-----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, FtFbgrCAlXHa/p14k6eX3ESR9xFFKPRVqPOS7ANYC35RWgyavzwKqKayhmI6TM3P s2fdXJIk/I8bdH0VQkdOEw== 0000853665-04-000131.txt : 20040729 0000853665-04-000131.hdr.sgml : 20040729 20040728203942 ACCESSION NUMBER: 0000853665-04-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040627 FILED AS OF DATE: 20040729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLEBEES INTERNATIONAL INC CENTRAL INDEX KEY: 0000853665 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 431461763 STATE OF INCORPORATION: DE FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17962 FILM NUMBER: 04937222 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 q20410q.txt QTR. 2 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 2004 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ------------------------ Commission File Number: 000-17962 --------------------------------------------------------- Applebee's International, Inc. ------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 43-1461763 - ------------------------------------ ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 4551 W. 107th Street, Overland Park, Kansas 66207 ----------------------------------------------------------- (Address of principal executive offices and zip code) (913) 967-4000 ----------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes X No ------- ------- The number of shares of the registrant's common stock outstanding as of July 23, 2004 was 82,083,020. -1- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES FORM 10-Q FISCAL QUARTER ENDED JUNE 27, 2004 INDEX
Page Part I Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets as of June 27, 2004 and December 28, 2003................................................................ 3 Consolidated Statements of Earnings for the 13 Weeks and 26 Weeks Ended June 27, 2004 and June 29, 2003................................................ 4 Consolidated Statement of Stockholders' Equity for the 26 Weeks Ended June 27, 2004......................................................... 5 Consolidated Statements of Cash Flows for the 26 Weeks Ended June 27, 2004 and June 29, 2003 ............................................... 6 Notes to Consolidated Financial Statements................................................ 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 26 Item 4. Controls and Procedures................................................................... 26 Part II Other Information Item 1. Legal Proceedings......................................................................... 27 Item 2. Changes in Securities and Use of Proceeds................................................. 27 Item 4. Submission of Matters to a Vote of Security Holders....................................... 28 Item 6. Exhibits and Reports on Form 8-K.......................................................... 28 Signatures .................................................................................................. 29 Exhibit Index................................................................................................ 30
-2- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts)
June 27, December 28, 2004 2003 ----------------- ---------------- ASSETS Current assets: Cash and cash equivalents........................................................... $ 14,890 $ 17,867 Short-term investments, at market value............................................. 280 27 Receivables (less allowance for bad debts of $4,401 in 2004 and $4,117 in 2003)..... 41,166 31,950 Receivables related to captive insurance subsidiary................................. 4,775 450 Inventories......................................................................... 31,814 20,799 Prepaid income taxes................................................................ -- 5,800 Other current assets related to captive insurance subsidiary........................ 1,706 657 Prepaid and other current assets.................................................... 11,448 9,072 ----------------- ---------------- Total current assets........................................................... 106,079 86,622 Property and equipment, net............................................................. 435,647 419,802 Goodwill................................................................................ 116,344 105,326 Restricted assets related to captive insurance subsidiary............................... 16,251 10,763 Other intangible assets, net............................................................ 5,819 1,137 Other assets............................................................................ 26,125 20,351 ----------------- ---------------- $ 706,265 $ 644,001 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................................................... $ 212 $ 192 Accounts payable.................................................................... 39,507 37,633 Accrued expenses and other current liabilities...................................... 81,026 96,637 Loss reserve and unearned premiums related to captive insurance subsidiary.......... 20,758 11,007 Accrued income taxes................................................................ 20,697 -- Accrued dividends................................................................... -- 3,863 ----------------- ---------------- Total current liabilities...................................................... 162,200 149,332 ----------------- ---------------- Non-current liabilities: Long-term debt - less current portion............................................... 43,584 20,670 Other non-current liabilities....................................................... 17,656 14,267 ----------------- ---------------- Total non-current liabilities.................................................. 61,240 34,937 ----------------- ---------------- Total liabilities.............................................................. 223,440 184,269 ----------------- ---------------- Commitments and contingencies (Note 3) Stockholders' equity: Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares; no shares issued................................................................. -- -- Common stock - par value $0.01 per share: authorized - 125,000,000 shares; issued - 108,503,243 shares...................................................... 1,085 1,085 Additional paid-in capital.......................................................... 210,064 200,574 Retained earnings................................................................... 581,636 523,954 ----------------- ---------------- 792,785 725,613 Treasury stock - 26,631,822 shares in 2004 and 25,715,767 shares in 2003, at cost............................................................................. (309,960) (265,881) ----------------- ---------------- Total stockholders' equity..................................................... 482,825 459,732 ----------------- ---------------- $ 706,265 $ 644,001 ================= ================
See notes to consolidated financial statements. -3- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (in thousands, except per share amounts)
13 Weeks Ended 26 Weeks Ended ----------------------------------- ----------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 ---------------- ---------------- ---------------- --------------- Revenues: Company restaurant sales ......................... $ 247,769 $ 220,107 $ 491,329 $ 428,517 Franchise royalties and fees...................... 30,779 27,331 61,551 54,494 Other franchise income............................ 3,399 3,268 6,514 5,909 ---------------- ---------------- ---------------- --------------- Total operating revenues..................... 281,947 250,706 559,394 488,920 ---------------- ---------------- ---------------- --------------- Cost of company restaurant sales: Food and beverage................................. 66,647 57,040 130,162 111,886 Labor............................................. 81,086 71,804 160,745 140,168 Direct and occupancy.............................. 60,240 54,386 119,309 104,947 Pre-opening expense............................... 391 334 941 555 ---------------- ---------------- ---------------- --------------- Total cost of company restaurant sales....... 208,364 183,564 411,157 357,556 ---------------- ---------------- ---------------- --------------- Cost of other franchise income........................ 5,035 3,173 7,972 5,673 General and administrative expenses................... 24,932 22,887 50,449 45,507 Amortization of intangible assets..................... 158 92 244 191 Loss on disposition of restaurants and equipment...... 584 731 1,079 1,198 ---------------- ---------------- ---------------- --------------- Operating earnings.................................... 42,874 40,259 88,493 78,795 ---------------- ---------------- ---------------- --------------- Other income (expense): Investment income................................. 18 485 241 821 Interest expense.................................. (416) (518) (760) (1,039) Impairment of Chevys note receivable (Note 9)..... -- (8,803) -- (8,803) Other income...................................... 951 1 842 206 ---------------- ---------------- ---------------- --------------- Total other income (expense)................. 553 (8,835) 323 (8,815) ---------------- ---------------- ---------------- --------------- Earnings before income taxes.......................... 43,427 31,424 88,816 69,980 Income taxes.......................................... 15,200 11,239 31,086 25,193 ---------------- ---------------- ---------------- --------------- Net earnings.......................................... $ 28,227 $ 20,185 $ 57,730 $ 44,787 ================ ================ ================ =============== Basic net earnings per common share................... $ 0.35 $ 0.24 $ 0.71 $ 0.54 ================ ================ ================ =============== Diluted net earnings per common share................. $ 0.34 $ 0.24 $ 0.68 $ 0.53 ================ ================ ================ =============== Basic weighted average shares outstanding............. 81,781 83,153 81,883 83,031 ================ ================ ================ =============== Diluted weighted average shares outstanding........... 84,098 85,548 84,371 85,303 ================ ================ ================ ===============
See notes to consolidated financial statements. -4- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) (in thousands, except share amounts)
Common Stock Additional Total ------------------------- Paid-In Retained Treasury Stockholders' Shares Amount Capital Earnings Stock Equity ------------ ------------ -------------- -------------- -------------- -------------- Balance, December 28, 2003............. 108,503,243 $ 1,085 $ 200,574 $ 523,954 $ (265,881) $ 459,732 Net earnings........................ -- -- -- 57,730 -- 57,730 Purchases of treasury stock......... -- -- -- -- (53,223) (53,223) Stock options exercised and related tax benefit............... -- -- 6,596 -- 7,362 13,958 Shares issued under employee benefit plans..................... -- -- 2,603 -- 1,378 3,981 Restricted shares awarded under equity incentive plan, net of cancellations.............. -- -- (404) -- 404 -- Amortization of unearned compensation relating to restricted shares................. -- -- 695 -- -- 695 Dividends paid for fractional shares............................ -- -- -- (48) -- (48) ------------ ------------ -------------- -------------- -------------- -------------- Balance, June 27, 2004................. 108,503,243 $ 1,085 $ 210,064 $ 581,636 $ (309,960) $ 482,825 ============ ============ ============== ============== ============== ==============
See notes to consolidated financial statements. -5- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
26 Weeks Ended ------------------------------------ June 27, June 29, 2004 2003 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings........................................................................ $ 57,730 $ 44,787 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.................................................. 22,167 19,943 Amortization of intangible assets.............................................. 244 191 Amortization of unearned compensation.......................................... 695 539 Other amortization............................................................. 175 97 Inventory impairment........................................................... 2,300 -- Deferred income tax benefit.................................................... (245) (734) Gain on sale of investments.................................................... -- (24) Loss on disposition of restaurants and equipment............................... 1,079 1,198 Impairment of Chevys note receivable........................................... -- 8,803 Income tax benefit from exercise of stock options.............................. 5,169 3,879 Changes in assets and liabilities (exclusive of effects of acquisitions): Receivables.................................................................... (9,003) (5,377) Receivables related to captive insurance subsidiary............................ (4,325) (4,359) Inventories.................................................................... (13,103) (8,019) Prepaid income taxes........................................................... 5,800 1,880 Other current assets related to captive insurance subsidiary................... (1,049) (2,031) Prepaid and other current assets............................................... (923) 2,347 Accounts payable............................................................... 1,874 2,547 Accrued expenses and other current liabilities................................. (15,927) (6,693) Loss reserve and unearned premiums related to captive insurance subsidiary..... 9,751 8,210 Accrued income taxes........................................................... 20,697 -- Other.......................................................................... (2,667) 608 ---------------- ---------------- NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 80,439 67,792 ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment................................................. (36,543) (28,964) Restricted assets related to captive insurance subsidiary........................... (5,488) (2,512) Acquisition of restaurants.......................................................... (13,817) (21,557) Lease acquisition costs............................................................. (4,919) -- Purchases of short-term investments................................................. (253) -- Proceeds from sale of restaurants and equipment..................................... -- 35 Maturities and sales of short-term investments...................................... -- 480 Other investing activities.......................................................... (966) -- ---------------- ---------------- NET CASH USED BY INVESTING ACTIVITIES.......................................... (61,986) (52,518) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock......................................................... (53,223) (13,282) Dividends paid...................................................................... (3,911) (3,323) Issuance of common stock upon exercise of stock options............................. 8,789 8,318 Shares issued under employee benefit plans.......................................... 3,981 1,418 Net long-term debt proceeds (payments).............................................. 22,934 (19,039) ---------------- ---------------- NET CASH USED BY FINANCING ACTIVITIES.......................................... (21,430) (25,908) ---------------- ---------------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................................... (2,977) (10,634) CASH AND CASH EQUIVALENTS, beginning of period.......................................... 17,867 15,169 ---------------- ---------------- CASH AND CASH EQUIVALENTS, end of period................................................ $ 14,890 $ 4,535 ================ ================
