498 ------------- ------------- ------------- ------------- Other income (expense): Investment income................................. 325 227 566 1,048 Interest expense.................................. (379) (330) (1,139) (1,369) Impairment of Chevys note receivable (Note 9)..... -- -- -- (8,803) Other income...................................... 568 395 1,410 601 ------------- ------------- ------------- ------------- Total other income (expense)................. 514 292 837 (8,523) ------------- ------------- ------------- ------------- Earnings before income taxes.......................... 43,521 39,995 132,337 109,975 Income taxes.......................................... 15,232 14,398 46,318 39,591 ------------- ------------- ------------- ------------- Net earnings.......................................... $ 28,289 $ 25,597 $ 86,019 $ 70,384 ============= ============= ============= ============= Basic net earnings per common share................... $ 0.35 $ 0.31 $ 1.05 $ 0.85 ============= ============= ============= ============= Diluted net earnings per common share................. $ 0.34 $ 0.30 $ 1.02 $ 0.82 ============= ============= ============= ============= Basic weighted average shares outstanding............. 81,511 83,334 81,759 83,132 ============= ============= ============= ============= Diluted weighted average shares outstanding........... 83,503 85,777 84,079 85,482 ============= ============= ============= =============
See notes to consolidated financial statements. -4- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands, except share amounts)
Common Stock Additional Total ------------------------- Paid-In Retained Treasury Stockholders' Shares Amount Capital Earnings Stock Equity ------------ ------------ ------------- ------------ ------------- -------------- Balance, December 28, 2003............. 108,503,243 $ 1,085 $ 200,574 $ 523,954 $ (265,881) $ 459,732 Net earnings....................... -- -- -- 86,019 -- 86,019 Purchases of treasury stock........ -- -- -- -- (88,224) (88,224) Stock options exercised and related tax benefit............. -- -- 9,675 -- 11,306 20,981 Shares issued under employee benefit plans................... -- -- 3,150 -- 1,784 4,934 Restricted shares awarded under equity incentive plan, net of cancellations............ -- -- (544) -- 544 -- Amortization of unearned compensation relating to restricted shares............... -- -- 1,073 -- -- 1,073 Dividends paid for fractional shares.......................... -- -- -- (48) -- (48) ------------ ------------ ------------- ------------ ------------- -------------- Balance, September 26, 2004........... 108,503,243 $ 1,085 $ 213,928 $ 609,925 $ (340,471) $ 484,467 ============ ============ ============= ============ ============= ==============
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 26, September 28, 2004 2003 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings..................................................................... $ 86,019 $ 70,384 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................................... 33,708 30,091 Amortization of intangible assets........................................... 443 278 Amortization of unearned compensation....................................... 1,073 785 Other amortization.......................................................... 242 146 Inventory impairment........................................................ 2,100 -- Deferred income tax provision (benefit)..................................... 26,638 (541) Gain on sale of investments................................................. -- (24) Loss on disposition of restaurants and equipment............................ 1,520 1,314 Impairment of Chevys note receivable........................................ -- 8,803 Income tax benefit from exercise of options................................. 7,610 5,536 Changes in assets and liabilities (exclusive of effects of acquisitions or disposition): Receivables................................................................. (4,916) (5,890) Receivables related to captive insurance subsidiary......................... (2,657) (290) Inventories................................................................. (15,039) (2,454) Prepaid income taxes........................................................ (1,904) 5,002 Other current assets related to captive insurance subsidiary................ (193) (1,134) Prepaid and other current assets............................................ (1,185) 1,554 Accounts payable............................................................ (763) 7,300 Accrued expenses and other current liabilities.............................. (15,275) (1,798) Loss reserve and unearned premiums related to captive insurance subsidiary.. 9,857 10,073 Accrued income taxes........................................................ -- 457 Other....................................................................... (1,010) 68 --------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 126,268 129,660 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.............................................. (68,224) (54,893) Restricted assets related to captive insurance subsidiary........................ (7,548) (8,830) Acquisition of restaurants....................................................... (13,817) (21,557) Lease acquisition costs.......................................................... (4,857) -- Purchases of short-term investments.............................................. (253) -- Proceeds from sale of restaurants and equipment.................................. -- 8,579 Maturities and sales of short-term investments................................... -- 480 Other investing activities....................................................... (1,045) -- --------------- --------------- NET CASH USED BY INVESTING ACTIVITIES....................................... (95,744) (76,221) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock...................................................... (88,224) (49,757) Dividends paid................................................................... (3,911) (3,323) Issuance of common stock upon exercise of stock options.......................... 13,371 11,269 Shares issued under employee benefit plans....................................... 4,934 2,134 Proceeds from issuance of notes payable.......................................... 3,000 4,800 Net long-term debt proceeds (payments)........................................... 22,880 (30,372) --------------- --------------- NET CASH USED BY FINANCING ACTIVITIES....................................... (47,950) (65,249) --------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (17,426) (11,810) CASH AND CASH EQUIVALENTS, beginning of period....................................... 17,867 15,169 --------------- --------------- CASH AND CASH EQUIVALENTS, end of period............................................. $ 441 $ 3,359 =============== ===============
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 26, September 28, 2004 2003 ----------------- ----------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the 39 week period for: Income taxes.................................................................. $ 13,561 $ 29,494 ================= ================= Interest...................................................................... $ 544 $ 887 ================= =================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: We issued restricted common stock of $1,772,000 and $1,836,000 for the 39 weeks ended September 26, 2004 and September 28, 2003, respectively. On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection with the acquisition of 11 restaurants. As of September 28, 2003, we recorded a receivable of $1,125,000 in connection with the sale of a restaurant. DISCLOSURE OF ACCOUNTING POLICY: For purposes of the consolidated statements of cash flows, we consider 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 consolidated balance sheet information as of December 28, 2003 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 28, 2003. 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 prior periods' consolidated financial statements to conform to the 2004 presentation. 2. Stock-Based Compensation We have adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We account for stock-based compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of our plans are granted with an exercise price equal to the fair market value on the date of the grant. The following table presents the effect on our net earnings and earnings per share had we adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation" (in thousands, except for per share amounts). -8-
13 Weeks Ended 39 Weeks Ended ------------------------------- ------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Net earnings, as reported............................. $ 28,289 $ 25,597 $ 86,019 $ 70,384 Add: Stock-based employee compensation expense included in net earnings, net of related taxes.............................. 327 433 616 1,393 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related taxes.............................. 2,220 2,159 6,719 7,088 --------------- --------------- --------------- --------------- Pro forma net earnings................................ $ 26,396 $ 23,871 $ 79,916 $ 64,689 =============== =============== =============== =============== Basic net earnings per common share, as reported....................................... $ 0.35 $ 0.31 $ 1.05 $ 0.85 =============== =============== =============== =============== Basic net earnings per common share, pro forma......................................... $ 0.32 $ 0.29 $ 0.98 $ 0.78 =============== =============== =============== =============== Diluted net earnings per common share, as reported....................................... $ 0.34 $ 0.30 $ 1.02 $ 0.82 =============== =============== =============== =============== Diluted net earnings per common share, pro forma......................................... $ 0.32 $ 0.28 $ 0.95 $ 0.76 =============== =============== =============== ===============
3. Commitments and Contingencies Litigation, claims and disputes: We are involved in various legal actions which include, without limitation, employment law related matters, dram shop claims, personal injury claims and other such normal restaurant operational matters. 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 our 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 statements. Lease guarantees: 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 26, 2004, the aggregate amount of these lease payments totaled approximately $19,200,000. These leases expire at various times throughout the next several years with the final lease agreement expiring in 2025. The buyers have indemnified us from any losses related to these guarantees. We have not recorded a liability as of September 26, 2004 or December 28, 2003. Franchisee guarantees: In November 2003, we arranged for a financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments. Under the terms of this financing program, we will provide -9- a limited guarantee pool for the loans advanced during the three-year period ending December 2006. There was one loan outstanding for approximately $800,000 under this program as of September 26, 2004. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of September 26, 2004. In May 2004, we arranged for a financing company to provide up to $250,000,000 to qualified franchisees for loans to fund development of new restaurants through October 2007. We will provide a limited guarantee of certain loans advanced under this program. As of September 26, 2004, there was one loan outstanding for approximately $2,400,000 under this program. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of September 26, 2004. 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 26, 2004, we would have been required to make payments totaling approximately $12,300,000. 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 $7,200,000 if such officers had been terminated as of September 26, 2004. 4. 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 26, September 28, September 26, September 28, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Net earnings......................................... $ 28,289 $ 25,597 $ 86,019 $ 70,384 =============== =============== =============== =============== Basic weighted average shares outstanding............ 81,511 83,334 81,759 83,132 Dilutive effect of stock options and equity-based compensation.......................... 1,992 2,443 2,320 2,350 --------------- --------------- --------------- --------------- Diluted weighted average shares outstanding.......... 83,503 85,777 84,079 85,482 =============== =============== =============== =============== Basic net earnings per common share.................. $ 0.35 $ 0.31 $ 1.05 $ 0.85 =============== =============== =============== =============== Diluted net earnings per common share................ $ 0.34 $ 0.30 $ 1.02 $ 0.82 =============== =============== =============== ===============
We excluded stock options with exercise prices greater than the average market price of our common stock for the applicable periods from the computation of diluted weighted average shares outstanding. There were approximately 1,520,000 and 5,000 of these options for the 13 weeks ended September 26, 2004 and September 28, 2003, respectively, and 1,400,000 and 10,000 of these options for the 39 weeks ended September 26, 2004 and September 28, 2003, respectively. -10- 5. Stock Split On May 13, 2004, we declared a three-for-two stock split, effected in the form of a 50% stock dividend, to shareholders of record on May 28, 2004, payable on June 15, 2004. We issued approximately 36,200,000 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. 6. Acquisitions On April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price was allocated to the fair value of property and equipment of $2,500,000, goodwill of $10,800,000 and other net assets of approximately $400,000. We do not expect this transaction to have a significant impact on our net earnings for fiscal 2004. On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price of $23,200,000 was allocated to the fair value of property and equipment of $7,900,000, goodwill of $16,600,000, and other net liabilities of $1,300,000. The following table is comprised of actual company restaurant sales included in our consolidated financial statements for each period presented and pro forma company restaurant sales assuming the two acquisitions above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 39 Weeks Ended ------------------------------- ------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Actual company restaurant sales for acquired restaurants.......................... $ 12,500 $ 6,100 $ 30,000 $ 13,100 =============== =============== =============== =============== Pro forma company restaurant sales for acquired restaurants.......................... $ 12,500 $ 11,600 $ 38,800 $ 35,600 =============== =============== =============== ===============
7. Disposition On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. This transaction did not have a significant impact on our net earnings for fiscal 2003. Actual company restaurant sales included in our consolidated financial statements for the nine restaurants were approximately $900,000 and $10,300,000 for the 13 weeks and 39 weeks ended September 28, 2003, respectively. -11- 8. Inventory Impairment In the second quarter of 2004, we determined that we had excess inventories of riblets that no longer met our quality standards. Accordingly, we recorded an inventory impairment of $2,100,000 (approximately $1,400,000 net of income taxes) in our consolidated financial statements during the 39 weeks ended September 26, 2004. The portion of the riblet inventory impairment related to the company's historical usage of approximately $500,000 was recorded in food and beverage cost and the portion related to the franchisee's historical usage of approximately $1,600,000 was recorded in cost of other franchise income in the consolidated statements of earnings. 9. Impairment of Chevys Note Receivable In 1999, we received a $6,000,000, 8% subordinated note in connection with the sale of the Rio Bravo concept to Chevys Holdings, Inc ("Chevys") due in 2009. In June 2003, Chevys announced the sale of the majority of its restaurants. Subsequent to the announcement, we received Chevys' audited financial statements for the fiscal year ended December 31, 2002. During the fiscal quarter ended June 29, 2003, we fully impaired the principal and accrued interest of approximately $8,800,000. A charge for the impairment of this note is included in our consolidated statements of earnings for the 39 weeks ended September 28, 2003. In October 2003, Chevys Inc. filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. We no longer accrue interest receivable on this note and will record future interest income on this note only upon the receipt of any related cash payments. 10. Goodwill and Other Intangible Assets Changes in goodwill are summarized below (in thousands):
