-----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, CD7gZukvFL7ftscJG26MLqSQgpIfXxyF+Re+cnSMM1DhFkxtMOWmQkYCxBl7VrQM zdmXAfg/0n4FKSyFwNUKkg== 0000853665-05-000110.txt : 20050728 0000853665-05-000110.hdr.sgml : 20050728 20050727215441 ACCESSION NUMBER: 0000853665-05-000110 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050626 FILED AS OF DATE: 20050728 DATE AS OF CHANGE: 20050727 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: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17962 FILM NUMBER: 05978919 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 q22005.txt SECOND QUARTER 2005 10Q 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 June 26, 2005 ------------------------------------------------- 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 July 22, 2005 was 79,036,538. 1 APPLEBEE'S INTERNATIONAL, INC. FORM 10-Q FISCAL QUARTER ENDED JUNE 26, 2005 INDEX
Page Part I Financial Information Item 1. Condensed Consolidated Financial Statements: Consolidated Balance Sheets as of June 26, 2005 and December 26, 2004................................................................ 3 Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks Ended June 26, 2005 and June 27, 2004 (as restated).................................. 4 Consolidated Statement of Stockholders' Equity for the 26 Weeks Ended June 26, 2005......................................................... 5 Consolidated Statements of Cash Flows for the 26 Weeks Ended June 26, 2005 and June 27, 2004 (as restated).................................. 6 Notes to Condensed Consolidated Financial Statements...................................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 32 Item 4. Controls and Procedures................................................................... 32 Part II Other Information Item 1. Legal Proceedings......................................................................... 33 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................... 33 Item 4. Submission of Matters to a Vote of Security Holders....................................... 34 Item 6. Exhibits.................................................................................. 34 Signatures .................................................................................................. 35 Exhibit Index................................................................................................ 36
2 PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts)
June 26, December 26, . 2005 2004 ---------------- --------------- ASSETS Current assets: Cash and cash equivalents..................................................... $ 661 $ 10,642 Short-term investments, at market value....................................... 283 282 Receivables (less allowance for bad debts of $382 in 2005 and $417 in 2004)... 38,318 39,152 Receivables related to captive insurance subsidiary........................... 3,908 2,566 Inventories................................................................... 27,112 35,936 Prepaid and other current assets.............................................. 14,859 12,079 ---------------- --------------- Total current assets..................................................... 85,141 100,657 Property and equipment, net....................................................... 544,082 486,548 Goodwill.......................................................................... 138,788 116,344 Restricted assets related to captive insurance subsidiary......................... 18,803 17,386 Other intangible assets, net...................................................... 8,094 8,524 Other assets, net................................................................. 28,478 24,972 ---------------- --------------- $ 823,386 $ 754,431 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt............................................. $ 243 $ 222 Notes payable................................................................. 4,300 -- Accounts payable.............................................................. 47,456 42,830 Accrued expenses and other current liabilities................................ 82,491 89,064 Loss reserve and unearned premiums related to captive insurance subsidiary.... 14,012 12,137 Accrued dividends............................................................. -- 4,867 Accrued income taxes.......................................................... 13,130 2,578 ---------------- --------------- Total current liabilities................................................ 161,632 151,698 ---------------- --------------- Non-current liabilities: Long-term debt - less current portion......................................... 82,349 35,472 Deferred income taxes......................................................... 29,264 28,995 Other non-current liabilities................................................. 45,392 41,539 ---------------- --------------- Total non-current liabilities............................................ 157,005 106,006 ---------------- --------------- Total liabilities........................................................ 318,637 257,704 ---------------- --------------- Commitments and contingencies (Note 4) 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.................................................... 231,468 220,897 Unearned compensation......................................................... (3,458) (1,924) Retained earnings............................................................. 682,462 623,315 ---------------- --------------- 911,557 843,373 Treasury stock - 29,082,335 shares in 2005 and 27,375,044 shares in 2004, at cost........................................................................ (406,808) (346,646) ---------------- --------------- Total stockholders' equity............................................... 504,749 496,727 ---------------- --------------- $ 823,386 $ 754,431 ================ ===============
See notes to condensed consolidated financial statements. 3 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (in thousands, except per share amounts)
13 Weeks Ended 26 Weeks Ended ----------------------------------- ----------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 ---------------- ---------------- ---------------- ---------------- (as restated) (as restated) Revenues: Company restaurant sales ........................ $ 272,703 $ 247,769 $ 543,161 $ 491,329 Franchise royalties and fees..................... 32,493 30,722 65,501 61,437 Other franchise income........................... 1,424 3,399 2,489 6,514 ---------------- ---------------- ---------------- ---------------- Total operating revenues.................... 306,620 281,890 611,151 559,280 ---------------- ---------------- ---------------- ---------------- Cost of company restaurant sales: Food and beverage................................ 72,565 66,647 144,200 130,162 Labor............................................ 90,115 80,683 178,839 160,338 Direct and occupancy............................. 71,038 60,513 137,405 119,855 Pre-opening expense.............................. 1,268 425 2,435 992 ---------------- ---------------- ---------------- ---------------- Total cost of company restaurant sales...... 234,986 208,268 462,879 411,347 ---------------- ---------------- ---------------- ---------------- Cost of other franchise income....................... 1,229 5,035 2,048 7,972 General and administrative expenses.................. 27,980 24,960 54,926 50,382 Amortization of intangible assets.................... 226 158 454 244 Loss on disposition of restaurants and equipment..... 564 584 861 1,079 ---------------- ---------------- ---------------- ---------------- Operating earnings................................... 41,635 42,885 89,983 88,256 ---------------- ---------------- ---------------- ---------------- Other income (expense): Investment income................................ 449 18 408 241 Interest expense................................. (634) (416) (971) (760) Other income..................................... 584 562 1,019 1,023 ---------------- ---------------- ---------------- ---------------- Total other income.......................... 399 164 456 504 ---------------- ---------------- ---------------- ---------------- Earnings before income taxes......................... 42,034 43,049 90,439 88,760 Income taxes......................................... 14,544 14,919 31,292 30,894 ---------------- ---------------- ---------------- ---------------- Net earnings......................................... $ 27,490 $ 28,130 $ 59,147 $ 57,866 ================ ================ ================ ================ Basic net earnings per common share.................. $ 0.34 $ 0.34 $ 0.74 $ 0.71 ================ ================ ================ ================ Diluted net earnings per common share................ $ 0.34 $ 0.33 $ 0.72 $ 0.69 ================ ================ ================ ================ Basic weighted average shares outstanding............ 79,897 81,781 80,295 81,883 ================ ================ ================ ================ Diluted weighted average shares outstanding.......... 81,360 84,098 81,861 84,371 ================ ================ ================ ================
See notes to condensed consolidated financial statements. 4 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands)
Common Stock Additional Total ------------------ Paid-In Unearned Retained Treasury Stockholders' Shares Amount Capital Compensation Earnings Stock Equity --------- -------- ---------- ------------ ---------- ---------- ------------- Balance, December 26, 2004......................... 108,503 $1,085 $220,897 $ (1,924) $623,315 $(346,646) $ 496,727 Net earnings..................................... -- -- -- -- 59,147 -- 59,147 Purchases of treasury stock...................... -- -- -- -- -- (68,238) (68,238) Stock options exercised and related tax benefit.. -- -- 7,173 -- -- 6,550 13,723 Shares issued under employee benefit plans....... -- -- 1,413 -- -- 910 2,323 Restricted shares awarded under equity incentive plans, net of cancellations.......... -- -- 1,985 (2,601) -- 616 -- Amortization of unearned compensation relating to restricted shares.................. -- -- -- 1,067 -- -- 1,067 --------- -------- ---------- ------------ ---------- ---------- ------------- Balance, June 26, 2005............................. 108,503 $1,085 $231,468 $ (3,458) $682,462 $(406,808) $ 504,749 ========= ======== ========== ============ ========== ========== =============
See notes to condensed consolidated financial statements. 5 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
26 Weeks Ended ------------------------------------ June 26, June 27, 2005 2004 ---------------- --------------- (as restated) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings..................................................................... $ 59,147 $ 57,866 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization............................................... 25,676 22,402 Amortization of intangible assets........................................... 454 244 Amortization of unearned compensation....................................... 1,067 695 Other amortization.......................................................... 63 175 Inventory impairment........................................................ -- 2,300 Deferred income tax benefit................................................. (2,294) (52) Loss on disposition of restaurants and equipment............................ 861 1,079 Income tax benefit from exercise of stock options........................... 3,794 5,169 Changes in assets and liabilities (exclusive of effects of acquisitions): Receivables................................................................. 834 (8,889) Receivables related to captive insurance subsidiary......................... (1,342) (4,325) Inventories................................................................. 9,014 (13,103) Other current assets related to captive insurance subsidiary................ -- (1,049) Prepaid and other current assets............................................ (217) (923) Accounts payable....................................................... .... 4,626 1,874 Accrued expenses and other current liabilities.............................. (6,902) (16,933) Loss reserve and unearned premiums related to captive insurance subsidiary.. 1,875 8,914 Income taxes................................................................ 10,552 26,287 Other non-current liabilities............................................... 1,759 1,892 Other....................................................................... (1,177) (3,184) ---------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES................................... 107,790 80,439 ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.............................................. (59,922) (36,543) Restricted assets related to captive insurance subsidiary........................ (1,417) (5,488) Acquisitions of restaurants...................................................... (46,777) (13,817) Lease acquisition costs.......................................................... -- (4,919) Purchases of short-term investments.............................................. -- (253) Other investing activities....................................................... -- (966) ---------------- --------------- NET CASH USED BY INVESTING ACTIVITIES....................................... (108,116) (61,986) ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock...................................................... (68,238) (53,223) Dividends paid................................................................... (4,867) (3,911) Issuance of common stock upon exercise of stock options.......................... 9,929 8,789 Shares issued under employee benefit plans....................................... 2,323 3,981 Net debt proceeds................................................................ 51,198 22,934 ---------------- --------------- NET CASH USED BY FINANCING ACTIVITIES....................................... (9,655) (21,430) ---------------- --------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (9,981) (2,977) CASH AND CASH EQUIVALENTS, beginning of period....................................... 10,642 17,867 ---------------- --------------- CASH AND CASH EQUIVALENTS, end of period............................................. $ 661 $ 14,890 ================ ===============
6 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) (in thousands)
26 Weeks Ended ------------------------------------ June 26, June 27, 2005 2004 ---------------- ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the 26 week period for: Income taxes........................................................... $ 20,316 $ 749 ================ ================ Interest............................................................... $ 654 $ 377 ================ ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: We issued restricted common stock, net of forfeitures, of $2,601,000 and $1,497,000 for the 26 weeks ended June 26, 2005 and June 27, 2004, respectively. In 2002, we entered into a rabbi trust agreement to protect the assets of the nonqualified deferred compensation plan for certain of our associates. The plan investments are included in other assets and the offsetting obligation is included in other non-current liabilities in our consolidated balance sheets. We had non-cash increases in these balances of $2,094,000 and $1,727,000 for the 26 weeks ended June 26, 2005 and June 27, 2004, respectively. In 2004, we made matching contributions in shares of our common stock to a profit sharing plan and trust established in accordance with Section 401(k) of the Internal Revenue Code of $1,308,000. See notes to condensed consolidated financial statements. 7 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Our condensed consolidated financial statements included in this Form 10-Q have been prepared without audit 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 condensed 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 26, 2004. 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 condensed consolidated financial statements to conform to the fiscal 2005 presentation. 2. Restatement of Financial Statements Like many other companies in the restaurant, retail and other industries, we reviewed our accounting treatment for leases and depreciation of related leasehold improvements during the fourth fiscal quarter of 2004 and we restated our consolidated financial statements for fiscal years 2003 and 2002 and the first three fiscal quarters of fiscal 2004 in our Annual Report on Form 10-K for the fiscal year ended December 26, 2004. Historically, when accounting for leases with renewal options, we had recorded rent expense on a straight-line basis over the initial non-cancelable lease term, with the term commencing when actual rent payments began and depreciated leasehold improvements on those properties over a maximum period of 20 years which, in certain cases, included a portion of the renewal option periods. We corrected our lease term to include option periods where failure to recognize such options would result in an economic penalty such that the renewal appears reasonably assured. The primary result of this correction was to accelerate the recognition of rent expense under certain leases that include fixed-rent escalations. In addition, the lease term is deemed to commence on the date the company becomes legally obligated for rent payments. Therefore, we adopted a policy to capitalize the straight-line rent amounts during the construction period of leased properties, which resulted in an increase to depreciation expense in the restated consolidated statements of earnings. Straight-line rent subsequent to the construction period and prior to the restaurant opening is recognized as expense, which resulted in an increase to previously reported pre-opening expenses in the restated consolidated statements of earnings. In connection with the restatement for lease accounting matters, we also corrected previously identified immaterial errors, primarily related to vacation and workers' compensation expense. 8 The following table contains information regarding the impact of the restatement adjustments on our consolidated statements of earnings for the 13 and 26 weeks ended June 27, 2004. All amounts, except per share amounts, are in thousands. Consolidated Statements of Earnings
13 Weeks Ended June 27, 2004 13 Weeks Ended (As previously Restatement June 27, 2004 reported) amounts (As restated) -------------- ----------- -------------- Revenues: Company restaurant sales.................................................... $ 247,769 $ -- $ 247,769 Franchise royalties and fees................................................ 30,779 (57) 30,722 Other franchise income...................................................... 3,399 -- 3,399 -------------- ----------- -------------- Total operating revenue................................................ 281,947 (57) 281,890 -------------- ----------- -------------- Cost of company restaurant sales: Food and beverage........................................................... 66,647 -- 66,647 Labor....................................................................... 81,086 (403) 80,683 Direct and occupancy........................................................ 60,240 273 60,513 Pre-opening expense......................................................... 391 34 425 -------------- ----------- -------------- Total cost of company restaurant sales................................. 208,364 (96) 208,268 -------------- ----------- -------------- Cost of other franchise income.................................................. 5,035 -- 5,035 General and administrative expenses............................................. 24,932 28 24,960 Amortization of intangible assets............................................... 158 -- 158 Loss on disposition of restaurants and equipment................................ 584 -- 584 -------------- ----------- -------------- Operating earnings.............................................................. 42,874 11 42,885 -------------- ----------- -------------- Other income (expense): Investment income........................................................... 18 -- 18 Interest expense............................................................ (416) -- (416) Other income................................................................ 951 (389) 562 -------------- ----------- -------------- Total other income..................................................... 553 (389) 164 -------------- ----------- -------------- Earnings before income taxes.................................................... 43,427 (378) 43,049 Income taxes.................................................................... 15,200 (281) 14,919 -------------- ----------- -------------- Net earnings.................................................................... $ 28,227 $ (97) $ 28,130 ============== =========== ============== Basic net earnings per common share............................................. $ 0.35 $ -- $ 0.34 ============== =========== ============== Diluted net earnings per common share........................................... $ 0.34 $ -- $ 0.33 ============== =========== ============== Basic weighted average shares outstanding....................................... 81,781 81,781 ============== ============== Diluted weighted shares outstanding............................................. 84,098 84,098 ============== ==============
9
26 Weeks Ended June 27, 2004 26 Weeks Ended (As previously Restatement June 27, 2004 reported) amounts (As restated) -------------- ----------- -------------- Revenues: Company restaurant sales.................................................... $ 491,329 $ -- $ 491,329 Franchise royalties and fees................................................ 61,551 (114) 61,437 Other franchise income...................................................... 6,514 -- 6,514 -------------- ----------- -------------- Total operating revenue................................................ 559,394 (114) 559,280 -------------- ----------- -------------- Cost of company restaurant sales: Food and beverage........................................................... 130,162 -- 130,162 Labor....................................................................... 160,745 (407) 160,338 Direct and occupancy........................................................ 119,309 546 119,855 Pre-opening expense......................................................... 941 51 992 -------------- ----------- -------------- Total cost of company restaurant sales................................. 411,157 190 411,347 -------------- ----------- -------------- Cost of other franchise income.................................................. 7,972 -- 7,972 General and administrative expenses............................................. 50,449 (67) 50,382 Amortization of intangible assets............................................... 244 -- 244 Loss on disposition of restaurants and equipment................................ 1,079 -- 1,079 -------------- ----------- -------------- Operating earnings.............................................................. 88,493 (237) 88,256 -------------- ----------- -------------- Other income (expense): Investment income........................................................... 241 -- 241 Interest expense............................................................ (760) -- (760) Other income................................................................ 842 181 1,023 -------------- ----------- -------------- Total other income..................................................... 323 181 504 -------------- ----------- -------------- Earnings before income taxes.................................................... 88,816 (56) 88,760 Income taxes.................................................................... 31,086 (192) 30,894 -------------- ----------- -------------- Net earnings.................................................................... $ 57,730 $ 136 $ 57,866 ============== =========== ============== Basic net earnings per common share............................................. $ 0.71 $ -- $ 0.71 ============== =========== ============== Diluted net earnings per common share........................................... $ 0.68 $ -- $ 0.69 ============== =========== ============== Basic weighted average shares outstanding....................................... 81,883 81,883 ============== ============== Diluted weighted shares outstanding............................................. 84,371 84,371 ============== ==============
3. 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 net 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). 10
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- (as restated) (as restated) Net earnings, as reported............................ $ 27,490 $ 28,130 $ 59,147 $ 57,866 Add: Stock-based employee compensation expense (benefit) included in net earnings, net of related taxes............................. 373 (12) 655 290 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related taxes............................. 1,735 2,155 3,428 4,770 --------------- --------------- --------------- --------------- Pro forma net earnings............................... $ 26,128 $ 25,963 $ 56,374 $ 53,386 =============== =============== =============== =============== Basic net earnings per common share, as reported...................................... $ 0.34 $ 0.34 $ 0.74 $ 0.71 =============== =============== =============== =============== Basic net earnings per common share, pro forma........................................ $ 0.33 $ 0.32 $ 0.70 $ 0.65 =============== =============== =============== =============== Diluted net earnings per common share, as reported...................................... $ 0.34 $ 0.33 $ 0.72 $ 0.69 =============== =============== =============== =============== Diluted net earnings per common share, pro forma........................................ $ 0.32 $ 0.31 $ 0.69 $ 0.63 =============== =============== =============== ===============
4. 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. We believe that the ultimate disposition of these matters will not, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial position. Lease guarantees and contingencies: 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 June 26, 2005, we have outstanding lease guarantees of approximately $18,200,000. These leases expire at various times throughout the next several years with the final lease agreement expiring in 2025. In addition, we or our subsidiaries are contingently liable for various leases that we have assigned in connection with the sale of restaurants to franchisees and other parties, in the potential amount of $17,200,000. We have not recorded a liability as of June 26, 2005 or December 26, 2004. Franchisee guarantees: In November 2003, we arranged for a third-party financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments, subject to our approval. Under the terms of this financing program, we will provide a limited guarantee pool for the loans advanced during the three-year period ending December 2006. As of June 26, 2005, there were loans outstanding to four franchisees aggregating approximately $1,300,000 under this program. 11 In May 2004, we arranged for a third-party financing company to provide up to $250,000,000 to qualified franchisees for loans to fund development of new restaurants through October 2007, subject to our approval. We will provide a limited guarantee of certain loans advanced under this program. As of June 26, 2005, there were loans outstanding to five franchisees aggregating approximately $20,100,000 under this program. The fair value of our guarantee under these two financing programs was less than $100,000 and is recorded in other non-current liabilities and other assets in our consolidated balance sheet as of June 26, 2005. 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 June 26, 2005, we would have been required to make payments totaling approximately $13,300,000. 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 $6,200,000 if such officers had been terminated as of June 26, 2005. 5. Net Earnings Per Share We compute basic net earnings per common share by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted net earnings per common 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 net earnings per share. All amounts in the chart, except per share amounts, are expressed in thousands.
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- Net earnings........................................... $ 27,490 $ 28,130 $ 59,147 $ 57,866 =============== =============== =============== =============== Basic weighted average shares outstanding.............. 79,897 81,781 80,295 81,883 Dilutive effect of stock options and equity-based compensation.......................... 1,463 2,317 1,566 2,488 --------------- --------------- --------------- --------------- Diluted weighted average shares outstanding............ 81,360 84,098 81,861 84,371 =============== =============== =============== =============== Basic net earnings per common share.................... $ 0.34 $ 0.34 $ 0.74 $ 0.71 =============== =============== =============== =============== Diluted net earnings per common share.................. $ 0.34 $ 0.33 $ 0.72 $ 0.69 =============== =============== =============== ===============
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 as the effect would be anti-dilutive. We have excluded approximately 593,000 and 1,464,000 of these options for the 13 weeks ended June 26, 2005 and June 27, 2004, respectively, and 338,000 and 90,000 of these options for the 26 weeks ended June 26, 2005 and June 27, 2004, respectively, from our diluted weighted average share computation. 12 6. Acquisitions All of our acquisitions below have been accounted for using the purchase method of accounting and, accordingly, our consolidated financial statements reflect the results of operations for each acquisition subsequent to the date of acquisition. The assets acquired and liabilities assumed are recorded at estimates of fair values as determined by management based upon information available. We finalize the allocation of purchase price to the fair value of assets acquired and liabilities assumed when we obtain information sufficient to complete the allocation, but in each case, no longer than one year after the acquisition date. In May 2005, we completed the acquisition of 12 Applebee's restaurants, which included one restaurant under construction, in Missouri, Kansas and Arkansas for approximately $39,500,000. Through June 2005, we have paid approximately $38,900,000, which has been allocated to the fair value of property and equipment of $16,800,000, goodwill of $21,900,000 and other net assets of approximately $200,000. In addition, we expect to pay the remaining $600,000 for property and equipment relating to the completion of construction of one restaurant in the third fiscal quarter of 2005. The following table is comprised of actual company restaurant sales for the restaurant acquisition above, which are included in our condensed consolidated financial statements for each period presented and pro forma company restaurant sales assuming the acquisition above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- Actual acquired company restaurant sales............. $ 2,800 $ -- $ 2,800 $ -- =============== =============== =============== =============== Pro forma acquired company restaurant sales.......... $ 7,300 $ 6,700 $ 14,400 $ 13,400 =============== =============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants that were closed in fiscal 2004 by a former franchisee for approximately $8,800,000 payable in cash. In connection with this acquisition, we paid approximately $800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000 in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash in the second quarter of fiscal 2005. The purchase price of $8,800,000 has been allocated to the fair value of property and equipment of approximately $8,200,000 and goodwill of approximately $600,000. As of June 26, 2005, we have remodeled and opened six restaurants. Subsequent to June 26, 2005, one additional restaurant was opened and the remaining restaurant was sold to a third party for $1,300,000. In April 2004, we completed our acquisition of the operations and assets of ten Applebee's restaurants located in Southern California for approximately $13,800,000 in cash. 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 $500,000. Company restaurant sales for these restaurants were $4,700,000 for both the 13 weeks ended and 26 weeks ended June 27, 2004. Proforma company restaurant sales for these restaurants would have been approximately $7,000,000 and $13,500,000 for the 13 weeks and 26 weeks ended June 27, 2004 had this acquisition been completed at the beginning of fiscal 2004. 13 7. 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 $2,300,000 (approximately $1,500,000 net of income taxes) in our condensed consolidated financial statements. 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 franchisees' historical usage of approximately $1,800,000 was recorded in cost of other franchise income in the consolidated statement of earnings. In the third and fourth fiscal quarters of 2004, we recovered a portion of the inventory impairment as a result of higher than anticipated sales of these excess inventories. 8. Goodwill and Other Intangible Assets Changes in goodwill are summarized below (in thousands):
26 Weeks Ended 52 Weeks Ended June 26, December 26, 2005 2004 ---------------------- ---------------------- Carrying amount, beginning of the year.................. $ 116,344 $ 105,326 Goodwill acquired during the period..................... 22,444 11,018 ---------------------- ---------------------- Goodwill amount, end of the period...................... $ 138,788 $ 116,344 ====================== ======================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," are summarized below (in thousands):
June 26, 2005 ---------------------------------------------------------- Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ----------------- ----------------- Amortized intangible assets: Franchise interest and rights....... $ 6,371 $ 5,730 $ 641 Lease acquisition costs............. 4,911 535 4,376 Noncompete agreement................ 350 65 285 ------------------ ---------------- ----------------- Total................................... $ 11,632 $ 6,330 $ 5,302 ================== ================= ================= December 26, 2004 ---------------------------------------------------------- Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ----------------- ----------------- Amortized intangible assets: Franchise interest and rights....... $ 6,371 $ 5,565 $ 806 Lease acquisition costs............. 4,875 294 4,581 Noncompete agreement................ 350 22 328 ------------------ ----------------- ----------------- Total................................... $ 11,596 $ 5,881 $ 5,715 ================== ================= =================