See notes to consolidated financial statements. -6- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (Unaudited) (in thousands)
26 Weeks Ended ------------------------------------ June 27, June 29, 2004 2003 ---------------- ---------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the 26 week period for: Income taxes........................................................... $ 749 $ 20,336 ================ ================ Interest............................................................... $ 377 $ 709 ================ ================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: We issued restricted common stock, net of forfeitures, of $1,497,000 and $1,618,000 for the 26 weeks ended June 27, 2004 and June 29, 2003, respectively. On March 24, 2003, we assumed a loan of approximately $1,400,000 in connection with the acquisition of 11 restaurants. DISCLOSURE OF ACCOUNTING POLICY: For purposes of the consolidated statements of cash flows, we consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. See notes to consolidated financial statements. -7- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation Our consolidated financial statements included in this Form 10-Q have been prepared without audit (except that the balance sheet information as of December 28, 2003 has been derived from consolidated financial statements which were audited) in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, we believe that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2003. We believe that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year. We have made certain reclassifications to the prior periods' consolidated financial statements to conform to the 2004 presentation. 2. Stock-Based Compensation We have adopted the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123." The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We account for stock-based compensation awards under the intrinsic method of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of our plans are granted with an exercise price equal to the fair market value on the date of the grant. The following table presents the effect on our net earnings and earnings per share had we adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation" (in thousands, except for per share amounts). -8-
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Net earnings, as reported............................ $ 28,227 $ 20,185 $ 57,730 $ 44,787 Add: Stock-based employee compensation expense (benefit) included in net earnings, net of related taxes............................. (12) 506 290 960 Less: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of related taxes............................. 2,155 2,429 4,770 5,084 --------------- --------------- --------------- --------------- Pro forma net earnings............................... $ 26,060 $ 18,262 $ 53,250 $ 40,663 =============== =============== =============== =============== Basic net earnings per common share, as reported...................................... $ 0.35 $ 0.24 $ 0.71 $ 0.54 =============== =============== =============== =============== Basic net earnings per common share, pro forma........................................ $ 0.32 $ 0.22 $ 0.65 $ 0.49 =============== =============== =============== =============== Diluted net earnings per common share, as reported...................................... $ 0.34 $ 0.24 $ 0.68 $ 0.53 =============== =============== =============== =============== Diluted net earnings per common share, pro forma........................................ $ 0.31 $ 0.21 $ 0.63 $ 0.48 =============== =============== =============== ===============
3. Commitments and Contingencies Litigation, claims and disputes: We are involved in various legal actions which include, without limitation, employment law related matters, dram shop claims, personal injury claims and other such normal restaurant operational matters. In each instance, we believe that we have meritorious defenses to the allegations made and we are vigorously defending these claims. While the resolution of the matters described above may have an impact on our financial results for the period in which they are resolved, we believe that the ultimate disposition of these matters will not, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial statements. Lease guarantees: In connection with the sale of restaurants to franchisees and other parties, we have, in certain cases, remained contingently liable for the remaining lease payments. As of June 27, 2004, the aggregate amount of these lease payments totaled approximately $19,800,000. These leases expire at various times throughout the next several years with the final lease agreement expiring in 2025. The buyers have indemnified us from any losses related to these guarantees. We have not recorded a liability as of June 27, 2004 or December 28, 2003. Franchisee guarantees: In November 2003, we arranged for a financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments. Under the terms of this financing program, we will provide a limited guarantee pool for the loans advanced during the three-year period ending December 2006. There was one loan outstanding for approximately $400,000 under this program as of June 27, 2004. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of June 27, 2004. -9- In May 2004, we arranged for a financing company to provide up to $250,000,000 to qualified franchisees for loans to fund development of new restaurants through October 2007. We will provide a limited guarantee of certain loans advanced under this program. As of June 27, 2004, there were no loans outstanding under this program. Severance agreements: We have severance and employment agreements with certain officers and other senior executives 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 27, 2004, we would have been required to make payments totaling approximately $12,200,000. In addition, we have severance and employment agreements with certain officers which contain severance provisions not related to a change in control. Those provisions would have required aggregate payments of approximately $7,200,000 if such officers had been terminated as of June 27, 2004. 4. Earnings Per Share We compute basic earnings per share by dividing income available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of options or other contracts to issue common stock exercised or converted their holdings into common stock. Outstanding stock options and equity-based compensation represent the only dilutive effects on weighted average shares. The chart below presents a reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share. All amounts in the chart, except per share amounts, are expressed in thousands.
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Net earnings......................................... $ 28,227 $ 20,185 $ 57,730 $ 44,787 =============== =============== =============== =============== Basic weighted average shares outstanding............ 81,781 83,153 81,883 83,031 Dilutive effect of stock options and equity-based compensation........................ 2,317 2,395 2,488 2,272 --------------- --------------- --------------- --------------- Diluted weighted average shares outstanding.......... 84,098 85,548 84,371 85,303 =============== =============== =============== =============== Basic net earnings per common share.................. $ 0.35 $ 0.24 $ 0.71 $ 0.54 =============== =============== =============== =============== Diluted net earnings per common share................ $ 0.34 $ 0.24 $ 0.68 $ 0.53 =============== =============== =============== ===============
We excluded stock options with exercise prices greater than the average market price of our common stock for the applicable periods from the computation of diluted weighted average shares outstanding. There were approximately 1,470,000 and 1,000 of these options for the 13 weeks ended June 27, 2004 and June 29, 2003, respectively, and 90,000 and 55,000 of these options for the 26 weeks ended June 27, 2004 and June 29, 2003, respectively. -10- 5. Stock Split On May 13, 2004, we declared a three-for-two stock split, effected in the form of a 50% stock dividend, to shareholders of record on May 28, 2004 payable on June 15, 2004. We issued approximately 36,200,000 shares of common stock as a result of the stock split. All references to the number of shares and per share amounts of common stock have been restated to reflect the stock split. We have reclassified an amount equal to the par value of the number of shares issued to common stock from retained earnings. 6. Acquisitions On April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price was allocated to the fair value of property and equipment of $2,500,000, goodwill of $10,800,000 and other net assets of approximately $400,000. We do not expect this transaction to have a significant impact on our net earnings for fiscal 2004. On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price of $23,200,000 was allocated to the fair value of property and equipment of $7,900,000, goodwill of $16,600,000, and other net liabilities of $1,300,000. The following table is comprised of actual company restaurant sales included in our consolidated financial statements for each period presented and pro forma company restaurant sales assuming the two acquisitions above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Actual acquired company restaurant sales.............. $ 11,000 $ 6,400 $ 17,500 $ 7,000 =============== =============== =============== =============== Pro forma acquired company restaurant sales........... $ 13,200 $ 12,000 $ 26,300 $ 24,000 =============== =============== =============== ===============
In 2002, we acquired the operations and assets of 21 Applebee's restaurants located in the Washington, D.C. area from a franchisee. The purchase agreement provided for additional consideration to be paid in July 2004 if the restaurants achieved cash flows in excess of historical levels. As of June 27, 2004, we have determined that the additional payment will be approximately $100,000 which has been recorded as goodwill in our consolidated financial statements. 7. Disposition On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for -11- $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. This transaction did not have a significant impact on our net earnings for fiscal 2003. Actual company restaurant sales included in our consolidated financial statements for the nine restaurants were approximately $4,600,000 and $9,300,000 for the 13 weeks and 26 weeks ended June 29, 2003, respectively. 8. Inventory Impairment In the second quarter of 2004, we determined that we had excess inventories of riblets that no longer met our quality standards. Accordingly, we recorded an inventory impairment of $2,300,000 (approximately $1,500,000 net of income taxes) in our 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 franchisee's historical usage of approximately $1,800,000 was recorded in cost of other franchise income in the consolidated statements of earnings. 9. Impairment of Chevys Note Receivable In 1999, we received a $6,000,000, 8% subordinated note in connection with the sale of the Rio Bravo concept to Chevys Holdings, Inc ("Chevys") due in 2009. The note receivable balance of approximately $8,800,000 as of June 27, 2004 and December 28, 2003, respectively, is included in other assets in our consolidated balance sheets. In June 2003, Chevys announced the sale of the majority of its restaurants. Subsequent to the announcement, we received Chevys' audited financial statements for the fiscal year ended December 31, 2002. During the fiscal quarter ended June 29, 2003, we fully impaired the principal and accrued interest of approximately $8,800,000. A charge for the impairment of this note is included in our consolidated statements of earnings for the 13 weeks and 26 weeks ended June 29, 2003. In October 2003, Chevys Inc. filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. We no longer accrue interest receivable on this note and will record future interest income on this note only upon the receipt of any related cash payments. 10. Goodwill and Other Intangible Assets Changes in goodwill are summarized below (in thousands):
June 27, December 28, 2004 2003 ---------------------- ---------------------- Carrying amount, beginning of the year..................... $ 105,326 $ 88,715 Goodwill acquired during the period........................ 11,018 16,611 ---------------------- ---------------------- $ 116,344 $ 105,326 ====================== ======================
Intangible assets subject to amortization pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," are summarized below (in thousands):