September 26, December 28, 2004 2003 ---------------------- ---------------------- Carrying amount, beginning of the year.................. $ 105,326 $ 88,715 Goodwill acquired during the period..................... 11,018 16,611 ---------------------- ---------------------- $ 116,344 $ 105,326 ====================== ======================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," are summarized below (in thousands):
September 26, 2004 ------------------------------------------------------------ Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ------------------ ------------------ Amortized intangible assets: Franchise interest and rights....... $ 6,371 $ 5,482 $ 889 Lease acquisition costs............. 4,857 182 4,675 ------------------ ---------------- ----------------- Total................................... $ 11,228 $ 5,664 $ 5,564 ================== ================ ================= December 28, 2003 ----------------------------------------------------------- Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ---------------- ----------------- Amortized intangible assets: Franchise interest and rights....... $ 6,371 $ 5,234 $ 1,137 ================== ================ =================
-12- In the second quarter of 2004, we acquired six restaurant leases for approximately $4,900,000 in cash. The lease acquisition costs are being amortized over the next 8 to 20 years and the franchise interest and rights are being amortized over the next two to four years. We expect annual amortization expense for all intangible assets for the next five fiscal years to range from approximately $500,000 to $800,000. 11. Captive Insurance Subsidiary In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a wholly-owned captive insurance subsidiary to provide Applebee's International, Inc. and qualified franchisees with workers' compensation and general liability insurance. Applebee's International, Inc. and covered franchisees make premium payments to the captive insurance company which pays administrative fees and insurance claims, subject to individual and aggregate maximum claim limits under the captive insurance company's reinsurance policies. Franchisee premium amounts billed by the captive insurance company are established based upon third-party actuarial estimates of settlement costs for incurred claims and administrative fees. The franchisee premiums are included in other franchise income ratably over the policy year. The related offsetting expenses are included in cost of other franchise income. Accordingly, we do not expect franchisee participation in the captive insurance company to have a material impact on our net earnings. As of September 26, 2004, our consolidated balance sheet includes the following balances related to the captive insurance subsidiary: o Deferred policy acquisition costs of approximately $900,000 included in other current assets related to captive insurance subsidiary. o Franchise premium receivables of approximately $3,100,000 included in receivables related to captive insurance subsidiary. o Cash equivalent investments restricted for the payment of claims of approximately $17,600,000 included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $20,900,000. o Other miscellaneous items, net, of approximately $700,000 included in several line items in the consolidated balance sheet. 12. Deferred Income Taxes In 2004, we implemented new tax planning strategies that accelerated depreciation on restaurant assets which resulted in an increase in our deferred income tax liability. Deferred income taxes of $32,141,000 are reflected in non-current liabilities in our consolidated balance sheet as of September 26, 2004. -13- 13. New Accounting Pronouncement In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51." This interpretation, which replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation is required in financial statements for periods ending after March 15, 2004 for those companies that have yet to adopt the provisions of FIN 46. We adopted FIN 46R in January 2004 and the initial adoption did not have a material impact on our consolidated financial statements. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Our revenues are generated from three primary sources: o Company restaurant sales (food and beverage sales) o Franchise royalties and fees o Other franchise income Beverage sales consist of sales of alcoholic beverages, while non-alcoholic beverages are included in food sales. Franchise royalties are generally 4% of each franchise restaurant's monthly gross sales. Franchise fees typically range from $30,000 to $35,000 for each restaurant opened. Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees. Comparable restaurant sales are based upon those restaurants open for at least 18 months and are compared from period to period. 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 Cost of other franchise income includes the costs related to franchisee participation in our captive insurance company and costs related to information technology products and services provided to certain franchisees. In addition, cost of other franchise income in fiscal 2004 includes the franchisee portion of the riblet inventory impairment (see Note 8). 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 26, 2004 and September 28, 2003 each contained 13 weeks and are referred to hereafter as the "2004 quarter" and the "2003 quarter," respectively. Our 39 week periods ended September 26, 2004 and September 28, 2003 are referred to hereafter as the "2004 year-to-date period" and the "2003 year-to-date period," respectively. In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a wholly-owned captive insurance subsidiary to provide Applebee's International, Inc. and qualified franchisees with workers' compensation and general liability insurance. Applebee's International, Inc. and covered franchisees make premium payments to the captive insurance company which pays administrative fees and insurance claims, subject to individual and aggregate maximum claim limits under the captive insurance company's reinsurance policies. Franchisee premium amounts billed by the captive insurance company are established based upon third-party actuarial estimates of settlement costs for incurred claims and administrative -15- fees. The franchisee premiums are included in other franchise income ratably over the policy year. The related offsetting expenses are included in cost of other franchise income. Accordingly, we do not expect franchisee participation in the captive insurance company to have a material impact on our net earnings. As of September 26, 2004, our consolidated balance sheet includes the following balances related to the captive insurance subsidiary: o Deferred policy acquisition costs of approximately $900,000 included in other current assets related to captive insurance subsidiary. o Franchise premium receivables of approximately $3,100,000 included in receivables related to captive insurance subsidiary. o Cash equivalent investments restricted for the payment of claims of approximately $17,600,000 included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $20,900,000. o Other miscellaneous items, net, of approximately $700,000 included in several line items in the consolidated balance sheet. 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 our consolidated financial statements. We believe that the following significant accounting policies involve a higher degree of judgment or complexity. Franchise revenues: Franchise revenues consist of franchise royalties, franchise fees and other franchise income. We recognize royalties on a franchisee's sales in the period in which the sales are reported to have occurred. We also receive a franchise fee for each restaurant that a franchisee opens. The recognition of franchise fees is deferred until we have performed substantially all of our related obligations as franchisor, typically when the restaurant opens. Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees. Income from franchise premiums and information technology services is recognized ratably over the related contract period. Income from information technology products is recognized when the products are installed at the restaurant. Inventory valuation: We state inventories at the lower of cost, using the first-in, first-out method, or market. Market is determined based upon the estimated net realizable value. We purchase and maintain inventories of certain specialty products to assure sufficient supplies to the system. We review and make quality control inspections of our inventories to determine obsolescence on an ongoing basis. These reviews require management to make certain estimates and judgments. 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 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 on a restaurant by restaurant basis 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 -16- subject to a significant degree of judgment. 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. We are required to assess the probability of any adverse judgments as well as the potential range of loss. We determine the required accruals after a review of the facts of each legal action. We use estimates in the determination of the appropriate liabilities for general liability, workers' compensation and health insurance. The estimated liability is established based upon historical claims data and third-party actuarial estimates of settlement costs for incurred claims. Unanticipated changes in these factors may require us to revise our estimates. Employee incentive compensation plans: We have various long-term employee incentive compensation plans which require us to make estimates to determine our liability based upon projected performance of plan criteria. If actual performance against the criteria 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. We establish our allowance for bad debts based on several factors, including historical collection experience, the current economic environment and other specific information available to us at the time. The allowance for bad debts may change in the future due to changes in the factors above or other developments. We periodically reassess our assumptions and judgments 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 our consolidated balance sheets would be adjusted accordingly. Historically, actual results have not been materially different than the estimates that are described above. Acquisitions On April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price was allocated to the fair value of property and equipment of $2,500,000, goodwill of $10,800,000 and other net assets of approximately $400,000. We do not expect this transaction to have a significant impact on our net earnings for fiscal 2004. On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price of $23,200,000 was allocated to the fair value of property and equipment of $7,900,000, goodwill of $16,600,000, and other net liabilities of $1,300,000. -17- The following table is comprised of actual company restaurant sales included in our consolidated financial statements for each period presented and pro forma company restaurant sales assuming the two acquisitions above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 39 Weeks Ended ------------------------------- ------------------------------- September 26, September 28, September 26, September 28, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Actual company restaurant sales for acquired restaurants.......................... $ 12,500 $ 6,100 $ 30,000 $ 13,100 =============== =============== =============== =============== Pro forma company restaurant sales for acquired restaurants.......................... $ 12,500 $ 11,600 $ 38,800 $ 35,600 =============== =============== =============== ===============
Disposition On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. This transaction did not have a significant impact on our net earnings for fiscal 2003. Actual company restaurant sales included in our consolidated financial statements for the nine restaurants were approximately $900,000 and $10,300,000 for the 13 weeks and the 39 weeks ended September 28, 2003, respectively. -18- 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 26, September 28, September 26, September 28, 2004 2003 2004 2003 ---------------- ---------------- --------------- ---------------- Revenues: Company restaurant sales...................... 87.9% 87.9% 87.9% 87.7% Franchise royalties and fees.................. 10.7 10.9 10.9 11.1 Other franchise income........................ 1.4 1.2 1.2 1.2 ---------------- ---------------- --------------- ---------------- Total operating revenues................. 100.0% 100.0% 100.0% 100.0% ================ ================ =============== ================ Cost of sales (as a percentage of company restaurant sales): Food and beverage............................. 26.3% 25.7% 26.4% 26.0% Labor......................................... 32.2 32.8 32.5 32.8 Direct and occupancy.......................... 24.9 25.1 24.5 24.7 Pre-opening expense........................... 0.4 0.3 0.3 0.2 ---------------- ---------------- --------------- ---------------- Total cost of sales...................... 83.9% 83.9% 83.8% 83.6% ================ ================ =============== ================ Cost of other franchise income (as a percentage of other franchise income)...................... 90.0% 95.5% 110.2% 95.8% General and administrative expenses............... 9.5 9.3 9.2 9.3 Amortization of intangible assets................. 0.1 -- 0.1 -- Loss on disposition of restaurants and equipment.. 0.2 -- 0.2 0.2 ---------------- ---------------- --------------- ---------------- Operating earnings................................ 15.3 15.7 15.6 16.0 ---------------- ---------------- --------------- ---------------- Other income (expense): Investment income............................. 0.1 0.1 0.1 0.1 Interest expense.............................. (0.1) (0.1) (0.1) (0.2) Impairment of Chevys note receivable.......... -- -- -- (1.2) Other income.................................. 0.2 0.2 0.2 0.1 ---------------- ---------------- --------------- ---------------- Total other income (expense)............. 0.2 0.1 0.1 (1.1) ---------------- ---------------- --------------- ---------------- Earnings before income taxes...................... 15.5 15.8 15.7 14.8 Income taxes...................................... 5.4 5.7 5.5 5.3 ---------------- ---------------- --------------- ---------------- Net earnings...................................... 10.1% 10.1% 10.2% 9.5% ================ ================ =============== ================
-19- 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 26, September 28, September 26, September 28, 2004 2003 2004 2003 ------------- ------------- -------------- ------------- Number of restaurants: Company: Beginning of period....................... 405 373 383 357 Restaurant openings....................... 9 8 21 15 Restaurants closed........................ (1) -- (1) (2) Restaurants acquired from franchisees..... -- -- 10 11 Restaurants acquired by franchisees....... -- (9) -- (9) ------------- ------------- -------------- ------------- End of period............................. 413 372 413 372 ------------- ------------- -------------- ------------- Franchise: Beginning of period....................... 1,207 1,155 1,202 1,139 Restaurant openings....................... 21 12 40 41 Restaurants closed(1)..................... (4) (5) (8) (7) Restaurants acquired from franchisees..... -- -- (10) (11) Restaurants acquired by franchisees....... -- 9 -- 9 ------------- ------------- -------------- ------------- End of period............................. 1,224 1,171 1,224 1,171 ------------- ------------- -------------- ------------- Total: Beginning of period....................... 1,612 1,528 1,585 1,496 Restaurant openings....................... 30 20 61 56 Restaurants closed........................ (5) (5) (9) (9) ------------- ------------- -------------- ------------- End of period............................. 1,637 1,543 1,637 1,543 ============= ============= ============== ============= Weighted average weekly sales per restaurant: Company........................................ $ 46,365 $ 45,976 $ 47,489 $ 45,356 Franchise...................................... $ 47,253 $ 45,760 $ 48,258 $ 45,637 Total.......................................... $ 47,027 $ 45,812 $ 48,067 $ 45,569 Change in comparable restaurant sales:(2) Company........................................ 1.1% 5.9% 5.0% 5.2% Franchise...................................... 3.1% 4.4% 5.9% 3.5% Total.......................................... 2.7% 4.8% 5.6% 3.9% Total operating revenues (in thousands): Company restaurant sales....................... $ 247,173 $ 222,429 $ 738,502 $ 650,946 Franchise royalties and fees(3)................ 30,105 27,594 91,656 82,088 Other franchise income(4)...................... 3,913 2,972 10,427 8,881 ------------- ------------- -------------- ------------- Total.......................................... $ 281,191 $ 252,995 $ 840,585 $ 741,915 ============= ============= ============== =============