In the fourth quarter of fiscal 2004, we acquired the exclusive right to operate Applebee's restaurants in the Memphis, Tennessee market from a former franchisee group for approximately $2,800,000. This intangible asset has an indefinite 14 life, and accordingly, will not be amortized but tested for impairment at least annually. In connection with this acquisition, we entered into an expanded 4-year noncompete agreement with the former franchise principals which is being amortized over the life of the agreement. In the second quarter of fiscal 2004, we acquired six restaurant leases which were formerly operated as Ground Round restaurants for approximately $4,900,000 in cash. Franchise interest and rights are being amortized over the next two to four years, the lease acquisition costs are being amortized over the next 8 to 20 years and the noncompete agreement is being amortized over the next four years. We expect annual amortization expense for all intangible assets for the next five fiscal years to range from approximately $400,000 to $900,000. 9. 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. In fiscal 2005, we reduced the types of insurance coverage plans which resulted in fewer franchisee participants in our captive insurance program. Our consolidated balance sheets include the following balances related to the captive insurance subsidiary: o Franchise premium receivables of approximately $3,200,000 and $1,900,000 as of June 26, 2005 and December 26, 2004, respectively, included in receivables related to captive insurance subsidiary. o Cash equivalent and other long-term investments restricted for the payment of claims of approximately $18,100,000 and $16,700,000 as of June 26, 2005 and December 26, 2004, respectively, included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $21,400,000 and $19,600,000 as of June 26, 2005 and December 26, 2004, respectively. Approximately $7,400,000 and $7,500,000 as of June 26, 2005 and December 26, 2004, respectively, is included in other non-current liabilities. o Other miscellaneous items, net, of approximately $100,000 and $1,000,000 as of June 26, 2005 and December 26, 2004, respectively, included in several line items in the consolidated balance sheets. 15 10. Treasury Shares As of June 26, 2005, we had approximately 29,082,000 shares held in treasury. A reconciliation of our treasury shares for the 26 weeks ended June 26, 2005 is provided below (shares in thousands): Treasury Shares --------------- Balance as of December 26, 2004........................ 27,375 Purchases of treasury stock............................ 2,660 Stock options exercised................................ (756) Shares issued under employee benefit plans............. (105) Restricted shares awarded under equity incentive plans............................................. (92) --------------- Balance as of June 26, 2005............................ 29,082 =============== 11. New Accounting Pronouncements In June 2005, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force reached a consensus on Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 will not have an impact on our consolidated financial statements. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies that the term "conditional" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations." This Interpretation refers to a legal obligation to perform an asset retirement activity even if the timing and/or settlement is conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. The Interpretation is effective for fiscal years ending after December 15, 2005. We are evaluating the impact the adoption of FIN 47 will have on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based Payment," which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supercedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of 16 compensation cost will be measured based on the fair value on the grant date of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service for that award, resulting in a decrease in our net earnings. We will adopt the provisions of this Statement, as amended, using the modified prospective method beginning in fiscal 2006. We expect that the adoption of this Standard will be material to our consolidated financial statements; however, we are still in the process of evaluating its impact. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Restatement of Financial Statements The accompanying Management's Discussion and Analysis gives effect to the restatement of our condensed consolidated financial statements for quarterly and year-to-date information in 2004 to correct our accounting treatment for leases, depreciation of related leasehold improvements and for previously identified immaterial errors, primarily related to vacation and workers' compensation, as described in Note 2 to the condensed consolidated financial statements. General We operate on a 52 or 53 week fiscal year ending on the last Sunday in December. Our fiscal years and fiscal periods are as follows: Number Fiscal Year Fiscal Year End of Weeks - ------------------------------ --------------------- ---------------- 2004 December 26, 2004 52 2005 December 25, 2005 52 2006 December 31, 2006 53 Number Fiscal Period Fiscal Period End of Weeks - ------------------------------ --------------------- ---------------- 2004 Quarter June 27, 2004 13 2005 Quarter June 26, 2005 13 2004 Year-to-date period June 27, 2004 26 2005 Year-to-date period June 26, 2005 26 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 for the current year and premium audit adjustments for prior years from franchisee participation in our captive insurance program and revenue from information technology products and services provided to certain franchisees. In fiscal 2005, we have fewer franchisee participants in the captive insurance program due to the termination of one of our captive programs, which will result in a decrease in franchise premiums recognized in other franchise income of approximately $9,500,000. Certain expenses relate only to company operated restaurants. These include: 18 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 program and costs related to information technology products and services provided to certain franchisees. In fiscal 2005, we have fewer franchisee participants in the captive insurance program due to the termination of one of our captive programs, which will result in a decrease in franchise premiums expense in the cost of other franchise income of approximately $9,500,000. Other expenses, such as general and administrative and amortization expenses, relate to both company operated restaurants and franchise operations. Overview Applebee's International, Inc. and our subsidiaries develop, franchise and operate casual dining restaurants under the name "Applebee's Neighborhood Grill & Bar" which is the largest casual dining concept in the world with over 1,700 system-wide restaurants open as of June 26, 2005. The casual dining segment of the restaurant industry is highly competitive and there are many factors that affect our profitability. Our industry is susceptible to changes in economic conditions, trends in lifestyles, fluctuating costs, government regulation, availability of resources and consumer perceptions. When evaluating and assessing our business, we believe there are five key factors: o Development - the number of new company and franchise restaurants opened during the period. As the largest casual dining concept in the world, Applebee's has a unique opportunity to leverage our brand, system size and scale to optimize our future growth. Our expansion strategy has been to cluster restaurants in targeted markets, thereby increasing consumer awareness and convenience, and enabling us to take advantage of operational, distribution and advertising efficiencies. We currently expect that the Applebee's system will encompass at least 3,000 restaurants in the United States, as well as the potential for at least 1,000 restaurants internationally. In the 2005 quarter and the 2005 year-to-date period, we and our franchisees opened 30 and 56 restaurants, respectively. We have opened at least 100 restaurants system-wide each year for the past 12 fiscal years. In fiscal 2005, we currently expect to open at least 135 restaurants system-wide, comprised of 50 company and 85 franchise restaurants. o Comparable restaurant sales - a year-over-year comparison of sales for restaurants open at least 18 months. Our revenues are generated primarily from company restaurant sales, franchise royalties and fees and other franchise income. Increases in company and franchise comparable restaurant sales will result in increases in company restaurant sales and franchise fees and royalties. In the 2005 quarter, company comparable sales decreased 1.2% while franchise and system-wide comparable sales were up 2.5% and 1.6%, respectively. For the 2005 year-to-date period, company comparable sales were down 0.4% while franchise and system-wide comparable sales were up 3.7% and 2.7%, respectively. We have had 28 consecutive quarters of positive system-wide comparable sales growth. We currently expect system-wide comparable restaurant sales to increase by at least 3% in fiscal 2005, with results expected to accelerate in the latter half of the year as comparisons 19 become easier. Comparable restaurant sales increases are driven by increases in the average guest check and/or increases in guest traffic. Average guest check increases result from menu price increases and/or a change in menu mix. Although we may have increases in our average guest check from period to period, our main focus has been increasing guest traffic as we view this component to be more indicative of the long-term health of the Applebee's brand. We are constantly seeking to increase guest traffic by focusing on operations and improving our menu with semi-annual new menu rollouts and implementation of new programs such as Carside to Go(TM)and Weight Watchers(TM). Carside To Go(TM)is expected to be a driver of company, franchise and system-wide comparable sales growth in fiscal 2005. o Company restaurant margin - company restaurant sales less food and beverage, labor, direct and occupancy restaurant costs and pre-opening expenses expressed as a percentage of company restaurant sales. Company restaurant margins were 13.8% and 14.8% in the 2005 quarter and 2005 year-to-date period, respectively. We currently expect full year fiscal 2005 company restaurant margins to be less than full year fiscal 2004 results and will be dependent on comparable sales performance at company restaurants. Company restaurant margins are susceptible to fluctuations in commodity costs, labor costs and other operating costs such as utilities costs. We attempt to negotiate contracts for the majority of our food products in order to mitigate the impact of rising commodity costs. We currently expect commodity costs for beef, poultry and other proteins to increase by approximately 1.5% in fiscal 2005. Labor costs are impacted by many factors, including minimum wage rate and other employment laws. o General and administrative expenses - general and administrative expense expressed as a percentage of total operating revenues. General and administrative expense leverage is a key focus for us. We currently expect that revenues will grow faster than general and administrative expenses. In fiscal 2005, general and administrative expenses as a percent of total revenues are currently expected to be approximately 9%. o Return on equity - net earnings expressed as a percent of average stockholders' equity. We believe this is an important indicator as it allows us to evaluate our ability to create value for our shareholders. We have exceeded our stated goal of at least 20% return on equity for the past six years and we are a leader in the casual dining industry in this category. The above overview contains forward-looking statements. Please refer to "Forward-Looking Statements" later in this section. Application of Critical Accounting Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed 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 condensed consolidated financial statements and notes thereto. Actual results may differ from these estimates, and such differences may be material to our condensed consolidated financial statements. We believe that the following significant accounting policies involve a significant degree of judgment or complexity. Inventory valuation: We state inventories at the lower of cost, using the first-in, first-out method, or market. Market is determined based upon our estimates of the 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 regarding projected usage which may change in the future and may require us to record an inventory impairment. 20 Property and equipment: We report property and equipment at historical cost less accumulated depreciation. Depreciation is provided on a straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the related asset. 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. If there are changes in circumstances that shorten an asset's useful life, we will recognize increased depreciation expense for that asset in future periods. Impairment of long-lived assets: We periodically review restaurant 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. We review other long-lived assets annually and when events or circumstances indicate that the carrying value of the asset may not be recoverable. The recoverability is assessed in most instances by comparing the carrying value to its undiscounted cash flows. This assessment process requires the use of estimates and assumptions regarding future cash flows and estimated useful lives which are subject to a significant degree of judgment. If these assumptions change in the future, we may be required to record impairment charges for these assets. Income taxes: We record valuation allowances against our deferred tax assets, when necessary, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain. We assess the likelihood that our deferred tax assets in each of the jurisdictions in which we operate will be recovered from future taxable income. Deferred tax assets do not include future tax benefits that we deem likely not to be realized. We are periodically audited by foreign, state and local tax authorities for both income and sales and use taxes. We record accruals when we determine it is probable that we have an exposure in a matter relating to an audit. The accruals may change in the future due to new developments in each matter. 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. 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 All of our acquisitions below have been accounted for using the purchase method of accounting and, accordingly, our consolidated financial statements reflect the results of operations for each acquisition subsequent to the date of acquisition. The assets acquired and liabilities assumed are recorded at 21 estimates of fair values as determined by management based upon information available. We finalize the allocation of purchase price to the fair value of assets acquired and liabilities assumed when we obtain information sufficient to complete the allocation, but in each case, no longer than one year after the acquisition date. In May 2005, we completed the acquisition of 12 Applebee's restaurants, which included one restaurant under construction, in Missouri, Kansas and Arkansas for approximately $39,500,000. Through June 2005, we have paid approximately $38,900,000, which has been allocated to the fair value of property and equipment of $16,800,000, goodwill of $21,900,000 and other net assets of approximately $200,000. In addition, we expect to pay the remaining $600,000 for property and equipment relating to the completion of construction of one restaurant in the third fiscal quarter of 2005. The following table is comprised of actual company restaurant sales for the restaurant acquisition above, which are included in our condensed consolidated financial statements for each period presented and pro forma company restaurant sales assuming the acquisition above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- Actual acquired company restaurant sales............. $ 2,800 $ -- $ 2,800 $ -- =============== =============== =============== =============== Pro forma acquired company restaurant sales.......... $ 7,300 $ 6,700 $ 14,400 $ 13,400 =============== =============== =============== ===============
In April 2005, we finalized the acquisition of eight Applebee's restaurants that were closed in fiscal 2004 by a former franchisee for approximately $8,800,000 payable in cash. In connection with this acquisition, we paid approximately $800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000 in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash in the second quarter of fiscal 2005. The purchase price of $8,800,000 has been allocated to the fair value of property and equipment of approximately $8,200,000 and goodwill of approximately $600,000. As of June 26, 2005, we have remodeled and opened six restaurants. Subsequent to June 26, 2005, one additional restaurant was opened and the remaining restaurant was sold to a third party for $1,300,000. In April 2004, we completed our acquisition of the operations and assets of ten Applebee's restaurants located in Southern California for approximately $13,800,000 in cash. 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 $500,000. Company restaurant sales for these restaurants were $4,700,000 for both the 13 weeks ended and 26 weeks ended June 27, 2004. Proforma company restaurant sales for these restaurants would have been approximately $7,000,000 and $13,500,000 for the 13 weeks and 26 weeks ended June 27, 2004 had this acquisition been completed at the beginning of fiscal 2004. 22 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. In fiscal 2005, we reduced the types of insurance coverage plans which resulted in fewer franchisee participants in our captive insurance program. Our consolidated balance sheets include the following balances related to the captive insurance subsidiary: o Franchise premium receivables of approximately $3,200,000 and $1,900,000 as of June 26, 2005 and December 26, 2004, respectively, included in receivables related to captive insurance subsidiary. o Cash equivalent and other long-term investments restricted for the payment of claims of approximately $18,100,000 and $16,700,000 as of June 26, 2005 and December 26, 2004, respectively, included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $21,400,000 and $19,600,000 as of June 26, 2005 and December 26, 2004, respectively. Approximately $7,400,000 and $7,500,000 as of June 26, 2005 and December 26, 2004, respectively, is included in other non-current liabilities. o Other miscellaneous items, net, of approximately $100,000 and $1,000,000 as of June 26, 2005 and December 26, 2004, respectively, included in several line items in the consolidated balance sheets. 23 Results of Operations The following table contains information derived from our consolidated statements of earnings expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended 26 Weeks Ended ------------------------- ------------------------- June 26, June 27, June 26, June 27 2005 2004 2005 2004 ------------ ------------ ------------ ------------ (as (as restated) restated) Revenues: Company restaurant sales.................................. 88.9% 87.9% 88.9% 87.9% Franchise royalties and fees.............................. 10.6 10.9 10.7 11.0 Other franchise income.................................... 0.5 1.2 0.4 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......................................... 26.6% 26.9% 26.5% 26.5% Labor..................................................... 33.0 32.6 32.9 32.6 Direct and occupancy...................................... 26.0 24.4 25.3 24.4 Pre-opening expense....................................... 0.5 0.2 0.4 0.2 ------------ ------------ ------------ ------------ Total cost of sales.................................. 86.2% 84.1% 85.2% 83.7% ============ ============ ============ ============ Cost of other franchise income (as a percentage of other franchise income)......................................... 86.3% 148.1% 82.3% 122.4% General and administrative expenses........................... 9.1 8.9 9.0 9.0 Amortization of intangible assets............................. 0.1 0.1 0.1 -- Loss on disposition of restaurants and equipment.............. 0.2 0.2 0.1 0.2 ------------ ------------ ------------ ------------ Operating earnings............................................ 13.6 15.2 14.7 15.8 ------------ ------------ ------------ ------------ Other income (expense): Investment income......................................... 0.1 -- 0.1 -- Interest expense.......................................... (0.2) (0.1) (0.2) (0.1) Other income.............................................. 0.2 0.2 0.2 0.2 ------------ ------------ ------------ ------------ Total other income................................... 0.1 0.1 0.1 0.1 ------------ ------------ ------------ ------------ Earnings before income taxes.................................. 13.7 15.3 14.8 15.9 Income taxes.................................................. 4.7 5.3 5.1 5.5 ------------ ------------ ------------ ------------ Net earnings.................................................. 9.0% 10.0% 9.7% 10.3% ============ ============ ============ ============
24 The following table sets forth certain unaudited financial information and other restaurant data relating to company and franchise restaurants, as reported to us by franchisees:
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 26, June 27, June 26, June 27, 2005 2004 2005 2004 ------------- ------------- -------------- ------------- Number of restaurants: Company: Beginning of period....................... 437 391 424 383 Restaurant openings....................... 14 4 27 12 Restaurants acquired from franchisees..... 11 10 11 10 ------------- ------------- -------------- ------------- End of period............................. 462 405 462 405 ------------- ------------- -------------- ------------- Franchise: Beginning of period....................... 1,257 1,212 1,247 1,202 Restaurant openings....................... 16 8 29 19 Restaurants closed........................ (2) (3) (5) (4) Restaurants acquired from franchisees..... (11) (10) (11) (10) ------------- ------------- -------------- ------------- End of period............................. 1,260 1,207 1,260 1,207 ------------- ------------- -------------- ------------- Total: Beginning of period....................... 1,694 1,603 1,671 1,585 Restaurant openings....................... 30 12 56 31 Restaurants closed........................ (2) (3) (5) (4) ------------- ------------- -------------- ------------- End of period............................. 1,722 1,612 1,722 1,612 ============= ============= ============== ============= Weighted average weekly sales per restaurant: Company........................................ $ 46,800 $ 47,758 $ 47,483 $ 48,075 Franchise...................................... $ 50,114 $ 48,759 $ 50,705 $ 48,763 Total.......................................... $ 49,244 $ 48,510 $ 49,868 $ 48,593 Change in comparable restaurant sales:(1) Company........................................ (1.2)% 5.5 % (0.4)% 7.0 % Franchise...................................... 2.5 % 6.5 % 3.7 % 7.2 % Total.......................................... 1.6 % 6.3 % 2.7 % 7.2 % Total operating revenues (in thousands): Company restaurant sales....................... $ 272,703 $ 247,769 $ 543,161 $ 491,329 Franchise royalties and fees(2)................ 32,493 30,722 65,501 61,437 Other franchise income(3)...................... 1,424 3,399 2,489 6,514 ------------- ------------- -------------- ------------- Total.......................................... $ 306,620 $ 281,890 $ 611,151 $ 559,280 ============= ============= ============== =============
(1) When computing comparable restaurant sales, restaurants open for at least 18 months are compared from period to period. (2) Franchise royalties are generally 4% of each franchise restaurant's reported monthly gross sales. Reported franchise sales, in thousands, were $820,483 and $764,422 in the 2005 quarter and the 2004 quarter, respectively, and $1,653,480 and $1,528,538 in the 2005 year-to-date and 2004 year-to-date period, respectively. Franchise fees typically range from $30,000 to $35,000 for each restaurant opened. (3) Other franchise income includes insurance premiums from franchisee participation in our captive insurance program and revenue from information technology products and services provided to certain franchisees. 25 2005 Quarter Compared With 2004 Quarter and 2005 Year-to-Date Period Compared With 2004 Year-to-Date Period Company Restaurant Sales. Total company restaurant sales increased $24,934,000 (10%) from $247,769,000 in the 2004 quarter to $272,703,000 in the 2005 quarter and increased $51,832,000 (11%) from $491,329,000 in the 2004 year-to-date period to $543,161,000 in the 2005 year-to-date period. The percentage increase in total company restaurant sales was comprised of the following:
2005 Year-to-Date 2005 Quarter Period ---------------------- ---------------------- Company restaurant openings............................. 11 % 10 % Restaurant acquisitions................................. 1 % 2 % Weighted average weekly sales........................... (2)% (1)%
Comparable restaurant sales at company restaurants decreased by 1.2% and 0.4% in the 2005 quarter and the 2005 year-to-date period, respectively. Weighted average weekly sales at company restaurants decreased 2.0% from $47,758 in the 2004 quarter to $46,800 in the 2005 quarter and decreased 1.2% from $48,075 in the 2004 year-to-date period to $47,483 in the 2005 year-to-date period. These decreases were a result of a reduction in guest traffic due to lapping over the implementation of our Weight Watchers(TM) menu system-wide in May 2004 and a decline in guest counts in the Kansas City, St. Louis and Minnesota markets, where more than one-third of our company restaurants are located. These decreases were partially offset by increases in the average guest check resulting from menu price increases of approximately 1.0% in November 2004 and 1.5% in May 2005 and our Carside To Go(TM) initiative. Carside To Go(TM) sales mix increased from 9.4% of company restaurant sales in the 2004 quarter to 10.4% of company restaurant sales in the 2005 quarter. Franchise Royalties and Fees. Franchise royalties and fees increased $1,771,000 (6%) from $30,722,000 in the 2004 quarter to $32,493,000 in the 2005 quarter and increased $4,064,000 (7%) from $61,437,000 in the 2004 year-to-date period to $65,501,000 in the 2005 year-to-date period. These increases were due primarily to the increased number of franchise restaurants operating during the 2005 quarter and 2005 year-to-date period as compared to the same periods in 2004 and increases in comparable restaurant sales. Weighted average weekly sales at franchise restaurants increased 2.8% and 4.0% in the 2005 quarter and 2005 year-to-date period, respectively, and franchise comparable restaurant sales increased 2.5% and 3.7% in the 2005 quarter and 2005 year-to-date period, respectively. These increases were due in part to the implementation of the Carside To Go(TM) program in most franchise restaurants which were partially offset by lapping over sales increases which resulted from the implementation of our Weight Watchers(TM) menu system-wide in May 2004. Other Franchise Income. Other franchise income decreased $1,975,000 (58%) from $3,399,000 in the 2004 quarter to $1,424,000 in the 2005 quarter and decreased $4,025,000 (62%) from $6,514,000 in the 2004 year-to-date period to $2,489,000 in the 2005 year-to-date period due primarily to fewer franchisee participants in our captive insurance program resulting from the reduction of the types of insurance coverage plans offered. Franchise premiums are included in other franchise income ratably over the policy year. Cost of Company Restaurant Sales. Food and beverage costs decreased from 26.9% in the 2004 quarter to 26.6% in the 2005 quarter and were 26.5% in both the 2004 year-to-date period and the 2005 year-to-date period. Both periods were favorably impacted by a menu price increases of 1.0% in November 2004 and 1.5% in May 2005, which were offset by higher commodity costs. The 2004 quarter and 26 2004 year-to-date period were unfavorably impacted by the company portion of the June 2004 impairment of approximately $500,000 for excess riblet inventories which no longer met our quality standards. Labor costs increased from 32.6% in the 2004 quarter to 33.0% in the 2005 quarter and increased from 32.6% in the 2004 year-to-date period to 32.9% in the 2005 year-to-date period. The increases in both periods were due primarily to higher management and hourly wage rates and higher group insurance costs which were partially offset by lower management incentive compensation. Direct and occupancy costs increased from 24.4% in both the 2004 quarter and the 2004 year-to-date period to 26.0% in the 2005 quarter and 25.3% in the 2005 year-to-date period due primarily to lower sales volumes at company restaurants which resulted in unfavorable depreciation, rent and property tax expenses, as a percentage of sales, due to their relatively fixed nature as well as higher utilities, packaging and smallwares costs. The increase in the 2005 quarter was also due to higher advertising costs, as a percentage of sales. Pre-Opening Expenses. Pre-opening expenses increased from 0.2% in both the 2004 quarter and the 2004 year-to-date period to 0.5% in the 2005 quarter and 0.4% in the 2005 year-to-date period due primarily to the increased number of restaurant openings. Cost of Other Franchise Income. Cost of other franchise income decreased $3,806,000 (76%) from $5,035,000 in the 2004 quarter to $1,229,000 in the 2005 quarter and decreased $5,924,000 (74%) from $7,972,000 in the 2004 year-to-date period to $2,048,000 in the 2005 year-to-date due to fewer franchisee participants in our captive insurance program resulting from the reduction of the types of insurance coverage plans offered and the franchisee portion of the June 2004 impairment of approximately $1,800,000 for excess riblet inventories which no longer met our quality standards. General and Administrative Expenses. General and administrative expenses increased from 8.9% in the 2004 quarter to 9.1% in the 2005 quarter and were 9.0% in both the 2004 year-to-date period and the 2005 year-to-date period. General and administrative expenses were unfavorably impacted in both periods by higher compensation expense due to staffing levels and higher management training costs due to the increased number of company restaurant openings as compared to 2004. The increase in the 2005 quarter was also due to the timing of our restaurant general manager convention. Income Taxes. The effective income tax rate, as a percentage of earnings before income taxes, decreased from 34.7% in the 2004 quarter and 34.8% in the 2004 year-to-date period to 34.6% in both the 2005 quarter and the 2005 year-to-date period due to a reduction in state and local income taxes. 27 Liquidity and Capital Resources Our primary source of liquidity is cash provided by operations. Our need for capital resources historically has resulted from the construction and acquisition of restaurants, the repurchase of our common stock 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. In addition, we have assumed debt or issued new debt in connection with certain mergers and acquisitions. The following table presents a summary of our cash flows for the 2005 and 2004 year-to-date period (in thousands):
2005 2004 Year-to-Date Year-to-Date Period Period ------------------- ------------------- (as restated) Net cash provided by operating activities.......... $ 107,790 $ 80,439 Net cash used by investing activities.............. (108,116) (61,986) Net cash used by financing activities.............. (9,655) (21,430) ------------------- ------------------- Net decrease in cash and cash equivalents.......... $ (9,981) $ (2,977) =================== ===================
Capital expenditures, excluding acquisitions, were $36,543,000 in the 2004 year-to-date period and $59,922,000 in the 2005 year-to-date period. In fiscal 2005, we currently expect to open at least 50 company restaurants, and capital expenditures are expected to be between $150,000,000 and $160,000,000, including the costs to acquire and re-open seven company restaurants that were closed in fiscal 2004 by a former franchisee in Memphis, Tennessee, but excluding the costs to acquire the assets of 12 Applebee's restaurants in Missouri, Kansas and Arkansas. These expenditures will primarily be for the development of new restaurants, refurbishment and capital replacement for existing restaurants and the enhancement of information systems. Because we expect to continue to purchase a portion of our sites, the amount of actual capital expenditures will be dependent upon, among other things, the proportion of leased versus owned properties. In addition, if we open more or fewer restaurants than we currently anticipate or acquire additional restaurants, our capital requirements will increase or decrease accordingly. In May 2005, we completed the acquisition of 12 Applebee's restaurants, which included one restaurant under construction, in Missouri, Kansas and Arkansas for approximately $39,500,000. Through June 2005, we have paid approximately $38,900,000, which has been allocated to the fair value of property and equipment of $16,800,000, goodwill of $21,900,000 and other net assets of approximately $200,000. In addition, we expect to pay the remaining $600,000 for property and equipment relating to the completion of construction of one restaurant in the third fiscal quarter of 2005. In April 2005, we finalized the acquisition of eight Applebee's restaurants that were closed in fiscal 2004 by a former franchisee for approximately $8,800,000 payable in cash. In connection with this acquisition, we paid approximately $800,000 in cash in the fourth quarter of fiscal 2004, approximately $5,700,000 in cash in the first quarter of fiscal 2005 and approximately $2,300,000 in cash in the second quarter of fiscal 2005. 28 In April 2004, we completed our acquisition of the operations and assets of ten Applebee's restaurants located in Southern California for approximately $13,800,000 in cash. In December 2004, we completed the refinancing of our $150,000,000 unsecured revolving credit facility. The new bank credit agreement provides for a $150,000,000 five-year unsecured revolving credit facility, of which $40,000,000 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. There is no limit on cash dividends provided that the declaration and payment of such dividend does not cause a default of any other covenant contained in the agreement. The facility is subject to standard other terms, conditions, covenants, and fees. As of June 26, 2005, we are in compliance with the covenants contained in our credit agreement. As of June 26, 2005, we had borrowings of $81,300,000, standby letters of credit of $9,500,000 outstanding and approximately $59,200,000 available under our revolving credit facility. During fiscal 2005, we expect to fund operations, capital expansion, any repurchases of common stock, and the payment of dividends from operating cash flows and borrowings under our revolving credit facility. In October 2004, our Board of Directors authorized additional repurchases of our common stock of up to $150,000,000 beginning in fiscal 2005 and approved a written plan for repurchases of our common stock in the open market. During the 2005 year-to-date period, we repurchased 2,660,000 shares of our common stock at an average price of $25.65 for an aggregate cost of $68,200,000. As of June 26, 2005, we had $81,800,000 remaining under our repurchase authorization. As of June 26, 2005, our liquid assets totaled $944,000. These assets consisted of cash and cash equivalents in the amount of $661,000 and short-term investments in the amount of $283,000. The working capital deficit increased from $51,041,000 as of December 26, 2004 to $76,491,000 as of June 26, 2005. This increase was due primarily to increases in accrued income taxes and decreases in cash and cash equivalents due to repurchases of our common stock, acquisition of restaurants and capital expenditures in the 2005 year-to-date period and was partially offset by the redemption of gift cards in the 2005 year-to-date period sold in fiscal 2004. We believe that our liquid assets and cash generated from operations, combined with borrowings available under our credit facility, will provide sufficient funds for capital expenditures, repurchases of our common stock, the payment of dividends and other such operating activities for the foreseeable future. 29 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 June 26, 2005 (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) (1)...................... $ 82,784 $ 4,428 $ 162 $ 77,095 $ 1,099 Capital Lease Obligations....................... 8,720 780 1,644 1,760 4,536 Operating Leases (2)............................ 360,523 25,208 50,628 50,634 234,053 Purchase Obligations - Company(3)............... 206,221 174,938 21,130 10,153 -- Purchase Obligations - Franchise(4)............ 448,359 384,875 40,934 22,550 --
(1) The amounts for long-term debt are primarily borrowings under our revolving credit facility and exclude interest payments which are variable in nature. (2) The amounts for operating leases include option periods where failure to exercise such options would result in an economic penalty such that the renewal appears reasonably assured. (3) The amounts for company purchase obligations include commitments for food items, energy, supplies, severance and employment agreements, and other miscellaneous commitments. (4) 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 $18,200,000 as of June 26, 2005 (see Note 4 to the condensed consolidated financial statements). In addition, we or our subsidiaries are contingently liable for various leases that we have assigned in connection with the sale of restaurants to franchisees and other parties, in the potential amount of $17,200,000. We have not recorded a liability for these guarantees as of June 26, 2005 or December 26, 2004. We have severance and employment agreements with certain officers providing for severance payments to be made in the event the associate 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 June 26, 2005, we would have been required to make payments totaling approximately $13,300,000. 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 $6,200,000 if such officers had been terminated as of June 26, 2005. In November 2003, we arranged for a third-party financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments, subject to our approval. Under the terms of this financing program, we will provide a limited guarantee pool for the loans advanced during the three-year period ending December 2006. As of June 26, 2005, there were loans outstanding to four franchisees for approximately $1,300,000 under this program. In May 2004, we arranged for a third-party financing company to provide up to $250,000,000 to qualified franchisees for loans to fund development of new restaurants through October 2007, subject to our approval. We will provide a 30 limited guarantee of certain loans advanced under this program. As of June 26, 2005, there were loans outstanding to five franchisees for approximately $20,100,000 under this program. The fair value of our guarantees under these two financing programs was less than $100,000 and is recorded in other non-current liabilities and other assets in our consolidated balance sheet as of June 26, 2005. New Accounting Pronouncements In June 2005, the Financial Accounting Standards Board's ("FASB") Emerging Issues Task Force reached a consensus on Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 will not have an impact on our consolidated financial statements. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS No. 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations," ("FIN 47"). FIN 47 clarifies that the term "conditional" as used in SFAS No. 143, "Accounting for Asset Retirement Obligations." This Interpretation refers to a legal obligation to perform an asset retirement activity even if the timing and/or settlement is conditional on a future event that may or may not be within the control of an entity. Accordingly, the entity must record a liability for the conditional asset retirement obligation if the fair value of the obligation can be reasonably estimated. The Interpretation is effective for fiscal years ending after December 15, 2005. We are evaluating the impact the adoption of FIN 47 will have on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-based Payment," which replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supercedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123 (revised 2004) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the fair value on the grant date of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service for that award, resulting in a decrease in our net earnings. We will adopt the provisions of this Statement, as amended, using the modified prospective method beginning in fiscal 2006. We expect that the adoption of this Standard will be material to our consolidated financial statements; however, we are still in the process of evaluating its impact. 31 Forward-Looking Statements The statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section regarding restaurant development, comparable sales, Carside To Go(TM), revenue growth, restaurant margin, commodity costs, general and administrative expenses, capital expenditures, return on equity 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 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, the impact of economic factors on consumer spending, 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 9, 2005. 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 0.5%, at our option. As of June 26, 2005, the total amount of debt subject to interest rate fluctuations was $81,300,000 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 $813,000 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 weather, seasonality and fuel costs. As part of our strategy to moderate this volatility, we have entered into fixed price purchase commitments. Item 4. Controls and Procedures As of June 26, 2005, 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 occurred that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. 32 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. We believe that the ultimate disposition of these matters will not, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial position. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Issuer Purchases of Equity Securities.