June 27, 2004 ------------------------------------------------------------ Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ------------------ ------------------ Amortized intangible assets: Franchise interest and rights........... $ 6,371 $ 5,400 $ 971 Lease acquisition costs................. 4,919 71 4,848 ------------------ ------------------ ------------------ Total....................................... $ 11,290 $ 5,471 $ 5,819 ================== ================== ==================
-12-
December 28, 2003 ------------------------------------------------------------ Gross Carrying Accumulated Net Book Amount Amortization Value ------------------ ------------------ ------------------ Amortized intangible assets: Franchise interest and rights........... $ 6,371 $ 5,234 $ 1,137 ================== ================== ==================
In the second quarter of 2004, we acquired six restaurant leases for approximately $4,900,000 in cash. The lease acquisition costs are being amortized over the next 8 to 20 years and the franchise interest and rights are being amortized over the next two to four years. We expect annual amortization expense for all intangible assets for the next five fiscal years to range from approximately $500,000 to $800,000. 11. Captive Insurance Subsidiary In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a wholly-owned captive insurance subsidiary to provide Applebee's International, Inc. and qualified franchisees with workers' compensation and general liability insurance. Applebee's International, Inc. and covered franchisees make premium payments to the captive insurance company which pays administrative fees and insurance claims, subject to individual and aggregate maximum claim limits under the captive insurance company's reinsurance policies. Franchisee premium amounts billed by the captive insurance company are established based upon third-party actuarial estimates of settlement costs for incurred claims and administrative fees. The franchisee premiums are included in other franchise income ratably over the policy year. The related offsetting expenses are included in cost of other franchise income. Accordingly, we do not expect franchisee participation in the captive insurance company to have a material impact on our net earnings. As of June 27, 2004, our consolidated balance sheet includes the following balances related to the captive insurance subsidiary: o Deferred policy acquisition costs of approximately $1,700,000 included in other current assets related to captive insurance subsidiary. o Franchise premium receivables of approximately $4,800,000 included in receivables related to captive insurance subsidiary. o Cash equivalent investments restricted for the payment of claims of approximately $15,500,000 included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $20,800,000. o Other miscellaneous items, net, of approximately $1,200,000 included in several line items in the consolidated balance sheet. -13- 12. New Accounting Pronouncement In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51." This interpretation, which replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation is required in financial statements for periods ending after March 15, 2004 for those companies that have yet to adopt the provisions of FIN 46. We adopted FIN 46R in January 2004 and the initial adoption did not have a material impact on our consolidated financial statements. -14- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Our results continue to be driven by the execution of integrated strategies, including improved food, promotions backed by effective advertising, meeting our guests' desires for more convenience, our focus on operations excellence and the retention of better people. We completed the rollout of our Carside To Go(TM) program in all company restaurants where practicable in November 2003 and our franchisees will continue implementation during 2004. We expect Carside To Go(TM) to be a significant driver of sales and traffic growth in 2004. Our revenues are generated from three primary sources: o Company restaurant sales (food and beverage sales) o Franchise royalties and fees o Other franchise income Beverage sales consist of sales of alcoholic beverages, while non-alcoholic beverages are included in food sales. Franchise royalties are generally 4% of each franchise restaurant's monthly gross sales. Franchise fees typically range from $30,000 to $35,000 for each restaurant opened. Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees. Comparable restaurant sales are based upon those restaurants open for at least 18 months and are compared from period to period. Certain expenses relate only to company operated restaurants. These include: o Food and beverage costs o Labor costs o Direct and occupancy costs o Pre-opening expenses Cost of other franchise income includes the costs related to franchisee participation in our captive insurance company and costs related to information technology products and services provided to certain franchisees. In addition, cost of other franchise income in fiscal 2004 includes the franchisee portion of the riblet inventory impairment (see Note 8). Other expenses, such as general and administrative and amortization expenses, relate to both company operated restaurants and franchise operations. We operate on a 52 or 53 week fiscal year ending on the last Sunday in December. Our fiscal quarters ended June 27, 2004 and June 29, 2003 each contained 13 weeks and are referred to hereafter as the "2004 quarter" and the "2003 quarter," respectively. Our 26 week periods ended June 27, 2004 and June 29, 2003 are referred to hereafter as the "2004 year-to-date period" and the "2003 year-to-date period," respectively. -15- In 2002, we formed Neighborhood Insurance, Inc., a Vermont corporation and a wholly-owned captive insurance subsidiary to provide Applebee's International, Inc. and qualified franchisees with workers' compensation and general liability insurance. Applebee's International, Inc. and covered franchisees make premium payments to the captive insurance company which pays administrative fees and insurance claims, subject to individual and aggregate maximum claim limits under the captive insurance company's reinsurance policies. Franchisee premium amounts billed by the captive insurance company are established based upon third-party actuarial estimates of settlement costs for incurred claims and administrative fees. The franchisee premiums are included in other franchise income ratably over the policy year. The related offsetting expenses are included in cost of other franchise income. Accordingly, we do not expect franchisee participation in the captive insurance company to have a material impact on our net earnings. As of June 27, 2004, our consolidated balance sheet includes the following balances related to the captive insurance subsidiary: o Deferred policy acquisition costs of approximately $1,700,000 included in other current assets related to captive insurance subsidiary. o Franchise premium receivables of approximately $4,800,000 included in receivables related to captive insurance subsidiary. o Cash equivalent investments restricted for the payment of claims of approximately $15,500,000 included in restricted assets related to captive insurance subsidiary. o Loss reserve and unearned premiums related to captive insurance subsidiary of approximately $20,800,000. o Other miscellaneous items, net, of approximately $1,200,000 included in several line items in the consolidated balance sheet. Application of Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which were prepared in accordance with accounting principles generally accepted in the United States of America. These principles require us to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and notes thereto. Actual results may differ from these estimates, and such differences may be material to our consolidated financial statements. We believe that the following significant accounting policies involve a higher degree of judgment or complexity. Franchise revenues: Franchise revenues consist of franchise royalties, franchise fees and other franchise income. We recognize royalties on a franchisee's sales in the period in which the sales are reported to have occurred. We also receive a franchise fee for each restaurant that a franchisee opens. The recognition of franchise fees is deferred until we have performed substantially all of our related obligations as franchisor, typically when the restaurant opens. Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees. Income from franchise premiums and information technology services is recognized ratably over the related contract period. Income from information technology products is recognized when the products are installed at the restaurant. Inventory valuation: We state inventories at the lower of cost, using the first-in, first-out method, or market. Market is determined based upon the estimated net realizable value. -16- We purchase and maintain inventories of certain specialty products to assure sufficient supplies to the system. We review and make quality control inspections of our inventories to determine obsolescence on an ongoing basis. These reviews require management to make certain estimates and judgments. Property and equipment: Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets. The useful lives of the assets are based upon management's expectations. We periodically review the assets for changes in circumstances which may impact their useful lives. Impairment of long-lived assets: We periodically review property and equipment for impairment on a restaurant by restaurant basis using historical cash flows as well as current estimates of future cash flows and/or appraisals. This assessment process requires the use of estimates and assumptions which are subject to a significant degree of judgment. In addition, we periodically assess the recoverability of goodwill and other intangible assets, which requires us to make assumptions regarding the future cash flows and other factors to determine the fair value of the assets. If these assumptions change in the future, we may be required to record impairment charges for these assets. Legal and insurance reserves: We are periodically involved in various legal actions. We are required to assess the probability of any adverse judgments as well as the potential range of loss. We determine the required accruals after a review of the facts of each legal action. We use estimates in the determination of the appropriate liabilities for general liability, workers' compensation and health insurance. The estimated liability is established based upon historical claims data and third-party actuarial estimates of settlement costs for incurred claims. Unanticipated changes in these factors may require us to revise our estimates. Employee incentive compensation plans: We have various long-term employee incentive compensation plans which require us to make estimates to determine our liability based upon projected performance of plan criteria. If actual performance against the criteria differs from our estimates in the future, we will be required to adjust our liability accordingly. Receivables: We continually assess the collectibility of our franchise receivables. We establish our allowance for bad debts based on several factors, including historical collection experience, the current economic environment and other specific information available to us at the time. The allowance for bad debts may change in the future due to changes in the factors above or other developments. We periodically reassess our assumptions and judgments and make adjustments when significant facts and circumstances dictate. A change in any of the above estimates could impact our consolidated statements of earnings and the related asset or liability recorded in the consolidated balance sheets would be adjusted accordingly. Historically, actual results have not been materially different than the estimates that are described above. Acquisitions On April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price was allocated to the fair value of property and equipment of $2,500,000, goodwill of $10,800,000 and other net assets of approximately $400,000. We do not expect this transaction to have a significant impact on our net earnings for fiscal 2004. -17- On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. The purchase price of $23,200,000 was allocated to the fair value of property and equipment of $7,900,000, goodwill of $16,600,000, and other net liabilities of $1,300,000. The following table is comprised of actual company restaurant sales included in our consolidated financial statements for each period presented and pro forma company restaurant sales assuming the two acquisitions above occurred at the beginning of each respective period (in thousands):
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 --------------- --------------- --------------- --------------- Actual acquired company restaurant sales.............. $ 11,000 $ 6,400 $ 17,500 $ 7,000 =============== =============== =============== =============== Pro forma acquired company restaurant sales........... $ 13,200 $ 12,000 $ 26,300 $ 24,000 =============== =============== =============== ===============
In 2002, we acquired the operations and assets of 21 Applebee's restaurants located in the Washington, D.C. area from a franchisee. The purchase agreement provided for additional consideration to be paid in July 2004 if the restaurants achieved cash flows in excess of historical levels. As of June 27, 2004, we have determined that the amount of the additional payment will be approximately $100,000 which has been recorded as goodwill in our consolidated financial statements. Disposition On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. This transaction did not have a significant impact on our net earnings for fiscal 2003. Actual company restaurant sales included in our consolidated financial statements for the nine restaurants were approximately $4,600,000 and $9,300,000 for the 13 weeks and the 26 weeks ended June 29, 2003, respectively. -18- Results of Operations The following table contains information derived from our consolidated statements of earnings expressed as a percentage of total operating revenues, except where otherwise noted. Percentages may not add due to rounding.