(1) Subsequent to the end of the quarter, 12 franchise restaurants in the Memphis, Tennessee area were closed. (2) When computing comparable restaurant sales, restaurants open for at least 18 months are compared from period to period. (3) Franchise royalties are generally 4% of each franchise restaurant's reported monthly gross sales. Reported franchise sales, in thousands, were $746,239 and $687,292 in the 2004 quarter and the 2003 quarter, respectively, and $2,274,777 and $2,047,735 in the 2004 year-to-date and 2003 year-to-date period, respectively. Franchise fees typically range from $30,000 to $35,000 for each restaurant opened. (4) Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees. -20- Company Restaurant Sales. Total company restaurant sales increased $24,744,000 (11%) from $222,429,000 in the 2003 quarter to $247,173,000 in the 2004 quarter and increased $87,556,000 (13%) from $650,946,000 in the 2003 year-to-date period to $738,502,000 in the 2004 year-to-date period. Company restaurant openings contributed approximately 8% of the increase in total company restaurant sales in both the 2004 quarter and the 2004 year-to-date period. Increases in weighted average weekly sales contributed approximately 1% and 5% of the total company sales increase in the 2004 quarter and 2004 year-to-date period, respectively. Both periods were also favorably impacted by the acquisition of 10 restaurants in Southern California in April 2004 which was partially offset by the impact of the sale of 8 restaurants in the Atlanta, Georgia market in July 2003. Comparable restaurant sales at company restaurants increased by 1.1% and 5.0% in the 2004 quarter and the 2004 year-to-date period, respectively. Weighted average weekly sales at company restaurants increased 0.8% from $45,976 in the 2003 quarter to $46,365 in the 2004 quarter and increased 4.7% from $45,356 in the 2003 year-to-date period to $47,489 in the 2004 year-to-date period. These increases were due primarily to increases in the average guest check resulting from a menu price increase of approximately 1.5% in both periods and increases in guest traffic in the 2004 year-to-date period. In addition, a portion of the increase resulted from the implementation of our Carside To Go(TM) initiative. Carside To Go(TM) sales mix increased from 6.9% of company restaurant sales in the 2003 quarter to 8.9% of company restaurant sales in the 2004 quarter. Franchise Royalties and Fees. Overall franchise royalties and fees increased $2,511,000 (9%) from $27,594,000 in the 2003 quarter to $30,105,000 in the 2004 quarter and increased $9,568,000 (12%) from $82,088,000 in the 2003 year-to-date period to $91,656,000 in the 2004 year-to-date period. These increases were due primarily to the increased number of franchise restaurants operating during the 2004 quarter and 2004 year-to-date period as compared to the same periods in 2003 and increases in comparable restaurant sales. Weighted average weekly sales at franchise restaurants increased 3.3% and 5.7% in the 2004 quarter and 2004 year-to-date period, respectively, and franchise comparable restaurant sales increased 3.1% and 5.9% in the 2004 quarter and 2004 year-to-date period, respectively. Other Franchise Income. Other franchise income increased $941,000 (32%) from $2,972,000 in the 2003 quarter to $3,913,000 in the 2004 quarter and increased $1,546,000 (17%) from $8,881,000 in the 2003 year-to-date period to $10,427,000 in the 2004 year-to-date period due primarily to revenues recognized related to the franchise premium amounts billed by the captive insurance company. Franchise premiums are included in other franchise income ratably over the policy year. Cost of Company Restaurant Sales. Food and beverage costs increased from 25.7% in the 2003 quarter to 26.3% in the 2004 quarter and increased from 26.0% in the 2003 year-to-date period to 26.4% in the 2004 year-to-date period. The increases in both the 2004 quarter and 2004 year-to-date period were due primarily to higher commodity costs and higher food costs related to new menu items and were partially offset by menu price increases. The 2004 year-to-date period was also unfavorably impacted by the company portion of the impairment of approximately $500,000 for excess riblet inventories which no longer met our quality standards. Labor costs decreased from 32.8% in the 2003 quarter to 32.2% in the 2004 quarter and decreased from 32.8% in the 2003 year-to-date period to 32.5% in the 2004 year-to-date period. The decreases were due to lower management costs due to higher sales volumes at company restaurants in the 2004 year-to-date period and lower management incentive compensation in both the 2004 quarter and the 2004 year-to-date period. These decreases were partially offset by higher costs related to the addition of dedicated Carside To Go(TM) hourly labor at most of our restaurants beginning in the second half of 2003, increased hourly labor wage rates and higher workers' compensation costs. -21- Direct and occupancy costs decreased from 25.1% in the 2003 quarter and 24.7% in the 2003 year-to-date period to 24.9% in the 2004 quarter and 24.5% in the 2004 year-to-date period. The decrease in the 2004 quarter was due primarily to lower advertising costs, as a percentage of sales, due to the timing of our menu promotions. The decrease in the 2004 year-to-date period was due primarily to higher sales volumes at company restaurants which resulted in favorable depreciation expense, rent expense and repairs and maintenance expense, as a percentage of sales, due to their relatively fixed nature. In addition, decreases in both periods were partially offset by higher packaging costs as a result of increased Carside To Go(TM) sales volumes. Cost of Other Franchise Income. Cost of other franchise income increased $684,000 (24%) from $2,837,000 in the 2003 quarter to $3,521,000 in the 2004 quarter and increased $2,983,000 (35%) from $8,510,000 in the 2003 year-to-date period to $11,493,000 in the 2004 year-to-date due primarily to an increase in costs related to the operation of our captive insurance company and the franchisee portion of the inventory impairment of approximately $1,600,000 in the 2004 year-to-date period for excess riblet inventories which no longer met our quality standards. General and Administrative Expenses. General and administrative expenses increased from 9.3% in the 2003 quarter to 9.5% in the 2004 quarter and decreased from 9.3% in the 2003 year to date period to 9.2% in the 2004 year-to-date period. General and administrative expenses were favorably impacted in both periods by the absorption of general and administrative expenses over a larger revenue base and lower incentive compensation. In addition, both periods were unfavorably impacted by higher compensation expense due to staffing levels and costs associated with compliance with Section 404 of the Sarbanes-Oxley Act. Impairment of Chevys Note Receivable. In June 2003, Chevys announced the sale of the majority of its restaurants. Subsequent to the announcement, we received Chevys' audited financial statements for the fiscal year ended December 31, 2002. During the fiscal quarter ended June 29, 2003, we fully impaired the principal and accrued interest of approximately $8,800,000. In October 2003, Chevys Inc. filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Income Taxes. The effective income tax rate, as a percentage of earnings before income taxes, decreased from 36.0% in both the 2003 quarter and the 2003 year-to-date period to 35.0% in both the 2004 quarter and the 2004 year-to-date period due to a reduction in state and local income taxes. Liquidity and Capital Resources Our need for capital historically has resulted from the construction and acquisition of restaurants, the repurchase of our common shares and investment 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 $82,562,000 in 2003 (excluding the acquisition of 11 restaurants) and $68,224,000 in the 2004 year-to-date period (excluding the acquisition of 10 restaurants and lease acquisition costs). We currently expect to open at least 32 company restaurants, and capital expenditures, excluding acquisitions, are expected to be between $95,000,000 and $105,000,000 in 2004. These expenditures will primarily be for the development of new restaurants, -22- refurbishment and capital replacement for existing restaurants, the enhancement of information systems and lease acquisition costs. 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 April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. In addition, we acquired six restaurant leases for approximately $4,900,000 in cash in the 2004 year-to-date period. On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. Our bank credit agreement, as amended, expires in November of 2005 and provides for a $150,000,000 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. As of September 26, 2004, we had borrowings of $41,000,000, which included $3,000,000 in short-term borrowings, and had standby letters of credit of approximately $11,970,000 outstanding under our revolving credit facility. Our Board of Directors authorized repurchases of our common stock of up to $75,000,000 and $80,000,000 in 2002 and 2003, respectively. As of December 28, 2003, we had $99,800,000 remaining on our authorizations. During the 2004 year-to-date period, we repurchased 3,504,970 shares of our common stock at an average price of $25.17 for an aggregate cost of $88,200,000. As of September 26, 2004, we had $11,500,000 remaining under our repurchase authorization. In October 2004, our Board of Directors authorized additional repurchases of up to $150,000,000 beginning in 2005 and approved a written plan for repurchases of our common stock in the open market in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. As of September 26, 2004, our liquid assets totaled $722,000. These assets consisted of cash and cash equivalents in the amount of $441,000 and short-term investments in the amount of $281,000. The working capital deficit decreased from $62,710,000 as of December 28, 2003 to $49,270,000 as of September 26, 2004. This decrease was due primarily to the redemption of gift cards in 2004 sold in 2003, repurchases of our common stock and increases in inventories and receivables and was partially offset by increases in loss reserve and unearned premiums related to the captive insurance subsidiary. -23- Our deferred income taxes liability increased from $5,880,000 as of December 28, 2003 to $32,141,000 as of September 26, 2004 which contributed to an increase in our cash flows from operating activities of $26,638,000 in our consolidated statement of cash flows for the 39 weeks ended September 26, 2004. In 2004, we implemented new tax planning strategies that accelerated depreciation on restaurant assets. 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 debt amortization schedule, future capital lease commitments (including principal and interest payments), future operating lease commitments and future purchase obligations as of September 26, 2004 (in thousands):
Payments due by period ---------------------------------------------------------------------- Certain Less than 1 1-3 3-5 More than 5 Contractual Obligations Total year Years years years - ------------------------------------------------- ------------- ------------- ------------- ------------- ------------- Long-term Debt (excluding capital lease obligations)............................. $ 42,575 $ 3,121 $ 38,227 $ 87 $ 1,140 Capital Lease Obligations........................ 9,388 760 1,602 1,671 5,355 Operating Leases................................. 256,248 22,968 44,802 41,832 146,646 Purchase Obligations - Company(1)................ 223,771 176,369 31,432 12,043 3,927 Purchase Obligations - Franchise(2)............. 529,551 419,532 76,768 21,613 11,638
(1) The amounts for company purchase obligations include commitments for food items and supplies, severance and employment agreements, and other miscellaneous commitments. (2) The amounts for franchise purchase obligations include commitments for food items and supplies made by Applebee's International, Inc. for our franchisees. Applebee's International, Inc. contracts with certain suppliers to ensure competitive pricing. These amounts will only be payable by Applebee's International, Inc. if our franchisees do not meet certain minimum contractual requirements. Other Contractual Obligations We have outstanding lease guarantees of approximately $19,200,000 as of September 26, 2004 (see Note 3). We have not recorded a liability for these guarantees as of September 26, 2004 or December 28, 2003. 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 26, 2004, we would have been required to make payments totaling approximately $12,300,000. 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 $7,200,000 if such officers had been terminated as of September 26, 2004. In November 2003, we arranged for a financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments. Under the terms of this financing program, we will provide a limited guarantee pool for the loans advanced during the three-year period -24- ending December 2006. There was one loan outstanding for approximately $800,000 under this program as of September 26, 2004. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of September 26, 2004. In May 2004, we arranged for a financing company to provide up to $250,000,000 to qualified franchisees for loans to fund development of new restaurants through October 2007. We will provide a limited guarantee of certain loans advanced under this program. As of September 26, 2004, there was one loan outstanding for approximately $2,400,000 under this program. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of September 26, 2004. 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 Pronouncement In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51." This interpretation, which replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation is required in financial statements for periods ending after March 15, 2004 for those companies that have yet to adopt the provisions of FIN 46. We adopted FIN 46R in January 2004 and the initial adoption did not have a material impact on our consolidated financial statements. Forward-Looking Statements The statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section regarding restaurant development, 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 our ability and the ability of our franchisees to open and operate additional restaurants profitably, the ability -25- of our franchisees to obtain financing, the continued growth of our franchisees, our ability to attract and retain qualified franchisees, the impact of intense competition in the casual dining segment of the restaurant industry, and our ability to control restaurant operating costs which are impacted by market changes, minimum wage and other employment laws, food costs and inflation. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our current report on Form 8-K which we filed with the Securities and Exchange Commission on February 11, 2004. 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 0.625%, at our option. As of September 26, 2004, the total amount of debt subject to interest rate fluctuations was $41,000,000 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 $410,000 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. Many of the food products we purchase are subject to price volatility due to factors that are outside of our control such as available supply, weather and seasonality. As part of our strategy to moderate this volatility, we have entered into fixed price purchase commitments. Item 4. Controls and Procedures As of September 26, 2004, 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. During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. -26- PART II. OTHER INFORMATION Item 1. Legal Proceedings We are involved in various legal actions which include, without limitation, employment law related matters, dram shop claims, personal injury claims and other such normal restaurant operational matters. 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 our 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 statements. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Issuer Purchases of Equity Securities.