- ------------------------------------------------------------------------------------------------------------------ Purchases of Equity Securities(1) - ------------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) - ------------------------------ ------------------ ----------- ------------------------- -------------------------- Maximum Dollar Total Number of Value of Shares that Average Shares Purchased as May Yet Be Total Number Price Part of Publicly Purchased Under the of Shares Paid Per Announced Plans or Plans or Programs Period Purchased Share Programs (in thousands) - ------------------------------ ------------------ ----------- ------------------------- -------------------------- March 28, 2005 through April 24, 2005 86,000 $26.72 86,000 $129,079 - ------------------------------ ------------------ ----------- ------------------------- -------------------------- April 25, 2005 through May 22, 2005 1,752,400 $25.56 1,752,400 $84,291 - ------------------------------ ------------------ ----------- ------------------------- -------------------------- May 23, 2005 through June 26, 2005 94,239(2) $26.76 93,300 $81,795 - ------------------------------ ------------------ ----------- ------------------------- -------------------------- Total 1,932,639 1,931,700 ============================== ================== =========== ========================= ==========================
(1) In October 2004, our Board of Directors authorized additional repurchases of our common stock of up to $150,000,000 beginning in fiscal 2005. (2) Includes 939 shares received as partial payment for shares issued under stock option plans. 33 Item 4. Submission of Matters to a Vote of Security Holders Our annual meeting of stockholders was held on May 12, 2005. The stockholders voted on the following matters: Proposal I. Elect Erline Belton and Eric L. Hansen as Directors. Proposal II. Approve an amendment to the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan. Proposal III. Approve an amendment to the Applebee's International, Inc. Employee Stock Purchase Plan. Proposal IV. Ratify Deloitte & Touche LLP as our independent registered public accounting firm for the 2005 fiscal year. Proposal V. Act on a shareholder proposal to require us to issue a report on the feasibility of requiring our chicken suppliers to utilize an alternative method of slaughter. The results of the voting were as follows:
Negative/ Affirmative Withheld Broker Proposal Votes Votes Abstentions Non-Votes - -------------------------- ---------------- -------------------- -------------------- ----------------- I (Belton) 74,075,223 1,885,305 -- -- I (Hansen) 73,930,090 2,030,438 -- -- II 47,478,774 17,841,092 135,508 10,505,154 III 62,431,883 2,904,626 118,865 10,505,154 IV 75,129,910 554,259 276,359 -- V 3,639,797 57,048,023 4,767,554 10,505,154
Proposals I, II, III and IV received the required affirmative votes and were affirmatively adopted by the Stockholders. Proposal V did not receive the required affirmative votes. Item 6. Exhibits (a) The Exhibits listed on the accompanying Exhibit Index are filed as part of this report. 34 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: July 27, 2005 By: /s/ Lloyd L. Hill --------------------------- -------------------------------------- Lloyd L. Hill Director, Chairman of the Board and Chief Executive Officer (principal executive officer) Date: July 27, 2005 By: /s/ Steven K. Lumpkin --------------------------- -------------------------------------- Steven K. Lumpkin Director, Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer) Date: July 27, 2005 By: /s/ Beverly O. Elving --------------------------- -------------------------------------- Beverly O. Elving Vice President and Controller (principal accounting officer) 35 APPLEBEE'S INTERNATIONAL, INC AND SUBSIDIARIES EXHIBIT INDEX Exhibit Number Description of Exhibit - ----------- -------------------------------------------------------------------- 10.1 Amendment to Memorandum of Understanding, dated October 5, 2002, with Louis A. Kaucic 10.2 Asset Purchase Agreement with The Ozark Apples, Inc. dated April 8, 2005 10.3 Amended and Restated 1995 Equity Incentive Plan, as amended 10.4 Employee Stock Purchase Plan, as amended 10.5 Amendment to Executive Retirement Plan 10.6 CEO Use of the Company Airplane Policy (incorporated by reference to Form 8-K filed on May 16, 2005) 10.7 Personal Use of Corporate Aircraft for Senior Team (incorporated by reference to Form 8-K filed on May 16, 2005) 31.1 Certification of Chairman and Chief Executive Officer Pursuant to SEC Rule 13a-14(a) 31.2 Certification of Chief Financial Officer Pursuant to SEC Rule 13a-14(a) 32.1 Certification of Chairman and Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 36 EX-10 3 kaucicagreementamendment.txt LOU KAUCIC AMENDMENT AMENDMENT NO. 1 TO MEMORANDUM OF UNDERSTANDING THIS AGREEMENT, made and entered into as of the 1st day of July, 2005, between Applebee's International, Inc., a Delaware Corporation ("Company") and Lou Kaucic ("Employee"). WHEREAS, the Company and the Executive have entered into a Memorandum of Understanding dated July 1, 2005; WHEREAS, the parties mutually desire to amend the Memorandum of Understanding; NOW, THEREFORE, in consideration of these premises and other good and valuable consideration, the parties agree as follows: 1. Section (1) of Paragraph 2(a) of the Memorandum of Understanding is hereby deleted and the following is substituted in lieu thereof: "(1) work on average three (3) days per week in Kansas City at the direction of the Company's Chief Executive Officer. Employee's travel to and from Kansas City shall be at the Company's expense." 2. Section (6) of Paragraph 2(a) of the Memorandum of Understanding is hereby deleted and the following is substituted in lieu thereof: (6) be eligible to receive a stock option grant of 10,000 shares (which will be adjusted for any stock splits or stock dividends) in January 2006 and be eligible to receive equity grants commensurate with the CPO position, including for 2006 (any equity grants in 2004, 2005 and 2006 will provide continued vesting after retirement)." 3. A new Section (7) of Paragraph 2(a) of the Memorandum of Understanding is hereby added as follows: "(7) be eligible to carry over all unused 2005 vacation into 2006 and be eligible to participate in the Flexperx Plan during 2006." In witness whereof, the parties have executed this Amendment to the Memorandum of Understanding as of the day and year written above. APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE By: /s/ Lou Kaucic -------------------------------------- Lou Kaucic EX-10 4 assetpurchaseagree.txt OZARK PURCHASE AGREEMENT GOURMET SYSTEMS, INC. AND THE OZARK APPLES, INC. ASSET PURCHASE AGREEMENT April 8, 2005 i
TABLE OF CONTENTS Page ARTICLE I PURCHASE AND SALE OF ASSETS..............................................................................2 SECTION 1.1 PURCHASED ASSETS...................................................................................2 SECTION 1.2 EXCLUDED ASSETS....................................................................................3 ARTICLE II PURCHASE PRICE OF ASSETS................................................................................3 SECTION 2.1 PURCHASE PRICE; EARNEST MONEY......................................................................3 SECTION 2.2 FORM OF PAYMENT....................................................................................4 SECTION 2.3 ADJUSTMENT OF PURCHASE PRICE.......................................................................4 SECTION 2.4 OBLIGATIONS ASSUMED BY BUYER.......................................................................4 SECTION 2.5 OBLIGATIONS SATISFIED BY SELLER....................................................................5 SECTION 2.6 ALLOCATION OF PURCHASE PRICE.......................................................................5 SECTION 2.7 TAXES..............................................................................................5 ARTICLE III CLOSING................................................................................................5 SECTION 3.1 DATE, TIME AND PLACE OF CLOSING....................................................................5 SECTION 3.2 DELIVERIES BY SELLER AT CLOSING....................................................................5 SECTION 3.3 DELIVERIES BY BUYER AT CLOSING.....................................................................7 SECTION 3.4 TRANSFER OF OPERATIONS.............................................................................7 SECTION 3.5 ASSIGNMENT BY BUYER................................................................................7 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER................................................................7 SECTION 4.1 EXISTENCE; OWNERSHIP...............................................................................7 SECTION 4.2 POWER AND AUTHORITY................................................................................7 SECTION 4.3 EXECUTION AND DELIVERY PERMITTED...................................................................8 SECTION 4.4 THE PURCHASED ASSETS...............................................................................8 SECTION 4.5 BINDING EFFECT.....................................................................................9 SECTION 4.6 LICENSURE..........................................................................................9 SECTION 4.7 CONDITION OF PURCHASED ASSETS.....................................................................10 SECTION 4.8 ABSENCE OF OTHER ASSETS...........................................................................10 SECTION 4.9 OWNERSHIP OF PURCHASED ASSETS.....................................................................10 SECTION 4.10 REAL PROPERTY....................................................................................10 SECTION 4.11 INTENTIONALLY DELETED............................................................................11 SECTION 4.12 DOCUMENTS SUFFICIENT.............................................................................12 SECTION 4.13 LITIGATION OR CONDEMNATION.......................................................................12 SECTION 4.14 TAXES............................................................................................12 SECTION 4.15 CONTRACTS........................................................................................12 SECTION 4.16 DISCLOSURE.......................................................................................13 SECTION 4.17 EMPLOYMENT MATTERS...............................................................................13 SECTION 4.18 EMPLOYEE BENEFIT PLANS...........................................................................13 SECTION 4.19 LIABILITIES OF SELLER............................................................................15 SECTION 4.20 INSURANCE COVERAGE...............................................................................15 SECTION 4.21 SEVERANCE PAY....................................................................................15 SECTION 4.22 ENVIRONMENTAL MATTERS............................................................................15
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SECTION 4.23 RESTAURANT LOCATIONS.............................................................................17 SECTION 4.24 ACCURACY OF REPRESENTATIONS AND WARRANTIES.......................................................17 SECTION 4.25 INTENTIONALLY DELETED............................................................................17 SECTION 4.26 AFFILIATED TRANSACTIONS..........................................................................17 SECTION 4.27 SUBSIDIARIES.....................................................................................17 SECTION 4.28 STATUS OF ADDITIONAL RESTAURANTS.................................................................17 SECTION 4.29 FINANCIAL STATEMENTS.............................................................................17 ARTICLE V COVENANTS OF SELLER.....................................................................................18 SECTION 5.1 EMPLOYEE BENEFIT PLANS............................................................................18 SECTION 5.2 PERFORMANCE OF REAL PROPERTY LEASES AND MATERIAL CONTRACTS........................................18 SECTION 5.3 TRANSFER OF LICENSES AND PERMITS..................................................................18 SECTION 5.4 AGREEMENTS RESPECTING EMPLOYEES OF SELLER.........................................................19 SECTION 5.5 MAINTENANCE OF EXISTENCE..........................................................................19 SECTION 5.6 CONDUCT OF BUSINESS...............................................................................19 SECTION 5.7 BROKER'S FEES.....................................................................................20 SECTION 5.8 ACCESS TO INFORMATION AND PROPERTIES..............................................................20 SECTION 5.9 INTENTIONALLY DELETED.............................................................................20 SECTION 5.10 INTENTIONALLY DELETED............................................................................20 SECTION 5.11 INTENTIONALLY DELETED............................................................................20 SECTION 5.12 SURVEY AND TITLE REPORT..........................................................................20 SECTION 5.13 FINANCIAL STATEMENTS.............................................................................21 SECTION 5.14 NO SECURITIES TRADING............................................................................21 SECTION 5.15 CHANGE OF NAME...................................................................................21 SECTION 5.16 COOPERATION......................................................................................22 SECTION 5.17 RIGHT TO INSPECT.................................................................................22 SECTION 5.18 DEFICIENCIES--REPAIRS AND REPLACEMENTS...........................................................22 SECTION 5.19 RESTRICTIVE COVENANTS............................................................................23 SECTION 5.20 NO SALE NEGOTIATIONS.............................................................................24 SECTION 5.21 POTENTIAL SITES..................................................................................24 SECTION 5.22 SALE OR ASSIGNMENT OF POTENTIAL SITES............................................................24 SECTION 5.23 ADDITIONAL RESTAURANTS; REIMBURSEMENT............................................................24 SECTION 5.24 DEVELOPMENT ACTIVITIES...........................................................................24 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER................................................................24 SECTION 6.1 CORPORATE EXISTENCE...............................................................................25 SECTION 6.2 CORPORATE POWER AND AUTHORITY.....................................................................25 SECTION 6.3 EXECUTION AND DELIVERY PERMITTED..................................................................25 ARTICLE VII COVENANTS OF BUYER....................................................................................25 SECTION 7.1 BUYER PERFORMANCE.................................................................................25 SECTION 7.2 DEVELOPMENT OF ADDITIONAL RESTAURANTS.............................................................25 SECTION 7.3 POTENTIAL SITES...................................................................................25 SECTION 7.4 RIGHT TO INSPECT..................................................................................26 SECTION 7.5 BUYER'S OPTIONS...................................................................................26
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ARTICLE VIII PRORATIONS AND PURCHASE PRICE ADJUSTMENT; CONDITIONS TO CLOSING......................................26 SECTION 8.1 PRORATIONS AND PURCHASE PRICE ADJUSTMENTS.........................................................26 SECTION 8.2 INVENTORY ADJUSTMENT AND VACATION CREDIT..........................................................27 SECTION 8.3 AMOUNTS OWED BUYER; STORE CASH....................................................................27 SECTION 8.4 BUYER'S CONDITIONS TO CLOSING.....................................................................27 SECTION 8.5 SELLER'S CONDITIONS TO CLOSING....................................................................29 ARTICLE IX INDEMNIFICATION AGAINST LOSS...........................................................................29 SECTION 9.1 INDEMNIFICATION BY SELLER AND THE SHAREHOLDERS....................................................29 SECTION 9.2 INDEMNIFICATION BY BUYER..........................................................................30 SECTION 9.3 LIMITATIONS.......................................................................................30 ARTICLE X MISCELLANEOUS...........................................................................................30 SECTION 10.1 NOTICES..........................................................................................30 SECTION 10.2 APPLICABLE LAW...................................................................................31 SECTION 10.3 BINDING ON SUCCESSORS; ASSIGNMENT................................................................31 SECTION 10.4 PAYMENT OF COSTS.................................................................................31 SECTION 10.5 CLOSING NOT TO PREJUDICE CLAIM FOR DAMAGES.......................................................32 SECTION 10.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND UNDERTAKINGS..............................33 SECTION 10.7 ADDITIONAL DOCUMENTS.............................................................................33 SECTION 10.8 TIME IS OF THE ESSENCE...........................................................................33 SECTION 10.9 INTERPRETATION...................................................................................33 SECTION 10.10 ENTIRE AGREEMENT................................................................................33 SECTION 10.11 COUNTERPARTS....................................................................................33 SECTION 10.12 TERMINATION.....................................................................................33 SECTION 10.13 PUBLIC ANNOUNCEMENTS............................................................................34 SECTION 10.14 CONFIDENTIALITY.................................................................................34
iv ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into this day of April, 2005, by and among The Ozark Apples, Inc., a Missouri corporation ("Seller"), Ozark Holdings, Inc., a Missouri corporation ("Holdings"), Gregory R. Walton ("Greg Walton"), Sandra G. Walton ("Sandra Walton") Sandra G. Walton, Voting Trustee under Voting Trust dated June 29, 1992, as amended ("Sandra Walton Trust"), Gregory R. Walton, Trustee under Voting Trust, dated August 12, 2002 f/b/o Sandra G. Walton and Gregory R. Walton (the "Walton Trust"), G. Reid Teaney, Trustee under the Christopher Ryan Walton Irrevocable Trust, dated November 25, 1977 (the "Christopher Walton Trust"), G. Reid Teaney, Trustee under the Megan N. (Walton) Allen Irrevocable Trust, dated November 25, 1977 (the "Megan Allen Trust"), Gregory W. McGhee, Trustee of the Gregory W. McGhee Revocable Trust, dated September 16, 2002 (the "Gregory McGhee Trust"), Gregory McGhee ("McGhee"), Yvonne T. McGhee, Trustee of the Yvonne T. McGhee Revocable Trust, dated September 16, 2002 (the "Yvonne McGhee Trust") and Yvonne T. McGhee ("Yvonne McGhee") (collectively, Holdings, Greg Walton, Sandra Walton, Sandra Walton Trust, the Walton Trust, the Christopher Walton Trust, the Megan Allen Trust, the Gregory McGhee Trust, McGhee, the Yvonne McGhee Trust and Yvonne McGhee shall be referred to herein as the "Shareholders") and Gourmet Systems, Inc., a Missouri corporation (the "Buyer"). RECITALS WHEREAS, Seller owns various items of personal property and interests in real property (i) used in the operation of eleven (11) Applebee's Neighborhood Grill & Bar restaurants (the "Existing Restaurants") at the locations set forth on Exhibit A to this Agreement; and (ii) intended to be used in the operation of one (1) Applebee's Neighborhood Grill & Bar restaurants under construction at the location set forth on Exhibit B to this Agreement (the "Additional Restaurants") (collectively, the Existing Restaurants and the Additional Restaurant shall hereinafter be defined as the "Restaurants" and the locations of all such Restaurants shall be defined as (the "Restaurant Locations")); WHEREAS, Seller may acquire or occupy, or enter into purchase contracts or leases to acquire or occupy, two (2) potential development sites (the "Potential Sites") for Applebee's Neighborhood Bar & Grill restaurants in or near Fort Leonard Wood, Missouri and Webb City, Missouri; WHEREAS, Seller desires to sell such personal property and to convey certain interests in such real property to Buyer; WHEREAS, Buyer desires to purchase such personal property and real property interests from Seller; and WHEREAS, Buyer and Seller have agreed upon the terms and conditions of such sale and desire to reduce the same to writing. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements, covenants, representations, warranties and promises set forth herein, and in order to prescribe the terms and conditions of such purchase and sale, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS Section 1.1 Purchased Assets. Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees that at the Closing (as defined in Section 3.1, below) it shall sell, transfer, convey, and assign to Buyer and Buyer hereby agrees at the Closing to purchase and accept from Seller, free and clear of all mortgages, liens, security interests, pledges and encumbrances, the following assets (collectively, the "Purchased Assets"): (a) All of Seller's right, title and interest in and under all of the Franchise Agreements listed on Exhibit C (the "Franchise Agreements") and all operating manuals, recipes, proprietary information and similar documents and information held by Seller in connection with Seller's status as a franchisee of Applebee's International, Inc., a Delaware corporation ("AII") and all copies and extracts therefrom; (b) All of Seller's right, title and interest at the Closing in and to the real and personal property (of whatever nature) intended to be used in the operation of the Additional Restaurant and leased by Seller; (c) All real and personal property (of whatever nature) intended to be used in the operation of the Additional Restaurant and owned by Seller; (d) Subject to the consultation and approval of Buyer as set forth in Section 5.22 herein, all of Seller's right, title and interest, if any, at the Closing in and to the Potential Sites; (e) Seller's interest as lessee in and to the Real Property Leases (as defined in Section 4.4(c), below), including all of Seller's interest under the Real Property Leases in the buildings, fixtures, signs, parking facilities, trash facilities, fences, other leasehold improvements, appurtenances, and hereditaments subject to such Real Property Leases; (f) All Owned Real Property (as defined in Section 4.4(a), below), including all of Seller's interest in the buildings, fixtures, signs, parking facilities, trash facilities, fences, other improvements, appurtenances and hereditaments related to the Owned Real Property; (g) All Material Contracts (as defined in Section 4.4(g), below), including, but not limited to, all confidentiality agreements, non-competition agreements and non-solicitation agreements between Seller and its employees; (h) All equipment, vehicles and leasehold improvements used in the normal and customary operations of the Restaurants, including but not limited to the furniture, machinery, equipment, tables, chairs, cash registers, ovens, refrigerators, display cases, shelves, utensils, tools, 2 pans, lights, uniforms, curtains, signs, menus, tablecloths, glasses, plates, dishes, silverware, pitchers, books, cabinets, racks, towels, ornaments, artifacts, decor, collectibles, bars, and bar equipment located at the Restaurant Locations or the Additional Restaurants, as the case may be (the "Equipment") ; (i) All inventories of foodstuffs, beverages, paper products, cleaning supplies and other supplies (the "Inventories") which are in the Restaurant Locations or the Additional Restaurant, as the case may be, on the Closing Date (as defined in Section 3.1, below); (j) All of Seller's other rights and property interests of any nature which are customarily used in the operation of the Restaurants or intended to be used in the operation of the Additional Restaurant, including, but not limited to rights to use existing telephone numbers, fax numbers, keys, security system codes, copyrights, trademarks and service marks (and all goodwill associated with such trademarks or service marks), and rights arising under equipment or other warranties; (k) All data transmission equipment and related software and software licenses ("Transferred Licenses"), computer software (subject to Seller's ability to assign or transfer such software) and related materials and portable computers used by field personnel and used only in connection with the operation of the Restaurants; (l) All records and files related to the Real Property (as defined in Section 4.4(b), below) such as rent calculations, landlord correspondence, purchase agreements, deeds, construction documents, title reports, environmental and engineering reports, appraisals, surveys, etc., and the Material Contracts and all personnel records and files related to Seller employees who accept employment with Buyer as of the Effective Time (as defined below in Section 3.4, below); and (m) All cash amounts normally used to operate the Restaurants, provided that in no event shall such cash be in excess of $1,500 per Restaurant. Section 1.2 Excluded Assets. Excluded from sale under this Agreement are the assets of Seller listed or described on Schedule 1.2 to this Agreement. ARTICLE II PURCHASE PRICE OF ASSETS Section 2.1 Purchase Price; Earnest Money. The purchase price paid for the Purchased Assets shall be (a) Thirty-Four Million Eight Hundred Seventy-Two Thousand Two Hundred Ninety-Eight and No/100 Dollars ($34,872,298.00), adjusted as set forth in Section 2.3 and Article VIII below, plus (b) the amount set forth on Exhibit D attached hereto as the amount of Seller's out-of-pocket costs paid in connection with the development and construction of the Restaurant located in Osage Beach, Missouri (the "Purchase Price"). The Purchase Price shall be paid at Closing in accordance with Section 2.2 below and will be adjusted pursuant to Section 2.3 and Article VIII below, which adjustments will include payments for the Potential Sites, if any, and the Construction Costs (defined herein) relating to the Additional Restaurant.Pursuant to the Letter of 3 Intent between the parties, dated February 28, 2005, Buyer agreed to deliver to Seller earnest money in the total amount of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) (the "Earnest Money"), of which Fifty Thousand and No/100 Dollars ($50,000.00) has already been delivered to Seller from Buyer as of March 3, 2005. Simultaneously with the execution of this Agreement, Buyer shall pay to Seller the remainder of the Earnest Money in the amount of Two Hundred Thousand and No/100 Dollars ($200,000.00). The Earnest Money shall be refunded to Buyer in the event the Closing is not consummated on account of termination of this Agreement by either party pursuant to the rights contained herein. Upon Closing, the Earnest Money will be retained by Seller and will reduce the Purchase Price on a dollar for dollar basis. Section 2.2 Form of Payment. At the Closing, Buyer shall pay Seller the Purchase Price, as adjusted herein, in cash by wire transfer of funds, or in such other manner reasonably acceptable to Seller. Section 2.3 Adjustment of Purchase Price. Within five (5) business days prior to the Closing, Seller will deliver to Buyer a preliminary statement (the "Initial Closing Statement") of the Purchase Price adjustments and prorations as set forth in Article VIII. The amounts on the Initial Closing Statement, as reasonably agreed to by Buyer, shall constitute the initial adjustments to the Purchase Price at Closing. Within one hundred eighty (180) days following the Closing, Buyer will deliver to Seller, subject to the reasonable agreement of Seller, a final statement (the "Final Closing Statement") of any such adjustments and prorations. Any differences in the adjustment to the Purchase Price between the Final Closing Statement and the Initial Closing Statement shall be paid by the applicable party within five (5) days after the execution of the Final Closing Statement. The parties agree that payments owed by Buyer to Seller pursuant to Section 7.2 herein will be paid in accordance with said section even if the payment date occurs after the date for Final Closing Statement payments required under this Section 2.3. Section 2.4 Obligations Assumed by Buyer. In addition to the payment of the Purchase Price, Buyer hereby agrees to (a) assume responsibility for all earned and unused vacation, as of the Closing Date, of all employees of Seller who are hired by Buyer and (b) assume and perform all of Seller's obligations with respect to the Real Property Leases and Material Contracts (the "Assumed Liabilities"); however, except as specifically provided herein, Buyer shall not assume or be responsible for any liability, indebtedness, or contractual obligation of Seller relating to Restaurant operations or other events, acts or omissions occurring prior to the Effective Time, even if such liability, indebtedness or contractual obligation does not arise until after the Effective Time. Without limiting the generality of the foregoing, in no case shall Buyer be required to assume any obligation which: (a) Is prorated to Seller under Section 2.3 or Article VIII of this Agreement; (b) Arises from an event (including any action or inaction on the part of Seller) occurring on or prior to the Effective Time which, with notice, the passage of time or both, would result in an event of default occurring under any lease or agreement to which Seller is a party; (c) Is represented or warranted by Seller in this Agreement, or in the Exhibits and Schedules attached hereto, not to exist; 4 (d) Relates to Seller's payroll or pension, incentive or benefit plans; (e) Relates to any lease of personal property used in the operation of any Restaurant Location or in connection with the operations or development of the Additional Restaurant, unless it is a Material Contract; or (f) Any other liability of Seller not expressly assumed by Buyer hereunder. Section 2.5 Obligations Satisfied by Seller. Seller shall pay all trade payables, accounts payable, utility payments, tax withholding, payroll taxes, wages and similar operating expenses which are incurred, or related to a time prior to, the Effective Time. Section 2.6 Allocation of Purchase Price. Buyer and Seller agree that the Purchase Price shall be allocated to the Purchased Assets as set forth on Schedule 2.6 attached hereto, which schedule will be completed as mutually agreed to by the parties on or before the Closing Date. Such allocation shall be binding on Buyer and Seller for all purposes, including the reporting of gain or loss and determination of basis for income tax purposes, and each of the parties hereto agrees that it or they will file a statement setting forth such allocation with its or their federal income tax returns and will also file such further information or take such further actions as may be necessary to comply with the Treasury Regulations that have been promulgated pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended (the "1060 Regulations"). The parties also agree that such allocations will be consistent with Generally Accepted Accounting Principles ("GAAP") to the extent not inconsistent with the 1060 Regulations. Section 2.7 Taxes. Seller shall be liable for and shall pay all transfer or sales taxes and all filing fee and documentary fees or taxes related to the recording of all deeds and lease assignments payable in connection with the purchase, sale or transfer of the Purchased Assets to, and the assumption of the Assumed Liabilities by, Buyer pursuant to this Agreement. ARTICLE III CLOSING Section 3.1 Date, Time and Place of Closing. The consummation of the transactions contemplated hereby (the "Closing") shall be held on May 23, 2005 (the "Closing Date"), beginning at 9:00 a.m. central time in the offices of Blackwell Sanders Peper Martin LLP, 4801 Main Street, Suite 1000, Kansas City, Missouri, 64112, or at such other place, time or date as the parties hereto shall mutually agree. Section 3.2 Deliveries by Seller at Closing. At the Closing and thereafter as may be reasonably requested by Buyer, Seller shall convey, transfer, assign, and deliver the Purchased Assets to Buyer, and shall also deliver to Buyer the following: (a) Duly executed bills of sale, easements, assignments, leases, subleases, lease assignments and acceptances (including the Real Property Leases), estoppel certificates, consents to lease assignments or Material Contracts (if consent to assignment is required under the terms of an existing lease or a Material Contract), nondisturbance agreements, UCC 5 termination statements, satisfactions of mortgage, special warranty deeds regarding the real property and improvements to be conveyed, and other appropriate instruments of transfer as Buyer has requested, all in recordable form, of content acceptable to Buyer and Buyer's counsel and sufficient to vest in Buyer good and marketable title to all of the Purchased Assets which, with regard to interests in Real Property, is subject to no exception to title insurance coverage which could, in Buyer's sole discretion, substantially affect the operation of the subject Restaurant Location as a Restaurant or the operations or development of the Additional Restaurant, and, with regard to both real and personal property, is free and clear of all mortgages, deeds of trust, liens, security agreements, charges, or other encumbrances; (b) Certified copies of duly adopted resolutions of the Board of Directors and the stockholders of Seller authorizing, approving, and consenting to the execution and delivery of this Agreement, to the consummation of the transactions contemplated herein, and to performance of the agreements set forth herein; (c) Except for the consent of AII, the waiver, release, consent, estoppel certificate or other document of any person, corporation, association, or other entity of any nature whatsoever which is necessary to consummate the transactions contemplated hereby, and to make the warranties and representations made in this Agreement true; (d) Proof that all real and personal property taxes upon the Purchased Assets which are due and payable as of the Closing Date have been paid; (e) Letters of good standing from the tax commission for the States of Missouri, Kansas and Arkansas, as appropriate, indicating that all sales, employment, franchise, and income tax liabilities of Seller have been satisfied through the date of Closing; (f) A duly executed Assignment of Franchise Agreements in the form attached hereto as Exhibit E; (g) Certificates of good standing for Seller dated within ten (10) days of the date of Closing from the States of Missouri, Kansas and Arkansas and each other state wherein business is conducted by Seller; (h) An ALTA policy of title insurance regarding each Restaurant, Additional Restaurant and Potential Site (if applicable) (each, a "Title Policy") insuring fee or leasehold title, as applicable, to such properties and containing only such exceptions and exclusions as could not, in Buyer's sole discretion, substantially affect the operation of the Restaurant Location as a Restaurant or the operations or development of the Additional Restaurant or transfer of title to Buyer; (i) Lien and UCC search reports and other documentation sufficient to ensure that all leases of equipment employed in the operation of the Restaurant Locations or in connection with the operations or development of the Additional Restaurants which are not Material Contracts have been terminated and that all obligations of Seller thereunder have been 6 satisfied, or that arrangements have been made to apply such amount of the Purchase Price received from Buyer hereunder as may be necessary to fully satisfy the obligations of Seller in connection with such Equipment; (j) A duly executed release and waiver of claims in favor of Buyer from Seller; (k) A duly executed Cross-Receipt; and (l) Wire transfer instructions regarding delivery of the Purchase Price. Section 3.3 Deliveries by Buyer at Closing. Upon receipt and review by Buyer's counsel of all of the documents specified in Section 3.2 above, duly authorized and validly executed, Buyer shall deliver to Seller's representatives in attendance at Closing: (a) The Purchase Price; (b) Assignments and Acceptances of the Real Property Leases and Material Contracts; and (c) A duly executed Cross-Receipt. Section 3.4 Transfer of Operations. Buyer shall be entitled to immediate possession of, and to exercise all rights arising under, the Purchased Assets from and after the time that the Restaurants open for business on the Closing Date, and operation of the Restaurant Locations shall transfer at such time (the "Effective Time"). Except as provided hereby, all profits, losses, liabilities, claims, or injuries arising before the Effective Time shall be solely to the benefit or the risk of Seller. All such occurrences after the Effective Time shall be solely to the benefit or the risk of Buyer. The risk of loss or damage by fire, storm, flood, theft, or other casualty or cause shall be in all respects upon Seller prior to the Effective Time and upon Buyer thereafter. Section 3.5 Assignment by Buyer. Buyer may assign any or all of its rights and benefits under this Agreement to any entity or entities that control, are controlled by or are under common control with Buyer, upon written notice to Seller of such assignment. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER As an inducement to Buyer to enter this Agreement and to consummate the transactions contemplated hereby, Seller and each of the Shareholders, jointly and severally, hereby represent and warrant to Buyer as follows: Section 4.1 Existence; Ownership. Seller is duly organized, validly existing, and in good standing under the laws of the State of Missouri and is qualified to do business and in good standing in all jurisdictions where its activities so require. Except for the Shareholders, no other person or entity owns, directly or indirectly, any shares of any class of stock of Seller. Section 4.2 Power and Authority. Seller has the power and authority to own its properties and assets, specifically including but not limited to the 7 Purchased Assets, and to carry on its business as now conducted, and to convey, assign, and transfer the Purchased Assets as set forth in this Agreement. Section 4.3 Execution and Delivery Permitted. The execution, delivery and performance of this Agreement will not (a) violate or result in a breach of any term of Seller's Articles of Incorporation or Bylaws, (b) result in a breach of or constitute a default under any term in any agreement or other instrument to which Seller is a party, such default having not been previously waived by the other party to any such agreement, (c) violate any law or any order, rule or regulation applicable to Seller, of any court or of any regulatory body, administrative agency or other governmental instrumentality having jurisdiction over Seller or its properties or (d) result in the creation or imposition of any lien, charge, or encumbrance of any nature whatsoever upon any of the Purchased Assets. The Board of Directors and the stockholders of Seller have taken all action required by law and by Seller's Articles of Incorporation and Bylaws to authorize the execution and delivery of this Agreement, and the transfer of the Purchased Assets to Buyer in accordance with this Agreement. Except as set forth on Schedule 4.3, the execution, delivery and performance of this Agreement and the other agreements executed in connection herewith, and the consummation of the transactions contemplated hereby and thereby do not require any filing with, notice to or consent, waiver or approval of any third party, including but not limited to, any governmental body or entity. Schedule 4.3 identifies separately each notice, consent, waiver or approval by reference to each Real Property Lease and to each Material Contract to which it is applicable. Section 4.4 The Purchased Assets. (a) Attached hereto as Schedule 4.4(a) is a complete and accurate list of each parcel of real property owned by Seller on which a Restaurant is located or which is being held for development of a Restaurant (the "Owned Real Property"), listing the street address and providing the true legal description of each such parcel, and stating whether any improvements are located thereon and, if so, whether such improvements are owned or leased by Seller; (b) Attached hereto as Schedule 4.4(b) is a complete and accurate list of each parcel of real estate leased by Seller or in which Seller has a leasehold or other interest on which a Restaurant is located or which is being held for development of a Restaurant (the "Leased Real Property"), and stating whether any improvements are located thereon and, if so, whether such improvements are owned or leased by Seller, listing the street address of such property and the name and address of the landlord's agent to which Seller is obligated to provide notices regarding the Leased Real Property, (collectively, the Owned Real Property and the Leased Real Property are referred to as the "Real Property"); (c) Attached hereto as Schedule 4.4(c) is a complete and accurate list of all agreements or documents under which Seller claims or holds such leasehold or other interest or right to the use of the Leased Real Property (the "Real Property Leases") and showing the street address, exact name of the parties to such Real Property Lease, the date of such Real Property Lease, each amendment, modification or extension thereof and the exact name of the parties thereto, and the dates of each such amendment, modification or extension; 8 (d) Attached hereto as Schedule 4.4(d) is a complete and accurate list of all material liens, claims, encumbrances, security interests and restrictions on the Purchased Assets or any portion thereof; (e) Attached hereto as Schedule 4.4(e) is a complete and accurate list of all leases of personal property used in the operation of the Restaurants or in connection with the operations or development of the Additional Restaurants (the "Equipment Leases"), identified by parcel of Owned Real Property or Leased Real Property or otherwise where the leased equipment is located, and identifying the parties thereto, the property leased thereunder, the rental and other payment terms, expiration date and cancellation and renewal terms thereof; (f) Attached hereto as Schedule 4.4(f) is a complete and accurate list of all loan agreements, indentures, mortgages, pledges, security agreements, guarantees, leases or lease purchase agreements (not listed on Schedule 4.4(c) or 4.4(e)) to which Seller is a party and to which any of the Purchased Assets are subject; (g) Attached hereto as Schedule 4.4(g) is a complete and accurate list of all other contracts, agreements, commitments or other understandings or arrangements to which Seller is a party that relate to the Restaurants or to the operations or development of the Additional Restaurant and by which any of the Purchased Assets are bound or affected, identified by parcel of Owned Real Property or Leased Real Property or otherwise to which such is applicable. The contracts listed on Schedules 4.4(e) and 4.4(g) are the "Material Contracts," which will be transferred to Buyer hereunder; (h) Except as set forth on Schedule 4.4(h), there are no contracts, agreements, commitments, understandings or arrangements affecting or relating to the Purchased Assets or the Restaurants to which any Affiliate of Seller is a party or by which any such Affiliate is bound; and (i) The items listed in the above Schedules constitute all of the matters required to be shown on such Schedules. A true and complete copy, or with respect to oral agreements an accurate summary, of each item listed on the above Schedules has been made available to Buyer. Section 4.5 Binding Effect. This Agreement and each other agreement required to be executed and delivered by Seller in connection herewith, when executed and delivered, will be the legal, valid and binding obligation of Seller, enforceable in accordance with its terms, except as enforceability may be limited by (i) applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting the enforcement of creditors' rights generally, and (ii) general equitable principles (regardless of whether enforceability is considered in a proceeding in equity or at law). Section 4.6 Licensure. Seller has all state, county, and municipal permits and licenses necessary to operate the Restaurants, except for those permits and licenses which are not material to such operation. Seller is in 9 material compliance with all requirements and limitations set forth in such permits and licenses. All requisite and necessary state, county and municipal permits and licenses necessary to operate the Restaurant Locations are listed on Schedule 4.6 hereto. Section 4.7 Condition of Purchased Assets. (a) Each Restaurant contains all Equipment and Inventories required by the applicable Franchise Agreement and/or necessary to operate the Restaurant in accordance with Seller's historical practices. The Equipment is in good operating condition, commensurate with its age, with reasonable wear and tear excepted, and the Equipment complies with all material federal, state and local laws, rules and regulations, and all material occupational safety and health act regulations. (b) All Inventories are saleable or usable in the ordinary course of business for their intended use and exist in such quantity as necessary to operate the Restaurants in accordance with Seller' historical practices. (c) The buildings, fixtures, parking facilities, trash facilities, fences and other improvements, appurtenances and hereditaments at or on each Restaurant are in good condition, commensurate with their age, with reasonable wear and tear excepted, and in compliance in all material respects with all federal, state and local laws, rules and regulations and leases and lease provisions. Section 4.8 Absence of Other Assets. Except as specifically provided in this Agreement, there is no asset, property, or right of any nature which has not previously or is not now being transferred to Buyer hereunder by Seller or which is being retained by Seller that has been customarily employed, owned, held, or used in connection with the operation of any Restaurant Location. Except for the Purchased Assets used by field personnel referenced in Section 1.1(k) above, all Purchased Assets used in the operation of any Restaurant Location are situated entirely upon the premises of such Restaurant Location. All assets located upon the Restaurant Locations have been or are being conveyed to Buyer pursuant to this Agreement. Section 4.9 Ownership of Purchased Assets. (a) Seller has good and marketable title to the Purchased Assets, which title is free and clear of all deeds of trust, mortgages, liens, security interests, charges, and encumbrances of any nature whatsoever; (b) Seller has the full, absolute and unrestricted right to assign, transfer and convey the Purchased Assets to Buyer, subject only to such consents as Seller shall deliver to Buyer at Closing; (c) no person or entity, other than Seller has any interest in the Purchased Assets other than the interests of the lessors under the Real Property Leases and Equipment Leases and the interests of the other parties to the Material Contracts; and (d) all Equipment employed in the operation of the Restaurant Locations which is leased under leases other than Material Contracts has been acquired and the purchase price therefore fully paid, or arrangements have been made to apply such amount of the Purchase Price received from Buyer hereunder as may be necessary to fully pay the purchase price therefore. Section 4.10 Real Property. (a) Seller has good and marketable title to all of the Owned Real Property and has the full, absolute and unrestricted right to assign, 10 transfer and convey to Buyer said Owned Real Property, subject only to such consents as Seller shall deliver to Buyer at Closing. (b) Each of the Restaurant Locations is adequately serviced by all utilities necessary for the effective operation of the Restaurants and has not, during the last two years, experienced any material interruption in the delivery of adequate quantities of any utilities (including, without limitation, electricity, natural gas, potable water, water for cooling or other business uses and fuel oil, but excluding any electricity interruption due to storm damage) or other public services, including, without limitation, sanitary and industrial sewer services, required by Seller in the operation of the Restaurants. (c) Seller is not in default under and has not breached, and existing improvements do not violate and no event has occurred or is continuing which with notice or the passage of time, or both, would constitute a default by Seller under, any of the covenants, restrictions, rights-of-way, licenses, leases, agreements or easements affecting title to or relating to the use of the Restaurant Locations, and no such covenant, restriction, right-of-way, license, lease, agreement or easement has impaired in any material way the right of Seller to operate the Restaurants. Seller has not received any notice or has any knowledge of any encroachments, fence dispute, boundary dispute, boundary line question, water dispute or drainage dispute concerning or affecting the Restaurant Locations. Seller has not received any notice that the use or occupancy of the Restaurant Locations by Seller violates any statute, law or ordinance applicable to the Restaurant Locations, or conflicts with or is in the violation of the rights of any other person or entity. (d) There are no outstanding options or rights of first refusal to purchase any Restaurant Location or any portion thereof or any interest therein. Except as set forth on Schedule 4.10(d), the use and occupancy of the Restaurant Locations, and the operation of the Restaurants, do not (i) use or require the use of, adjacent property or the property of any other person, whether for ingress, egress, access, parking, storage, or other business operations, or otherwise, or (ii) require the consent or approval of any other person. (e) Each Real Property Lease is in full force and effect; the terms contained in the Real Property Leases have not been modified or amended in any respect except as disclosed on Schedule 4.4(c), and each constitutes the legal, valid, binding and enforceable obligation of the parties thereto. Seller is current in all obligations under each Real Property Lease. There have been no events of default, and, to the best of Seller's knowledge, no state of facts exists which with notice or the passage of time, or both, would constitute an event of default under any Real Property Lease. Subject to the consents listed on Schedule 4.3, the consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any rights of, or accelerate or increase any obligation of Seller under any Real Property Lease. Section 4.11 Intentionally Deleted. 11 Section 4.12 Documents Sufficient. The documents delivered by Seller to Buyer pursuant to Section 3.2 of this Agreement are valid, sufficient and effective to completely transfer to Buyer full legal and equitable title to all of the Purchased Assets. Section 4.13 Litigation or Condemnation. Except as set forth on Schedule 4.13 to this Agreement, there are no suits, actions, condemnation actions, investigations, complaints, or other proceedings of any nature whatsoever in law or in equity, which are pending or, to the best of their knowledge, threatened against, or which affect in any manner, Seller or any of the Purchased Assets, by or before any federal, state, municipal, or other governmental court, department, commission, board, bureau, agency, or other instrumentality (whether domestic or foreign). Seller is not in default with respect to any order, writ, injunction, garnishment, levy, or decree of any federal, state, municipal, or other governmental court, department, commission, board, bureau, agency, or instrumentality, and the use, occupancy, ownership, or transfer of the Purchased Assets do not constitute a default thereunder. The operations of Seller at the Restaurant Locations and the condition of the Purchased Assets do not violate any federal, state, or municipal law, regulation or rule (including any applicable zoning or similar use regulation or law). Seller's operations at the Restaurant Locations have not received a citation, warning, or reprimand for, or otherwise been notified of, any violation of any law, rule or regulation governing alcoholic beverages, or any health, environmental, or similar municipal, state, or federal law or regulation which has not been cured. Seller has not served any food or foodstuff which is adulterated, spoiled, or contains foreign substances, nor has Seller served any food item which has or, except as set forth on Schedule 4.13 to this Agreement, is claimed to have caused any illness or injury to the consumer thereof. Section 4.14 Taxes. All ad valorem and other property taxes relating to the Purchased Assets have been fully paid to the extent due, and there are no delinquent property tax liens or assessments. Seller has also timely filed (or will timely file after giving effect to any applicable extensions) all federal, state, local and other tax returns and reports required to be filed by Seller for all periods up to and including the Closing Date, and no request has been made for any extension of time within which to file such returns and reports, except for those returns and reports which have since been filed. Seller has paid (or will timely pay) all taxes, interest, penalties, governmental charges, duties, fees, and fines imposed by the United States, foreign countries, states, counties, municipalities, and subdivisions, and by all other governmental entities or taxing authorities, which are due and payable (or which relate to any period prior to the Closing Date) or for which assessments have been received, the nonpayment of which would result in a lien on any of the Purchased Assets. There are no audits, suits, actions, claims, investigations, inquiries, or proceedings pending or to the best of their knowledge, threatened against Seller with respect to taxes, interest, penalties, governmental charges, duties, or fines, nor are any such matters under discussion with any governmental authority, nor have any claims for additional taxes, interest, penalties, charges, fines, fees or duties been received by or assessed against Seller. Section 4.15 Contracts. The Material Contracts have been entered into in the ordinary course of Seller's business and, to Seller's knowledge, contain commercially reasonable terms. Subject to the consents delivered to Buyer at Closing, Seller has full, absolute and unrestricted right to assign, transfer and convey to Buyer the Material Contracts. Each Material Contract is in full 12 force and effect; the terms contained in the Material Contracts have not been modified or amended in any respect except as disclosed on Schedule 4.4(e) or (g) and each constitutes the legal, valid, binding and enforceable obligation of the parties thereto. Seller is current in all obligations under each Material Contract. There have been no events of default, and, no state of facts exists which with notice or the passage of time, or both, would constitute an event of default under any Material Contract. The consummation of the transactions contemplated by this Agreement will not (and will not give any person a right to) terminate or modify any rights of, or accelerate or increase any obligation of Seller under any Material Contract. Section 4.16 Disclosure. No representation or warranty by Seller in this Agreement, nor any statement or certificate furnished, or to be furnished, by or on behalf of Seller, nor any document or certificate delivered to Buyer pursuant to this Agreement, or in connection with the transactions contemplated hereby, contains any untrue statement of material fact, or omits to state any material fact necessary to make any statement contained therein not misleading. Section 4.17 Employment Matters. (a) No employees of the Restaurants are on strike, nor are any such employees threatening to strike, and there is no strike in progress in any collective bargaining unit of any union to which Seller's employees belong. Seller has no knowledge that any labor union has recently attempted, or is presently attempting, to organize Seller's employees into a collective bargaining unit, and no group of employees of Seller is presently organized into a collective bargaining unit. None of Seller's employees are a party to a written or oral agreement with Seller and all of Seller's employees are employees at will whose employment may be terminated at any time, with or without cause or prior notice. (b) Schedule 4.17(b) hereto is a true and complete list as of March 3, 2005, (i) of each person employed in connection with the operation of the Restaurants from and including each assistant manager and assistant kitchen manager up through area director; and (ii) of each other employee whose duties are primarily related to Seller's Restaurant operations. For each such person, Schedule 4.17(b) shows the full name, job title or duty, wages or salary and estimated bonus. (c) Seller has operated all Restaurants in accordance with all local, state and federal laws and regulations related to employment matters including, but not limited to, payment of wages and benefits and employee discrimination. Section 4.18 Employee Benefit Plans. (a) Schedule 4.18(a) contains a true and complete list of each pension, profit sharing, other deferred compensation, bonus, incentive compensation, stock purchase, stock option, supplemental retirement, severance or termination pay, medical, hospitalization, life insurance, dental, disability, salary continuation, vacation, supplemental unemployment benefits plan, program, arrangement or contract, and each other employee benefit plan, program, arrangement or contract, maintained, contributed to, or required to be contributed to, by Seller or any Related Party 13 (hereinafter defined) for the benefit of any current or former employee, director or agent of Seller or any Related Party, whether or not any of the foregoing is funded, whether formal or informal, whether or not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and whether legally binding or not (collectively, the "Benefit Plans"). Seller and its Related Parties do not have any express or implied plan or contract, whether legally binding or not, to create any additional Benefit Plan or modify any existing Benefit Plan, other than as may be required to comply with the Tax Reform Act of 1986. Seller has delivered to Purchaser, with respect to each applicable Benefit Plan (1) true and complete copies of all documents embodying or relating to each Benefit Plan including, without limitation, the plan and trust or other funding arrangement relating thereto, summary plan descriptions, employee handbooks or personnel manuals and all amendments and supplements thereto; (2) the most recent annual report (Series 5500 and all schedules thereto), if any, required by ERISA; and (3) the most recent determination letter received from the Internal Revenue Service ("IRS"), if any. "Related Party" means any member of a controlled group of corporations, a group of trades or businesses under common control or an affiliated service group, within the meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended (the "Code"), of Seller; (b) The Benefit Plans that are intended by Seller or any Related Party to meet the requirements of Section 401(a) of the Code now meet and since their inception have met, the requirements for qualification under Section 401(a) of the Code and the related trusts are now, and since their inception have been, exempt from taxation under Section 501(a) of the Code and nothing has occurred or, in connection with the transaction contemplated by this Agreement, will occur that has or could have an adverse affect on the qualified status of any such Benefit Plan. (c) Seller and any Related Party have performed in all material respects obligations required to be performed by them under, and are not in default under or in violation of, any and all of the Benefit Plans, and each Benefit Plan has been operated in all material respects in accordance with its provisions and in compliance with all applicable laws and regulations. Neither any Benefit Plan or fiduciary nor Seller or any Related Party has taken any action, or failed to take any action, that could subject it or any other person to any liability for any excise tax under Chapter 43 of the Code or for breach of fiduciary duty with respect to or in connection with a Benefit Plan; (d) At no time has Seller or any Related Party been required to contribute to any "multiemployer plan" (within the meaning of Section 3(37) of ERISA) and Seller and its Related Parties have no liability (contingent or otherwise) relating to the withdrawal or partial withdrawal from a multiemployer plan. Seller and its Related Parties do not participate in any "multiple employer plans," within the meaning of ERISA; (e) No Benefit Plan provides or is required to provide group health, medical, death or survivor benefits to any former or retired employee of Seller or beneficiary thereof, except to the extent (1) required under any state insurance law providing for a conversion option under a group insurance policy or (2) under Section 601 of ERISA; 14 (f) No "reportable event" (as defined in ERISA) has occurred with respect to any Benefit Plan. No liability to the Pension Benefit Guaranty Corporation ("PBGC") has been incurred, or is expected by Seller or any Related Party to be incurred, by Seller or any Related Party with respect to any Benefit Plan and no Benefit Plan has "unfunded benefit liabilities" within the meaning of Title IV of ERISA. No steps have been taken to terminate any Benefit Plan which is subject to Title IV of ERISA and no proceeding has been initiated by the PBGC to terminate any such Benefit Plan or to appoint a Trustee to administer any such Benefit Plan; (g) Neither any Benefit Plan or fiduciary nor Seller or any Related Party has any liability to any participant, beneficiary or other person under any provision of ERISA or any other applicable law by reason of any payment of, or failure to pay, benefits or other amounts with respect to or in connection with any Benefit Plan; and (h) Each Benefit Plan may be terminated by Seller or its Related Parties within a period of 30 days following the date of Closing without acceleration or additional vesting of any benefits and without payment of any amount as a penalty, bonus, premium, severance pay or other compensation or amount. Section 4.19 Liabilities of Seller. All liabilities of Seller related to the Restaurant Locations not expressly assumed by Buyer hereunder will be promptly paid by Seller; and all liabilities secured by Purchased Assets to be transferred to Buyer under this Agreement have been satisfied prior to, or will be satisfied in conjunction with, Closing. Section 4.20 Insurance Coverage. Schedule 4.20 to this Agreement is a true and accurate list and brief description of property, fire, casualty, liability, life, worker's compensation, and other forms of insurance of any kind owned or held by Seller regarding the Restaurant Locations. All such policies (a) are in full force and effect, (b) are valid and outstanding policies, (c) insure against risks of the kind customarily insured against and in the amounts customarily carried by entities similarly situated, and (d) provide that they will remain in full force and effect through the respective dates set forth in Schedule 4.20. Except as set forth on Schedule 4.20, all of the insurance policies set forth on Schedule 4.20 are of an "occurrence-based" variety, i.e., even if such policies are terminated, they insure all events covered under the applicable policy so long as such events occurred while such insurance policy was in full force and effect. Section 4.21 Severance Pay. No employee of Seller involved in the operation of any Restaurant Location will be entitled to severance pay by virtue of the transactions contemplated by this Agreement. Section 4.22 Environmental Matters. (a) During Seller's possession, and to the best knowledge of Seller and the Shareholders prior to Seller's possession, Hazardous Materials (as defined below) have never been generated, stored, discharged, disposed of, spilled, dumped, poured, emptied, or released on, in, beside, above, or under the real estate underlying or used in connection with the Restaurant 15 Locations (the "Real Estate"). Hazardous Materials are not currently present at, on, in, beside, above, or under the Real Estate. No underground storage tanks are, and to the best knowledge of Seller and the Shareholders, no underground storage tanks have been located on the Real Estate. Seller has at all times operated the Real Estate in compliance with all Environmental Laws (as defined below). (b) Seller and the Shareholders, jointly and severally, agree to indemnify and hold harmless Buyer, for any and all losses, claims, damages, penalties, liabilities, costs and expenses (including attorney's fees, administrative expenses, prejudgment interest and court costs), fines, injuries, penalties, response costs (including the cost of any required or necessary investigation, testing, monitoring, repair, clean up, detoxification, decontamination, preparation of any closure or other required plans, removal, response or remedial action at or relating to the Real Estate) (collectively, "Claims and Costs"), with respect to, as a direct or indirect result of, or arising out of any contamination, requirement, lawsuit, notice of violation, notice letter, warning letter, administrative order, compliance order, enforcement action, settlement, agreement, consent order, decree or judgment, injunction, restraining order or prohibition (collectively "Action") relating to the generation, presence, storage, management, disposal, release, discharge, escape, emission, spilling, seepage, leakage, dumping, pumping, pouring, emptying or clean up of Hazardous Materials (as herein defined) at, on, in, beside, above, from or under all or a portion of the Real Estate which occurs from activities undertaken prior to Closing. (c) For the purpose of this Agreement, the term "Hazardous Materials" shall include, but not be limited to: any substance defined as "hazardous substances," "hazardous air pollutant," "pollutants," "contaminants," "hazardous materials," "hazardous wastes," "toxic chemicals," "petroleum or petroleum products," "toxics," "hazardous chemicals," "extremely hazardous substances," "pesticides" or related materials, including but not limited to radon and asbestos, as now, in the past, or hereafter defined in any applicable federal, state or local law, regulation, ordinance, policy or directive, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.ss. 9601 et. seq.; the Emergency Planning and Community Right-to-Know Act, 42 U.S.C.ss. 1101 et. seq.; the Resource Conservation and Recovery Act, 42 U.S.C.ss. 6901 et. seq.; the Hazardous Materials Transportation Act of 1974, 49 U.S.C.ss. 1801 et. seq.; the Federal Water Pollution Control Act, 33 U.S.C.ss. 1251 et. seq.; the Clean Air Act, 42 U.S.C.ss. 4701 et. seq.; the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C.ss. 136 et. seq.; the Safe Drinking Water Act, 42 U.S.C.ss. 3001 et. seq.; the Toxic Substances Control Act, 15 U.S.C.ss. 2601 et. seq.; the Oil Pollution Act of 1990, 33 U.S.C.ss. 2701 et. seq.; and any laws regulating the use of biological agents or substances including medical or infectious wastes and the corresponding State laws, regulations and local ordinances, etc. which may be applicable, ("Environmental Laws") as any such acts may be amended. 16 (d) Seller agrees and consents to the performance of environmental testing on the Real Estate; provided, however, that neither the performance of nor failure to perform such tests by Buyer will negate or affect Seller's representations or warranties or agreement to indemnify contained herein. Section 4.23 Restaurant Locations. Exhibit A and Exhibit B include a complete and accurate list of all Restaurant Locations owned, held or used by Seller pursuant to the Franchise Agreements. The activities carried on in all buildings, structures or improvements included as part of, or located on or at the Restaurant Locations, and the buildings, structures and improvements themselves, are not in violation of, or in conflict with, any applicable zoning or health regulation or ordinance or any other similar law. There is no pending, threatened or proposed proceeding or governmental action to modify the zoning classification of, or to condemn or take by the power of eminent domain (or to purchase in lieu thereof), or to impose special assessments on, or otherwise to take or restrict in any way the right to use, alter or occupy all or any part of any of the Restaurant Locations. Section 4.24 Accuracy of Representations and Warranties. All representations and warranties made by Seller in this Agreement or any schedule or exhibit hereto or in any certificate or other document furnished by Seller pursuant to this Agreement are true and correct in all material respects on and as of the date hereof, and Seller has performed or complied in all material respects with all covenants, agreements and conditions contained in this Agreement on their part required to be performed or complied with at or prior to the Closing Date. Section 4.25 Intentionally Deleted. Section 4.26 Affiliated Transactions. Except as set forth on Schedule 4.26, Seller has not been a party to, and there does not now exist, any transaction affecting the Restaurants or the Purchased Assets (including without limitation the purchase, sale or exchange of property or the rendering of any service) with any Affiliate of Seller or any entity in which any of them owns a beneficial interest. For purposes of this Agreement, "Affiliate" means any person or entity that owns or controls more than a 10% interest in Seller (a "Controlling Affiliate") or in which Seller or a Controlling Affiliate owns or controls more than a 5% interest. Section 4.27 Subsidiaries. No subsidiary of Seller nor any entity in which Seller has a direct or indirect interest has any direct or indirect interest in any of the Purchased Assets. Section 4.28 Status of Additional Restaurant. Exhibit F contains, as of the date of this Agreement, a description of the current status of the Additional Restaurant, a list of all leases, contracts, or other agreements existing or under negotiation in respect thereof, a summary of the amounts invested therein, and a timetable and budget therefore. For the avoidance of doubt, and notwithstanding anything herein to the contrary, the provisions of this Agreement applicable to the Restaurants apply prospectively to the Additional Restaurant if the Additional Restaurant is open for business prior to the Closing. Section 4.29 Financial Statements. The Financial Statements (defined in Section 5.13 herein) were derived from the books and records of Seller and (i) are true, complete and correct in all material respects, (ii) present fairly the 17 financial position and results of operations of Seller and include appropriate reserves for liabilities at the dates and for the periods indicated, (iii) have been prepared in accordance with GAAP applied on a consistent basis, and (iv) do not include any untrue statement of a material fact required to be stated or reflected therein or omit to state or reflect any material fact necessary to make any statements therein not misleading. ARTICLE V COVENANTS OF SELLER Seller covenants and agrees as follows: Section 5.1 Employee Benefit Plans. (a) Buyer is not obligated to assume any liability, obligation or other responsibility under any Benefit Plan. With respect to any "defined benefit" Benefit Plan, Seller shall treat all employees who are transferred to Buyer pursuant to this Agreement as if they terminated employment with Seller on the date of Closing. With respect to any "defined contribution" Benefit Plan, Seller shall pay all amounts owed to the related trust with respect to each Transferred Employee as of the date of Closing as soon as reasonably practicable thereafter. Seller shall remain responsible and liable for all payments required under the terms of any "employee welfare benefit plan" as defined in Section 3(1) of ERISA for claims incurred and expenses and payments accrued on and prior to the date of Closing. (b) Seller, its Related Parties and the Shareholders, jointly and severally, agree to pay and be liable to Buyer and shall indemnify and hold harmless Buyer from and against all losses, expenses and liabilities, arising under Section 4980B of the Code arising from the failure to comply with the continuation requirements of Section 4980B of the Code and sections 601 through 608 of ERISA occurring prior to the date of Closing or as a result of the closing of the transactions contemplated herein and the termination of Seller's employees as a result thereof. (c) Seller agrees that prior to the date of Closing, Seller and its Related Parties shall not permit any event or condition to exist or occur that would give rise to a "reportable event" (as defined in ERISA) or to liabilities or taxes under ERISA or the Code with respect to any Benefit Plan or incur any commitment to increase their obligation under any Benefit Plan. Upon becoming aware of the occurrence or forthcoming occurrence of any of the above, Seller shall provide a written notice to Buyer specifying the nature of the event and action taken or proposed or threatened to be taken by Seller, its Related Parties, or any governmental body with respect to such events. Section 5.2 Performance of Real Property Leases and Material Contracts. Seller shall continue to faithfully and diligently perform each and every continuing obligation of Seller, if any, under each of the Real Property Leases and Material Contracts through the Effective Time and thereafter, to the extent such obligations are not assumed by Buyer pursuant to Section 2.4. Section 5.3 Transfer of Licenses and Permits. Seller shall use its best efforts and cooperate fully in assisting Buyer with the assumption, transfer