13 Weeks Ended 26 Weeks Ended ------------------------- -------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ Revenues: Company restaurant sales.................................. 87.9% 87.8% 87.8% 87.6% Franchise royalties and fees.............................. 10.9 10.9 11.0 11.1 Other franchise income.................................... 1.2 1.3 1.2 1.2 ------------ ------------ ------------ ------------ Total operating revenues............................. 100.0% 100.0% 100.0% 100.0% ============ ============ ============ ============ Cost of sales (as a percentage of company restaurant sales): Food and beverage......................................... 26.9% 25.9% 26.5% 26.1% Labor..................................................... 32.7 32.6 32.7 32.7 Direct and occupancy...................................... 24.3 24.7 24.3 24.5 Pre-opening expense....................................... 0.2 0.2 0.2 0.1 ------------ ------------ ------------ ------------ Total cost of sales.................................. 84.1% 83.4% 83.7% 83.4% ============ ============ ============ ============ Cost of other franchise income (as a percentage of other franchise income)......................................... 148.1% 97.1% 122.4% 96.0% General and administrative expenses........................... 8.8 9.1 9.0 9.3 Amortization of intangible assets............................. -- -- -- -- Loss on disposition of restaurants and equipment.............. 0.2 0.3 0.2 0.2 ------------ ------------ ------------ ------------ Operating earnings............................................ 15.2 16.1 15.8 16.1 ------------ ------------ ------------ ------------ Other income (expense): Investment income......................................... -- 0.2 -- 0.2 Interest expense.......................................... (0.1) (0.2) (0.1) (0.2) Impairment of Chevys note receivable...................... -- (3.5) -- (1.8) Other income.............................................. 0.3 -- 0.2 -- ------------ ------------ ------------ ------------ Total other income (expense)......................... 0.2 (3.5) 0.1 (1.8) ------------ ------------ ------------ ------------ Earnings before income taxes.................................. 15.4 12.5 15.9 14.3 Income taxes.................................................. 5.4 4.5 5.6 5.2 ------------ ------------ ------------ ------------ Net earnings.................................................. 10.0% 8.1% 10.3% 9.2% ============ ============ ============ ============
-19- The following table sets forth certain unaudited financial information and other restaurant data relating to company and franchise restaurants, as reported to us by franchisees:
13 Weeks Ended 26 Weeks Ended ------------------------------- ------------------------------- June 27, June 29, June 27, June 29, 2004 2003 2004 2003 ------------- ------------- -------------- ------------- Number of restaurants: Company: Beginning of period....................... 391 371 383 357 Restaurant openings....................... 4 4 12 7 Restaurants closed........................ -- (2) -- (2) Restaurants acquired from franchisees..... 10 -- 10 11 ------------- ------------- -------------- ------------- End of period............................. 405 373 405 373 ------------- ------------- -------------- ------------- Franchise: Beginning of period....................... 1,212 1,142 1,202 1,139 Restaurant openings....................... 8 13 19 29 Restaurants closed........................ (3) -- (4) (2) Restaurants acquired from franchisees..... (10) -- (10) (11) ------------- ------------- -------------- ------------- End of period............................. 1,207 1,155 1,207 1,155 ------------- ------------- -------------- ------------- Total: Beginning of period....................... 1,603 1,513 1,585 1,496 Restaurant openings....................... 12 17 31 36 Restaurants closed........................ (3) (2) (4) (4) ------------- ------------- -------------- ------------- End of period............................. 1,612 1,528 1,612 1,528 ============= ============= ============== ============= Weighted average weekly sales per restaurant: Company........................................ $ 47,758 $ 45,402 $ 48,075 $ 45,041 Franchise...................................... $ 48,759 $ 45,940 $ 48,763 $ 45,682 Total.......................................... $ 48,510 $ 45,807 $ 48,593 $ 45,526 Change in comparable restaurant sales:(1) Company........................................ 5.5% 5.1% 7.0% 4.9% Franchise...................................... 6.5% 3.2% 7.2% 3.0% Total.......................................... 6.3% 3.6% 7.2% 3.5% Total operating revenues (in thousands): Company restaurant sales....................... $ 247,769 $ 220,107 $ 491,329 $ 428,517 Franchise royalties and fees(2)................ 30,779 27,331 61,551 54,494 Other franchise income(3)...................... 3,399 3,268 6,514 5,909 ------------- ------------- -------------- ------------- Total.......................................... $ 281,947 $ 250,706 $ 559,394 $ 488,920 ============= ============= ============== ============= (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 $764,422 and $684,131 in the 2004 quarter and the 2003 quarter, respectively, and $1,528,538 and $1,360,443 in the 2004 year-to-date and 2003 year-to-date period, respectively. Franchise fees typically range from $30,000 to $35,000 for each restaurant opened. (3) Other franchise income includes insurance premiums from franchisee participation in our captive insurance company and revenue from information technology products and services provided to certain franchisees.