- ------------------------------------------------------------------------------------------------------------------------------ Purchases of Equity Securities(1) (2) - ------------------------------------------------------------------------------------------------------------------------------ - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- (a) (b) (c) (d) - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- Average Total Number of Shares Maximum Dollar Value of Shares Price Purchased as Part of that May Yet Be Purchased Under Total Number of Paid Per Publicly Announced Plans the Plans or Programs Period Shares Purchased Share or Programs (in thousands) - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- June 28, 2004 through July 27, 2004 3,850(3) $25.81 -- $46,532 - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- July 28, 2004 through August 27, 2004 597,906(4) $25.25 594,115 $31,532 - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- August 28, 2004 through September 26, 2004 813,405 $24.59 813,405 $11,532 - -------------------------------- ------------------ ---------- ---------------------------- ---------------------------------- Total 1,415,161 ================================ ================== ========== ============================ ==================================
(1) In May 2002, our Board of Directors authorized a repurchase of up to $75,000,000 of our common stock through May 2005. In December 2003, our Board of Directors authorized an additional repurchase of up to $80,000,000 of our common stock. The May 2002 authorization limit was met in January 2004. The December 2003 authorization has no expiration date. (2) All references to the number of shares have been restated to reflect a three-for-two stock split, effected as a 50% stock dividend, paid on June 15, 2004. (3) Represents shares received as partial payment for shares issued under stock option plans. (4) Included 3,791 shares received as partial payment for shares issued under stock option plans. Item 6. Exhibits The Exhibits listed on the accompanying Exhibit Index are filed as part of this report. -27- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLEBEE'S INTERNATIONAL, INC. (Registrant)
Date: October 27, 2004 By: /s/ Lloyd L. Hill --------------------------- --------------------------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) Date: October 27, 2004 By: /s/ Steven K. Lumpkin --------------------------- --------------------------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial officer) Date: October 27, 2004 By: /s/ Beverly O. Elving --------------------------- --------------------------------------------------------- Beverly O. Elving Vice President, Accounting (principal accounting officer)
-28- APPLEBEE'S INTERNATIONAL, INC. EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------------- ------------------------------------------------------------------------------------------------ 10.1 Form of Nonqualified Stock Option Agreement 10.2 Form of Incentive Stock Option Agreement 10.3 Form of Restricted Stock Award Agreement 10.4 New Form of Change in Control and Noncompete Agreement and schedule of parties thereto. 10.5 Amendment No. 2 to the Revolving Credit Agreement dated as of November 5, 2001 31.1 Certification of Chairman and Chief Executive Officer Pursuant to SEC Rule 13a-14 31.2 Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14 32 Certification of Chairman and Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
-29- EX-10 3 nonqstockoptagreement.txt NONQUALIFIED STOCK OPTION AGREEMENT Nonqualified Stock Option Agreement (Officer Participants In the Executive Retirement Plan) - -------------------------------------------------------------------------------- THIS STOCK OPTION AWARD AGREEMENT (the "Agreement") is made and entered into this <> (the "Grant Date"), between Applebee's International, Inc., a Delaware corporation (the "Corporation"), and <> (the "Holder") in connection with the grant of a Nonqualified Stock Option under the APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN (the "Plan"). - -------------------------------------------------------------------------------- WITNESSETH: WHEREAS, the Holder is either an employee of the Corporation or one of its Affiliates in a key position or a director of the Corporation or one of its Affiliates and the Corporation desires to encourage him to own Shares and to give him added incentive to advance the interests of the Corporation through the Plan and desires to grant the Holder a Nonqualified Stock Option to purchase Shares under terms and conditions established by the Board of Directors. NOW, THEREFORE, in consideration of these premises, the parties agree that the following, along with the terms and conditions set forth in the Plan, shall constitute the Agreement between the Corporation and the Holder: 1. Definitions. Capitalized terms used in this Agreement but not defined herein shall have the meaning set forth in the Plan. In addition, the following terms shall have the meanings specified below: 1.1 "Retirement" shall mean the satisfaction of all conditions necessary for the Holder to become entitled to receive benefits under the Corporation's Executive Retirement Plan. 1.2 "Securities Act" shall mean the Securities Act of 1933, as amended. -1- 2. Grant of Nonqualified Stock Option. Subject to the terms and conditions set forth herein and in the Plan, the Corporation grants to the Holder a Nonqualified Stock Option to purchase from the Corporation during the period ending ten (10) years from the Grant Date <> Shares at a price of <> per share, subject to adjustment as provided in the Plan. This Nonqualified Stock Option shall vest and become exercisable in full on and after the third anniversary of the Grant Date and, except as specifically provided otherwise herein or in the Plan, not before such date. 3. Notice of Exercise. This Nonqualified Stock Option may be exercised in whole or in part, from time to time, in accordance with Paragraph 2, by written notice to the Corporation at the address provided in Paragraph 14, which notice shall: (a) specify the number of Shares to be purchased and the Exercise Price to be paid therefor; (b) if the person exercising this Nonqualified Stock Option is not the Holder himself, contain or be accompanied by evidence satisfactory to the Committee of such person's right to exercise this Nonqualified Stock Option; and (c) be accompanied by payment in full of the Exercise Price in a form permitted by the Committee. 4. Investment Letter. The Holder agrees that the Shares acquired on exercise of this Nonqualified Stock Option shall be acquired for his own account for investment only and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act, or other applicable securities laws. If the Board of Directors or Committee so determines, any stock certificates issued upon exercise of this Nonqualified Stock Option shall bear a legend to the effect that the shares have been so acquired. The Corporation may, but in no event shall be required to, bear any expenses of complying with the Securities Act, other applicable securities laws or the rules and regulations of any national securities exchange or other regulatory authority in connection with the registration, qualification, or transfer, as the case may be, of this Nonqualified Stock Option or any Shares acquired upon the exercise thereof. The foregoing restrictions on the transfer of the Shares shall be inoperative if (a) the Corporation previously shall have been furnished with an opinion of counsel, satisfactory to it, to the effect that such transfer will not involve any violation of the Securities Act or other applicable laws or (b) the Shares shall have been duly registered in compliance with the Securities Act and other applicable securities laws. If this Nonqualified Stock Option is registered under the Securities Act, the Holder agrees that he will not make a public offering of the said shares except on a national securities exchange on which the Shares of the Corporation is then listed. 5. Transfer and Exercise of Nonqualified Stock Option. This Nonqualified Stock Option shall not be transferable except by will or by the laws of descent and distribution. During the Holder's lifetime this Nonqualified Stock Option may be exercised only by him. No assignment or transfer of this Nonqualified Stock Option, whether voluntary or involuntary, by operation of law or descent or distribution, shall vest in the assignee or transferee any interest or right whatsoever in this Nonqualified Stock Option. 6. Issue of Shares. The Corporation shall not be required to issue or transfer any certificates for Shares purchased upon exercise of this Nonqualified Stock Option until all applicable requirements of law have been complied with and such shares shall have been duly listed on any securities exchange on which the Shares may then be listed. -2- 7. No Effect on Capital Structure. This Nonqualified Stock Option shall not affect the right of the Corporation or any Affiliate thereof to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, liquidate, windup, or otherwise reorganize. 8. Expiration of Nonqualified Stock Option. This Nonqualified Stock Option expires ten (10) years from the date hereof. In the event of a Termination of Service of the Holder prior to the expiration of this Nonqualified Stock Option, the following rules shall apply: (a) Termination of Employment - Other than Disability, Death or Retirement. If there is a Termination of Service of the Holder for a reason other than the Holder's death, Disability or Retirement, the portion, if any, of this Nonqualified Stock Option that remains unexercised, shall terminate and cease to be exercisable ninety (90) days after the date of such Termination of Service and that portion, if any, that pursuant to this Agreement is not yet exercisable on such date, shall terminate and cease to be exercisable as of such date. (b) Termination of Employment - Disability. If there is a Termination of Service of the Holder by reason of Disability, the Holder shall have the right for one (1) year after the date of Termination of Service to exercise this Nonqualified Stock Option to the extent this Nonqualified Stock Option is exercisable on the date of such Termination of Service, and thereafter, this Nonqualified Stock Option shall terminate and cease to be exercisable. (c) Termination of Employment - Death. If there is a Termination of Service of the Holder by reason of death, this Nonqualified Stock Option shall be exercisable by the Holder's legal representatives, legatees, or distributes for one (1) year following the date of the Termination of Service, to the extent this Nonqualified Stock Option is exercisable on the date of such Termination of Service, and thereafter this Nonqualified Stock Option shall terminate and cease to be exercisable. (d) Termination of Employment - Retirement. If there is a Termination of Service of the Holder by reason of Retirement, the vesting and exercisability of this Nonqualified Stock Option shall be determined under the Applebee's International, Inc. Executive Retirement Plan. 9. Change in Control. The effect of a Change in Control shall be as set forth in either the Change in Control and Noncompete Agreement entered into between the Holder and the Corporation, or, in the event Holder has not entered into a Change in Control and Noncompete Agreement, the Holder's employment agreement with the Corporation. In the event the Holder has not entered into either a Change in Control and Noncompete Agreement or an employment agreement with the Corporation (or Holder has entered into an agreement but such agreement does not address the effect of a Change in Control on this Agreement), the effect of a Change in Control shall be as set forth in the Plan. 10. Right of Set-off. By accepting this agreement, Holder consents to a deduction from any amounts the Corporation owes Holder from time to time (including amounts owed to Holder as wages or other compensation, fringe benefits, or vacation pay), to the extent of the amounts owed by Holder to the Corporation hereunder. Whether or not the Corporation -3- elects to make any set-off in whole or in part, if the Corporation does not recover by means of set-off the full amount owed it by Holder, calculated as set forth above, Holder agrees to pay immediately in cash the unpaid balance to the Corporation. 11. Committee Discretion. Holder may be released from its obligations under paragraph 10 above only if the Committee determines in its sole discretion that such action is in the best interests of the Corporation. 12. Committee Authority. Any questions concerning the interpretation of this Agreement or the Plan, and any controversy which arises under this Agreement or the Plan shall be settled by the Committee in its sole discretion. 13. Plan Controls. The terms of this Agreement are governed by the terms of the Plan and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. 14. Notice. Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed to be delivered on the date which it was personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Corporation or Holder may change, at any time and from time to time, by written notice to the other, the address previously specified for receiving notices. Until changed in accordance herewith, the Corporation and the Holder specify their respective addresses as set forth below: Corporation: APPLEBEE'S INTERNATIONAL, INC. 4551 W. 107TH STREET OVERLAND PARK, KS 66207 Holder: <> 4551 W. 107TH STREET OVERLAND PARK, KS 66207 15. Information Confidential. As partial consideration for the granting of this Nonqualified Stock Option, the Holder agrees that he will keep confidential all information and knowledge that he has relating to the manner and amount of his participation in the Plan, provided, however, that such information may be disclosed as required by law and may be given in confidence to the Holder's spouse, tax and financial advisors, or to a financial institution of the extent that such information is necessary to secure a loan. 16. Governing Law. Where applicable, the provisions of this Agreement shall be governed by the contract law of the State of Kansas. -4- IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed and the Holder has hereunto set his hand on the day and year first above written. APPLEBEE'S INTERNATIONAL, INC. Name: ---------------------------------- Name: Lloyd L. Hill Title: Chairman & Chief Executive Officer Holder ----------------------------------------- Name: <> -5- EX-10 4 incentivestockoptagree.txt INCENTIVE STOCK OPTION AGREEMENT Incentive Stock Option Agreement (Officer Participants in Executive Retirement Plan) - -------------------------------------------------------------------------------- THIS STOCK OPTION AWARD AGREEMENT (the "Agreement") is made and entered into this <> (the "Grant Date") between Applebee's International, Inc., a Delaware corporation (the "Corporation"), and <> (the "Holder") in connection with the grant of an Incentive Stock Option under the APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN (the "Plan"). - -------------------------------------------------------------------------------- WITNESSETH: WHEREAS, the Holder is an employee of the Corporation or one of its Affiliates and the Corporation desires to encourage him to own Shares and to give him added incentive to advance the interests of the Corporation through the Plan and desires to grant the Holder an Incentive Stock Option to purchase Shares under terms and conditions established by the Board of Directors. NOW, THEREFORE, in consideration of these premises, the parties agree that the following, along with the terms and conditions set forth in the Plan, shall constitute the Agreement between the Corporation and the Holder: 1. Definitions. Capitalized terms used in this Agreement but not defined herein shall have the meaning set forth in the Plan. In addition, the following terms shall have the meanings specified below: 1.1 "Retirement" shall mean the satisfaction of all conditions necessary for the Holder to become entitled to receive benefits under the Corporation's Executive Retirement Plan. 1.2 "Securities Act" shall mean the Securities Act of 1933, as amended. 2. Grant of Incentive Stock Option and Termination. Subject to the terms and conditions set forth herein and in the Plan, the Corporation grants -1- to the Holder an Incentive Stock Option to purchase from the Corporation during the period ending ten (10) years from the Grant Date (the "Expiration Date") <> Shares at a price of <> per share, subject to adjustment as provided in the Plan. 3. Exercise. During the Holder's lifetime, only he may exercise this Incentive Stock Option, as the case may be. This Incentive Stock Option shall vest and become exercisable in full on or after the third anniversary of the Grant Date and, except as specifically provided otherwise herein or in the Plan, not before such date. 4. Notice of Exercise. This Incentive Stock Option may be exercised in whole or in part, from time to time, in accordance with Paragraphs 2 and 3, by written notice to the Corporation at the address provided in Paragraph 17, which notice shall: (a) specify the number of Shares to be purchased and the Exercise Price to be paid therefor; (b) if the person exercising this Incentive Stock Option is not the Holder himself, contain or be accompanied by evidence satisfactory to the Committee of such person's right to exercise this Incentive Stock Option; and (c) be accompanied by payment in full of the Exercise Price in a form permitted by the Committee. 5. Investment Letter. The Holder agrees that the Shares acquired on exercise of this Incentive Stock Option shall be acquired for his own account for investment only and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act, or other applicable securities laws. If the Board of Directors or Committee so determines, any stock certificates issued upon exercise of this Incentive Stock Option shall bear a legend to the effect that the shares have been so acquired. The Corporation may, but in no event shall be required to, bear any expenses of complying with the Securities Act other applicable securities laws or the rules and regulations of any national securities exchange or other regulatory authority in connection with the registration, qualification, or transfer, as the case may be, of this Incentive Stock Option or any Shares acquired upon the exercise thereof. The foregoing restrictions on the transfer of the Shares shall be inoperative if (a) the Corporation previously shall have been furnished with an opinion of counsel, satisfactory to it, to the effect that such transfer will not involve any violation of the Securities Act or other applicable laws or (b) the Shares shall have been duly registered in compliance with the Securities Act and other applicable securities laws. If this Incentive Stock Option is so registered under the Securities Act, the Holder agrees that he will not make a public offering of the said shares except on a national securities exchange on which the Shares of the Corporation are then listed. 6. Transfer of Option. The Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution. No assignment or transfer of this Incentive Stock Option, whether voluntary or involuntary, by operation of law or descent or distribution, shall vest in the assignee or transferee any interest or right whatsoever in this Incentive Stock Option. 7. Issue of Shares. The Corporation shall not be required to issue or transfer any certificates for Shares purchased upon exercise of this Incentive Stock Option until all applicable requirements of law have been complied with and such shares shall have been duly listed on any securities exchange on which the Shares may then be listed. -2- 8. No Effect on Capital Structure. This Incentive Stock Option shall not affect the right of the Corporation or any Affiliate thereof to reclassify, recapitalize or otherwise change its capital or debt structure or to merge, consolidate, convey any or all of its assets, dissolve, liquidate, windup, or otherwise reorganize. 9. Expiration of Option. This Incentive Stock Option shall expire on the Expiration Date. In the event of a Termination of Service of the Holder prior to the expiration of this Incentive Stock Option, the following rules shall apply: (a) Termination of Employment - Other than Disability, Death or Retirement. If there is a Termination of Service of the Holder for a reason other than the Holder's death, Disability or Retirement, the portion of this Incentive Stock Option, if any, that remains unexercised shall terminate and cease to be exercisable three (3) months after the date of such Termination of Service and that portion, if any, that pursuant to this Agreement is not yet exercisable on the date of such Termination of Service, shall terminate and cease to be exercisable as of such date. (b) Termination of Employment - Disability. If there is a Termination of Service of the Holder by reason of Disability, the Holder shall have the right for one (1) year after such Termination of Service to exercise this Incentive Stock Option to the extent this Incentive Stock Option is exercisable on such Termination of Service date and thereafter, this Incentive Stock Option shall terminate and cease to be exercisable. (c) Termination of Employment - Death. If there is a Termination of Service of the Holder by reason of death, this Incentive Stock Option shall be exercisable by the Holder's legal representatives, legatees, or distributees for one (1) year following the date of the Holder's death to the extent this Incentive Stock Option is exercisable on the Holder's date of death, and thereafter this Incentive Stock Option shall terminate and cease to be exercisable. (d) Termination of Employment - Retirement. If there is a Termination of Service of the Holder by reason of Retirement, the vesting and exercisability of this Incentive Stock Option shall be determined under the Applebee's International, Inc. Executive Retirement Plan; provided that exercise may not occur after the Expiration Date. 10. Change in Control. The effect of a Change in Control shall be as set forth in either the Change in Control and Noncompete Agreement entered into between the Holder and the Corporation, or, in the event Holder has not entered into a Change in Control and Noncompete Agreement, the Holder's employment agreement with the Corporation. In the event the Holder has not entered into either a Change in Control and Noncompete Agreement or an employment agreement with the Corporation (or Holder has entered into an agreement but such agreement does not address the effect of a Change in Control on this Agreement), the effect of a Change in Control shall be as set forth in the Plan. 11. Committee Authority. Any questions concerning the interpretation of this Agreement or the Plan, and any controversy which arises under this Agreement or the Plan shall be settled by the Committee in its sole discretion. -3- 12. Right of Set-off. By accepting this agreement, Holder consents to a deduction from any amounts the Corporation owes Holder from time to time (including amounts owed to Holder as wages or other compensation, fringe benefits, or vacation pay), to the extent of the amounts owed by Holder to the Corporation hereunder. Whether or not the Corporation elects to make any set-off in whole or in part, if the Corporation does not recover by means of set-off the full amount owed it by Holder, calculated as set forth above, Holder agrees to pay immediately in cash the unpaid balance to the Corporation. 13. Committee Discretion. Holder may be released from its obligations under paragraph 12 above only if the Committee determines in its sole discretion that such action is in the best interests of the Corporation. 14. Notice of Disqualifying Disposition. In order to enable the Corporation to avail itself of any income tax deduction to which it may be entitled, the Holder shall notify the Corporation of his intent to dispose of any of the Shares purchased pursuant to this Incentive Stock Option within two (2) years from the date of the grant of the Incentive Stock Option and one (1) year from the date of exercise of the Incentive Stock Option. Promptly after such disposition the Holder shall notify the Corporation of the number of Shares disposed of, the dates of acquisition and disposition of such shares, and the consideration, if any, received on such disposition. If, in connection with any such disposition, the Corporation becomes liable for withholding taxes and has no amounts owing the Holder with which to discharge its withholding obligation, the Holder shall provide the Corporation with the amount needed to discharge the Corporation's withholding obligation and shall indemnify the Corporation against any penalties it may incur through its inability to apply amounts owing the Holder in discharge of its withholding obligations. Nothing in this Paragraph 14 shall give the Holder any right to dispose of the Shares in a manner that is inconsistent with any Paragraph of this Agreement, the Plan, or any stock transfer restriction agreement entered into by the Holder. 15. Incentive Option Qualification. This Incentive Stock Option is intended to qualify as an "incentive stock option" within the meaning of Section 422A of the Code, and shall be so construed; provided, however, that nothing in this Agreement shall be interpreted as a representation, guarantee or other undertaking on the part of the Corporation that this Incentive Stock Option is or will be determined to be an "incentive stock option" within such section or any other section of the Code. Any acceleration, exercise more than three (3) months after termination of employment, or extension of exercisability pursuant to this Agreement, the Plan, or pursuant to the Change in Control and Noncompete Agreement between the Holder and the Corporation may result in this Incentive Stock Option ceasing to qualify as any incentive stock option, or may result in the tax benefits of such status not being available, as of the date such acceleration or extension takes effect, or as of the date of exercise more than three (3) months after termination of employment. 16. Plan Controls. The terms of this Agreement are governed by the terms of the Plan and in the case of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. 17. Notice. Whenever any notice is required or permitted hereunder, such notice must be in writing and personally delivered or sent by mail. Any notice required or permitted to be delivered hereunder shall be deemed -4- to be delivered on the date which it was personally delivered, or, whether actually received or not, on the third business day after it is deposited in the United States mail, certified or registered, postage prepaid, addressed to the person who is to receive it at the address which such person has theretofore specified by written notice delivered in accordance herewith. The Corporation or Holder may change, at any time and from time to time, by written notice to the other, the address previously specified for receiving notices. Until changed in accordance herewith, the Corporation and the Holder specify their respective addresses as set forth below: Corporation: APPLEBEE'S INTERNATIONAL, INC. 4551 W. 107TH STREET OVERLAND PARK, KS 66207 Holder: <> 4551 W. 107TH STREET OVERLAND PARK, KS 66207 18. Information Confidential. As partial consideration for the granting of this Incentive Stock Option, the Holder agrees that he will keep confidential all information and knowledge that he has relating to the manner and amount of his participation in the Plan, provided, however, that such information may be disclosed as required by law and may be given in confidence to the Holder's spouse, tax and financial advisors, or to a financial institution of the extent that such information is necessary to secure a loan. 19. Governing Law. Where applicable, the provisions of this Agreement shall be governed by the contract law of the State of Kansas. IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed and the Holder has hereunto set his hand on the day and year first above written. APPLEBEE'S INTERNATIONAL, INC. By: -------------------------------------- Name: Lloyd L. Hill Title: Chairman & Chief Executive Officer Holder ----------------------------------------- Name: <> -5- EX-10 5 restrictedstockagree.txt RESTRICTED STOCK AWARD AGREEMENT Applebee's International, Inc AMENDED AND RESTATED 1995 Equity incentive plan Restricted Stock Award Agreement - -------------------------------------------------------------------------------- This Restricted Stock Award Agreement ( the "Agreement") is made this <> with <> (the "Grantee") and evidences the grant by Applebee's International, Inc. (the "Company") of a Restricted Stock Award (the "Award") to the Grantee on the date hereof (the "Grant Date"). By executing this Agreement, the Grantee agrees to be bound in accordance with the provisions of the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan (the "Plan"). Defined terms used but not defined herein shall have the same meaning as used in the Plan. 1. Shares Awarded and Restrictions on Shares. The Grantee is hereby awarded <> shares of the Company's common stock, $.01 par value (the "Restricted Shares"), which are subject to forfeiture and to the restriction on the rights of sale and transfer set forth in this document and further subject to the terms and conditions of the Plan, the provisions of which are hereby incorporated in this document by reference. 