or 18 reissuance of any and all required state, county or city licenses or permits required for the operation of the Restaurant Locations, including those shown on Schedule 4.6. Specifically, Seller agrees to take the following actions if requested by Buyer to ensure the orderly transition of liquor licenses for the Restaurants as of the Effective Time: (a) Arkansas. With respect to the Restaurant located in Arkansas, Seller will take such steps as are reasonably necessary to transfer control of its private club that holds the liquor license for such Restaurant to Buyer. (b) Kansas. With respect to the Restaurant located in Kansas, Seller agrees to execute a lease assignment for the applicable Real Property Lease and a bill of sale for the liquor inventory prior to the Closing Date, which documents will only be effective upon the Closing and the issuance of a new liquor license for such Restaurant to Buyer. Seller agrees to use its best efforts to obtain the consent of the landlord under such Real Property Lease to the lease assignment contemplated herein. (c) Missouri. With respect to the Restaurants located in Missouri, Seller agrees to execute (i) either a lease assignment for the applicable Real Property Leases or a deed for the Owned Real Property and (ii) a bill of sale for the liquor inventory prior to the Closing Date, which documents will only be effective upon the Closing and the issuance of a new liquor license for such Restaurant to Buyer. Seller agrees to use its best efforts to obtain the consent of the landlord under the Real Property Leases to the lease assignment contemplated herein. Section 5.4 Agreements Respecting Employees of Seller. Seller agrees to terminate the employment of all employees involved in the operation of the Restaurant Locations at the Effective Time. Section 5.5 Maintenance of Existence. Seller shall maintain its existence following Closing until such time as all closing conditions of Seller shall have been satisfied and the continuing obligations of Seller, if any, under the Real Property Leases and Material Contracts have been fully satisfied or adequate provision shall have been made for the satisfaction of such obligations. Section 5.6 Conduct of Business. From the execution of this Agreement until the Effective Time, Seller shall operate the Restaurants as they are currently being operated and only in the ordinary course and in compliance with all terms and conditions of the Franchise Agreements, using commercially reasonable efforts in keeping with Seller's historical practices to preserve and maintain the services of its employees, and its relationships with suppliers and customers, and to preserve its current level of sales volume, and shall continue to insure the Purchased Assets under existing policies of insurance, including workers' compensation and general liability insurance, at current levels. Seller shall pay all bills and debts incurred by it related to the business and the Restaurants promptly as they become due. Additionally, Seller shall continue with the implementation of initiatives as scheduled with AII. Further, Seller shall not: 19 (a) Change in any manner the equity ownership of Seller or the ownership of the Purchased Assets; (b) Increase the overall work force at the Restaurants or increase the rate of compensation to any officers or employees beyond the usual and customary annual merit increases or bonuses under established compensation plans; (c) Incur any capital expenditure obligations for material, or acquire by purchase, lease or otherwise, any material capital assets; provided, however, such obligations may be incurred with respect to the development of the Additional Restaurant, subject to the terms and conditions set forth herein. (d) Incur any material obligations, expenses, or liabilities except in the usual and ordinary course of business; (e) Mortgage, pledge or subject to lien any of the Purchased Assets; or (f) Sell or otherwise dispose of any Purchased Asset except for the sale or use of Inventories in the ordinary course of business. Section 5.7 Broker's Fees. Seller and the Shareholders, jointly and severally, shall indemnify and hold Buyer harmless in respect to any claim for brokerage or finder's fees or commissions with respect to the transactions contemplated herein by anyone claiming to have acted on behalf of Seller. Section 5.8 Access to Information and Properties. Subject to the limitations set forth in Section 5.17 hereof, Seller shall afford Buyer, its counsel, financial advisors, and other authorized representatives reasonable access for any purpose consistent with this Agreement from the date hereof until the Closing, during normal business hours, to the offices, properties, books, and records of Seller with respect to the Purchased Assets and the Restaurants and shall furnish to Buyer such additional financial and operating data and other information as Seller may possess and as Buyer may reasonably request, subject to the parties' obligations regarding confidentiality of such information as set forth in Section 10.13 hereof. Section 5.9 Intentionally Deleted. Section 5.10 Intentionally Deleted. Section 5.11 Intentionally Deleted. Section 5.12 Survey and Title Report. (a) Buyer, at Buyer's sole cost and expense, may obtain a survey for each of the Restaurant Locations (each, a "Survey"). If any Survey discloses that a portion of a Restaurant Location lies within a 100-year flood plain or any area having special flood hazards as designated by a government agency, then Buyer shall have the option, in Buyer's sole discretion, within 20 fifteen (15) days after receipt of the applicable Survey to terminate this Agreement, in which event the parties hereto shall have no further obligations under this Agreement. (b) Seller, at Seller's sole cost and expense, within ten (10) days after the date of this Agreement, will deliver to Buyer a preliminary title report or title policy commitment issued by Lincoln-Evans Land Title Company, as agent for Chicago Title Company (the "Title Company") for each Restaurant Location (collectively, the "Title Reports" and each, a "Title Report"), describing such Restaurant Location, listing Buyer as the prospective named insured and showing as the proposed policy amount an amount to be determined by Buyer. Seller shall also furnish to Buyer and Buyer's attorney a legible and true copy of all documents and other instruments referenced in the Title Report. (c) Buyer and Buyer's attorney shall have thirty (30) days after the date of receipt of all Surveys, Title Reports and copies of all related documents to review the same and to notify Seller in writing of any objections to condition of the title or matters shown on the Survey or in the Title Report. Seller shall have thirty (30) days following receipt of Buyer's notice to rectify Buyer's objections. The parties agree that if necessary, the time of Closing shall be extended accordingly. (d) If Seller cannot rectify Buyer's objections within thirty (30) days, or if the Title Reports are not delivered within the time specified, Buyer, at Buyer's option, may: (a) terminate this Agreement or (b) elect to waive such objections, in which case the parties shall proceed with the Closing and shall negotiate in good faith to agree upon a reduction in the Purchase Price corresponding to the uncured objection. Section 5.13 Financial Statements. Seller shall obtain and deliver to Buyer an audited balance sheet for each of the two (2) immediately preceding fiscal years, and an audited income statement for each of the three (3) preceding fiscal years with an unqualified opinion thereon from a certified public accountant reasonably acceptable to Buyer (collectively, the "Financial Statements"). The Financial Statements shall be prepared in accordance with generally accepted accounting principles. All such accounting services and reports shall be at the expense of Seller. Notwithstanding the foregoing, Financial Statements delivered for periods between January 1, 2005 and the Closing Date will be unaudited. Section 5.14 No Securities Trading. Seller and each Shareholder acknowledge that Buyer is a publicly-held company and dissemination of information concerning this transaction or trading in Buyer's stock by any party to this transaction or any party receiving information from any party to this transaction prior to public release could result in violation of SEC insider trading regulations. Therefore, Seller and each Shareholder agree not to disseminate any information concerning this transaction and agree not to trade in Buyer's stock until two business days after the Closing. Section 5.15 Change of Name. Seller shall change or shall cause to be changed the name of any affiliated entities as of the Closing to delete the use of the name "Apple" and "Applebee's." Immediately upon the Closing, Seller and such affiliated entities shall cease using the name "Apple" and "Applebee's" in 21 all of their activities, promotions, brochures, stationery, products, and in all other respects, and thereafter Seller and such affiliated entities shall agree not to use the names "Apple" and "Applebee's" in any business context. Section 5.16 Cooperation. Seller will use all commercially reasonable efforts to facilitate and cause the consummation of the transactions contemplated hereby; and obtain from all persons, and take all other actions with respect to, all consent or approvals required on the part of such party with respect to the consummation of those transactions. Section 5.17 Right to Inspect. Buyer may, at its expense, at any time prior to the Closing, cause inspections to be made of the Real Property and Restaurants, including environmental or engineering inspections, to determine the compliance with applicable law and the terms of the Franchise Agreements and to assess the operating condition of the Purchased Assets (an "Inspection"), subject to the following limitations: (i) inspection of any Restaurants or offices must be conducted (A) during normal business hours, (B) upon not less than three (3) days prior written notice to Seller, (C) under the supervision of Greg McGhee with prior written notice to Greg Owings and Wayne Dillard, and (D) in such a manner as to not disrupt or interfere with the operations of the Business or any Restaurant (ii) no inquires shall be made by Buyer of any director, officer, employee, manager or shareholder of Seller of any nature whatsoever, except with the prior written consent of Greg Owings or Wayne Dillard, (iii) all information regardless of medium or expression, provided by Seller to Buyer or otherwise acquired by Buyer in connection with the investigation of the Real Property, Business and the Restaurants, shall be treated as confidential in accordance with Section 10.14 hereof, and (iv) all inquires with respect to the Real Property, Business and the Restaurants shall be directed to Greg Owings and Wayne Dillard. Buyer shall provide to Seller copies of any Inspection conducted hereunder as soon as reasonably practicable after the conclusion of such Inspection. Seller shall cooperate in the performance of these inspections and shall also be responsible for correcting any deficiency identified by an Inspection in accordance with Section 5.18 below. Section 5.18 Deficiencies--Repairs and Replacements. Prior to Closing, Seller shall repair, replace, correct or remediate, at its sole cost and expense, any and all items identified as deficient pursuant to an Inspection conducted in accordance with Section 5.17. A Purchased Asset will be deemed to have a deficiency if all or any part of the Purchased Asset is not in good working condition (normal wear and tear excepted) or does not operate in accordance with applicable law or the terms of the Franchise Agreements or any manuals issued in connection therewith. Real Property shall be deemed deficient if it contains or is otherwise identified as having a "Recognized Environmental Condition," as that term is defined in the American Society for Testing Materials ("ASTM") "Standard Practice for Environmental Site Assessment: Phase 1 Environmental Site Assessment Process," ASTM E 1527-00 at 3.3.31. If an Inspection identifies any missing equipment or other property that is required to operate each Restaurant in accordance with AII's requirements and specifications as of the date of this Agreement ("Missing Equipment"), Seller will pay for and install all Missing Equipment prior to Closing. 22 Section 5.19 Restrictive Covenants. (a) Non-Solicitation. For a period of one year after the Closing Date, neither Seller nor the Shareholders shall solicit the employment of any employees who accept employment with Buyer at Closing. In addition, from the date of execution of this Agreement until Closing, neither Seller nor the Shareholders will offer continued employment to, or discourage any Restaurant employee from accepting employment with, Buyer. Provided, however, if a Restaurant employee independently elects not to accept employment with Buyer, neither Seller nor the Shareholders will be in violation of this Section 5.19 if it thereafter employs such employee. (b) Non-Compete. Seller and each of the Shareholders covenants and agrees that for a period of five (5) years from the Closing Date, neither Seller nor any Shareholder shall directly or indirectly, as an employee, employer, consultant, agent, franchisor, lender, guarantor, manager, principal, partner, shareholder, corporate officer, director, or through any other kind of ownership (other than ownership of securities of publicly held corporations of which Seller or any Shareholder owns less than five percent 5% of any class of outstanding securities) or in any other representative or individual capacity, engage in or render any services to any business in North America engaged in the casual dining restaurant industry. For purposes of this Agreement "casual dining restaurant industry" means any restaurant or restaurant chain listed, at the time Seller or a Shareholder engage in such business at a specific location, on the Casual Dining Category list of restaurants published by NPD - Crest/Recount from time to time or any substantially equivalent replacement list of which Buyer gives Seller prior written notice (the "Competitive List"). For purposes of this Section 5.19(b), the parties agree that the ownership and operation of one or more Fazzoli's restaurants, whether opened now or in the future, will not be deemed to be a violation of the covenant not to compete set forth above. Notwithstanding anything to the contrary contained herein, the covenant not to compete given by McGhee will only extend for two (2) years from the Closing Date. Buyer agrees that the covenant not to compete will not apply to any adult children of Walton so long as Walton is not engaged in any activities, directly or indirectly, of such children in a manner that would violate the covenant not to compete given by him in this Section 5.19. (c) Understanding of the Parties. It is mutually understood and agreed by and between the parties that the covenants contained in this Section 5.19 are fair and reasonable, and are reasonably required for the protection of Buyer and AII, Buyer's parent. (d) Remedies. In the event of a breach or threatened breach by Seller and/or any of the Shareholders (the "Breaching Party") of the provisions of this Section 5.19, Buyer and AII will be entitled to an injunction restraining the Breaching Party from such breach or threatened breach. Nothing contained herein will be construed to prohibit Buyer or AII from pursuing any other remedies available to it for such breach or threatened breach, including recovery of damages from the Breaching Party. If it is determined in any judicial or arbitration proceeding that the Breaching 23 Party breached one or more of the covenants set forth in Sections 5.19(a) or (b). of this Agreement, then all of such covenants will be deemed to be extended with respect to the Breaching Party for an additional period of time equal to the period of time during which the Breaching Party committed the applicable breach. (e) Savings Clause. Notwithstanding anything to the contrary herein contained and if, and only if, provisions of the type contained in this section are enforceable in the jurisdiction in question, if any one or more of the provisions contained in this Section 5.19 shall for any reason be held to be excessively broad as to time, duration, geographical scope, activity or subject, said provisions will be construed by limiting and reducing them so as to be enforceable to the extent compatible with the applicable law as it should then be determined. Section 5.20 No Sale Negotiations. From the date hereof through the later of (a) 60 days from the date hereof and (b) the Closing, neither Seller nor any Shareholder shall, directly or indirectly (a) entertain, solicit or encourage in any manner, (b) furnish or cause to be furnished any information to any persons or entities (other than Buyer) in connection with, or (c) negotiate or otherwise pursue, the sale of the business, the Purchased Assets or the Restaurants, the sale of stock of Seller or engage in any merger or other business combination involving the business, the Purchased Assets or the Restaurants. Section 5.21 Potential Sites. Seller agrees to consult with Buyer prior to executing any purchase contract or lease for a Potential Site, including any amendments thereto, and agrees to assign to Buyer at Closing any purchase contract or lease for a Potential Site previously approved by Buyer. Section 5.22 Sale or Assignment of Potential Sites. If Seller purchases a Potential Site pursuant to a purchase contract approved by Buyer prior to the Closing, Seller will sell, and Buyer will buy, such Potential Site for Seller's acquisition cost plus any other Buyer approved out-of-pocket costs with respect to such Potential Site. If Seller leases a Potential Site pursuant to a lease approved by Buyer prior to the Closing, Seller will assign, and Buyer will assume (to the extent obligations thereunder relate to acts or omissions occurring from and after the date of Closing), such lease in exchange for Buyer's payment of any Buyer approved out-of-pocket costs with respect to such Potential Site. Section 5.23 Additional Restaurant; Reimbursement. Subject to Sections 7.2 and Section 7.5, and reimbursement for reasonable and demonstrable Construction Costs (as defined in Section 7.2), Seller shall complete development and construction of the Additional Restaurant for Buyer. Section 5.24 Development Activities. Seller shall continue ordinary restaurant development activities (a) on the Potential Sites, to the extent Buyer approves reimbursement of out-of-pocket costs as provided for in Section 5.23, and (b) at the Additional Restaurant. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to Seller to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer hereby represents and warrants to Seller as follows: 24 Section 6.1 Corporate Existence. Buyer is a corporation validly existing and in good standing under the laws of the State of Missouri. Section 6.2 Corporate Power and Authority. Buyer has all requisite corporate power and authority to own its properties and assets, and to carry on the business in which it is now engaged. Buyer has the corporate power and authority to perform the covenants of Buyer set forth in this Agreement. Section 6.3 Execution and Delivery Permitted. The execution, delivery and performance of this Agreement will not (a) violate or result in a breach of any term of Buyer's Articles of Incorporation or of its Bylaws, (b) result in a breach of or constitute a default under any term in any agreement or other instrument to which Buyer is a party, such default having not been previously waived by the other party to such agreements, (c) violate any law or any order, rule or regulation applicable to Buyer, of any court or of any regulatory body, administrative agency or other governmental instrumentality having jurisdiction over Buyer or its properties, or (d) result in the creation or imposition of any mortgage, lien, charge, or encumbrance of any nature whatsoever upon any of the Purchased Assets purchased by Buyer hereunder. Buyer's Board of Directors, or an authorized committee thereof, has taken all action required by law, and by Buyer's Articles of Incorporation, its Bylaws, and otherwise to authorize the purchase of the Purchased Assets in accordance with this Agreement. ARTICLE VII COVENANTS OF BUYER Buyer hereby covenants and agrees as follows: Section 7.1 Buyer Performance. Buyer hereby covenants and agrees to accept conveyance of the Purchased Assets and, subject to Section 2.4 herein, to assume and perform the obligations of Seller under the Material Contracts as of the Effective Time. Section 7.2 Development of the Additional Restaurant. Buyer shall on the Closing Date reimburse Seller (in cash, by wire transfer of funds, or in such other manner reasonably acceptable to Seller) for Seller's reasonable and demonstrable out-of-pocket capital costs and expenses relating to the development and construction of the Additional Restaurant and the Restaurant located in Osage Beach, Missouri (to the extent not already reflected on Exhibit D) if such costs and expenses fall within one of the cost categories set forth on Exhibit G attached hereto (the "Construction Costs"). The Construction Costs will be paid to Seller in cash at Closing to the extent that such costs have been substantiated to Buyer's satisfaction. All other Construction Costs will be paid to Seller within fifteen (15) days of Buyer's receipt of satisfactory substantiation for such costs. Section 7.3 Potential Sites. If Seller purchases a Potential Site pursuant to a purchase contract approved by Buyer prior to the Closing, Seller will sell, and Buyer will buy at Closing, such Potential Site for Seller's acquisition cost plus any other Buyer approved out-of-pocket costs with respect to such Potential Site. If Seller leases a Potential Site pursuant to a lease approved by Buyer prior to the Closing, Seller will assign, and Buyer will 25 assume at Closing (to the extent obligations thereunder relate to acts or omissions occurring from and after the date of Closing), such lease in exchange for buyer's payment of any Buyer approved out-of-pocket costs with respect to such Potential Site. Section 7.4 Right to Inspect. Buyer may, at its expense, cause Inspections to be made of the Restaurant Locations and the Additional Restaurants and shall conduct such Inspections in accordance with Section 5.17. Section 7.5 Buyer's Options. Buyer, at its sole option, may (a) engage Walton Construction to develop the Potential Sites, and (b) elect to perform, and incur the costs of, certain pre-opening activities in connection with the Additional Restaurant. ARTICLE VIII PRORATIONS AND PURCHASE PRICE ADJUSTMENT; CONDITIONS TO CLOSING Section 8.1 Prorations and Purchase Price Adjustments. The following items shall be prorated between Buyer and Seller as of 11:59 PM on the day immediately preceding the Closing Date, or paid by one party on or after the Closing Date, in each case as set forth below, and shall constitute an adjustment to the Purchase Price: (a) All ad valorem, real and personal property taxes, general and special assessments (solely with respect to installments due in the current tax year), and any other property taxes on the Purchased Assets for the current tax year; however, if the amount of such tax for the current tax year is not determinable, (i) it shall be prorated on the basis of the tax for the immediately preceding tax year and (ii) after the amount of tax for the current tax year becomes determinable, (A) either party, at its option, may give the other party written notice of the correct amount of tax (accompanied by documentation substantiating such amount) and any necessary adjustment to the prorations and (B) the party from whom additional payment is required will pay the applicable amount within ten (10) days after such notice; (b) All rentals on Real Property Leases and Equipment Leases (to the extent assumed by Buyer), including prepaid rentals, percentage rents, and common area maintenance charges; (c) All prepaid insurance premiums on insurance policies covering the Purchased Assets and regarding welfare benefit programs, but only if Buyer elects to have said coverage remain in effect; (d) Any amounts paid by Seller on or prior to the Closing Date with respect to the Material Contracts for services extending beyond the Closing Date which are assignable to Buyer; (e) Any prepaid expenses, but not deposits, associated with the operation of a Restaurant Location which were paid by Seller in the ordinary course of business, including telephone expenses, billboard advertising expenses, cooperative fees, advertising expenses, and utility charges; 26 (f) The cost to repair, replace, correct or remediate a deficiency identified in Section 5.18 shall be paid by Seller as a reduction in Purchase Price, to the extent not repaired, replaced, corrected or remediated by Seller as set forth in Section 5.18 prior to Closing; (g) All amounts paid or to be paid by Buyer with regard to Buyer's purchase or lease of a Potential Site from Seller pursuant to Section 5.23 and Section 7.3 shall increase the Purchase Price; (h) All amounts paid or to be paid by Buyer with regard to reimbursing Seller in accordance with the development of the Additional Restaurant pursuant to Section 5.24 and Section 7.2 shall increase the Purchase Price; (i) The Earnest Money paid by Buyer to Seller shall be an offset against the Purchase Price as set forth in Section 2.1; and (j) The premiums for the Title Policies (excluding any premiums for special endorsements required by Buyer) will be paid by Seller as a reduction in Purchase Price. Seller shall bear the cost and expense of all prorated items applicable to periods ending on or before the Closing Date and shall receive the benefits thereof, and Buyer shall bear the cost and expense of payment of all prorated items applicable to periods from and after the Effective Time, and receive the benefits thereof. Section 8.2 Inventory Adjustment and Vacation Credit. (a) To the extent that the value of the Inventory as of the Closing Date, to be determined by physical audit thereof by Buyer, is (i) less than $165,000, the Purchase Price shall be reduced by an amount equal to such shortfall or (ii) more than $165,000, the Purchase Price shall be reduced by an amount equal to such excess. (b) The Purchase Price shall be reduced by the value of all earned and unused vacation, as of the Closing Date, of all employees of Seller who are hired by Buyer. Section 8.3 Amounts Owed Buyer; Store Cash. (a) The Purchase Price shall be reduced by the aggregate amount of all sums owed by Seller to Applebee's International, Inc. as recorded on the books of Applebee's International, Inc. (b) The Purchase Price shall be decreased for any petty cash amounts less than $1,500.00 per Restaurant by the amount of the shortfall at the Effective Time. Section 8.4 Buyer's Conditions to Closing. The obligations of Buyer hereunder are subject to satisfaction of each of the following conditions at or before Closing, the occurrence of which may, at the option of Buyer, be waived: 27 (a) All representations and warranties of Seller in this Agreement shall be true on and as of the Closing Date, and Seller shall have delivered to Buyer a certificate to such effect dated as of the Closing Date; (b) Neither the Purchased Assets nor any individual Restaurant Location shall have been substantially damaged as a result of fire, explosion, earthquake, disaster, accident, any action by the United States or any other governmental authority, earthquake, flood, drought, embargo, riot, civil disturbance, uprising, activity of armed forces, act of God, or public enemies; (c) There shall be no material adverse change in the Purchased Assets or the operations of Seller at the Restaurant Locations from the date hereof to the Closing Date; (d) Seller shall have performed and complied with all of Seller's covenants and obligations under this Agreement which are to be performed or complied with by Seller prior to or on the Closing Date; (e) Seller shall be willing and able to deliver all of the documents required to be delivered by them by this Agreement; (f) Buyer and Buyer's counsel shall have approved the form and substance of the documents delivered by Seller pursuant to this Agreement; (g) Seller shall have obtained and delivered to Buyer all necessary consents and estoppels to transfer the Purchased Assets and assign the Real Property Leases and Material Contracts to Buyer; (h) Seller shall have terminated the employment of all employees involved in the operation of the Restaurant Locations; (i) Buyer shall have obtained, either from Seller or directly from the issuing authority, all permits, licenses, and approvals of all governmental and quasi-governmental authorities necessary in the operation of the Restaurants as intended by Buyer; (j) There shall be no claims, actions or suits pending or threatened regarding the Purchased Assets or the Restaurant or that otherwise would restrict or prohibit Seller from consummating the transactions contemplated herein; (k) Buyer shall have completed to its satisfaction any review, investigation and due diligence of the Restaurants, Purchased Assets, business, operations or records of Seller and shall be satisfied with the results thereof; and (l) Seller shall have caused any companies affiliated with Seller, to transfer its ownership or leasehold interest in the Potential Sites or the real property on which the Restaurants or Additional Restaurants are situated to Buyer (for no additional consideration). 28 Section 8.5 Seller's Conditions to Closing. The obligations of Seller hereunder are subject to satisfaction of each of the following conditions at or before Closing, the occurrence of which may, at the option of Seller, be waived: (a) All representations and warranties of Buyer in this Agreement shall be true on and as of the Closing in all material respects, and Buyer shall have delivered to Seller a certificate to such effect dated as of the Closing Date; (b) Buyer shall have performed and complied in all material respects with all of its obligations under this Agreement which are to be performed or complied with by Buyer prior to or on the Closing Date; (c) Buyer shall be willing and able to deliver the Purchase Price and all of the documents required to be delivered by it under Section 3.3 of this Agreement; and (d) Seller shall have approved the form and substance of the documents delivered by Buyer pursuant to this Agreement. (e) The total costs to correct or remediate Real Property deficiencies pursuant to Section 5.18 and to remove exceptions to title insurance coverage from the Real Property required by Buyer does not exceed $300,000, plus the cost to Seller to remove all Monetary Liens. For purposes of this section, a "Monetary Lien" is any lien, claim or encumbrance which evidences or secures a fixed monetary amount or which can be removed by the payment of a liquidated sum. ARTICLE IX INDEMNIFICATION AGAINST LOSS Section 9.1 Indemnification by Seller and the Shareholders. Seller and each of the Shareholders, jointly and severally, agrees to defend, indemnify, and hold harmless Buyer, its officers, directors, agents, employees, and affiliates, against and in respect of any and all causes of action, claims, losses, liabilities, liens, damages, costs and expenses (including attorneys' fees) incurred or resulting from: (a) Any misrepresentation, breach of warranty, or nonfulfillment of any covenant or agreement on the part of Seller or any Shareholder under or in connection with this Agreement; (b) The acts or omissions of Seller alleged to be violations of Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 2000e et seq.; the Fair Labor Standards Act; the Age Discrimination in Employment Act; the Labor Management Relations Act; state unemployment taxes and any and all other applicable state or federal statutes or regulations; (c) Any tax liability of Seller (including, without limitation, liabilities for taxes, interest, penalties, governmental charges, duties, fees, and fines imposed by the United States, foreign countries, states, counties, municipalities, and subdivisions, and by all other governmental entities or taxing authorities); 29 (d) Operation of the Restaurant Locations through the Effective Time; (e) Any liability of Seller not expressly assumed by Buyer hereunder, including but not limited to obligations arising with regard to Seller's responsibilities under the Real Property Leases and Material Contracts through the Effective Time; and (f) Any and all claims, debts, liabilities, taxes and other obligations of Buyer that are imposed on Buyer as a result of its status as a successor to Seller except to the extent the foregoing are assumed by Buyer pursuant to Section 2.4 of this Agreement. Section 9.2 Indemnification by Buyer. Buyer agrees to defend, indemnify, and hold harmless Seller against and in respect of any and all causes of action, claims, losses, liabilities, liens, damages, costs and expenses (including attorneys' fees) incurred or resulting from: (a) Any misrepresentation, breach of warranty or nonfulfillment of any covenant on the part of Buyer in connection with this Agreement; (b) Operation of the Restaurant Locations after the Effective Time; and (c) Obligations arising with regard to Buyer's responsibilities under the Real Property Leases and Material Contracts after the Effective Time. Section 9.3 Limitations. No claim based on a breach of representation or warranty made in this Agreement may be made against the other party after the end of the 30th month after the Closing Date; provided, however, Buyer may bring a claim against Seller or the Shareholders with respect to a breach of any representation or warranty contained in Sections 4.14, 4.18 or 4.22 at any time after the Closing until the expiration of the applicable statute of limitations (with respect to each such date, the "Expiration Date"). Any lawsuit or arbitration proceeding to enforce the indemnification obligations of a party hereunder for which the indemnifying party has refused to satisfy its obligations must be instituted within one year after the applicable Expiration Date. ARTICLE X MISCELLANEOUS Section 10.1 Notices. Except as otherwise expressly provided, all notices, consents, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally, sent by facsimile transmission with confirmation of receipt, or if mailed by certified mail, return receipt requested, with first class postage prepaid, addressed as follows: 30 (a) If to Seller: The Ozark Apples, Inc. 3252 Roanoke Street Kansas City, Missouri 64111 Attention: Gregory R.Walton, President Greg Owings FAX: ------------------------------------- With a copy to: Wayne Dillard 9221 Ward Parkway, Suite 335 Kansas City, MO 64114 FAX: (816) 221-0303 (b) If to Buyer: Applebee's International, Inc. 4551 West 107th Street Overland Park, KS 66207 Attention: General Counsel FAX: (913) 341-1696 With a copy to: James M. Ash, Esq. Blackwell Sanders Peper Martin LLP 4801 Main Street, Suite 1000 Kansas City, MO 64112 FAX: (816) 983-8080 or to such other address as Buyer or Seller shall have last designated by notice to the other party. Section 10.2 Applicable Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal laws of the State of Missouri, without regard to the choice of law provisions thereof. Section 10.3 Binding on Successors; Assignment. All of the terms, provisions and conditions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, their respective successors, assigns and legal representatives. Seller may not assign all or any part of its interest in this Agreement. Buyer may assign this Agreement and any or all of its rights or obligations hereunder to any entity that controls, is controlled by, or is under common control with Buyer. Buyer may assign its rights under Section 5.19 of this Agreement to any party that purchases or acquires the right to operate the Restaurants. Section 10.4 Payment of Costs. (a) Seller Costs. Seller shall pay: (1) All of Seller's expenses for legal counsel, accountants, brokers and other advisors; 31 (2) All costs, search fees and expenses associated with the Title Reports and the Title Policies, excluding any cost for special policy endorsements required by Buyer or its lenders; (3) All costs of any real estate title curative work required to remove such exceptions to title insurance coverage for the Real Property required to be removed by Buyer; (4) All fees, costs and expenses incurred in recording all real estate documents related to the transactions contemplated hereby; (5) All sales, transfer or other taxes arising from the transactions contemplated hereby arising under state law; (6) All costs to remedy any deficiencies as described in Section 5.18; (7) All fees or expenses charged or passed through by Seller's lenders, including fees of counsel to any of Seller's lenders; and (8) All other costs and expenses incurred by Seller in negotiating this Agreement and in consummating the transactions contemplated hereby. (b) Buyer Costs. Buyer shall pay: (1) All of its expenses for legal counsel, accountants, brokers and other advisors; (2) All costs to perform the Surveys and Phase I environmental and audit surveys of the Restaurants, the Additional Restaurant and Potential Sites; and (3) All other costs and expenses incurred by Buyer in negotiating this Agreement and in consummating the transactions contemplated hereby, including any fees or commissions payable to any party representing Buyer in connection with arranging or negotiating this Agreement and the transactions contemplated hereby. (c) Shared Costs. Buyer and Seller shall equally pay the following costs: (1) Any and all closing and escrow fees charged by the Title Company. Section 10.5 Closing Not to Prejudice Claim for Damages. Closing of the transactions contemplated by this Agreement shall not prejudice any claim for damages which either party may have hereunder, in law or in equity, due to a material default in observance in the due and timely performance of any of the covenants and agreements herein contained or for the breach of any warranty or representation hereunder, unless such observance, performance, warranty, or representation is specifically waived in writing by the party making such claim. 