-20- Company Restaurant Sales. Total company restaurant sales increased $27,662,000 (13%) from $220,107,000 in the 2003 quarter to $247,769,000 in the 2004 quarter and increased $62,812,000 (15%) from $428,517,000 in the 2003 year-to-date period to $491,329,000 in the 2004 year-to-date period. Company restaurant openings contributed approximately 8% of the increase in total company restaurant sales in both the 2004 quarter and the 2004 year-to-date period. Weighted average weekly sales contributed approximately 5% and 7% of the total company sales increase in the 2004 quarter and 2004 year-to-date period, respectively. Both periods were also favorably impacted by the acquisition of 10 restaurants in Southern California in April 2004 which was partially offset by the impact of the sale of 8 restaurants in the Atlanta, Georgia market in July 2003. In addition, the March 2003 acquisition of 11 restaurants in Illinois, Indiana, Kentucky and Missouri contributed approximately 1% of the total sales increase in the 2004 year-to-date period. Comparable restaurant sales at company restaurants increased by 5.5% and 7.0% in the 2004 quarter and the 2004 year-to-date period, respectively. Weighted average weekly sales at company restaurants increased 5.2% from $45,402 in the 2003 quarter to $47,758 in the 2004 quarter and increased 6.7% from $45,041 in the 2003 year-to-date period to $48,075 in the 2004 year-to-date period. These increases were due primarily to increases in guest traffic and in the average guest check resulting from our food promotions. In addition, a portion of the increase resulted from the implementation of our Carside To Go(TM) initiative and menu price increases of approximately 1.5% in fiscal 2004. Carside To Go(TM) sales mix increased from 6.8% of company restaurant sales in the 2003 quarter to 9.4% of company restaurant sales in the 2004 quarter. Franchise Royalties and Fees. Franchise royalties and fees increased $3,448,000 (13%) from $27,331,000 in the 2003 quarter to $30,779,000 in the 2004 quarter and increased $7,057,000 (13%) from $54,494,000 in the 2003 year-to-date period to $61,551,000 in the 2004 year-to-date period. These increases were due primarily to the increased number of franchise restaurants operating during the 2004 quarter and 2004 year-to-date period as compared to the same periods in 2003 and increases in comparable restaurant sales. Weighted average weekly sales at franchise restaurants increased 6.1% and 6.7% in the 2004 quarter and 2004 year-to-date period, respectively, and franchise comparable restaurant sales increased 6.5% and 7.2% in the 2004 quarter and 2004 year-to-date period, respectively. Other Franchise Income. Other franchise income increased $131,000 (4%) from $3,268,000 in the 2003 quarter to $3,399,000 in the 2004 quarter and increased $605,000 (10%) from $5,909,000 in the 2003 year-to-date period to $6,514,000 in the 2004 year-to-date period due primarily to revenues recognized related to the franchise premium amounts billed by the captive insurance company. Franchise premiums are included in other franchise income ratably over the policy year. Cost of Company Restaurant Sales. Food and beverage costs increased from 25.9% in the 2003 quarter to 26.9% in the 2004 quarter and increased from 26.1% in the 2003 year-to-date period to 26.5% in the 2004 year-to-date period. The increases in both the 2004 quarter and 2004 year-to-date period were due primarily to higher commodity costs, higher food costs related to our menu promotions and the company portion of the June 2004 impairment of approximately $500,000 for excess riblet inventories which no longer met our quality standards. These increases were partially offset by menu price increases in both the 2004 quarter and the 2004 year-to-date period. Labor costs increased from 32.6% in the 2003 quarter to 32.7% in the 2004 quarter and were 32.7% in both the 2003 year-to-date period and the 2004 year-to-date period. Both periods were impacted by higher costs related to the -21- addition of dedicated Carside To Go(TM) hourly labor at most of our restaurants beginning in the second half of 2003, higher preparation time and training costs related to the May 2004 rollout of our new Weight Watchers menu and higher workers' compensation costs. These higher costs were offset in both periods by lower management and hourly costs due to higher sales volumes at company restaurants and lower management incentive compensation. Direct and occupancy costs decreased from 24.7% in the 2003 quarter and 24.5% in the 2003 year-to-date period to 24.3% in both the 2004 quarter the 2004 year-to-date period due to higher sales volumes at company restaurants which resulted in favorable depreciation expense, rent expense and repairs and maintenance expense, as a percentage of sales, due to their relatively fixed nature. The decrease in the 2004 quarter was also due to lower property and liability insurance expense. Decreases in both periods were partially offset by higher packaging costs as a result of increased Carside To Go(TM) sales volumes. The 2004 year-to-date period was also unfavorably impacted by higher advertising costs, as a percentage of sales, due primarily to Carside To Go(TM) advertising in company markets. Cost of Other Franchise Income. Cost of other franchise income increased $1,862,000 from $3,173,000 in the 2003 quarter to $5,035,000 in the 2004 quarter and increased $2,299,000 from $5,673,000 in the 2003 year-to-date period to $7,972,000 in the 2004 year-to-date due primarily to 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 decreased from 9.1% in the 2003 quarter and 9.3% in the 2003 year-to-date period to 8.8% in the 2004 quarter and 9.0% in the 2004 year-to-date period. General and administrative expenses were lower in both the 2004 quarter and 2004 year-to-date period due to the absorption of general and administrative expenses over a larger revenue base which were partially offset by higher compensation expense due to staffing levels. Impairment of Chevys Note Receivable. In June 2003, Chevys announced the sale of the majority of its restaurants. Subsequent to the announcement, we received Chevys' audited financial statements for the fiscal year ended December 31, 2002. During the fiscal quarter ended June 29, 2003, we fully impaired the principal and accrued interest of approximately $8,800,000. In October 2003, Chevys Inc. filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Income Taxes. The effective income tax rate, as a percentage of earnings before income taxes, decreased from 35.8% in the 2003 quarter and 36.0% in the 2003 year-to-date period to 35.0% in both the 2004 quarter and the 2004 year-to-date period due to a reduction in state and local income taxes. Liquidity and Capital Resources Our need for capital historically has resulted from the construction and acquisition of restaurants, the repurchase of our common shares and investment in information technology systems. In the past, we have obtained capital through public stock offerings, debt financing, and our ongoing operations. Cash flows from our ongoing operations include cash generated from company and franchise operations, credit from trade suppliers, real estate lease financing, and landlord contributions to leasehold improvements. We have also used our common stock as consideration in the acquisition of restaurants. In addition, we have assumed debt or issued new debt in connection with certain mergers and acquisitions. Capital expenditures were $82,562,000 in 2003 (excluding the acquisition of 11 restaurants) and $36,543,000 in the 2004 year-to-date period (excluding the acquisition of 10 restaurants and lease acquisition costs). We currently expect to open at least 32 company restaurants, and capital expenditures, excluding acquisitions, are expected to be between $95,000,000 and $105,000,000 in 2004. -22- These expenditures will primarily be for the development of new restaurants, refurbishment and capital replacement for existing restaurants, the enhancement of information systems and lease acquisition costs. Because we expect to continue to purchase a portion of our sites, the amount of actual capital expenditures will be dependent upon, among other things, the proportion of leased versus owned properties. In addition, if we open more restaurants than we currently anticipate or acquire additional restaurants, our capital requirements will increase accordingly. On April 26, 2004, we completed our acquisition of the operations and assets of 10 Applebee's restaurants located in Southern California for approximately $13,700,000 in cash. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. In addition, we acquired six restaurant leases for approximately $4,900,000 in cash in the 2004 quarter. On July 20, 2003, we completed the sale of eight company restaurants in the Atlanta, Georgia market to an affiliate of an existing franchisee for $8,000,000. In connection with the sale of these restaurants, we closed one restaurant in the Atlanta market in June 2003. On March 24, 2003, we acquired the operations and assets of 11 Applebee's restaurants located in Illinois, Indiana, Kentucky and Missouri for $21,800,000 in cash and $1,400,000 in assumed debt from a franchisee. The total cash payment included $20,800,000 paid at closing, approximately $200,000 paid as a deposit in fiscal 2002 and approximately $800,000 paid in the second quarter of 2003. Our financial statements reflect the results of operations for these restaurants subsequent to the date of acquisition. Our bank credit agreement, as amended, expires in November of 2005 and provides for a $150,000,000 unsecured revolving credit facility, of which $25,000,000 may be used for the issuance of letters of credit. The facility is subject to various covenants and restrictions which, among other things, require the maintenance of stipulated fixed charge, leverage and indebtedness to capitalization ratios, as defined, and limit additional indebtedness and capital expenditures in excess of specified amounts. Cash dividends are limited to $10,000,000 annually. The facility is subject to standard other terms, conditions, covenants, and fees. We are currently in compliance with the covenants contained in our credit agreement. As of June 27, 2004, we had borrowings of $38,000,000 and had standby letters of credit of approximately $11,920,000 outstanding under our revolving credit facility. Our Board of Directors authorized repurchases of our common stock of up to $75,000,000 and $80,000,000 in 2002 and 2003, respectively. As of December 28, 2003, we had $99,800,000 remaining on our authorizations. During the 2004 year-to-date period, we repurchased 2,097,450 shares of our common stock at an average price of $25.38 for an aggregate cost of $53,200,000. As of June 27, 2004, we had $46,500,000 remaining under our repurchase authorization. As of June 27, 2004, our liquid assets totaled $15,170,000. These assets consisted of cash and cash equivalents in the amount of $14,890,000 and short-term investments in the amount of $280,000. The working capital deficit decreased from $62,710,000 as of December 28, 2003 to $56,121,000 as of June 27, 2004. This decrease was due primarily to the redemption of gift cards in 2004 sold in 2003, the payment of accrued dividends and bonuses and increases in inventories and receivables and was partially offset by increases in accrued income taxes and loss reserve and unearned premiums related to the captive insurance subsidiary. -23- We believe that our liquid assets and cash generated from operations, combined with borrowings available under our credit facilities, will provide sufficient funds for our operating, capital and other requirements for the foreseeable future. The following table shows our debt amortization schedule, future capital lease commitments (including principal and interest payments), future operating lease commitments and future purchase obligations as of June 27, 2004 (in thousands):
Payments due by period ------------------------------------------------------------------------- Certain Less than 1 1-3 3-5 More than 5 Contractual Obligations Total year Years Years years - ------------------------------------------------- ------------- ------------- ------------- ------------- ------------- Long-term Debt (excluding capital lease obligations)........................... $ 39,612 $ 127 $ 38,249 $ 86 $ 1,150 Capital Lease Obligations........................ 9,474 754 1,588 1,701 5,431 Operating Leases................................. 245,675 21,441 41,149 40,026 143,059 Purchase Obligations - Company(1)................ 172,830 116,230 36,834 10,235 9,531 Purchase Obligations - Franchise(2).............. 385,240 254,780 97,505 21,421 11,534