2. Sale or Transfer Restrictions. Except as provided in Paragraph 6 below, all Restricted Shares shall be held by the Grantee without the rights of sale or transfer, and subject to forfeiture as provided in Paragraph 3 below; provided, however, that such restrictions shall lapse as of [vesting date(s)]. 3. Employment Requirement. Except as provided in Paragraph 6 below, in the event the Grantee's employment with the Company or any of its Affiliates terminates prior to the dates specified in Paragraph 2, above, any portion of the Restricted Shares which remains restricted will be forfeited by the Grantee and become the property of the Company. For purposes of this document, an authorized leave of absence (authorized by the Company to the Grantee in writing) shall not be deemed a termination of employment hereunder. 4. Issuance of Restricted Shares. Restricted Shares will be issued in the name of the Grantee and shall be held in escrow by the Company in accordance with the terms of the Plan. When the prohibited sale and transfer restrictions lapse under Paragraph 2, above, with respect to -1- all or a portion of the Restricted Shares, provided the Restricted Shares have not been forfeited under Paragraph 3, above, the Company shall deliver to the Grantee the stock certificate for the Restricted Shares or such portion thereof. The Company is not acting as a fiduciary and has no obligations other than as set forth in the Plan and this Award. The Company may cancel the Restricted Shares if forfeited hereunder and the Grantee shall deliver herewith any instrument requested by the Company to effect such cancellation. 5. Voting and Other Rights of Restricted Shares. Upon the issuance of the Restricted Shares, the Grantee shall have all of the rights of a stockholder of the Company, including the right to receive dividends and to vote the Restricted Shares until the date as of which such shares may have been forfeited to the Company as provided in Paragraph 3 above. Notwithstanding the foregoing, in the event of any stock dividend, stock split, division of shares or other corporate structure change which results in the issuance of additional shares with respect to Restricted Shares prior to the date as of which the certificate for such Restricted Shares is to be delivered to the Grantee, such shares shall be held by the Company and shall become Restricted Shares. 6. Acceleration of Release of Restrictions. The forfeiture and prohibited sale and transfer restrictions on the Restricted Shares shall immediately lapse on the earliest of the following: (a) The Grantee's date of death; (b) The Disability of the Grantee; or (c) The Retirement of the Grantee, unless the Grantee has entered into an employment agreement or Change in Control and Noncompete Agreement with the Company and participates in the Company's Executive Retirement Plan, in which case the effect on the Restricted Shares of the Grantee's Retirement shall be as set forth in the terms of the Company's Executive Retirement Plan. 7. Taxes. The Grantee will be solely responsible for any federal, state or local income taxes imposed in connection with the granting of the Restricted Shares or the delivery of such shares pursuant thereto, and the Grantee authorizes the Company or any Affiliate to make any withholding for taxes which the Company or any Affiliate deems necessary or proper in connection therewith. Upon recognition of income by the Grantee with respect to the Award hereunder, the Company shall withhold taxes pursuant to Section 13 of the Plan. 8. Changes in Circumstances. It is expressly understood and agreed that the Grantee assumes all risks incident to any change hereafter in the applicable laws or regulations or incident to any change in the market value of the Restricted Shares after the date hereof. 9. No Conflict. In the event of a conflict between this Award and the Plan, the provisions of the Plan shall govern. 10. Governing Law. This award shall be governed under the laws of the State of Kansas. -2- 11. Change of Control. The effect of a Change in Control shall be as set forth in either the Change in Control and Noncompete Agreement entered into between Grantee and Company, or, in the event Grantee has not entered into a Change in Control and Noncompete Agreement, the Grantee's employment agreement with the Company. In the event the Grantee has not entered into either a Change in Control and Noncompete Agreement or an employment agreement with the Company (or Grantee has entered into an agreement but such agreement does not address the effect of a Change in Control on this Agreement), the effect of a Change in Control shall be as set forth in the Plan. Applebee's International, Inc - ----------------------------------- By: Lloyd Hill Title: Chairman and Chief Executive Officer ACKNOWLEDGEMENT The undersigned Grantee acknowledges that he or she understands and agrees to be bound by each of the terms and conditions of this Agreement. - --------------------------------------------- Name of Grantee -3- EX-10 6 noncompeteagree.txt NONCOMPETE AGREEMENT APPLEBEE'S INTERNATIONAL, INC. CHANGE IN CONTROL AND NONCOMPETE AGREEMENT This Agreement is between APPLEBEE'S INTERNATIONAL, INC. ("AII"), and ____________________ ("you"). This Agreement is dated ____________________. The terms of this Agreement are set forth in the following questions and answers. What do "AII" and "Company" mean? "AII" means Applebee's International, Inc. "Company" means AII and all of its wholly-owned subsidiaries or subsidiaries of subsidiaries now or hereafter in existence. What is the purpose of this Agreement? The Company wants to encourage continuity of management and to protect its management personnel against financial hardship in the event of a change in control by offering the "Change in Control Benefits." The Company also wants to specify your obligations to the Company with respect to non-competition, non-solicitation, confidential information and discoveries (your "Obligations"). You are willing to agree to Your Obligations in exchange for the Company's promise to provide the Change in Control Benefits if a "change in control" were to occur. CHANGE IN CONTROL BENEFITS: What must happen before I'm eligible for "change in control" benefits? All of the following must occur: o Both you and AII must have signed this Agreement o A "change in control" must occur What does "change in control" mean?" "Change in Control" means any one of the following: > continuing Directors no longer constitute at least 2/3 of AII's board of directors (the "Board of Directors"); or > 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 AII's then outstanding common stock or thirty percent (30%) or more of the combined voting power of AII's then outstanding securities (calculated in accordance with Section 13(d)(3) or 14(d) of the Exchange Act) entitled generally to vote for the election of AII's directors; or > the merger or consolidation of AII with any other corporation, the sale of substantially all of the assets of -1- AII or the liquidation or dissolution of AII, 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 > at least 2/3 of the then Continuing Directors in office immediately prior to any other action proposed to be taken by AII's stockholders or by AII's Board of Directors determine that such proposed action, if taken, would constitute a change in control of the Corporation and such action is taken. "Continuing Director" means any individual who either (i) was a member of AII's Board of Directors (a "Director") 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. What if control of only a subsidiary changes? No Change in Control Benefits will be available even if you work for the affected subsidiary. Change in control benefits will be offered only if there were to be a change in the control of AII. o Your employment with the Company (or its successor) must terminate within 18 months following the "change in control" and it must terminate in one of two ways: Either: > by the Company or its successor without "cause" What is "cause"? >> The Executive is convicted of - or pleads no contest / nolo contendre to - any felony or any criminal offense involving fraud; or >> The Executive is determined by a government agency or court to have violated this Agreement or any applicable local, state or federal employment law, including, but not limited to, any anti-discrimination law. Or: > Or by you for "good reason" at a time when "cause" does not exist. What is "good reason"? The Company (or its successor) - >> reduces your compensation or benefits as in effect prior to the change in control; or -2- >> requires you to relocate more than 50 miles from the metropolitan area in which you worked prior to the Change in Control; or >> reduces your responsibilities. If I believe I have "good reason" to quit, must I notify AII (or its successor)? Yes. The Company (or its successor) must receive written notice from you that describes the basis for "good reason" within 30 days after the event that constitutes "good reason". Will the Company (or its successor) have a right to fix it by eliminating the circumstances that constitute "good reason"? Yes. The fix must occur within 10 days after receipt of notice from you. If it is fixed, you may not quit for "good reason." What are the "change in control" benefits? The following benefits will apply if, and only if, you become "eligible" for "change in control" benefits: o Bonus: How much? > First, determine the sum of: >> your annual base salary in effect before the change in control, plus >> the greater of - (i) your average bonus for the three fiscal years preceding the change in control, or (ii) your target bonus for the fiscal year in which your employment terminates. > Second, divide that sum by 12. > Third, multiply the result by 20 (or by 24, if you are a member of the Company's "Senior Team" at the time of the change in control, as determined by the Company immediately prior to the change in control, in its sole and absolute discretion). How will this be paid? Lump sum, in cash. When will it be paid? By the next payroll processing date that occurs at least five business days after you terminate employment. o Company payment of Health Plan premiums: How much? All of the premiums. What if my spouse/domestic partner and/or eligible dependent child are covered? The Company (or its successor) pays all of the premium. -3- For how long? 20 months (or 24 months, if you are a member of the Company's "Senior Team" at the time of the change in control, as determined by the Company immediately prior to the change in control, in its sole and absolute discretion). Under what plan? The AII Executive Health Plan or substantially similar coverage. o Immediate vesting of stock options and restricted shares: Does this apply to all of my options and restricted shares? Yes, except of course this benefit does not apply to any option that has expired and any restricted shares that have been forfeited prior to you becoming eligible for Change in Control Benefits. What does "immediate vesting" mean? Upon becoming eligible for Change in Control Benefits: > any options to which this benefit applies will become exercisable, and > the forfeiture and prohibited sale and transfer restrictions on restricted shares to which this benefit applies will lapse. Will exercisability of options be extended? No. Unless "retirement" benefits apply (see below), termination of exercisability of options will be governed by each option's award agreement. Will the terms of my awards and the applicable plan control all terms other than the specific benefits of this Agreement? Yes. For example, if the award or option plan provides that the Company may purchase an option from you upon the occurrence of a change in control, then that right will continue to apply. Can termination by the Company without cause or termination by me for good reason entitle me to retirement benefits? Yes. If the termination of your employment that entitles you to Change in Control Benefits occurs under circumstances that constitute "retirement" under the AII Executive Retirement Plan, you will receive retirement benefits in addition to Change in Control Benefits. o In order for this to apply, must I "retire" at the time of my termination? Yes, you must satisfy the conditions to "retire" under the AII Executive Retirement Plan by the time of the termination of employment that makes you eligible for Change in Control Benefits. Do I have to satisfy all of the retirement conditions? No, the notice and voluntary termination requirements will not apply and the Company (or its successor) must give you at least ten days to sign the "release" and "Noncompete Agreement" as those terms are described in the AII Executive Retirement Plan. -4- o What additional benefits will I receive? > Retiree health: Your benefit will be as described in the AII Executive Retirement Plan, except that in accordance with this Agreement you will not be required to pay any premium for the first 20 or 24 months of coverage. > Options and Restricted Shares: >> Vesting: The Change in Control Benefits will apply because they are more favorable. >> Option exercisability: The extension of exercisability under the Retirement Plan will apply because it is more