32 Section 10.6 Survival of Representations, Warranties, Covenants and Undertakings. All of the representations, warranties, covenants and undertakings made by the parties hereto shall survive the execution of this Agreement and Closing. Section 10.7 Additional Documents. After Closing, each party agrees to furnish such additional documents as are necessary to complete the transactions contemplated hereby. Section 10.8 Time is of the Essence. Time is of the essence in the performance of the obligations of the parties hereunder. Section 10.9 Interpretation. The title of the sections of this Agreement are for convenience of reference only, and are not to be considered in construing this Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. Section 10.10 Entire Agreement. This Agreement and the Exhibits and Schedules attached hereto and incorporated herein by this reference contain the entire Agreement of the parties hereto with respect to the transactions contemplated hereby and supersede any and all prior agreements, arrangements, and understandings between the parties, including but not limited to the letter of Buyer addressed to The Ozark Apples, Inc. with respect to this transaction, dated February 28, 2005. No inducements contrary to the terms of this Agreement exist. No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be construed as a further or continuing waiver of any such term, provision or condition or any other term, provision or condition of this Agreement. This Agreement may not be modified orally and may only be amended in a writing executed by all parties hereto. Section 10.11 Counterparts. This Agreement may be executed in one or more counterparts which in the aggregate shall comprise one Agreement. Section 10.12 Termination. (a) This Agreement may be terminated prior to the Closing as follows: (1) At any time by the mutual consent of Seller and Buyer; (2) By either Seller or Buyer, at its sole election, at any time after April 25, 2005, if the Closing shall not have occurred on or prior to such date unless the failure of the Closing to occur by such date shall have been as a result of a material breach by a party hereto; provided further, however, that the right to terminate this Agreement under this Section 10.12(a)(2) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur on or prior to such date; (3) By Buyer if any condition set forth in Section 8.4 hereof shall not have been met as of the Closing; or 33 (4) By Seller if any condition set forth in Section 8.5 hereof shall not have been met as of the Closing. (b) In the event of the termination of this Agreement pursuant to subparagraph (3) above because Seller shall have willingly or in bad faith failed to satisfy a condition to the Closing, Buyer shall be entitled to pursue, exercise, and enforce any and all remedies, rights, powers, and privileges available to it at law or in equity. (c) Upon termination of this Agreement, Buyer shall be entitled to a refund of the Earnest Money paid by Buyer to Seller unless Seller terminates this Agreement for Buyer's material breach pursuant to Section 10.12(a)(2). Section 10.13 Public Announcements. Neither Buyer nor Seller or any of their respective representatives, agents, or affiliates, shall make any public announcement or other disclosure with respect to this Agreement or the transactions contemplated hereby without the prior review of and written consent to such disclosure by the other party. Section 10.14 Confidentiality. Each party agrees to treat all information concerning the other furnished, or to be furnished, by or on behalf of the other (collectively, the "Information"), in accordance with the provisions of this paragraph and to take, or abstain from taking, all actions set forth herein. The Information will be used solely for the purposes of evaluating the business, Restaurants, and the Purchased Assets, and will be kept confidential by the receiving party and its officers, directors, employees, representatives, agents, and advisors; provided, that (i) any of such Information may be disclosed to officers, directors, employees, representatives, agents, and advisors of the receiving party who need to know such information for the purpose of evaluating the Restaurants, the business and the Purchased Assets, (ii) any disclosure of such information may be made to which the disclosing party consents in writing, and (iii) such information may be disclosed if required by law. If the transaction contemplated hereby is not consummated, the receiving party will return to the disclosing party all material containing or reflecting the Information. [SIGNATURE PAGES FOLLOW] 34 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day, month, and year first above written. BUYER: GOURMET SYSTEMS, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- SELLER: THE OZARK APPLES, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- SHAREHOLDERS: OZARK HOLDINGS, INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- Gregory R. Walton, Trustee under Voting Trust dated August 12, 2002 for benefit of Sandra G. Walton and Gregory R. Walton By: /s/ Gregory R. Walton -------------------------------------- Gregory R. Walton, as Trustee By: /s/ Gregory R. Walton -------------------------------------- Gregory R. Walton 35 Sandra G. Walton, Trustee under Voting Trust dated June 29, 1992, as amended By: /s/ Sandra G. Walton -------------------------------------- Sandra G. Walton, as Trustee By: /s/ Sandra G. Walton -------------------------------------- Sandra G. Walton G. Reid Teaney, Trustee under the Christopher Ryan Walton Irrevocable Trust dated November 25, 1977 By: /s/ G. Reid Teaney -------------------------------------- G. Reid Teaney, as Trustee G. Reid Teaney, Trustee under the Megan N. (Walton) Allen Irrevocable Trust dated November 25, 1977 By: /s/ G. Reid Teaney -------------------------------------- G. Reid Teaney, as Trustee Gregory W. McGhee, Trustee of the Gregory W. McGhee Revocable Trust dated September 16, 2002 By: /s/ Gregory W. McGhee -------------------------------------- Gregory W. McGhee, as Trustee By: /s/ Gregory W. McGhee -------------------------------------- Gregory W. McGhee 36 Yvonne T. McGhee, Trustee of the Yvonne T. McGhee Revocable Trust dated September 16, 2002 By: /s/ Yvonne T. McGhee -------------------------------------- Yvonne T. McGhee, as Trustee By: /s/ Yvonne T. McGhee -------------------------------------- Yvonne T. McGhee 37 EX-10 5 equityplan.txt AMENDED EQUITY PLAN APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN (Amended and Restated effective as of May 13, 2004) TABLE OF CONTENTS
SECTION 1 PURPOSE AND DURATION......................................................................................1 1.1. EFFECTIVE DATE............................................................................................1 1.2. PURPOSE OF THIS PLAN......................................................................................1 SECTION 2 DEFINITIONS...............................................................................................1 SECTION 3 ADMINISTRATION............................................................................................5 3.1. THE COMMITTEE.............................................................................................5 3.2. AUTHORITY OF THE COMMITTEE................................................................................5 3.3. DELEGATION BY THE COMMITTEE...............................................................................5 3.4. NONEMPLOYEE DIRECTOR OPTIONS AND RESTRICTED STOCK.........................................................6 3.5. DECISIONS BINDING.........................................................................................6 SECTION 4 SHARES SUBJECT TO THIS PLAN...............................................................................6 4.1. NUMBER OF SHARES..........................................................................................6 4.2. LAPSED AWARDS.............................................................................................6 4.3. ADJUSTMENTS IN AWARDS AND AUTHORIZED SHARES...............................................................6 SECTION 5 STOCK OPTIONS.............................................................................................7 5.1. GRANT OF OPTIONS..........................................................................................7 5.2. AWARD AGREEMENT...........................................................................................7 5.3. EXERCISE PRICE............................................................................................7 5.4. EXPIRATION OF OPTIONS.....................................................................................8 5.5. EXERCISABILITY OF OPTIONS.................................................................................8 5.6. PAYMENT...................................................................................................8 5.7. RESTRICTIONS ON SHARE TRANSFERABILITY.....................................................................8 5.8. CERTAIN ADDITIONAL PROVISIONS FOR INCENTIVE STOCK OPTIONS.................................................9 5.9. REPRICING OF OPTIONS......................................................................................9 SECTION 6 STOCK APPRECIATION RIGHTS.................................................................................9 6.1. GRANT OF SARS.............................................................................................9 6.2. EXERCISE OF TANDEM SARS..................................................................................10 6.3. EXERCISE OF AFFILIATED SARS..............................................................................10
6.4. EXERCISE OF FREESTANDING SARS............................................................................10 6.5. SAR AGREEMENT............................................................................................10 6.6. EXPIRATION OF SARS.......................................................................................10 6.7. PAYMENT OF SAR AMOUNT....................................................................................10 SECTION 7 RESTRICTED STOCK.........................................................................................10 7.1. GRANT OF RESTRICTED STOCK................................................................................10 7.2. RESTRICTED STOCK AGREEMENT...............................................................................10 7.3. TRANSFERABILITY..........................................................................................11 7.4. OTHER RESTRICTIONS.......................................................................................11 7.5. REMOVAL OF RESTRICTIONS..................................................................................11 7.6. VOTING RIGHTS............................................................................................12 7.7. DIVIDENDS AND OTHER DISTRIBUTIONS........................................................................12 7.8. RETURN OF RESTRICTED STOCK TO COMPANY....................................................................12 7.9. SECTION 83(B) ELECTION...................................................................................12 SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES.................................................................12 8.1. GRANT OF PERFORMANCE UNITS/SHARES........................................................................12 8.2. VALUE OF PERFORMANCE UNITS/SHARES........................................................................12 8.3. PERFORMANCE OBJECTIVES AND OTHER TERMS...................................................................12 8.4. EARNING OF PERFORMANCE UNITS/SHARES......................................................................13 8.5. FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES...................................................13 8.6. CANCELLATION OF PERFORMANCE UNITS/SHARES.................................................................13 SECTION 9 DIRECTOR OPTIONS AND RESTRICTED STOCK....................................................................13 9.1. NONEMPLOYEE DIRECTOR GRANTS..............................................................................14 9.2. EMPLOYEE DIRECTOR GRANTS.................................................................................14 9.3. GRANT DATE...............................................................................................14 9.4. AWARD AGREEMENT..........................................................................................14 9.5. EXERCISE PRICE...........................................................................................14 9.6. EXERCISABILITY...........................................................................................14 9.7. EXPIRATION OF OPTIONS....................................................................................14 9.8. NOT INCENTIVE STOCK OPTIONS..............................................................................15 9.9. VESTING PERIOD FOR RESTRICTED STOCK......................................................................15 9.10. OTHER TERMS..............................................................................................15
SECTION 10 STOCK AWARDS.............................................................................................15 10.1. STOCK AWARDS.............................................................................................15 SECTION 11 MISCELLANEOUS............................................................................................15 11.1. DEFERRALS................................................................................................15 11.2. NO EFFECT ON EMPLOYMENT OR SERVICE.......................................................................15 11.3. PARTICIPATION............................................................................................15 11.4. INDEMNIFICATION..........................................................................................15 11.5. SUCCESSORS...............................................................................................16 11.6. BENEFICIARY DESIGNATIONS.................................................................................16 11.7. TRANSFERABILITY..........................................................................................16 11.8. NO RIGHTS AS STOCKHOLDER.................................................................................16 11.9. CERTIFICATION............................................................................................16 11.10. DISCRETIONARY ADJUSTMENTS PURSUANT TO SECTION 162(M).....................................................16 SECTION 12 AMENDMENT, TERMINATION, AND DURATION.....................................................................17 12.1. AMENDMENT, SUSPENSION, OR TERMINATION....................................................................17 12.2. DURATION OF THIS PLAN....................................................................................17 SECTION 13 TAX WITHHOLDING..........................................................................................17 13.1. WITHHOLDING REQUIREMENTS.................................................................................17 13.2. WITHHOLDING ARRANGEMENTS.................................................................................17 SECTION 14 CHANGE IN CONTROL........................................................................................17 14.1. CHANGE IN CONTROL........................................................................................17 14.2. DEFINITION OF CHANGE IN CONTROL..........................................................................18 14.3. IMPACT OF CHANGE IN CONTROL..............................................................................19 SECTION 15 LEGAL CONSTRUCTION.......................................................................................19 15.1. GENDER AND NUMBER........................................................................................19 15.2. SEVERABILITY.............................................................................................19 15.3. REQUIREMENTS OF LAW......................................................................................19 15.4. SECURITIES LAW COMPLIANCE................................................................................20 15.5. GOVERNING LAW............................................................................................20 15.6. CAPTIONS.................................................................................................20
APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN SECTION 1 PURPOSE AND DURATION 1.1. Effective Date. This Plan permits the grant of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units and Performance Shares. This Plan shall become effective upon the affirmative vote of the holders of a majority of the Shares which are present in person or by proxy and entitled to vote at the 1995 Annual Meeting of Stockholders. This Plan shall be deemed reapproved for purposes of Section 12.2 upon the affirmative vote of the holders of a majority of the Shares present in person or by proxy and entitled to vote at the 2004 Annual Meeting of Stockholders. 1.2. Purpose of this Plan. This Plan is intended to attract, motivate, and retain (a) employees of the Company and its Affiliates, (b) consultants who provide significant services to the Company and its Affiliates, and (c) directors of the Company who are employees of neither the Company nor any Affiliate. This Plan also is designed to further the growth and financial success of the Company and its Affiliates by aligning the interests of the Participants, through the ownership of Shares and through other incentives, with the interests of the Company's stockholders. SECTION 2 DEFINITIONS The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context: "1934 Act" means the Securities Exchange Act of 1934, as amended. Reference to a specific section of the 1934 Act or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. "Affiliate" means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by or under common control with the Company. "Affiliated SAR" means an SAR that is granted in connection with a related Option, and that automatically will be deemed to be exercised at the same time that the related Option is exercised. "Award" means, individually or collectively, a grant under this Plan of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance Units or Performance Shares. "Award Agreement" means the written agreement setting forth the terms and provisions applicable to each Award granted under this Plan. "Board" or "Board of Directors" means the Board of Directors of the Company. "Change in Control" shall have the meaning assigned to such term in Section 14.2. 1 "Code" means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. "Committee" means the committee appointed by the Board (pursuant to Section 3.1) to administer this Plan. "Company" means Applebee's International, Inc., a Delaware corporation, and any successor thereto. With respect to the definitions of the Performance Goals, the Committee in its sole discretion may determine that "Company" means Applebee's International, Inc. and its consolidated subsidiaries. "Consultant" means any consultant, independent contractor or other person who provides significant services to the Company or its Affiliates, but who is neither an Employee nor a Director. "Covered Employee" means a Participant who, as of the anticipated date of vesting and/or payout of an Award, as applicable, is reasonably believed to be one of the group of "covered employees," as defined in Code section 162(m), or any successor statute, and the regulations promulgated under Code section 162(m). "Director" means any individual who is a member of the Board of Directors of the Company. "Disability" means a permanent total disability within the meaning of Code section 22(e)(3), provided that in the case of Awards other than Incentive Stock Options, the Committee in its sole discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time. "Earnings Per Share" means as to any Fiscal Year, the Company's Net Income or a business unit's Pro Forma Net Income or a business unit's Pro Forma Net Income, divided by the weighted average number of Shares outstanding for such Fiscal Year (basic Earnings Per Share as opposed to diluted Earnings Per Share), rounded to the nearest cent ($0.01). The weighted average number of shares outstanding for any Fiscal Year will be determined by disregarding any stock repurchases by the Company and the Net Income or Pro Forma Net Income will be adjusted to reflect the net impact of any debt service attributable to funds borrowed to effect any stock repurchases. For those purposes, all funds used to effect stock purchases will be deemed to have been borrowed, and at an interest rate equal to the lowest cost of the Company's then existing borrowed funds. "Employee" means any employee of the Company or of an Affiliate, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. Reference to a specific section of ERISA or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation. "Exercise Price" means the price at which a Share may be purchased by a Participant pursuant to the exercise of an Option. "Fair Market Value" means the last quoted per share selling price at which Shares are traded on any given date, or if no Shares are traded on such 2 date, the most recent prior date on which Shares were traded, as reported in The Wall Street Journal. Notwithstanding the preceding, for federal, state and local income tax reporting purposes, fair market value shall be determined by the Committee (or its delegate) in accordance with uniform and nondiscriminatory standards adopted by it from time to time. "Fiscal Year" means the fiscal year of the Company. "Freestanding SAR" means a SAR that is granted independently of any Option. "Grant Date" means, with respect to an Award, the date that the Award was granted. "Incentive Stock Option" means an Option to purchase Shares which is designated as an Incentive Stock Option and is intended to meet the requirements of section 422 of the Code. "Individual MBOs" means as to a Participant, the objective and measurable goals set by a "management by objectives" process and approved by the Committee (in its sole discretion). "Net Income" means as to any Fiscal Year, the income after taxes of the Company for the Fiscal Year determined in accordance with generally accepted accounting principles; provided, however, that prior to the Fiscal Year, the Committee shall determine whether any significant item(s) shall be included or excluded from the calculation of Net Income with respect to one or more Participants. "Nonemployee Director" means a Director who is not an employee of the Company or of any Affiliate. "Nonqualified Stock Option" means an Option to purchase Shares which is not an Incentive Stock Option. "Operating Return on Invested Capital" means the Company's (i) Operating Earnings (as shown on its audited financial statements for a Fiscal Year) after income taxes, divided by (ii) average Long-term Debt plus average Stockholders' Equity less average Cash and Cash Equivalents less average Short-term Investments (all as shown on its audited financial statements for such Fiscal Year)." "Option" means an Incentive Stock Option or a Nonqualified Stock Option. "Participant" means an Employee, Consultant or Nonemployee Director who has been selected to receive an Award or who has an outstanding Award. "Performance-Based Compensation" means an Award that qualifies as performance-based compensation under Code section 162(m). "Performance Goals" means the goal(s) (or combined goal(s)) determined by the Committee (in its sole discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) Earnings Per Share, (b) Individual MBOs, (c) Net Income, (d) Pro Forma Net Income, (e) Return on Designated Assets, (f) Return on Revenues, (g) Satisfaction MBOs, (h) Operating Return on Invested Capital, and (i) Total Return to Shareholders. The Performance Goals may differ from Participant to Participant and from Award to Award. The Committee may appropriately adjust any evaluation of performance under a Performance Goal to exclude any of the following events that occur 3 during a Performance Period: (a) asset write-downs, (b) litigation or claim judgments or settlements, (c) the effect of changes in tax laws or accounting principles, (d) accruals for reorganization or restructuring programs, and (e) any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's Form 10-K for the applicable year. "Performance Period" shall have the meaning assigned to such term in Section 8.3. "Performance Share" means an Award granted to a Participant pursuant to Section 8. "Performance Unit" means an Award granted to a Participant pursuant to Section 8. "Period of Restriction" means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and, therefore, the Shares are subject to a substantial risk of forfeiture. As provided in Section 7, such restrictions may be based on the passage of time, the achievement of target levels of performance or the occurrence of other events as determined by the Committee in its sole discretion. "Plan" means the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan, as set forth in this instrument and as hereafter amended from time to time. "Pro Forma Net Income" means as to any business unit for any Fiscal Year, the portion of Company's Net Income allocable to such business unit; provided, however, that prior to such Fiscal Year, the Committee shall determine the basis on which such allocation shall be made. "Restricted Stock" means an Award granted to a Participant pursuant to Section 7 or Section 9. "Retirement" means, in the case of an Employee, a Termination of Service by reason of the Employee's retirement at or after age 65 or as otherwise specifically provided in or pursuant to an Award Agreement as determined by the Committee. With respect to a Consultant, no Termination of Service shall be deemed to be on account of "Retirement." With respect to a Nonemployee Director, "Retirement" means termination of service on the Board at or after age 70. "Return on Designated Assets" means as to any Fiscal Year, (a) the Pro Forma Net Income of a business unit, divided by the average of beginning and ending business unit designated assets, or (b) the Net Income of the Company, divided by the average of beginning and ending designated corporate assets. "Return on Revenues" means as to any Fiscal Year, the percentage equal to the Company's Net Income or the business unit's Pro Forma Net Income, divided by the Company's or the business unit's annual revenue. "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, and any future regulation amending, supplementing or superseding such regulation. "Satisfaction MBOs" means as to any Participant, the objective and measurable individual goals set by a "management by objectives" process and approved by the Committee, which goals relate to the satisfaction of external or internal requirements. "Section 16 Person" means a person who, with respect to the Shares, is subject to Section 16 of the 1934 Act, as determined by the Board. "Shares" means the shares of common stock of the Company. 4 "Stock Appreciation Right" or "SAR" means an Award, granted alone or in connection with a related Option, that is designated as a SAR pursuant to Section 7. "Subsidiary" means any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Tandem SAR" means an SAR that is granted in connection with a related Option, the exercise of which shall require forfeiture of the right to purchase an equal number of Shares under the related Option (and when a Share is purchased under the Option, the SAR shall be canceled to the same extent). "Termination of Service" means, (a) in the case of an Employee, a cessation of the employee-employer relationship between an employee and the Company or an Affiliate for any reason, including, but not limited to, a cessation by resignation, discharge, death, Disability, Retirement or the disaffiliation of an Affiliate, but excluding any such cessation where there is a simultaneous reemployment by the Company or an Affiliate, and (b) in the case of a Consultant, a cessation of the service relationship between a Consultant and the Company or an Affiliate for any reason, including, but not limited to, a cessation by resignation, discharge, death, Disability or the disaffiliation of an Affiliate, but excluding any such cessation where there is a simultaneous reengagement of the Consultant by the Company or an Affiliate. "Total Return to Shareholders" means (i) the Fair Market Value of a Share on the last day of a period minus the Fair Market Value of a Share on the first day of the period plus all dividends paid on a Share during such period, divided by (ii) the Fair Market Value of a Share on the first day of the period. SECTION 3 ADMINISTRATION 3.1. The Committee. This Plan shall be administered by the Committee. The Committee shall consist of not less than two (2) Directors. The members of the Committee shall be appointed from time to time by, and shall serve at the pleasure of, the Board of Directors. The Committee shall be comprised solely of Directors who are both (a) "non-employee directors" under Rule 16b-3 and (b) "outside directors" under section 162(m) of the Code. The Board may delegate to the Committee any or all of the administration of the Plan; provided, however, that the administration of the Plan with respect to Awards granted to Nonemployee Directors may not be so delegated. To the extent that the Board has delegated to the Committee any authority and responsibility under the Plan, all applicable references to the Board in the Plan shall be to the Committee. 3.2. Authority of the Committee. It shall be the duty of the Committee to administer this Plan in accordance with its provisions. The Committee shall have all powers and discretion necessary or appropriate to administer this Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees and Consultants shall be granted Awards, (b) prescribe the terms and conditions of the Awards (other than the Options granted to Directors pursuant to Section 9), (c) interpret this Plan and the Awards, (d) adopt rules for the administration, interpretation and application of this Plan as are consistent therewith, and (e) interpret, amend or revoke any such rules. 3.3. Delegation by the Committee. The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under this Plan to one or more directors 5 or officers of the Company; provided, however, that the Committee may not delegate its authority and powers (a) with respect to Section 16 Persons, or (b) in any way which would jeopardize this Plan's qualification under section 162(m) of the Code or Rule 16b-3. 3.4. Nonemployee Director Options and Restricted Stock. Notwithstanding any contrary provision of this Section 3, the Board shall administer Section 9 of this Plan, and the Committee shall exercise no discretion with respect to Section 9. In the Board's administration of Section 9 and the Options and Restricted Stock granted to Nonemployee Directors, the Board shall have all authority and discretion otherwise granted to the Committee with respect to the administration of this Plan. 3.5. Decisions Binding. All determinations and decisions made by the Committee, the Board and any delegate of the Committee pursuant to Section 3.3 shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law. SECTION 4 SHARES SUBJECT TO THIS PLAN 4.1. Number of Shares. Subject to adjustment as provided in Section 4.3, the total number of Shares available for grant under this Plan shall not exceed 10,600,000. Shares granted under this Plan may be either authorized but unissued Shares or treasury Shares, or any combination thereof. 4.2. Lapsed Awards. If an Award is settled in cash, or is cancelled, terminates, expires or lapses for any reason (with the exception of the termination of a Tandem SAR upon exercise of the related Option, or the termination of a related Option upon exercise of the corresponding Tandem SAR), any Shares subject to such Award thereafter shall be available to be the subject of an Award. 4.3. Adjustments in Awards and Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, stock split, Share combination, or other change in the corporate structure of the Company affecting the Shares, the Committee shall adjust the number and class of Shares which may be delivered under this Plan, the number, class and price of Shares subject to outstanding Awards, and the numerical limits of Sections 4.1, 5.1, 6.1, 7.1 and 8.1, in such manner as the Committee (in its sole discretion) shall determine to be advisable or appropriate to prevent the dilution or diminution of such Awards. Any such numerical limitations shall be subject to adjustment under this Section only to the extent such adjustment will not affect the status of any Award intended to qualify as Performance-Based Compensation or the ability to grant or the qualification of Incentive Stock Options under the Plan. In the case of Options and Restricted Stock granted to Nonemployee Directors pursuant to Section 9, the foregoing adjustments shall be made by the Board with respect to Options and Restricted Stock granted and that may be granted thereafter from time to time pursuant to Section 9. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number. Appropriate adjustments may also be made by the Board in the other terms of any Awards under the Plan to reflect such changes or distributions on an equitable basis, including modifications of performance targets and changes in the length of Performance Periods. The Board is authorized to make adjustments to the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events affecting the Company or the financial statements of the Company, or in response to changes in applicable laws, regulations, or accounting principles. 6 Notwithstanding any provision in this Plan to the contrary, no adjustment may be made with respect to Awards intended to constitute Performance-Based Compensation, to the extent such adjustment would affect the status of such Award as Performance-Based Compensation, or the ability to grant (or the qualification of) Incentive Stock Options under the Plan. The determination of the Board as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan. SECTION 5 STOCK OPTIONS 5.1. Grant of Options. Subject to the terms and provisions of this Plan, Options may be granted to Employees and Consultants at any time and from time to time as determined by the Committee in its sole discretion. The Committee, in its sole discretion, shall determine the number of Shares subject to each Option; provided, however, that during any Fiscal Year, no Participant shall be granted Options covering more than 225,000 Shares. The Committee may grant Incentive Stock Options, Nonqualified Stock Options, or any combination thereof. Incentive Stock Options may be granted only to Employees. 5.2. Award Agreement. Each Option shall be evidenced by an Award Agreement that shall specify the Exercise Price, the expiration date of the Option, the number of Shares to which the Option pertains, any conditions to exercise of the Option and such other terms and conditions as the Committee, in its sole discretion, shall determine. The Award Agreement also shall specify whether the Option is intended to be an Incentive Stock Option or a Nonqualified Stock Option. 5.3. Exercise Price. Subject to the provisions of this Section 5.3, the Exercise Price for each Option shall be determined by the Committee in its sole discretion. 5.3.1. Nonqualified Stock Options. In the case of a Nonqualified Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date. 5.3.2. Incentive Stock Options. In the case of an Incentive Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date; provided, however, that if on the Grant Date, the Employee (together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code) owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the Exercise Price shall be not less than one hundred ten percent (110%) of the Fair Market Value of a Share on the Grant Date. 5.3.3. Substitute Options. Notwithstanding the provisions of Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Employees or Consultants on account of such transaction may be granted Options in substitution for options granted by such former employer or recipient of services. If such substitute Options are granted, the Committee, in its sole discretion and consistent with section 424(a) of the Code, may determine that such substitute Options shall have an exercise price less than one hundred (100%) of the Fair Market Value of the Share on the Grant Date. 7 5.4. Expiration of Options. 