(1) The amounts for company purchase obligations include commitments for food items and supplies, severance and employment agreements, and other miscellaneous commitments. (2) The amounts for franchise purchase obligations include commitments for food items and supplies made by Applebee's International, Inc. for our franchisees. Applebee's International, Inc. contracts with certain suppliers to ensure competitive pricing. These amounts will only be payable by Applebee's International, Inc. if our franchisees do not meet certain minimum contractual requirements. Other Contractual Obligations We have outstanding lease guarantees of approximately $19,800,000 as of June 27, 2004 (see Note 3). We have not recorded a liability for these guarantees as of June 27, 2004 or December 28, 2003. We have severance and employment agreements with certain officers and other senior executives 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 27, 2004, we would have been required to make payments totaling approximately $12,200,000. In addition, we have severance and employment agreements with certain officers which contain severance provisions not related to a change in control. Those provisions would have required aggregate payments of approximately $7,200,000 if such officers had been terminated as of June 27, 2004. In November 2003, we arranged for a financing company to provide up to $75,000,000 to qualified franchisees for short-term loans to fund remodel investments. Under the terms of this financing program, we will provide a limited guarantee pool for the loans advanced during the three-year period ending December 2006. There was one loan outstanding for approximately $400,000 under this program as of June 27, 2004. The fair value of our guarantee was immaterial and accordingly, we have not recorded a liability as of June 27, 2004. -24- Inflation Substantial increases in costs and expenses could impact our operating results to the extent such increases cannot be passed along to customers. In particular, increases in food, supplies, labor and operating expenses could have a significant impact on our operating results. We do not believe that inflation has materially affected our operating results during the past three years. A majority of our employees are paid hourly rates related to federal and state minimum wage laws and various laws that allow for credits to that wage. The Federal government continues to consider an increase in the minimum wage. Several state governments have increased the minimum wage and other state governments are also considering an increased minimum wage. In the past, we have been able to pass along cost increases to customers through food and beverage price increases, and we will attempt to do so in the future. We cannot guarantee, however, that all future cost increases can be reflected in our prices or that increased prices will be absorbed by customers without at least somewhat diminishing customer spending in our restaurants. New Accounting Pronouncement In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51." This interpretation, which replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation is required in financial statements for periods ending after March 15, 2004 for those companies that have yet to adopt the provisions of FIN 46. We adopted FIN 46R in January 2004 and the initial adoption did not have a material impact on our consolidated financial statements. Forward-Looking Statements The statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section regarding restaurant development, capital expenditures and financial commitments are forward-looking and based on current expectations. There are several risks and uncertainties that could cause actual results to differ materially from those described. These risks include but are not limited to our ability and the ability of our franchisees to open and operate additional restaurants profitably, the ability of our franchisees to obtain financing, the continued growth of our franchisees, our ability to attract and retain qualified franchisees, the impact of intense competition in the casual dining segment of the restaurant industry, and our ability to control restaurant operating costs which are impacted by market changes, minimum wage and other employment laws, food costs and inflation. For a more detailed discussion of the principal factors that could cause actual results to be materially different, you should read our current report on Form 8-K which we filed with the Securities and Exchange Commission on February 11, 2004. We disclaim any obligation to update forward-looking statements. -25- Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk from fluctuations in interest rates and changes in commodity prices. Our revolving credit facility bears interest at either the bank's prime rate or LIBOR plus 0.625%, at our option. As of June 27, 2004, the total amount of debt subject to interest rate fluctuations was $38,000,000 which was outstanding on our revolving credit facility. A 1% change in interest rates would result in an increase or decrease in interest expense of $380,000 per year. We may from time to time enter into interest rate swap agreements to manage the impact of interest rate changes on our earnings. Many of the food products we purchase are subject to price volatility due to factors that are outside of our control such as available supply, weather and seasonality. As part of our strategy to moderate this volatility, we have entered into fixed price purchase commitments. Item 4. Controls and Procedures As of June 27, 2004, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective. During our most recent fiscal quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting. -26- PART II. OTHER INFORMATION Item 1. Legal Proceedings We are involved in various legal actions which include, without limitation, employment law related matters, dram shop claims, personal injury claims and other such normal restaurant operational matters. In each instance, we believe that we have meritorious defenses to the allegations made and we are vigorously defending these claims. While the resolution of the matters described above may have an impact on our financial results for the period in which they are resolved, we believe that the ultimate disposition of these matters will not, individually or in the aggregate, have a material adverse effect upon our business or consolidated financial statements. Item 2. Changes in Securities and Use of Proceeds (e) Issuer Purchases of Equity Securities.
- ------------------------------------------------------------------------------------------------------------ Purchases of Equity Securities(1) (2) - ------------------------------------------------------------------------------------------------------------ (a) (b) (c) (d) - ---------------------------- -------------- ---------- ------------------------- --------------------------- Maximum Dollar Value of Average Total Number of Shares Shares that May Yet Be Total Number Price Purchased as Part of Purchased Under the Plans of Shares Paid Per Publicly Announced or Programs Period Purchased Share Plans or Programs (in thousands) - ---------------------------- -------------- ---------- ------------------------- --------------------------- March 29, 2004 through April 27, 2004 3,499(3) $28.39 -- $67,717 - ---------------------------- -------------- ---------- ------------------------- --------------------------- April 28, 2004 through May 27, 2004 814,500 $26.01 814,500 $46,532 - ---------------------------- -------------- ---------- ------------------------- --------------------------- May 28, 2004 through June 27, 2004 -- -- -- $46,532 - ---------------------------- -------------- ---------- ------------------------- --------------------------- Total 817,999 814,500 ============================ ============== ========== ========================= ===========================
(1) In May 2002, our Board of Directors authorized a repurchase of up to $75,000,000 of our common stock through May 2005. In December 2003, our Board of Directors authorized an additional repurchase of up to $80,000,000 of our common stock. The May 2002 authorization limit was met in January 2004. The December 2003 authorization has no expiration date. (2) All references to the number of shares have been restated to reflect a three-for-two stock split, effected as a 50% stock dividend, paid on June 15, 2004. (3) Represents shares received as partial payment for shares issued under stock option plans. -27- Item 4. Submission of Matters to a Vote of Security Holders Our annual meeting of stockholders was held on May 13, 2004. The stockholders voted on the following matters: Proposal I. Elect Jack Helms, Lloyd Hill, Burton Sack, Michael Volkema and Steven Lumpkin as Directors. Proposal II. Approve the Applebee's International, Inc. Amended and Restated 1995 Equity Incentive Plan. Proposal III. Approve the Executive Nonqualified Stock Purchase Plan Proposal IV. Ratify Deloitte & Touche LLP as our independent auditors for the 2004 fiscal year. Proposal V. Act on a Shareholder Proposal to require us to issue a report relating to genetically engineered ingredients. The results of the voting were as follows:
Negative/ Affirmative Withheld Broker Proposal Votes Votes Abstentions Non-Votes - -------------------------- ---------------- -------------------- -------------------- ----------------- I (Helms) 48,558,417 1,572,327 -- -- I (Hill) 48,635,185 1,495,559 -- -- I (Sack) 48,654,681 1,476,063 -- -- I (Volkema) 48,851,107 1,279,637 -- -- I (Lumpkin) 48,361,854 1,768,890 -- -- II 26,778,025 15,673,253 860,428 6,819,038 III 30,704,447 11,734,261 872,998 6,819,038 IV 47,712,325 1,605,215 813,203 1 V 2,188,554 37,834,824 3,288,326 6,819,040
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 and Reports on Form 8-K (a) The Exhibits listed on the accompanying Exhibit Index are filed as part of this report. (b) We filed a report on Form 8-K on April 2, 2004 announcing the addition of a new executive officer. We furnished a report on Form 8-K on April 23, 2004 announcing the webcast of our first quarter earnings conference call over the Internet. We furnished a report on Form 8-K on April 28, 2004 reporting first quarter diluted earnings per share. We filed a report on Form 8-K on May 13, 2004 announcing a three-for-two stock split. -28- We filed a report on Form 8-K on May 14, 2004 announcing Mr. Volkema's election to the Board of Directors. We filed a report on Form 8-K on May 18, 2004 announcing the temporary suspension of trading under an employee benefit plan. We filed a report on Form 8-K on May 24, 2004 reporting May comparable sales. We furnished a report on Form 8-K on June 2, 2004 announcing our presentation at the Piper Jaffray Consumer Conference. We furnished a report on Form 8-K on June 10, 2004 announcing our presentation at two Investment Conferences in June. 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 28, 2004 By: /s/ Lloyd L. Hill -------------------- ----------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) Date: July 28, 2004 By: /s/ Steven K. Lumpkin -------------------- ----------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial officer) Date: July 28, 2004 By: /s/ Beverly O. Elving -------------------- ----------------------------------------- Beverly O. Elving Vice President, Accounting (principal accounting officer) -29- APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Number Description of Exhibit - ------------- ---------------------------------------------------------------------------------------- 10.1 Amended and Restated 1995 Equity Incentive Plan 10.2 Executive Nonqualified Stock Purchase Plan 10.3 New Form of Indemnification Agreement with all Officers and Directors 10.4 Executive Retirement Plan (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 28, 2004) and schedule of parties thereto 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