favorable. What if the Company exercises any right it may have to purchase my options upon a change in control? If your option award agreement or the option plan permit the Company to purchase the option and that occurs, extended exercisability will not apply. > Bonuses: Will I receive both a change in control bonus and the bonuses set forth in the Executive Retirement Plan? Yes. > Other Executive Retirement Benefits: Will the other Executive Retirement Plan benefits be provided in addition to the Change in Control Benefits? Yes. o Does "retirement" constitute "good reason" to terminate my employment after a change in control? No. o Do the Executive Retirement Plan "promises" by me apply after a change in control? Yes, if you receive the Executive Retirement Plan's benefits, then you must keep the promises. o Can my Change in Control Benefits be "cut back"? Yes. If the Change in Control Benefits would create an excess parachute payment, as that term is defined in Section 280G of the Internal Revenue Code (the "Code"), then you shall receive either (i) the Change in Control Benefits, or (ii) the Change in Control Benefits reduced to an amount equal to one dollar ($1) less than the maximum amount allowed under the Code without creating an excess parachute payment, whichever amount results in the greater after-tax payment to you. Who will decide which benefit(s) to cut back and how to do that? The Company. -5- YOUR OBLIGATIONS: By signing this Agreement, you agree to fulfill the following Obligations: Confidentiality/Trade Secrets: o What is my Obligation? You must use your best efforts and exercise utmost diligence to protect and safeguard the trade secrets and confidential and proprietary information of the Company. o What are examples of "trade secrets and confidential and proprietary information"? The identity of the Company's customers and suppliers, its arrangements with customers and suppliers, and its technical and financial data, records, compilations of information, processes, procedures, recipes and specifications relating to its customers, suppliers, products and services, new products and product testing, discoveries, ideas, trade secrets, computer software, training programs and techniques, research and development of new concepts, operating procedures and "know-how", marketing and advertising techniques and plans, customer research, strategic plans, pricing policies, restaurant sales and margin information, financial, business and operational information and reports and other financial information about the Company or its business. o May I disclose trade secrets or confidential or proprietary information? No. Are there exceptions? Yes, disclosures required in the course of your employment with the Company or by law. o May I use trade secrets or confidential or proprietary information for my own benefit or for the benefit of another? No, you may not do so either directly or indirectly. o Must I deliver such information to the Company upon termination of employment? Yes. Files, records, documents, drawings, specifications, memoranda, notes, or other documents relating to the business of the Company, whether prepared by you or otherwise coming into your possession, shall be the exclusive property of the Company and shall be delivered to the Company and not retained by you. May the Company require that I deliver this information at anytime? Yes. o During what period am I obligated by this? Both during the term of your employment by the Company and thereafter. Discoveries: o What is my Obligation? You will fully inform the Company of and disclose to the Company all "discoveries." -6- o What are "discoveries"? All inventions, designs, improvements, discoveries, and processes that you have now or may hereafter have during your 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 you alone or with others, and whether or not conceived during regular working hours or in conjunction with the use of any Company assets. o Do all "discoveries" belong to the Company? Yes, all discoveries shall be the exclusive property of the Company whether or not patent or trademark applications are filed thereon. You agree that you shall never at any time during or after termination of employment have or claim any right, title or interest in any copyright, trademark, trade name, or other intellectual property or any confidential information belonging to or used by the Company. o Am I required to assist the Company to establish its rights? Yes. You shall execute all necessary papers, maintain adequate and current records and otherwise provide assistance, at the Company's expense, during and after employment, to enable the Company to obtain for itself or its nominee patents, copyrights, trademarks, registrations or other legal protection for such intellectual property and protect the same against infringement by others. If such assistance takes place after your employment is terminated, then you shall be paid by the Company at an hourly rate determined based on one hundred percent (100%) of your existing base salary at the date of termination divided by 2080 for any time actually spent in rendering such assistance at the request of the Company. o What is "intellectual property? "Intellectual property" shall include, without limitation, patents, trademarks, copyrights, trade secrets, invention, discoveries and other business information that is not publicly known. o During what period am I obligated by this? Both during the term of your employment by the Company and thereafter. Non-competition: o What is my Obligation? You will 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 you own less than one percent 1% 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 [revise geographic scope as appropriate] 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 your termination of employment. -7- o What is the "casual dining restaurant industry"? For purposes of this Agreement "casual dining restaurant industry" consists of "sit down" restaurants serving alcoholic beverages, with a per guest average guest check within the United States of under $20.00 (adjusted upward each year to recognize Company menu price increases). o During what period am I obligated by this? During the period of your employment and until the first anniversary of your termination of employment. Nonsolicitation: o What is my Obligation? You will not, either directly or indirectly, for yourself or for any third party, solicit, induce, recruit, or cause another person in the employ of the Company to terminate his/her employment for the purpose of joining, associating, or becoming employed with any business or activity that is engaged in the casual dining restaurant industry or any other segment of the restaurant industry in which the Company may become involved after the date hereof and prior to the date of any termination of employment. o During what period am I obligated by this? During the term of your employment and until the first anniversary of your termination of employment. Enforcement of your Obligations: o Are there exceptions to the Obligations? Yes. > If you voluntarily terminate your employment following a change in control and you are not eligible for Change in Control Benefits, then you are not bound by the Obligations of this Agreement after your termination date. > If no change in control has occurred and your employment is terminated by the Company without cause (as defined in this agreement), then you are not bound by the obligations, unless the Company pays to you severance benefits equal to the amount you would have received under the Company's severance policy if your job had been eliminated. This provision does not apply if you terminate your employment, even if you do so for good reason. o May the Company force me to comply with my Obligations? Yes. You agree 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 of your Obligations. The Company may exercise all of the following rights and will not be barred from exercising one right due to exercise of another right: its remedies at law and its rights to an injunction and specific performance. -8- o May I avoid my Obligations if I have a claim against the Company? No. The existence of any claim or cause of action by you against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of your Obligations. o Will my Obligations be enforced to the maximum extent allowed? Yes. You agree that your Obligations are reasonable in content and scope and are given by you for adequate consideration. You further acknowledge and agree that, if any court of competent jurisdiction or other appropriate authority shall disagree with our foregoing agreement as to reasonableness, then such court or other authority shall reform or otherwise amend your Obligations as reason dictates. GENERAL PROVISIONS Arbitration: o Is arbitration required? Yes. Any dispute or claim arising out of or relating to this Agreement shall be settled by arbitration in Johnson County, Kansas by one arbitrator in accordance with the then current "National Rules for the Arbitration of Employment Disputes" of the American Arbitration Association, and judgment upon any award rendered therein may be entered in any court having proper jurisdiction. o How will that be done if a dispute arises before the occurrence of a Change in Control? The Company shall bear the full cost of any arbitration, including the expenses and attorney's fees incurred by you related thereto and including any actions taken by either party to appeal or enforce the judgment rendered therein, regardless of the outcome of such arbitration, and the Company shall not be entitled to use any lawyer who is a Company employee to represent it in any dispute or arbitration related hereto. Notwithstanding the foregoing, if the Company refuses to arbitrate such a dispute and the same is submitted to a court for resolution, the Company shall pay all attorney's fees and expenses as incurred by you in enforcing this Agreement, in addition to any such fees and expenses incurred by the Company. Conversely, if you refuse to arbitrate such a dispute and the same is submitted to a court for resolution, the Company shall not be obligated to pay your attorney's fees or expenses. Provided however, in no event shall the attorney's fees to be paid by the Company on behalf of you exceed $25,000. o How will that be done if a dispute arises after the occurrence of a Change in Control? Each party shall bear its own costs and expenses, including attorneys' fees, related to the dispute or claim and the parties shall share equally the costs and fees of the arbitrator; provided, however, that the arbitral award or any court rendered judgment may include a finding that one party substantially prevailed in the proceeding and, if so, such prevailing party may be awarded a judgment (in addition to any other judgment awarded to such party) for all or any part of its costs and expenses, including attorney's fees and its portion of the costs and fees of the arbitrator. -9- Mitigation: o Must I attempt to become employed if I become entitled to change in control benefits? No. You shall have no duty to attempt to mitigate the level of benefits payable by the Company to you hereunder and the Company shall not be entitled to set off against the amounts payable hereunder any amounts received by you from any other source, including any subsequent employer. Governing law: o What law will govern this Agreement? The laws of the State of Kansas. Termination: o May this Agreement be terminated? This Agreement shall remain in effect for a period of three (3) years from and after the date hereof and shall be automatically extended thereafter for additional terms of one (1) year each, unless either party has provide written notice to the other of the termination hereof sixty (60) days prior to the end of the then applicable term. o What if a change in control occurs? This Agreement shall not terminate or be terminable until eighteen (18) months after the effective date of the change in control and this Agreement may not be terminated after such eighteen (18) month period if your employment with the Company terminated during such 18 month period either by you for Good Reason at a time when circumstances constituting Cause do not exist or by the Company without Cause. o Do my Obligations survive termination? Your "confidentiality" and "discoveries" Obligations will survive any termination of this Agreement. Your "noncompete" and "nonsolicitation" Obligations will survive for one year after any termination of this Agreement by You. o What happens if my employment is terminated by the Company or by me during the one year extension? You are always subject to the "confidentiality" and "discoveries" Obligations. In addition, if under the terms of this Agreement, you are subject to the "noncompete" and "nonsolicitation" Obligations, then those will apply for one year after your termination of employment. Revisions to make Agreement enforceable: o What happens if any provision of this Agreement is held to be illegal, invalid, or unenforceable? Such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never -10- 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. Entire Agreement: o Is this the entire Agreement? Yes. This Agreement sets forth the entire understanding of the parties, other than with respect to any stock option or restricted shares award agreements entered into prior to January 1, 2004 (an "Existing Award"). 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. o Does this Agreement supersede any other agreement? Yes. This Agreement supersedes all prior agreements or understandings (other than Existing Awards), whether written or oral, with respect to change in control, non-compete, non-solicitation, confidentiality, discoveries, and termination or severance benefits payable by the Company to you; provided, however, that this Agreement shall not supersede any ability you may have to receive severance benefits under any Company severance plan or policy that applies to Company associates generally. Binding effect: o Does this Agreement bind successors? Yes. This Agreement shall extend to and be binding upon and inure to the benefit of the parties hereto, their respective heirs, representatives, successors and assigns. Waiver: o What happens if a provision is not promptly enforced? The failure of either party to insist on the performance of any of the terms or conditions of this Agreement, shall not be construed as a waiver or a relinquishment of any such provision. 