5.4.1. Expiration Dates. Each Option shall terminate upon the earlier of the first to occur of the following events: (a) The date for termination of the Option set forth in the Award Agreement; or (b) The expiration of ten (10) years from the Grant Date; or (c) The expiration of one (1) year from the date of the Optionee's Termination of Service for a reason other than the Optionee's death, Disability or Retirement (except as provided in Section 5.8.2 regarding Incentive Stock Options); or (d) The expiration of three (3) years from the date of the Optionee's Termination of Service by reason of Disability (except as provided in Section 5.8.2 regarding Incentive Stock Options) or death; or (e) The expiration of three (3) years from the date of the Optionee's Retirement (except as provided in Section 5.8.2 regarding Incentive Stock Options). 5.4.2. Committee Discretion. Subject to the limits of Section 5.4.1, the Committee, in its sole discretion, (a) shall provide in each Award Agreement when each Option expires and becomes unexercisable, and (b) may, after an Option is granted, extend the maximum term of the Option (subject to Section 5.8.4 regarding Incentive Stock Options). 5.5. Exercisability of Options. Options granted under this Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine in its sole discretion. After an Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of the Option. 5.6. Payment. Options shall be exercised by the Participant's delivery of a written notice of exercise to the Secretary of the Company (or its designee), setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in cash or its equivalent. The Committee, in its sole discretion, also may permit exercise (a) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (b) by any other means which the Committee, in its sole discretion, determines (i) to provide legal consideration for the Shares, and (ii) to be consistent with the purposes of this Plan. The Committee also may allow cashless exercise as permitted under the Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment for the Shares purchased, the Company shall deliver to the Participant (or the Participant's designated broker), Share certificates (which may be in book entry form) representing such Shares. 5.7. Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option 8 as it may deem advisable or appropriate in its sole discretion, including, but not limited to, restrictions related to applicable Federal securities laws, the requirements of any national securities exchange or system upon which Shares are then listed or traded, and any blue sky or state securities laws. 5.8. Certain Additional Provisions for Incentive Stock Options. 5.8.1. Exercisability. The aggregate Fair Market Value (determined on the Grant Date(s)) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries) shall not exceed $100,000. 5.8.2. Termination of Service. No Incentive Stock Option may be exercised more than three (3) months after the Participant's Termination of Service for any reason other than Disability or death, unless (a) the Participant dies during such three-month period, and (b) the Award Agreement or the Committee permits later exercise. No Incentive Stock Option may be exercised more than one (1) year after the Participant's termination of employment on account of Disability, unless (a) the Participant dies during such one-year period, and (b) the Award Agreement or the Committee permits later exercise. 5.8.3. Company and Subsidiaries Only. Incentive Stock Options may be granted only to persons who are employees of the Company or a Subsidiary on the Grant Date. 5.8.4. Expiration. No Incentive Stock Option may be exercised after the expiration of ten (10) years from the Grant Date; provided, however, that if the Option is granted to an Employee who, together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code, owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the Option may not be exercised after the expiration of five (5) years from the Grant Date. 5.9. Repricing of Options. The Company may not reprice, replace or regrant an outstanding Option either in connection with the cancellation of such Option or by amending an Award Agreement to lower the Exercise Price of such Option. SECTION 6 STOCK APPRECIATION RIGHTS 6.1. Grant of SARs. Subject to the terms and conditions of this Plan, an SAR may be granted to Employees and Consultants at any time and from time to time as shall be determined by the Committee, in its sole discretion. The Committee may grant Affiliated SARs, Freestanding SARs, Tandem SARs, or any combination thereof. 6.1.1. Number of Shares. The Committee shall have complete discretion to determine the number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant shall be granted SARs covering more than 225,000 Shares. 6.1.2. Exercise Price and Other Terms. The Committee, subject to the provisions of this Plan, shall have complete discretion to determine the terms and conditions of SARs granted under this Plan; provided, however, that the exercise price of a Freestanding SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date. The exercise price of Tandem or Affiliated SARs shall equal the Exercise Price of the related Option. 9 6.2. Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. With respect to a Tandem SAR granted in connection with an Incentive Stock Option: (a) the Tandem SAR shall expire no later than the expiration of the underlying Incentive Stock Option; (b) the value of the payout with respect to the Tandem SAR shall be for no more than one hundred percent (100%) of the difference between the Exercise Price of the underlying Incentive Stock Option and the Fair Market Value of the Shares subject to the underlying Incentive Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem SAR shall be exercisable only when the Fair Market Value of the Shares subject to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock Option. 6.3. Exercise of Affiliated SARs. An Affiliated SAR shall be deemed to be exercised upon the exercise of the related Option. The deemed exercise of an Affiliated SAR shall not necessitate a reduction in the number of Shares subject to the related Option. 6.4. Exercise of Freestanding SARs. Freestanding SARs shall be exercisable on such terms and conditions as the Committee, in its sole discretion, shall determine. 6.5. SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Committee, in its sole discretion, shall determine. 6.6. Expiration of SARs. An SAR granted under this Plan shall expire upon the date determined by the Committee, in its sole discretion, as set forth in the Award Agreement. Notwithstanding the foregoing, the terms and provisions of Section 5.4 also shall apply to SARs. 6.7. Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying; (a) The positive difference between the Fair Market Value of a Share on the date of exercise over the exercise price; by (b) The number of Shares with respect to which the SAR is exercised. At the sole discretion of the Committee, the payment upon SAR exercise may be in cash, in Shares of equivalent value, or in any combination thereof. SECTION 7 RESTRICTED STOCK 7.1. Grant of Restricted Stock. Subject to the terms and provisions of this Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Employees and Consultants in such amounts as the Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall determine the number of Shares to be granted to each Participant; provided, however, that during any Fiscal Year, no Participant shall receive more than 225,000 Shares of Restricted Stock. 7.2. Restricted Stock Agreement. Each Award of Restricted Stock shall be evidenced by an Award Agreement that shall specify the Period of Restriction, 10 the number of Shares granted, and such other terms and conditions as the Committee, in its sole discretion, shall determine. Unless the Committee, in its sole discretion, determines otherwise, Shares of Restricted Stock shall be held by the Company as escrow agent until the end of the applicable Period of Restriction. 7.3. Transferability. Except as provided in this Section 7, Shares of Restricted Stock may not be sold, transferred, gifted, bequeathed, pledged, assigned, or otherwise alienated or hypothecated, voluntarily or involuntarily, until the end of the applicable Period of Restriction. 7.4. Other Restrictions. The Committee, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate in accordance with this Section 7.4. 7.4.1. General Restrictions. The Committee may set restrictions based upon (a) the achievement of specific performance objectives (Company-wide, divisional or individual), (b) applicable Federal or state securities laws, or (c) any other basis determined by the Committee in its sole discretion. 7.4.2. Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as "performance-based compensation" under section 162(m) of the Code, the Committee, in its sole discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Restricted Stock to qualify as "performance-based compensation" under section 162(m) of the Code. In granting Restricted Stock that is intended to qualify under Code section 162(m), the Committee shall follow any procedures determined by it in its sole discretion from time to time to be necessary, advisable or appropriate to ensure qualification of the Restricted Stock under Code section 162(m) (e.g., in determining the Performance Goals). 7.4.3. Legend on Certificates. The Committee, in its sole discretion, may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. For example, the Committee may determine that some or all certificates representing Shares of Restricted Stock shall bear the following legend: "THE SALE OR OTHER TRANSFER OF THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE, WHETHER VOLUNTARY, INVOLUNTARY, OR BY OPERATION OR LAW, IS SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AS SET FORTH IN THE APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN, AND IN A RESTRICTED STOCK AGREEMENT. A COPY OF THIS PLAN AND SUCH RESTRICTED STOCK AGREEMENT MAY BE OBTAINED FROM THE SECRETARY OF APPLEBEE'S INTERNATIONAL, INC." 7.5. Removal of Restrictions. Except as otherwise provided in this Section 7, Shares of Restricted Stock covered by each Restricted Stock grant made under this Plan shall be released from escrow as soon as practicable after the end of the applicable Period of Restriction. The Committee, in its sole discretion, may accelerate the time at which any restrictions shall lapse and remove any restrictions; provided, however, that the Period of Restriction on Shares granted to a Section 16 Person may not lapse until at least six (6) months after the Grant Date (or such shorter period as may be permissible while 11 maintaining compliance with Rule 16b-3). After the end of the applicable Period of Restriction, the Participant shall be entitled to have any legend or legends under Section 7.4.3 removed from his or her Share certificate, and the Shares shall be freely transferable by the Participant, in accordance with applicable securities laws. 7.6. Voting Rights. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the applicable Award Agreement provides otherwise. 7.7. Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the applicable Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid. 7.8. Return of Restricted Stock to Company. On the date set forth in the applicable Award Agreement, the Restricted Stock for which restrictions have not lapsed shall revert to the Company and thereafter shall be available for grant under this Plan. 7.9. Section 83(b) Election. The Committee may provide in an Award Agreement that the Award of Restricted Stock is conditioned upon the Participant making or refraining from making an election with respect to the Award under section 83(b) of the Code. If a Participant makes an election pursuant to section 83(b) of the Code concerning a Restricted Stock Award, the Participant shall be required to promptly file a copy of such election with the Company. SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES 8.1. Grant of Performance Units/Shares. Performance Units and Performance Shares may be granted to Employees and Consultants at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant; provided, however, that during any Fiscal Year, (a) no Participant shall receive Performance Units having an initial value greater than $250,000, and (b) no Participant shall receive more than 225,000 Performance Shares. 8.2. Value of Performance Units/Shares. Each Performance Unit shall have an initial value that is established by the Committee on or before the Grant Date. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the Grant Date. 8.3. Performance Objectives and Other Terms. The Committee shall set performance objectives in its sole discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units or Performance Shares, or both, that will be paid out to the Participants. The time period during which the performance objectives must be met shall be called the "Performance Period". Performance Periods of Awards granted to Section 16 Persons shall, in all cases, exceed six (6) months in length (or such shorter period as may be permissible while maintaining compliance with Rule 16b-3). Each Award of Performance Units or Performance Shares shall be evidenced by an Award Agreement that shall specify the Performance Period, and such other terms and conditions as the Committee, in its sole discretion, shall determine. 8.3.1. General Performance Objectives. The Committee may set performance objectives based upon (a) the achievement of Company-wide, 12 divisional or individual goals, (b) applicable Federal or state securities laws, or (c) any other basis determined by the Committee in its discretion. 8.3.2. Section 162(m) Performance Objectives. For purposes of qualifying grants of Performance Units or Performance Shares as "performance-based compensation" under section 162(m) of the Code, the Committee, in its sole discretion, may determine that the performance objectives applicable to Performance Units or Performance Shares, as the case may be, shall be based on the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Performance Units or Performance Shares, as the case may be, the qualify as "performance-based compensation" under section 162(m) of the Code. In granting Performance Units or Performance Shares which are intended to qualify under Code section 162(m), the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate in its sole discretion to ensure qualification of the Performance Units or Performance Shares, as the case may be, under Code section 162(m) (e.g., in determining the Performance Goals). 8.4. Earning of Performance Units/Shares. After the applicable Performance Period has ended, the holder of Performance Units or Performance Shares shall be entitled to receive a payout of the number of Performance Units or Performance Shares, as the case may be, earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives have been achieved. After the grant of a Performance Unit or Performance Share, the Committee, in its sole discretion, may reduce or waive any performance objectives for such Performance Unit or Performance Share; provided, however, that Performance Periods of Awards granted to Section 16 Persons shall not be less than six (6) months (or such shorter period as may be permissible while maintaining compliance with Rule 16b-3). 8.5. Form and Timing of Payment of Performance Units/Shares. Payment of earned Performance Units or Performance Shares shall be made as soon as practicable after the end of the applicable Performance Period. The Committee, in its sole discretion, may pay earned Performance Units or Performance Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units or Performance Shares, as the case may be, at the end of the applicable Performance Period), or in any combination thereof. 8.6. Cancellation of Performance Units/Shares. On the earlier of date set forth in the Award Agreement or the Participant's Termination of Service (other than by death, Disability or, with respect to an Employee, Retirement), all unearned or unvested Performance Units or Performance Shares shall be forfeited to the Company, and thereafter shall be available for grant under this Plan. In the event of a Participant's death, Disability or, with respect to an Employee, Retirement, prior to the end of a Performance Period, the Committee shall reduce his or her Performance Units or Performance Shares proportionately based on the date of such Termination of Service. SECTION 9 DIRECTOR OPTIONS AND RESTRICTED STOCK The provisions of this Section 9 are applicable only to Options and Restricted Stock granted to Nonemployee Directors. 13 9.1. Nonemployee Director Grants. (a) In addition to any cash compensation paid to Nonemployee Directors for their service on the Board or any of its committees, each Nonemployee Director shall receive compensation in the form of Options and/or shares of Restricted Stock. The amount and mix of such equity compensation shall be determined annually by Board of Directors based on providing overall compensation (cash and equity) in the range of the 75th percentile of nonemployee director compensation paid by a selected peer group of public companies. (b) Each Nonemployee Director shall receive an annual grant of Options and/or Restricted Stock pursuant to Section 9.1(a), above, and each person first elected or appointed to the board after May 1, 2004 shall receive a one-time grant of Options and/or Restricted Stock equal to the number of Options and/or shares of Restricted Stock granted to the Nonemployee Directors in the immediately preceding January. (c) Each year, by written election made no later than December 15, each Nonemployee Director may designate all or a portion of his or her annual cash retainer for the following year to be paid by the grant of Director Options. If a Nonemployee Director so designates, such Nonemployee Director shall receive Director Options to purchase that number of Shares that equals the portion of the annual cash retainer so designated divided by three/tenths (0.3) of the Fair Market Value of a Share on the Grant Date, rounded to the next higher multiple of ten. 9.2. Employee Director Grants. Employee Directors shall receive Options or Restricted Stock only in their capacity as Employees and not in their capacity as Directors. 9.3. Grant Date. All annual grants of Director Options and Restricted Stock shall be granted on the first day in each calendar year that the Shares trade on a United States stock exchange or inter-dealer quotation system, as designated by the Board. All one-time Director Options issued under Section 9.1(b) shall be granted on the effective date of such Nonemployee Director's election or appointment. 9.4. Award Agreement. Each Option and each grant of Restricted Stock granted pursuant to this Section 9 shall be evidenced by an Award Agreement which shall be executed by the Nonemployee Director and the Company. 9.5. Exercise Price. The Exercise Price for the Shares subject to each Option granted pursuant to this Section 9 shall be 100% of the Fair Market Value of such Shares on the Grant Date. 9.6. Exercisability. Each Option granted pursuant to Section 9.1(a) or (b) shall become immediately exercisable on the first anniversary of the Grant Date and each Option granted pursuant to Section 9.1(c) shall become exercisable in 12 equal monthly installments on the last day of each month in the calendar year in which such Option is granted. Notwithstanding the preceding sentence, whenever an optionee ceases to be a Director for any reason whatsoever, any portion of his or her Options which are not exercisable at that time shall lapse and shall not become exercisable thereafter. 9.7. Expiration of Options. Each Option shall terminate upon the first to occur of the following events: (a) The expiration of ten (10) years from the Grant Date; or 14 (b) The expiration of one (1) year from the date of the Optionee's termination of service as a Director for any reason. 9.8. Not Incentive Stock Options. Options granted pursuant to this Section 9 shall not be designated as Incentive Stock Options. 9.9. Vesting Period for Restricted Stock. The Period of Restriction for the Shares of Restricted Stock granted pursuant to this Section 9 shall be one (1) year. If a person ceases to be a Director for any reason prior to the end of such period, the Restricted Stock shall revert to the Company. 9.10. Other Terms. All provisions of this Plan not inconsistent with this Section 9 shall apply to Options and Restricted Stock granted to Nonemployee Directors; provided, however, that Sections 5.2, 7.4.1 and 7.5 (relating to the Committee's discretion to set the terms and conditions of Options and Restricted Stock) shall be inapplicable with respect to Nonemployee Directors. SECTION 10 STOCK AWARDS 10.1. Stock Awards. The Committee may grant other types of equity-based or equity-related Awards (including the grant or offer for sale of unrestricted Shares) in such amounts and subject to such terms and conditions, as the Committee shall determine. Such Awards may entail the transfer of actual Shares to Employees, or payment in cash or otherwise of amounts based on the value of Shares and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States. SECTION 11 MISCELLANEOUS 11.1. Deferrals. The Committee, in its sole discretion, may permit a Participant to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award. Any such deferral election shall be subject to such rules and procedures as shall be determined by the Committee in its sole discretion. 11.2. No Effect on Employment or Service. Nothing in this Plan shall interfere with or limit in any way the right of the Company to terminate any Participant's employment or service at any time, with or without cause. For purposes of this Plan, transfer of employment of a Participant between the Company and any of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only, unless otherwise provided by an applicable employment agreement between the Participant and the Company or its Affiliate, as the case may be. 11.3. Participation. No Employee or Consultant shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. 11.4. Indemnification. Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability or expense (including attorneys' fees) that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to 15 which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under this Plan or any Award Agreement, and (b) from any and all amounts paid by him or her in settlement thereof, with the Company's prior written approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit or proceeding against him or her; provided, however, that he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Certificate of Incorporation or Bylaws, by contract, as a matter of law or otherwise, or under any power that the Company may have to indemnify them or hold them harmless. 11.5. Successors. All obligations of the Company under this Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business or assets of the company. 11.6. Beneficiary Designations. If permitted by the Committee, a Participant under this Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant's death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate and, subject to the terms of this Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant's estate. 11.7. Transferability. Except as otherwise set forth in an Award Agreement, no Award granted under this Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 11.6; provided, however, that, except as otherwise set forth in an Award Agreement, an Award granted under this Plan may be transferred to a holder's family members, to trusts created for the benefit of the holder or the holder's family members, or to charitable entities. 11.8. No Rights as Stockholder. Except to the limited extent provided in Sections 7.6 and 7.7, no Participant (nor any beneficiary thereof) shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable pursuant to an Award (or the exercise thereof), unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant (or his or her beneficiary). 11.9. Certification. Prior to the payment of any compensation under an Award intended to qualify as Performance-Based Compensation under Section 162(m) of the Code, the Committee shall certify the extent to which any Performance Goals and any other material terms under such Award have been satisfied (other than in cases where such relate solely to the increase in the value of the Shares). 11.10. Discretionary Adjustments Pursuant to Section 162(m). Notwithstanding satisfaction of any completion of any Performance Goals, to the extent specified at the time of grant of an Award to Covered Employees, the number of Shares, Options or other benefits granted, issued, retainable and/or vested under an Award on account of satisfaction of such Performance Goals may be reduced by the Committee on the basis of such further considerations as the Committee in its sole discretion shall determine. 16 SECTION 12 AMENDMENT, TERMINATION, AND DURATION 12.1. Amendment, Suspension, or Termination. The Board, in its sole discretion, may amend or terminate this Plan, or any part thereof, at any time and for any reason; provided, however, that the Board will obtain stockholder approval for any amendment which would require stockholder approval pursuant to the listing standards of the Nasdaq Stock Market or any other applicable laws or regulations. The amendment, suspension or termination of this Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted to such Participant. No Award may be granted during any period of suspension or after termination of this Plan. 12.2. Duration of this Plan. This Plan shall become effective on the date specified herein, and subject to Section 12.1 (regarding the Board's right to amend or terminate this Plan), shall remain in effect thereafter; provided, however, that no Incentive Stock Option may be granted under this Plan after the tenth anniversary of the original effective date of this Plan, or the tenth anniversary of any subsequent approval of the Plan by the stockholders of the Company. SECTION 13 TAX WITHHOLDING 13.1. Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or the exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required to be withheld with respect to such Award (or the exercise thereof). 13.2. Withholding Arrangements. The Committee, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part, by (a) electing to have the Company withhold otherwise deliverable Shares, or (b) delivering to the Company Shares then owned by the Participant having a Fair Market Value equal to the amount required to be withheld. The amount of the withholding requirement shall be deemed to include any amount that the Committee agrees may be withheld at the time any such election is made, not to exceed the amount determined by using the maximum federal, state or local marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the taxes are required to be withheld. SECTION 14 CHANGE IN CONTROL 14.1. Change in Control. Except as provided in Section 14.3, in the event of a Change in Control of the Company, all Awards granted under this Plan that then are outstanding and not then exercisable or are subject to restrictions, shall, unless otherwise provided for in the Award Agreements applicable thereto, become immediately exercisable, and all restrictions shall be removed, as of the first date that the Change in Control has been deemed to have occurred, and shall remain as such for the remaining life of the Award as provided herein and within the provisions of the related Award Agreements. 17 14.2. Definition of Change in Control. (a) For purposes of this Section 14, for Awards granted prior to the Company's 2004 Annual Meeting of Stockholders, a Change in Control of the Company shall be deemed to have occurred if the conditions set forth in any one or more of the following shall have been satisfied, unless such condition shall have received prior approval by a majority vote of the Continuing Directors, as defined below, indicating that Section 14.1 shall not apply thereto: (i) any "person", as such term is used in Sections 13(d) and 14(d) of the 1934 Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities; (ii) during any period of two consecutive years (not including any period prior to the Effective Date of this Plan), individuals ("Existing Directors") who at the beginning of such period constitute the Board of Directors, and any new director (an "Approved Director") (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (b) or (c) of this Section 14.2) whose election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of a least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election previously was so approved (Existing Directors together with Approved Directors constituting "Continuing Directors"), cease for any reason to constitute at least a majority of the Board of Directors; or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other person, other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities for the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (ii) a merger in which no "person" (as defined in Section 14.2(a)(i)) acquires more than thirty percent (30%) of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve (1) a plan of complete liquidation of the Company or (2) an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (b) For purposes of this Section 14, for Awards granted after the Company's 2004 Annual Meeting of Stockholders, or for prior Awards if consented to by the Participant, a Change in Control of the Company shall be deemed to have occurred if the conditions set forth in one or more of the following shall have been satisfied, unless such condition shall have received prior approval by a majority vote of the 18 Continuing Directors (For purposes of Section 14.2(b), "Continuing Directors" shall mean any individual who either (i) was a member of the Board on the date of the 2004 Annual Meeting of Stockholders, 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), indicating that Section 14.1 shall not apply thereto: (i) Continuing Directors no longer constitute at least 2/3 of the Company's Board; (ii) any person or group of persons (as defined in Rule 13d-5 under the 1934 Act), together with its affiliates, become the beneficial owner (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of thirty percent (30%) or more of the Company's then outstanding common stock or thirty percent (30%) or more of the combined voting power of the Company's then outstanding securities (calculated in accordance with Section 13(d)(3) or 14(d) of the 1934 Act) entitled generally to vote for the election of the Company's directors; (iii) the merger or consolidation of the Company with any other corporation, the sale of substantially all of the assets of the Company or the liquidation or dissolution of the Company, unless, in the case of a merger or consolidation, the then Continuing Directors in office immediately prior to such merger or consolidation will constitute at least 2/3 of the Board of Directors of the surviving corporation of such merger or consolidation and any parent (as such term is defined in Rule 12b-2 under the 1934 Act) of such corporation; or (iv) at least 2/3 of the then Continuing Directors in office immediately prior to any other action proposed to be taken by the Company's stockholders or by the Board determine that such proposed action, if taken, would constitute a change in control of the Company and such action is taken. 14.3. Impact of Change in Control. Notwithstanding the provisions of Section 14.1, in the event there is a Change in Control of the Company, as determined by the Board or the Committee, the Board or Committee may, in its discretion, (i) provide for the assumption or substitution of, or adjustment to, each outstanding Award; (ii) accelerate the vesting of Options and terminate any restrictions on Awards; and (iii) provide for the cancellation of Awards for a cash payment to the Participant. The provisions of this Section 14.3 will not apply to Awards granted prior to the 2004 Annual Meeting of Stockholders unless a Participant consents to such application as to a particular Award. SECTION 15 LEGAL CONSTRUCTION 15.1. Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 15.2. Severability. In the event any provision of this Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Plan, and this Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 15.3. Requirements of Law. The grant of Awards and the issuance of Shares under this Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required from time to time. 19 15.4. Securities Law Compliance. With respect to Section 16 Persons, Awards under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of this Plan, Award Agreement or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable or appropriate by the Committee in its sole discretion. 15.5. Governing Law. This Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of Kansas (excluding its conflict of laws provisions). 15.6. Captions. Captions are provided herein for convenience of reference only, and shall not serve as a basis for interpretation or construction of this Plan. 20 AMENDMENT TO APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN This Amendment is adopted this 9th day of December, 2004, by Applebee's International, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company has adopted the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan (the "Plan"); WHEREAS, the Company desires to amend the Plan to provide for additional flexibility for officers upon retirement and upon termination of service as a director, and to clarify the ability to transfer awards under the Plan; and WHEREAS, in accordance with Section 12.1 of the Plan, this Amendment does not require the approval of the stockholders of the Company. NOW, THEREFORE, effective as of the date hereof, the Plan is hereby amended as follows: Section 5.4.1(e) is amended to read in its entirety as follows: "(e) The expiration of three (3) years from the date of the Optionee's Retirement (except as provided in Section 5.8.2 regarding Incentive Stock Options), or as otherwise set forth in the Award Agreement." Section 9.7(b) is amended to read in its entirety as follows: "The expiration of one (1) year from the date of the Nonemployee Director's termination of service as a Director for any reason, or as otherwise set forth in the Award Agreement." Section 11.7 is amended to read in its entirety as follows: "Section 11.7. Transferability. Except as otherwise set forth in an Award Agreement, no Award granted under this Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 11.6." Except as provided above, the Plan is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the Company has hereby executed this Amendment as of this 9th day of December, 2004. APPLEBEE'S INTERNATIONAL, INC. By: /s/ Rebecca R. Tilden -------------------------------------- Name: Rebecca R. Tilden Title: Vice President, General Counsel and Secretary AMENDMENT TO APPLEBEE'S INTERNATIONAL, INC. AMENDED AND RESTATED 1995 EQUITY INCENTIVE PLAN This Amendment is adopted this 1st day of March, 2005, by Applebee's International, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company has adopted the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan (the "Plan"); WHEREAS, the Company desires to increase the number of shares of common stock of the Company available for issuance under the Plan; and WHEREAS, such increase and this Amendment is subject to approval of the stockholders of the Company at the 2005 Annual Meeting. NOW, THEREFORE, the Plan is amended as follows: Section 4.1 of the Plan shall be amended so that the number of authorized Shares under the Plan is increased by 4,000,000 Shares. Section 4.1 of the Plan shall then read as follows: "4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the total number of Shares available for grant under this Plan shall not exceed 19,900,000. Shares granted under this Plan may be either authorized but unissued Shares or treasury Shares, or any combination thereof. This Amendment shall become effective upon approval by the stockholders of the Company at the 2005 Annual Meeting. Except as provided above, the Plan is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the Company has hereby executed this Amendment as of this 1st day of March, 2005. APPLEBEE'S INTERNATIONAL, INC. By: /s/ Rebecca R. Tilden -------------------------------------- Name: Rebecca R. Tilden Title: Vice President, General Counsel and Secretary EX-10 6 stockpurchplan.txt ESPP APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN ARTICLE 1 - PURPOSE OF THE PLAN The Company has established this Plan to provide eligible employees of the Company and its Subsidiaries a method to purchase shares of common stock of the Company by payroll deduction at a discount. The Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code and shall be construed and operated consistently with the requirements of that Section. ARTICLE 2 - DEFINITIONS 2.1 "Beneficiary" means the person designated by the Participant on a form provided by and acceptable to the Committee to receive the Participant's Payroll Deduction Account in the event of his death. In the absence of any such designation, "Beneficiary" shall mean the Participant's estate. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Brokerage Account" means the general securities brokerage account, or such other account or record determined appropriate by the Company, established and maintained for the Plan with any entity selected by the Company, in its discretion, to assist in the administration of, and purchase of Shares under the Plan. 2.4 "Code" means the Internal Revenue Code of 1986, as amended. 2.5 "Commencement Date" means the January 1, April 1, July 1 or October 1, as the case may be, on which a particular Offering begins. 