-30- EX-10 3 amended1995plan.txt AMENDED AND RESTATED 1995 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 date, the most recent prior date on which Shares were traded, as reported in The -2- 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 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) -3- 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, the number of Shares granted, and such other terms and conditions as the -10- 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 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 -11- 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 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 -15- 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 -18- condition shall have received prior approval by a majority vote of the 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- EX-10 4 nonqualifiedplan.txt EXECUTIVE NONQUALIFIED PLAN APPLEBEE'S INTERNATIONAL, INC. EXECUTIVE NONQUALIFIED 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, at a discount and by payroll deduction, shares of common stock of the Company in excess of the shares permitted to be purchased under the Qualified Plan. This Plan is intended not to qualify as an "employee stock purchase plan" under Section 423 of the Code. ARTICLE 2 - DEFINITIONS ----------------------- 2.1 "Beneficiary" means the beneficiary designated under the Qualified Plan. In the absence of any such beneficiary designation under the Qualified Plan, "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. There shall be a single Brokerage Account for Shares purchased under this Plan and for Shares purchased under the Qualified 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 the later of the date that the stockholders of the Company approve this Plan or July 1, 2004. -1- 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. There may be a single enrollment form for both this Plan and the Qualified Plan. 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; (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. 2.15 "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 Qualified Plan and this Plan, reduced by amounts refunded to the Participant and amounts applied to purchase Shares from such account under the Qualified Plan and hereunder. There shall be a single Payroll Deduction Account for amounts deducted under this Plan and under the Qualified Plan. 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. Executive Nonqualified 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 "Qualified Plan" means the Applebee's International Inc. Employee Stock Purchase Plan. 2.19 "Shares" means shares of the Company's common stock. 2.20 "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. 2.21 "Withdrawal" means a Participant's election to withdraw from an Offering pursuant to Article 11. -2- ARTICLE 3 - ELIGIBILITY ----------------------- Any employee of the Company or any of its Subsidiaries in salary grade 16 or higher shall be eligible to participate in the Plan as of the Commencement Date coinciding with or next following the date such employee satisfies this eligibility criterion. If an employee terminates employment with the Company or any of its Subsidiaries for any reason and is later rehired, he or she shall be eligible to participate in the Plan as of the Commencement Date coinciding with or next following the date such employee is rehired and satisfies this eligibility criterion. 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 in accordance with procedures established by the Committee from time to time. ARTICLE 5 - OFFERINGS --------------------- Each Offering shall be for three (3) consecutive months. The first Offering shall commence on July 1, 2004. 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) 85% 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) 85% 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, less the number of Shares purchased under the Qualified Plan with respect to such Offering. -3- 7.2 The maximum, aggregate number of Shares that will be offered under the Plan is one hundred fifty thousand (150,000). 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. 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 the Participant may make a different percentage election with respect to bonus Pay than his percentage election with respect to other types of Pay. The Committee, in its discretion, may establish from time to time a minimum fixed dollar deduction that a Participant must authorize in order to participate in this Plan; provided, however, that a Participant's existing rights under any Offering that has already commenced may not be adversely affected thereby. The Board, Compensation Committee or the Committee may set limits from time to time on the amount or percentage of Pay that may be deducted. Until a different limit is set, the maximum that may be deducted for both the Qualified Plan and this Plan is 25% of base salary and 50% of bonus. Contributions to the Qualified Plan shall be limited as set forth in that plan. 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 -4- 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. 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 non-discretionary 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 non-discretionary 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. 8.5 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. ARTICLE 9 - PURCHASE OF SHARES ------------------------------ 9.1 As of the Ending Date of each Offering, a Participant's Payroll Deduction Account shall first be used to purchase Shares under the Qualified Plan. Once a Participant has purchased the maximum number of Shares permitted to be purchased during an Offering Period under the Qualified Plan, the Participant's Payroll Deduction Account shall be used to purchase Shares under this Plan, subject to the limits of Section 7.3 of this Plan. The 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 remaining after the purchase of Shares under the Qualified Plan 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. 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 purchased under this Plan and 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. -5- 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. ARTICLE 10 - EVIDENCE OF OWNERSHIP OF SHARES -------------------------------------------- Following the Ending Date of each Offering, the Shares that are purchased by each Participant pursuant to this Plan 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 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 or her 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. -6- 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. 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. ARTICLE 15 - MISCELLANEOUS -------------------------- 15.1 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 no Participant's existing rights under any Offering that is in progress may be adversely affected thereby. 15.2 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- 15.3 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. 15.4 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. 15.5 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. 15.6 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. 15.7 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. 15.8 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. 15.9 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- 15.10 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 the Effective Date. -9- EX-10 5 indemnificationagmt04.txt 2004 INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT THIS AGREEMENT is made and entered into this _________ day of _________________, 200_, between APPLEBEE'S INTERNATIONAL, INC., a Delaware corporation (the "Corporation") and ___________________ ("Indemnitee"). WITNESSETH: WHEREAS, Indemnitee is a ________________________ of the Corporation and as such is performing a valuable service for the Corporation; and WHEREAS, although Indemnitee has certain rights to indemnification under the Governing Documents of the Corporation and Delaware law, and such Governing Documents and law specifically provide that they are not exclusive and thereby contemplate that the Corporation may enter into indemnification agreements with its officers and directors; WHEREAS, the Corporation's Board of Directors have determined that the policy of the Corporation is to indemnify the Corporation's directors and officers against Claims and Liabilities incurred by reason of their Official Capacity; and WHEREAS, the Board of Directors of the Corporation has determined that the foregoing indemnification policy is important to the recruitment and retention of qualified, competent officers and directors to serve the Corporation, and is therefore in the best interests of the Corporation; and WHEREAS, the Corporation's Board of Directors has determined that it is appropriate and in the best interests of the Corporation to offer an indemnification agreement substantially the same as this Agreement to all directors of the Corporation and to those officers of the Corporation as the Board of Directors shall determine; and WHEREAS, the Corporation and Indemnitee desire to enter into this Agreement to provide to Indemnitee additional rights to indemnification in consideration of Indemnitee's continued service to the Corporation; NOW, THEREFORE, in consideration of Indemnitee's service or continued service to the Corporation in Indemnitee's Official Capacity, and the promises and agreements contained herein, the Corporation and Indemnitee agree as follows: 1. Certain Definitions. For purposes of this Agreement, the following definitions shall apply to the referenced words or terms: (a) "Arbitration" in the context of a Proceeding shall mean any alternative dispute resolution procedure or process. (b) "D&O Insurance" means directors and officers liability insurance. -1- (c) "Expenses" shall include all direct and indirect costs (including, without limitation, all attorneys' fees and retainers, and related disbursements, expert witness and advisory fees and related disbursements, and other out-of-pocket costs) actually and reasonably incurred or to be incurred by Indemnitee in connection with (i) the investigation, defense or appeal of a Proceeding, (ii) serving as an actual or prospective witness in any matter arising out of, or in any way related to, Indemnitee's Official Capacity, (iii) any voluntary or required interviews or depositions with respect to any matter arising out of, or in any way related to, Indemnitee's Official Capacity, and (iv) any Permitted Action brought against the Corporation by Indemnitee directly, or by means of impleader, cross-complaint, counterclaim or other proceeding. (d) "Governing Documents" shall mean the Certificate of Incorporation and Bylaws of the Corporation, as amended from time to time. (e) "Indemnitee's Affiliates" shall mean Indemnitee's spouse, members of Indemnitee's immediate family, and Indemnitee's representative(s), guardian(s), conservator(s) estate, executor(s), administrator(s), and trustee(s), as the case may be, as understood in, or relevant to, the context of a particular provision of this Agreement. (f) "Liabilities" shall include judgments, settlements, fines, damages, whether compensatory, punitive or exemplary, ERISA or IRS or other excise taxes, penalties, and all other liabilities of any kind or nature incurred by Indemnitee as a result of a Proceeding. (g) "Official Capacity" means Indemnitee's service as an officer and/or director of the Corporation and any Other Enterprise, and in such capacity shall include service as a trustee, fiduciary, agent or similar status with respect to the Corporation and any Other Enterprise. (h) "Other Enterprise" shall include without limitation any other corporation, partnership, joint venture, trust, employee benefit plan, or other entity or association of any kind or nature which is controlled by, or affiliated with, the Corporation, or of which the Corporation is a creditor, or sole or partial owner. (i) "Permitted Action" includes (i) any Proceeding against the Corporation brought by Indemnitee, alone or with others, in connection with, or related to, the defense by Indemnitee of any Proceeding brought against Indemnitee by a third party, the Corporation, or any Other Enterprise (or brought on behalf of the Corporation, including by means of a derivative action), whether by a separately initiated Proceeding, or impleader, cross-claim, counterclaim, or otherwise; (ii) a Proceeding brought by Indemnitee or Indemnitee's Affiliates to establish or enforce a right of indemnity, or Indemnitee's Affiliates, under this Agreement, an applicable D&O insurance policy, the Corporation's Governing Documents, or any other agreement or law pertaining to indemnification of Indemnitee, or to recover Expenses or a Liability of Indemnitee resulting from a Proceeding against Indemnitee; (iii) a Proceeding against the Corporation or any Other Enterprise brought by Indemnitee which is approved in advance by a -2- majority of the Corporation's independent