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. Counterparts: o May this Agreement be signed in counterparts? Yes, and each counterpart shall be deemed an original, and together the counterparts shall constitute one and the same instrument. -11- Notices: o How may notices be given? Any notices to be given hereunder by either party to the other may be effected either by personal delivery in writing or mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed as follows: 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: [Executive/address] o How may addresses for notice be changed? Either party may change its address for notice by giving notice as set forth immediately above. Assignment: o May this Agreement be assigned? Not by you, but the Company may assign this Agreement to any successor in interest to the business, or part thereof, of the Company. Nonconflicting agreements: o By signing this Agreement, am I agreeing that I do not have any conflicting commitments? Yes. You hereby represent to the Company (1) there are no restrictions, agreements, or understandings whatsoever to which you are a party that would prevent or make unlawful your execution or performance of this Agreement; and (2) your execution of this Agreement does not constitute a breach of any contract, agreement, or understanding, oral or written, to which you are a party or by which you are bound. Disclosure of Agreement: o May the Company disclose this Agreement? Yes. For example, in the event the Company has reason to believe this Agreement has or may be breached, you acknowledge and consent that this Agreement may be disclosed by the Company, without risk of liability, to a current or prospective employer of you or other business entity. -12- Adequate Consideration: o By signing below, do I agree that my rights to severance benefits, both before and after the occurrence of a change in control, are adequate consideration for my commitment to fulfill my obligations, including (but not limited to) the noncompete obligation? Yes. -13- IN WITNESS WHEREOF, the Company and the Executive have executed this Agreement as of the date and year first above written above. YOU: APPLEBEE'S INTERNATIONAL, INC. _______________________________ By: ________________________________ Title:______________________________ -14- SHCEDULE OF PARTIES THERETO Larry A. Cates Mike Czinege David L. Goebel David R. Parsley Harry B. Stroup Carin L. Stutz Rebecca R. Tilden Scott White EX-10 7 appleamend.txt AMENDMENT NO. 2 TO CREDIT AGREEMENT AMENDMENT NO. 2 TO 3-YEAR REVOLVING CREDIT AGREEMENT Dated as of July 19, 2004 THIS AMENDMENT NO. 2 TO 3-YEAR REVOLVING CREDIT AGREEMENT ("Amendment") is made as of the "Amendment Effective Date" (as defined below) by and among APPLEBEE'S INTERNATIONAL, INC. (the "Borrower"), the financial institutions listed on the signature pages hereof as lenders (the "Lenders"), BANK ONE, NA, individually as a Lender, as LC Issuer, Swing Line Lender and as administrative agent (the "Administrative Agent") for the Lenders under that certain 3-Year Revolving Credit Agreement dated as of November 5, 2001 by and among the Borrower, the Lenders and the Administrative Agent (as amended, the "Credit Agreement"). Defined terms used herein and not otherwise defined herein shall have the meaning given to them in the Credit Agreement. WITNESSETH WHEREAS, the Borrower, the Lenders and the Administrative Agent are parties to the Credit Agreement; WHEREAS, the Borrower has requested certain amendments set forth herein; and WHEREAS, the Lenders party hereto and the Administrative Agent are willing to agree to such extension request and amend the Credit Agreement, in each case on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises set forth above, the terms and conditions contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Lenders party hereto and the Administrative Agent have agreed to the following. 1. Amendments to Credit Agreement. Subject to the satisfaction of the conditions precedent set forth in Section 2 below, the Credit Agreement is hereby amended as follows: 1.1. Section 6.12 of the Credit Agreement is hereby amended and restated to read as follows. "6.12. Capital Expenditures. The Borrower will not, nor will it permit any Subsidiary to, expend in excess of an aggregate amount of $125,000,000 (the "Base Amount") for Capital Expenditures during any fiscal year, commencing with the fiscal year ending December 30, 2004; -1- provided that, if the aggregate amount of Capital Expenditures during any such fiscal year is less than the Base Amount (the difference being the "Shortfall Amount"), then the permitted amount of Capital Expenditures during the immediately succeeding fiscal year shall be an amount equal to the Base Amount plus the Shortfall Amount." 1.2. Section 1(d) of Schedule I to the Compliance Certificate set forth as Exhibit B to the Credit Agreement is hereby amended by deleting the reference to "$100,000,000" appearing therein and substituting "125,000,000" in lieu thereof. 2. Conditions of Effectiveness. This Amendment shall become effective and be deemed effective, if, and only if, and shall be effective as of date upon which, the Administrative Agent shall have received each of the following (such date, herein the "Amendment Effective Date"): (a) duly executed signature pages to this Amendment from the Borrower and the Required Lenders; (b) a reaffirmation from each of the Guarantors, such reaffirmation being attached hereto and made a part hereof; and (c) such other documents, instruments and agreements as the Administrative Agent may reasonably request. 3. Representations and Warranties of the Borrower. The Borrower hereby represents and warrants as follows: (a) This Amendment and the Credit Agreement as previously executed and as amended hereby, constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms. (b) Upon the effectiveness of this Amendment, the Borrower hereby reaffirms all covenants, representations and warranties made by it in the Credit Agreement and other Loan Documents, to the extent the same are not amended hereby, and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (c) No Default or Unmatured Default has occurred and is continuing under the Credit Agreement. -2- 4. Reference to the Effect on the Credit Agreement. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Credit Agreement, as amended hereby. (b) Except as specifically amended above, the Credit Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent or any of the Lenders, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 5. Governing Law. This Amendment shall be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions) of the State of Illinois. 6. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 7. Counterparts. This Amendment may be executed by one or more of the parties to the Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A facsimile signature page hereto sent to the Administrative Agent or the Administrative Agent's counsel shall be effective as a counterpart signature provided each party executing such a facsimile counterpart agrees to deliver originals to the Administrative Agent thereof. [Signature Pages Follow] -3- IN WITNESS WHEREOF, this Amendment No. 2 has been duly executed as of the day and year first above written. APPLEBEE'S INTERNATIONAL, INC. as Borrower By:/s/Rebecca R. Tilden ------------------------- Name: Rebecca R. Tilden Title: Vice President BANK ONE, NA, individually as a Lender, as LC Issuer, Swing Line Lender and as Administrative Agent By:/s/ William J. Oleferchik ------------------------- Name: William J. Oleferchik Title: Managing Director, Capital Markets SUNTRUST BANK, individually as a Lender and as a Syndication Agent By:/s/ Susan M. Hall -------------------------- Name: Susan M. Hall Title: Managing Director U.S. BANK NATIONAL ASSOCIATION, individually as a Lender and as a Syndication Agent By:/s/ John P. Mills -------------------------- Name: John P. Mills Title: Vice President Signature Page to Amendment No. 2 July 2004 Applebee's International, Inc. -4- BANK OF AMERICA, N.A., individually as a Lender and as a Documentation Agent By:_______________________________________ Name: Title: By:_______________________________________ Name: Title: FLEET NATIONAL BANK, individually as a Lender and as a Documentation Agent By:_______________________________________ Name: Title: JPMORGAN CHASE BANK as successor to THE CHASE MANHATTAN BANK, as a Lender By:/s/ William P. Wallace ------------------------------- Name: William P. Wallace Title: Vice President ROYAL BANK OF CANADA, as a Lender By:/s/ Gordon MacArthur --------------------------------- Name: Gordon MacArthur Title: Aurhorized Signatory Signature Page to Amendment No. 2 July 2004 Applebee's International, Inc. -5- REAFFIRMATION Each of the undersigned hereby acknowledges receipt of a copy of Amendment No. 2 to the 3-Year Revolving Credit Agreement dated as of November 5, 2001, by and among Applebee's International, Inc., the Lenders and the Administrative Agent (the "Credit Agreement"), which Amendment No. 2 is dated as of July 19, 2004 (the "Amendment"). Capitalized terms used in this Reaffirmation and not defined herein shall have the meanings given to them in the Credit Agreement. Without in any way establishing a course of dealing by the Administrative Agent or any Lender, the undersigned reaffirms the terms and conditions of the Guaranty dated as of November 5, 2001 executed by it and acknowledges and agrees that such Guaranty and each and every other Loan Document executed by the undersigned in connection with the Credit Agreement remain in full force and effect and are hereby ratified, reaffirmed and confirmed. All references to the Credit Agreement contained in the above-referenced documents shall be a reference to the Credit Agreement as so amended by the Amendment and as the same may from time to time hereafter be amended, modified or restated. AII SERVICES, INC. By:/s/ Rebecca R. Tilden Its:Vice President ANNE ARUNDEL APPLE HOLDING CORPORATION By: /s/ Barry L. Huffman Its: Assistant Secretary APPLE AMERICAN LIMITED PARTNERSHIP OF MINNESOTA By: Gourmet Systems of Minnesota, Inc., as general partner By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S BEVERAGE, INC. By:/s/ Carrie Benney Its: Secretary -6- APPLEBEE'S NEIGHBORHOOD GRILL & BAR OF GEORGIA, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S NORTHEAST, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S OF MICHIGAN, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S OF MINNESOTA, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S OF NEW MEXICO, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S OF NEW YORK, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S OF NEVADA, INC. By: /s/ Robert T. Steinkamp Its: Vice President -7- APPLEBEE'S OF PENNSYLVANIA, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S OF TEXAS, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S OF VIRGINIA, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLE VERMONT RESTAURANTS, INC. By: /s/ Robert T. Steinkamp Its: Vice President GOURMET SYSTEMS OF ARIZONA, INC. By: /s/ Rebecca R. Tilden Its: Vice President GOURMET SYSTEMS OF CALIFORNIA, INC. By: /s/ Robert T. Steinkamp Its: Vice President GOURMET SYSTEMS OF GEORGIA, INC. By: /s/ Robert T. Steinkamp Its: Vice President -8- GOURMET SYSTEMS, INC. By: /s/ Robert T. Steinkamp Its: Vice President GOURMET SYSTEMS OF KANSAS, INC. By: /s/ Rebecca R. Tilden Its: Vice President GOURMET SYSTEMS OF MINNESOTA, INC. By: /s/ Robert T. Steinkamp Its: Vice President GOURMET SYSTEMS OF NEVADA, INC. By: /s/ Robert T. Steinkamp Its: Vice President GOURMET SYSTEMS OF TENNESSEE, INC. By: /s/ Rebecca R. Tilden Its: Vice President GOURMET SYSTEMS OF WISCONSIN, INC. By: /s/ Robert T. Steinkamp Its: Vice President -9- GOURMET WEST OF NEVADA, LIMITED LIABILITY COMPANY By: Gourmet Systems of Nevada, Inc., as managing member By: /s/ Robert T. Steinkamp Its: Vice President INNOVATIVE RESTAURANT CONCEPTS, INC. By: /s/ Rebecca R. Tilden Its: Vice President IRC KANSAS, INC. By: /s/ Rebecca R. Tilden Its: Vice President RB INTERNATIONAL, INC. By: /s/ Rebecca R. Tilden Its: Vice President RIO BRAVO RESTAURANT, INC. By: /s/ Rebecca R. Tilden Its: Vice President RIO BRAVO SERVICES, INC. By: /s/ Rebecca R. Tilden Its: Vice President SUMMIT RESTAURANTS, INC. By: /s/ Rebecca R. Tilden Its: Vice President -10- ACMC, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S UK, LLC By: Applebee's International, Inc., as managing member By: /s/ Robert T. Steinkamp Its: Vice President AFSS, INC. By: /s/ Rebecca R. Tilden Its: Vice President NEIGHBORHOOD INSURANCE, INC. By: /s/ Rebecca R. Tilden Its: Vice President APPLEBEE'S OF MARYLAND, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S OF CALVERT COUNTY, INC. By: /s/ Robert T. Steinkamp Its: Vice President APPLEBEE'S OF ST. MARY'S COUNTY, INC. By: /s/ Robert T. Steinkamp Its: Vice President -11- APPLEBEE'S MICHIGAN SERVICES, LLC By: /s/ Rebecca R. Tilden Its: Vice President EX-31 8 lloydcertq304.txt CEO CERTIFICATION FOR Q3 2004 EXHIBIT 31.1 CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 27, 2004 By: /s/ Lloyd L. Hill ----------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) EX-31 9 stevecertq304.txt CFO CERTIFICATION FOR Q3 2004 EXHIBIT 31.2 CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 27, 2004 By: /s/ Steven K. Lumpkin ----------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial officer) EX-32 10 q3906cert.txt Q3 2004 906 CERTIFICATION EXHIBIT 32 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 26, 2004, 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, as amended 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: October 27, 2004 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 26, 2004, 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, as amended; 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: October 27, 2004 By: /s/ Steven K. Lumpkin ----------------------- ----------------------------------------- Steven K. Lumpkin Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----