2.6 "Committee" means the committee of persons appointed by the Company for the purpose of administering the Plan. 2.7 "Company" means Applebee's International, Inc. 2.8 "Designated Person" means the person designated by the Committee to receive any forms or agreements required or permitted under the Plan. More than one person may be designated by the Committee. Different persons may be designated for different forms or agreements. The Designated Person may be an individual or an entity. The Committee shall notify Participants in writing of the identity of each Designated Person and the forms or agreements to be sent to each such person. 2.9 "Effective Date" means January 1, 1997. 2.10 "Ending Date" means the March 31, June 30, September 30 or December 31, as the case may be, on which a particular Offering concludes. 2.11 "Enrollment Agreement" means the enrollment form acceptable to the Committee that a Participant who wishes to participate in the Plan must submit to the Designated Person prior to the Commencement Date. 2.12 "Offering" means each three (3) consecutive month offering period for the purchase and sale of Shares under the Plan. 2.13 "Participant" means an employee who has satisfied the eligibility requirements of Article 3 and who has complied with the requirements of Article 4. 2.14 "Pay" means and includes (i) a Participant's regular salary or earnings; (ii) a Participant's overtime pay; and (iii) bonuses designated by the Committee as being eligible to be used to purchase Shares under this Plan. "Pay" shall not include any other compensation, taxable or otherwise, including without limitation employee tips, moving/relocation expenses, imputed income, option income, tax-gross-ups and taxable benefits. 2.15 "Payroll Deduction Account" shall mean the Company's bookkeeping entry that reflects the amount deducted from each Participant's Pay for the purpose of purchasing Shares under the Plan, reduced by amounts refunded to the Participant and amounts applied to purchase Shares hereunder. Amounts deducted from each Participant's Pay may be commingled with the general funds of the Company. No interest shall be paid or allowed on a Participant's payroll deductions. 2.16 "Plan" means the Applebee's International, Inc. Employee Stock Purchase Plan. 2.17 "Purchase Price" means the price per Share as set forth in Article 6 paid by a Participant to acquire Shares hereunder. 2.18 "Shares" means shares of the Company's common stock. 2.19 "Subsidiaries" shall mean any present or future domestic or foreign corporation that would be a "subsidiary corporation" of the Company as that term is defined in Section 424(f) of the Code. 2.20 "Withdrawal" means a Participant's election to withdraw from an Offering pursuant to Article 11. ARTICLE 3 - ELIGIBILITY Any regular employee of the Company or any of its Subsidiaries shall be eligible to participate in the Plan as of the Commencement Date coinciding with or next following the completion of twelve (12) consecutive months of employment following his date of hire. For the purpose of determining an employee's initial eligibility, an employee's period of employment with any business entity, the assets, business or stock of which has been acquired, in whole or in part by the Company or any of its Subsidiaries through purchase, merger or otherwise ("Acquired Business"), shall be taken into account. An employee's period of employment with the Company, any of its Subsidiaries, or any Acquired Business 2 prior to the Effective Date shall be taken into account. If an employee terminates employment with the Company or any of its Subsidiaries for any reason and is later rehired, such employee, regardless of whether he is eligible to participate in the Plan prior to his termination, shall be treated as a new employee and will be eligible to participate in the Plan as of the Commencement Date coinciding with or next following the completion of twelve (12) consecutive months of employment following his date of rehire. For purposes of this Article, an employee's employment with the Company or any of its Subsidiaries shall not be considered interrupted or terminated in the case of a leave of absence or suspension, provided that such leave is approved by the Company or the employee's reemployment with the Company or any of its Subsidiaries upon the expiration of such leave is guaranteed by contract or statute. ARTICLE 4 - PARTICIPATION An eligible employee may become a Participant by completing an Enrollment Agreement provided by the Company and filing it with the Designated Person prior to the deadline set by the Committee that precedes the Commencement Date of the Offering to which it relates. Participation in one Offering under the Plan shall neither limit, nor require, participation in any other Offering; provided, however, that at the conclusion of each Offering, the Company shall automatically re-enroll each Participant in the next Offering at the same rate of payroll deduction, unless the Participant has advised the Designated Person otherwise in a written form acceptable to the Committee. ARTICLE 5 - OFFERINGS Each Offering shall be for three (3) consecutive months. The first Offering shall commence on January 1, 1997. Thereafter, Offerings shall commence on each subsequent April 1, July 1, October 1 and January 1, and shall continue until the Plan is terminated in accordance with Section 15.5. ARTICLE 6 - PURCHASE PRICE The "Purchase Price" per Share pursuant to an Offering shall be the lesser of (a) 90% of the fair market value per Share on the Commencement Date of such Offering or, if the Commencement Date is not a business day, the nearest subsequent business day; or (b) 90% of the fair market value of such Share on the Ending Date of such Offering or, if the Ending Date is not a business day, the nearest prior business day. "Fair market value" for this purpose shall mean the closing price as reported on the National Association of Securities Dealers Automated Quotation National Market System (the "NASDAQ-NMS") or, if the Shares are not reported on the NASDAQ-NMS, on the stock exchange, market, or system on which the Shares are traded as reported that is designated by the Committee as controlling for purposes of the Plan. In the event shares are not so traded or reported, no purchase shall be made and each Participant's interest in the amount credited to the Payroll Deduction Account shall be returned to each Participant without interest. ARTICLE 7 - LIMITATIONS ON SHARE OWNERSHIP 7.1 The maximum number of Shares that a Participant may acquire during an Offering shall be the amount credited to such Participant's Payroll Deduction Account as of the Ending Date of such Offering, divided by the Purchase Price per Share. 3 7.2 The maximum, aggregate number of Shares that will be offered under the Plan is two hundred thousand (200,000). If, as of any Ending Date, the total number of Shares to be purchased exceeds the number of Shares then available under this Article (after deduction of all Shares that have been previously purchased under the Plan), the Committee shall make a pro rata allocation of the Shares that remain available in as nearly a uniform manner as shall be practicable and as it shall determine, in its sole judgment, to be equitable. In such event, any amount credited to each Participant's Payroll Deduction Account that remains after purchase of such reduced number of Shares shall be refunded as soon as reasonably practicable, and no further payroll deductions or Offerings shall occur under this Plan unless and until additional shares are authorized. 7.3 Notwithstanding anything herein to the contrary, the maximum number of Shares that may be purchased by any Participant as of any Ending Date shall be reduced to that number which, when the voting power or value thereof is added to the total combined voting power or value of all classes of shares of capital stock of the Company or its Subsidiaries the person is already deemed to hold (excluding any number of Shares which such person would be entitled to purchase under the Plan), is one share less than five percent (5%) of the total combined voting power or value of all classes of shares of capital stock of the Company or its Subsidiaries. For purposes of the foregoing, the rules of Section 424(d) of the Code shall apply. In addition, no Participant shall be allowed to purchase Shares as of any Ending Date to the extent such purchase would cause the sum of the fair market value of all Shares purchased by such Participant under this Plan and any other plan qualified under Code Section 423 during the calendar year during which such Ending Date occurs to exceed $25,000. For purposes of the preceding sentence, "fair market value" shall be the value as of the date of grant of each such Offering and the rules of Section 423(b)(8) of the Code shall apply. ARTICLE 8 - PAYROLL DEDUCTIONS 8.1 At the time the Enrollment Agreement is filed with the Designated Person and for so long as a Participant participates in the Plan, each Participant may authorize the Company to make payroll deductions of either (a) a fixed dollar amount per pay period; or (b) a whole percentage (in 1% increments) of Pay per pay period, provided, however, that no payroll deduction shall exceed 15% of Pay per pay period. The Committee, in its discretion, may establish from time to time a minimum fixed dollar deduction that a Participant must authorize under this Plan; provided, however, that a Participant's existing rights under any Offering that has already commenced may not be adversely affected thereby. 8.2 The amount of each Participant's payroll deductions shall be credited to his Payroll Deduction Account. No interest or other amount shall be credited to a Payroll Deduction Account. 8.3 Commencing with respect to the first payroll period beginning on or after the Plan's Effective Date, a Participant's authorized payroll deductions shall be deducted from each paycheck paid during an Offering and shall continue until changed by the Participant or by amendment or termination of this Plan. A Participant may elect to increase or decrease his authorized payroll deductions effective as of January 1 or July 1 of each year upon prior 4 notice acceptable to the Company. Except for a Withdrawal and discontinuance of payroll deductions permitted under this Plan, no change in payroll deductions may be effective on a date other than January 1 or July 1, including without limitation, any change in the amount or rate of payroll deductions during an Offering. 8.4 With respect to each payroll period during an Offering, a Participant's authorized payroll deductions shall be deducted from Pay only after all other discretionary and nondiscretionary payroll deductions attributable to such Participant have first been deducted from Pay for such period. To the extent a Participant's Pay after such discretionary and nondiscretionary payroll deductions have been deducted is less than the Participant's authorized payroll deductions hereunder, the Participant's remaining Pay, if any, shall be credited on his behalf to the Payroll Deduction Account and the difference between the authorized and actual deduction shall be disregarded and never deducted from payroll or credited to the Payroll Deduction Account. ARTICLE 9 - PURCHASE OF SHARES 9.1 As of the Ending Date of each Offering, each Participant shall be deemed to have elected to purchase at the Purchase Price, the maximum number of Shares (including fractional Shares) that may be purchased with such Participant's Payroll Deduction Account in accordance with the terms of this Plan, unless the Designated Person has received timely and proper notice of a Withdrawal. The Shares purchased hereunder will be credited to the Brokerage Account. Any cash remaining in the Participant's Payroll Deduction Account which is not applied toward the purchase of Shares shall be carried forward and applied in subsequent Offerings. No Participant shall have any rights of a shareholder with respect to any Shares until the Shares have been purchased in accordance herewith. Shares purchased hereunder may be treasury or newly issued shares acquired from the Company or shares acquired on the open market. 9.2 Any cash dividends paid on Shares credited to the Brokerage Account shall be automatically applied to purchase, at Company expense, additional Shares from the Company at the fair market value (as defined in Article 6) of such Shares as of the business day immediately preceding the date of purchase, or on the open market at the market price at the time of purchase, and such additional shares shall be credited to the Brokerage Account. 9.3 Notwithstanding the preceding provisions of this Article or any other provision to the contrary, no Shares shall be purchased hereunder or credited to the Brokerage Account until the Plan is approved by the stockholders of the Company as provided in Section 15.1. ARTICLE 10 - EVIDENCE OF OWNERSHIP OF SHARES Following the Ending Date of each Offering, the Shares that are purchased by each Participant shall be recorded in book entry form and credited to the Brokerage Account. ARTICLE 11 - WITHDRAWAL 11.1 A Participant may "Withdraw" from an Offering, in whole but not in part, by notifying the Designated Person, in writing on a form acceptable to the Committee, in which event (i) the Participant's payroll deductions shall stop as soon as is reasonably practicable following receipt of such notice by 5 the Designated Person, (ii) the Company shall refund the amount credited to the Participant's Payroll Deduction Account as soon as reasonably practicable, and (iii) no Shares shall be purchased on behalf of the Participant with respect to such Offering. The notice described in this Section must be received by the Designated Person prior to the deadline set by the Committee, provided that if the Committee fails to set such a deadline, such notice must be received by the Ending Date (or the immediately preceding business day if the Ending Date is not a business day). 11.2 An eligible employee who has previously withdrawn from the Plan may re-enter by complying with the Participation requirements. Upon compliance with such requirements, an employee's re-entry into the Plan will be effective as of the Commencement Date coinciding with or next following the satisfaction of such requirements. 11.3 A Participant hereunder may elect at any time on a form acceptable to the Committee (i) to have all or part of the Shares credited to the Brokerage Account on his behalf (including fractional Shares) sold at the Participant's expense and cash paid to the Participant, (ii) to have any whole Shares transferred to the Participant's individual brokerage account established at the Participant's expense, or (iii) to have a stock certificate issued to the Participant or his designee for any whole Shares credited to the Brokerage Account on his behalf. ARTICLE 12 - RIGHTS NOT TRANSFERABLE No Participant shall be permitted to sell, assign, transfer, pledge, or otherwise dispose of or encumber such Participant's interest in the Payroll Deduction Account or any rights to purchase or to receive Shares under the Plan other than by will or the laws of descent and distribution, and such rights and interests shall not be subject to, a Participant's debts, contracts, or liabilities. If a Participant purports to make a transfer, or a third party makes a claim in respect of a Participant's rights or interests, whether by garnishment, levy, attachment or otherwise, such purported transfer or claim shall be treated as a Withdrawal. ARTICLE 13 - TERMINATION OF EMPLOYMENT As soon as reasonably practicable following termination of a Participant's employment with the Company or any of its Subsidiaries for any reason whatsoever, including, but not limited to, by reason of death, disability or retirement, (i) the amount credited to the Payroll Deduction Account on behalf of the Participant shall be returned to the Participant or the Participant's Beneficiary, as the case may be, subject to Section 15.1 and (ii) the Participant's interest in the Brokerage Account shall be liquidated in the manner described below. As part of the procedure to liquidate the Participant's interest in the Brokerage Account, the Participant may elect in writing on a form acceptable to the Committee and received by the Designated Person by the deadline set by the Committee, to have the number of Shares credited to the Brokerage Account on behalf of the Participant sold at the Participant's expense and cash paid to the Participant, or to have such Shares transferred to the Participant's individual brokerage account established at the Participant's expense. If the Participant does not request a sale or transfer by the deadline established by the Committee or requests to receive a stock certificate, a certificate for the whole Shares credited to the Brokerage Account on his behalf will be issued to the Participant and the Participant will receive cash for any fractional Shares credited to the Brokerage Account on his behalf. 6 ARTICLE 14 - ADMINISTRATION The Plan shall be administered by the Committee, which may engage such persons, entities or agents as it shall deem advisable to assist in the administration of the Plan. The Company may from time to time appoint or dismiss members of the Committee. A majority of the members of the Committee shall constitute a quorum and the acts of a majority of the members present at a meeting or the consent in writing signed by all the members of the Committee shall constitute the acts of the Committee. The Committee shall be vested with full authority to make, administer, and interpret such rules and regulations as it deems necessary to administer the Plan, and any determination, decision, or action of the Committee in connection with the construction, interpretation, administration or application of the Plan shall be final, conclusive, and binding upon all parties, including the Company, the Participants and any and all persons that claim rights or interests under or through a Participant. The Committee may delegate all or part of its authority to one or more of its members. AMENDMENT 15 - MISCELLANEOUS 15.1 Approval of the Plan. Notwithstanding any provision in this Plan to the contrary, if the Plan is not approved by the stockholders of the Company within twelve (12) months after the Effective Date of the Plan, the balance of each Participant's Payroll Deduction Account shall be refunded in its entirety, without interest, as soon as reasonably practicable. If an eligible employee terminates employment after the Ending Date of any Offering but prior to the approval of the Plan by the stockholders of the Company, then such employee may elect in writing on a form acceptable to the Committee, which form must be received by the Designated Person by the deadline set by the Committee, to have the balance credited to the Payroll Deduction Account on his behalf as of any such Ending Date retained and applied to purchase Shares following the subsequent approval of the Plan by the stockholders of the Company, or returned to the employee at a later date in the event the stockholders do not approve the Plan. If such election is not timely made or if such employee elects to receive cash, such employee shall receive the balance credited to the Payroll Deduction Account on his behalf as of any such Ending Date as soon as reasonably practicable after the passage of such deadline or making such election. 15.2 Amendment or Discontinuance of the Plan. The Board shall have the right to amend, modify or terminate the Plan at any time without notice, provided that (i) no Participant's existing rights under any Offering that is in progress may be adversely affected thereby, and (ii) in the event that the Board desires to retain the favorable tax treatment under Sections 421 and 423 of the Code, no such amendment of the Plan shall increase the number of Shares that were reserved for issuance hereunder unless the Company's shareholders approve such an increase. 15.3 Changes in Capitalization. In the event of reorganization, recapitalization, stock split, stock dividend, combination of shares, merger, consolidation, offerings of rights, or any other change in the capital structure of the Company, the number, kind and price of the Shares that are available for purchase under the Plan and the number of Shares that an employee is entitled to purchase shall be automatically adjusted to reflect the change in capital structure; provided, however, that the Board shall retain the right to modify any such adjustment in the manner it deems appropriate. 7 15.4 Notices. All notices or other communications by a Participant under or in connection with the Plan, including but not limited to Enrollment Agreements, shall be deemed to have been duly given when received by the Designated Person in the form specified by the Committee. 15.5 Termination of the Plan. This Plan shall terminate at the earliest of the following: (a) The date of the filing of a "Statement of Intent to Dissolve" by the Company or the effective date of a merger or consolidation wherein the Company is not to be the surviving corporation, which merger or consolidation is not between or among corporations affiliated with the Company; (b) The date the Board acts to terminate the Plan; and (c) The date when all of the Shares that were reserved for issuance hereunder have been purchased. Prior to termination of the Plan, the Company may change the Ending Date of a pending Offering. Upon termination of the Plan, the Company shall refund to each Participant the remaining amount credited to each Participant's Payroll Deduction Account after all purchases have been made. 15.6 Notice of, and Limitations on Sale of Stock Purchased Under the Plan. The Plan is intended to provide Shares for investment and not for resale. The Company does not, however, intend to restrict or influence the conduct of any employee's affairs beyond established Company policies. A current or former Participant may, therefore, sell Shares that are purchased under the Plan at any time at his expense, subject to compliance with any applicable federal or state securities laws and Company policies. Each current and former Participant assumes the risk of any market fluctuations in the price of the Shares. Each current or former Participant must notify the Company of any disposition of Shares purchased under this Plan that is described in Section 423(a)(1) of the Code, which is any disposition within two years after the date of grant of the option to purchase or any disposition within one year after the transfer of the Share to him. 15.7 Governmental Regulation. The Company's obligation to sell and deliver Shares under this Plan is subject to any governmental approval that is required in connection with the authorization, issuance or sale of such Shares. 15.8 No Employment Rights. This Plan does not, directly or indirectly, create in any employee or class of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. 15.9 Governing Law. The law of the state of Kansas shall govern all matters that relate to this Plan except to the extent it is superseded by the laws of the United States. 15.10 Text of Plan Documents Controls. Titles of Articles and Sections in this Plan are inserted for convenience of reference only and in the event of any conflict, the text of this instrument, rather than such titles, shall control. 8 15.11 Non-gender Clause. Any words herein used in the masculine shall read and be construed in the feminine where they would so apply. Words in the singular shall be read and be construed as though used in the plural in all cases where they would so apply. IN WITNESS WHEREOF, Applebee's International, Inc. has caused this Plan to be adopted effective as of January 1, 1997. APPLEBEE'S INTERNATIONAL, INC. "Company" By: /s/ Abe J. Gustin, Jr. ----------------------------------------- Title: Chairman and Chief Executive Officer -------------------------------------- 9 FIRST AMENDMENT APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN WHEREAS, by written instrument effective as of January 1, 1997, Applebee's International, Inc. (the "Company") adopted the Applebee's International, Inc. Employee Stock Purchase Plan (the "Plan") for the exclusive benefit of its eligible employees; and WHEREAS, the Board of Directors of the Company (the "Board") reserved the right to amend the Plan from time to time, subject to certain restrictions specified in Section 15.2 of the Plan which are not applicable; and WHEREAS, the Board now desires to amend the Plan in the manner hereinafter set forth. NOW, THEREFORE, the Plan is amended as follows: 1. Effective January 1, 2001, "Article 3 - Eligibility" is amended in its entirety to read as follows: "Any regular employee of the Company or any of its Subsidiaries shall be eligible to participate in the Plan as of the Commencement Date coinciding with or next following his date of hire. If an employee terminates employment with the Company or any of its Subsidiaries and is subsequently rehired, he shall be eligible to participate in the Plan as of the Commencement Date coinciding with or next following his rehire date." 2. Effective July 1, 2001, "Article 6 - Purchase Price" is amended by inserting "85%" in lieu of each reference to "90%" thereunder. 3. Effective January 1, 2001, Section 8.3 is amended in its entirety to read as follows: "8.3 Commencing with respect to the first payroll period beginning on or after the Plan's Effective Date, a Participant's authorized payroll deductions shall be deducted from each paycheck paid during an Offering and shall continue until changed by the Participant or by amendment or termination of this Plan. A Participant may elect to increase or decrease his authorized payroll deductions effective as of January 1, April 1, July 1, or October 1 of each year upon prior notice acceptable to the Company. Except for a Withdrawal and discontinuance of payroll deductions permitted under this Plan, no change in payroll deductions may be effective on a date other than January 1, April 1, July 1, or October 1, including without limitation, any change in the amount or rate of payroll deductions during an Offering." 4. The provisions of this Amendment are effective as of the dates set forth herein. In all other respects, the Plan shall remain unchanged. ******************************* IN WITNESS WHEREOF, the Company has executed this Amendment as of the 15th day of December, 2000. APPLEBEE'S INTERNATIONAL, INC. "Company" By: /s/ Lloyd Hill ----------------------------------------- Title: Chairman and Chief Executive Officer -------------------------------------- SECOND AMENDMENT APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN WHEREAS, by written instrument effective as of January 1, 1997, Applebee's International, Inc. (the "Company") adopted the Applebee's International, Inc. Employee Stock Purchase Plan (the "Plan") for the exclusive benefit of its eligible employees; and WHEREAS, the Board of Directors of the Company (the "Board") reserved the right to amend the Plan from time to time, subject to certain restrictions specified in Section 15.2 of the Plan; and WHEREAS, the Board now desires to amend the Plan in the manner hereinafter set forth. NOW, THEREFORE, effective as of August 30, 2001, the Plan is amended as follows: 2. Section 2.14, "Pay," is amended in its entirety to read as follows: "2.14 "Pay" means and includes (i) a Participant's regular salary or earnings; (ii) a Participant's overtime pay; (iii) bonuses designated by the bonus plan pursuant to which the bonus is paid as being eligible to be used to purchase Shares under this Plan and (iv) bonuses designated by the Committee as being eligible to be used to purchase Shares under this Plan. "Pay" shall not include any other compensation, taxable or otherwise, including without limitation employee tips, moving/relocation expenses, imputed income, option income, tax-gross-ups and taxable benefits." 2. The first sentence of Section 7.2 is replaced with the following two sentences: "The aggregate, available number of Shares originally available for offer under the Plan was two hundred thousand (200,000), which has been adjusted to three hundred thousand (300,000) pursuant to Section 15.3. Effective August 30, 2001, three hundred thousand (300,000) additional shares will be available for offer under this Plan so that the maximum, aggregate number of Shares available for offer under the Plan is six hundred thousand (600,000)." 3. A new Section 8.5 is added to the Plan and reads as follows: "A Participant who timely files an Enrollment Agreement authorizing the Company to start, stop, increase, or decrease his payroll deductions shall have thirty (30) days from the date of the first regular payroll check that such modification was to be effective to advise the Designated Person in writing that his payroll deduction was not properly implemented. If a Participant fails to inform the Designated Person within such thirty (30) day period, such Participant shall be deemed to have elected whatever amount (including zero) that has been and is being deducted from his paycheck." 4. The provisions of this Amendment are effective as of the dates set forth herein. In all other respects, the Plan shall remain unchanged. ******************************* IN WITNESS WHEREOF, the Company has executed this Amendment as of the 7th day of September, 2001. APPLEBEE'S INTERNATIONAL, INC. "Company" By: /s/ Lloyd Hill ----------------------------------------- Title: Chairman and Chief Executive Officer -------------------------------------- THIRD AMENDMENT APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN WHEREAS, by written instrument effective as of January 1, 1997, Applebee's International, Inc. (the "Company") adopted the Applebee's International, Inc. Employee Stock Purchase Plan (the "Plan") for the exclusive benefit of its eligible employees; and WHEREAS, the Board of Directors of the Company (the "Board") reserved the right to amend the Plan from time to time, subject to certain restrictions specified in Section 15.2 of the Plan; and WHEREAS, the Board now desires to amend the Plan in the manner hereinafter set forth. NOW, THEREFORE, effective as of January 1, 2003, the Plan is amended as follows: 3. Section 8.1 is amended in its entirety to read as follows: "8.1 At the time the Enrollment Agreement is filed with the Designated Person and for so long as a Participant participates in the Plan, each Participant may authorize the Company to make payroll deductions of either (a) a fixed dollar amount per pay period; or (b) a whole percentage (in 1% increments) of Pay per pay period, provided, however, that the Participant may make a different percentage election with respect to bonus Pay than his percentage election with respect to other types of Pay. Notwithstanding the foregoing, no payroll deduction (whether elected in a fixed dollar amount or percentage amount) shall exceed 15% of Pay per pay period. The Committee, in its discretion, may establish from time to time a minimum fixed dollar deduction that a Participant must authorize under this Plan; provided, however, that a Participant's existing rights under any Offering that has already commenced may not be adversely affected thereby." 2. The provisions of this Amendment are effective as of the dates set forth herein. In all other respects, the Plan shall remain unchanged. ******************************* IN WITNESS WHEREOF, the Company has executed this Amendment as of the 21st day of June, 2002. APPLEBEE'S INTERNATIONAL, INC. "Company" By: /s/ Robert T. Steinkamp ----------------------------------------- Title: Vice President and General Counsel -------------------------------------- FOURTH AMENDMENT APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN WHEREAS, by written instrument effective as of January 1, 1997, Applebee's International, Inc. (the "Company") adopted the Applebee's International, Inc. Employee Stock Purchase Plan (the "Plan") for the exclusive benefit of its eligible employees; and WHEREAS, the Board of Directors of the Company (the "Board") reserved the right to amend the Plan from time to time, subject to certain restrictions specified in Section 15.2 of the Plan; and WHEREAS, the Board now desires to amend the Plan in the manner hereinafter set forth. NOW, THEREFORE, effective as of February 17, 2004, the Plan is amended as follows: 4. The second sentence of Section 8.1 is amended in its entirety to read as follows: "Notwithstanding the foregoing, no payroll deduction (whether elected in a fixed dollar amount or percentage amount) shall exceed the percentage of Pay determined by the Committee." 2. The provisions of this Amendment are effective as of the dates set forth herein. In all other respects, the Plan shall remain unchanged. ******************************* IN WITNESS WHEREOF, the Company has executed this Amendment as of the 17th day of February, 2004. APPLEBEE'S INTERNATIONAL, INC. "Company" By: /s/ Rebecca R. Tilden ----------------------------------------- Title: Vice President and General Counsel --------------------------------------- FIFTH AMENDMENT TO APPLEBEE'S INTERNATIONAL, INC. EMPLOYEE STOCK PURCHASE PLAN THIS FIFTH AMENDMENT is adopted this 9th day of December, 2004, by Applebee's International, Inc., a Delaware corporation. WHEREAS, Applebee's International, Inc. (the "Company") adopted the Applebee's International, Inc. Employee Stock Purchase Plan (the "Plan"), with the Plan intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code; WHEREAS, the Plan permits eligible employees of the Company to purchase the common stock of the Company at a discount from its trading price on NASDAQ; WHEREAS, the Company now desires to increase the number of shares of common stock of the Company available for purchase under the Plan; NOW, THEREFORE, the Plan is amended as follows: 1. The first sentence of Section 7.2 is replaced with the following two sentences: "The aggregate number of Shares originally available for offer under the Plan was two hundred thousand (200,000), which has been adjusted from time to time pursuant to Section 15.3 and increased from time to time by amendments to the Plan. The maximum, aggregate number of Shares available for offer under the Plan prior to January 1, 2005 is 1,350,000. Effective January 1, 2005, 500,000 additional shares shall be available for offer under this Plan so that the maximum, aggregate number of Shares available for offer under the Plan is 1,850,000" 2. This Fifth Amendment shall be effective January 1, 2005. 3. Except as provided above, the Plan is hereby ratified and confirmed. IN WITNESS WHEREOF, the Company has hereby executed this Fifth Amendment this 9th day of December, 2004. APPLEBEE'S INTERNATIONAL, INC. By: /s/ Rebecca R. Tilden ----------------------------------------- Title: Vice President and General Counsel EX-10 7 execretirementplan.txt EXECUTIVE RETIREMENT PLAN AMENDMENT Amendment No. 1 Executive Retirement Plan May AII amend or terminate this Plan? This Plan may not be amended or terminated until on or after April 1, 2007. o Are there exceptions to this rule? Yes. > An amendment or termination of this plan may not adversely affect the rights and benefits under this plan of a person if such amendment or termination is adopted after, or less than three years prior to, the date such person becomes "eligible" to "retire" (determined without regard to the amendment); provided that the person "acknowledged eligibility" and executed either an employment agreement or a Change in Control and Noncompete Agreement prior to the date of such amendment or termination; and > Except during the 18 months following a "change in control," a plan amendment adopted at any time will apply to a Person if, in AII's reasonable judgment, the promises and benefits of the amended Plan are in the aggregate no less favorable to such person than the promises and benefits before the amendment or if, in AII's reasonable judgment, such amendment is necessary to achieve the purpose of the Plan or the purpose of the Plan's benefits. For example, such an amendment may be required due to future legal compliance or accounting issues, or to prevent deferred compensation from becoming taxable before the intended date. Such an amendment will apply to all persons regardless of whether they are retired or approaching retirement. > Except during the eighteen months following a "change in control," exhibits to this Plan may be revised or deleted at any time in the Company's sole discretion, and such revision or deletion will apply to all persons regardless of whether they are retired or approaching retirement. The Company is not required to attach to this Plan any revised exhibit. You should check with the Company before relying upon any exhibit to this Plan. > This Plan may not be amended or terminated during the eighteen month period following the occurrence of a "change in control." EX-31 8 lloydhillcert.txt LLOYD HILL 302 CERTIFICATION 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: July 27, 2005 By: /s/ Lloyd L. Hill -------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) EX-31 9 stevelumpkincert.txt STEVE LUMPKIN 302 CERTIFICATION 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) 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 d) 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: July 27, 2005 By: /s/ Steven K. Lumpkin -------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial officer EX-32 10 section906.txt 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 June 26, 2005, 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: July 27, 2005 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 June 26, 2005, 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: July 27, 2005 By: /s/ Steven K. Lumpkin ---------------------- -------------------------------------- Steven K. Lumpkin Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----