directors, excluding Indemnitee; and (iv) a Proceeding brought by Indemnitee which is required under any law; and with respect to (i) through (iv) above, any of the identified actions shall be considered a Permitted Action regardless of whether Indemnitee is ultimately determined to be entitled to the relief sought. (j) "Proceeding" shall include any threatened, pending, actual or completed inquiry, interview, investigation, action, suit, arbitration or other proceeding, whether civil, administrative, criminal, or any other type of proceeding whatsoever, including an appellate action of any kind, brought by (i) the Corporation (or brought on behalf of the Corporation, including a derivative action) against or involving Indemnitee or Indemnitee's Affiliates by reason of, or in any way related to, Indemnitee's Official Capacity; (ii) Indemnitee, against or involving the Corporation or any Other Enterprise by reason of, or in any way related to, Indemnitee's Official Capacity or rights Indemnitee has against the Corporation or any Other Enterprise under this Agreement, the Governing Documents, or any other agreement or law (but only with respect to a Permitted Action); (iii) any third party against or involving Indemnitee or Indemnitee's Affiliates by reason of, or in any way related to, Indemnitee's Official Capacity, directly or by impleader, cross-claim, counterclaim, or other means; or (iv) Indemnitee against any third party, other than the Corporation, by reason of, or in any way related to, Indemnitee's Official Capacity, directly or by impleader, cross-claim, counterclaim or other means. (k) "Serving at the Request of the Corporation" shall include any service to an Other Enterprise by Indemnitee in Indemnitee's Official Capacity. For the purposes of this Agreement, Indemnitee's service in Indemnitee's Official Capacity to any Other Enterprise shall be presumed to be "Service at the Request of the Corporation," unless it is conclusively determined to the contrary by a majority vote of the directors of the Corporation, excluding Indemnitee. With respect to such determination, it shall not be necessary for Indemnitee to show any actual or prior request by the Corporation or its Board of Directors for such Service to such Other Enterprise. 2. Indemnification. (a) Subject only to the provisions of Sections 4, 5 and 7 of this Agreement, the Corporation shall hold harmless and indemnify Indemnitee from and against any and all Expenses and Liabilities with respect to any Proceedings to which Indemnitee may be subject by reason of Indemnitee's Official Capacity with the Corporation or any Other Enterprise to the fullest extent permitted by Delaware law and this Agreement as such law and this Agreement may be hereafter modified or interpreted subsequent to the execution of this Agreement. -3- (b) Notwithstanding any other provisions of this Agreement, if Indemnitee is the subject of a Proceeding by reason of, or in any way related to, Indemnitee's Official Capacity, and is successful in the defense of (i) the entire Proceeding, or (ii) one or more claims brought as part of the Proceeding, the Indemnitee shall be fully indemnified by the Corporation as to all Expenses incurred with respect to the Proceeding, or the particular claims, as the case may be, to the extent Indemnitee has not otherwise been indemnified. (c) If a Proceeding against Indemnitee includes a claim against (i) one or more of Indemnitee's Affiliates, or (ii) a property interest of one or more of Indemnitee's Affiliates, and such Proceeding against Indemnitee is by reason of, or in any way related to, Indemnitee's Official Capacity with the Corporation or any Other Enterprise, this Agreement shall also include indemnification of the Indemnitee's Affiliates with respect to their Expenses and Liability, assuming that Indemnitee would have been entitled to indemnification under Section 4(a) if the Proceeding had been brought directly against Indemnitee. The Expenses of such Indemnitee Affiliate shall be advanced pursuant to Section 5 to the extent Indemnitee would have been entitled to advancement of Expenses had the Proceeding been directly against Indemnitee. (d) The Corporation and Indemnitee acknowledge that state or federal law or regulations, or applicable public policy, may prohibit the Corporation from indemnifying Indemnitee with respect to a Proceeding, or one or more claims in a Proceeding under this Agreement or otherwise. 3. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Corporation for any portion of Expenses or Liability incurred in connection with any Proceeding, but not for all of the Expenses or Liability incurred in connection with any Proceeding, the Corporation shall nevertheless indemnify Indemnitee for the portion of such Expenses and Liability to which Indemnitee is entitled. 4. Limitations on Indemnification. (a) The Corporation will not hold Indemnitee harmless or provide indemnification pursuant to Section 2: (i) if Indemnitee has been otherwise (than pursuant to this Agreement) indemnified by the Corporation or other person or entity, or pursuant to any D&O Insurance or other insurance purchased and maintained by the Corporation or Other Enterprise; (ii) if the Proceeding against Indemnitee is not by reason of, or does not in any way relate to, Indemnitee's Official Capacity; (iii) in respect of remuneration paid to Indemnitee if it shall be determined by a final adjudication of a court having jurisdiction in the matter that such remuneration was in violation of law; -4- (iv) on account of any suit for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Corporation pursuant to Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local law; (v) on account of Indemnitee's conduct if it is finally adjudged by a court or administrative agency, having jurisdiction in the matter, or is admitted by Indemnitee, that such conduct (I) was in bad faith (II) was believed by the Indemnitee to be opposed to the best interests of the corporation, (III) was knowingly fraudulent, false or dishonest, (IV) constituted knowing misconduct, or (V) in a criminal action or proceeding, constituted conduct that the Indemnitee had reasonable cause to believe was unlawful; (vi) with respect to Proceedings brought by, or on behalf of, Indemnitee or Indemnitee's Affiliates, against the Corporation, any Other Enterprise or any other person or entity having a right to be indemnified by the Corporation or any Other Enterprise, unless such Proceeding is a Permitted Action; or (vii) if it shall be determined by a final adjudication of a court, or administrative agency, having jurisdiction in the matter, that such indemnification is not lawful. (b) A determination as to whether Indemnitee is not entitled to indemnification by reason of the provisions of Section 4(a) shall be made by (i) the board of directors by a majority vote of directors who were not parties to the action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion to the effect that there is clear and convincing evidence that, based on the evidence then known, Indemnitee is not entitled to indemnification; and any such determination under (i), (ii) or (iii) shall be final and binding upon the Corporation. 5. Advancement of Expenses. (a) Until the assumption of the defense of a Proceeding by the Corporation pursuant to Section 7 of this Agreement or after Indemnitee's employment of separate counsel as permitted under Section 7, expenses of Indemnitee in defending or responding to a Proceeding shall be paid by the Corporation, within 15 days of the receipt of invoices therefor from Indemnitee, in advance of the final disposition of such Proceeding. (b) Expenses of Indemnitee in prosecuting a Permitted Action shall be paid by the Corporation within 15 days of the receipt of invoices therefor from Indemnitee, in advance of the final disposition of such Permitted Action. (c) Indemnitee's initial submission of an invoice for -5- reimbursement of Expenses incurred in connection with, or related to, any Proceeding shall be accompanied by a written undertaking by or on behalf of Indemnitee to repay all or a portion of the amounts advanced, if it shall be determined by a final adjudication of a court or administrative agency having jurisdiction in the matter that Indemnitee is not entitled to indemnification by the Corporation with respect to all or a portion of the advanced Expenses. (d) Notwithstanding the foregoing, no advance shall be made by the Corporation if a determination is reasonably and promptly made by (i) the board of directors by a majority vote of directors who were not parties to the action, suit or proceeding, even though less than a quorum or (ii) if there are no such directors, by independent legal counsel in a written opinion to the effect that there is clear and convincing evidence that, based on the information then known, Indemnitee would not be entitled to indemnification by reason of a limitation set forth in Section 4(a) of this Agreement. In no event shall any advance be made in instances where the board or independent legal counsel reasonably determines that such Indemnitee knowingly breached his or her duty to the Corporation or its stockholders. 6. Maintenance of D&O Insurance. (a) The Corporation represents that it presently has in force and effect D&O Insurance coverage under the policies with the insurance carriers, and in the amounts set forth on Attachment A (the "Insurance Policies"). (b) Subject only to the provisions of Section 6(c) hereof, the Corporation agrees that, so long as Indemnitee shall continue to serve in an Official Capacity, and thereafter, for so long as Indemnitee shall be subject to any possible Proceeding by reason of, or in any way related to, Indemnitee's Official Capacity, the Corporation will purchase and maintain in effect for the benefit of Indemnitee one or more valid, binding and enforceable policies of D&O Insurance providing, in all respects, coverage at least comparable to that presently provided pursuant to the Insurance Policies. All decisions as to whether and to what extent the Corporation maintains D&O Insurance shall be made by the Board of Directors of the Corporation. (c) The Corporation shall not be required to maintain D&O Insurance coverage at least comparable to that provided by the Insurance Policies if (i) said Insurance is not available, or (ii) in the reasonable business judgment of a two-thirds majority of the directors of the Corporation, the premium cost for such insurance is substantially disproportionate to the benefits of such coverage. In making any determination to eliminate or reduce coverage, the Board of Directors shall seek the advice of independent legal counsel or other advisors experienced in the review and analysis of D&O Insurance coverage. -6- (d) Promptly after (i) learning of facts and circumstances which may give rise to a Proceeding, the Corporation shall notify its D&O Insurance carriers, if such notice is required by the applicable insurance policies, and any other insurance carrier providing applicable insurance coverage to the Corporation, of such facts and circumstances, or (ii) receiving notice of a Proceeding, whether from Indemnitee, or otherwise, the Corporation shall give prompt notice to its D&O Insurance carriers, and any other insurance carriers providing applicable insurance coverage to the Corporation, in accordance with the requirements of the respective insurance policies. The Corporation shall, thereafter, take all appropriate action to cause such insurance carriers to pay on behalf of Indemnitee, all Expenses incurred or to be incurred, and liability incurred, by Indemnitee with respect to such Proceeding, in accordance with the terms of the applicable insurance policies. 7. Notification to Corporation by Indemnitee of a Proceeding or Permitted Action; Defense of Proceeding by Corporation. (a) Promptly after receipt by Indemnitee of notice of the commencement of a Proceeding or Permitted Action, Indemnitee will, if a claim for indemnification with respect thereto is to be made by Indemnitee against the Corporation under this Agreement, or otherwise, notify the Corporation of such Proceeding or Permitted Action; but the omission so to notify the Corporation will not relieve the Corporation from any liability which it may have to Indemnitee under this Agreement. (b) With respect to a Proceeding of which the Corporation has notice pursuant to Section 6, Section 7(a), or otherwise: (i) Except as otherwise provided below, the Corporation may, alone or jointly with any other indemnifying party, assume the defense thereof, with counsel reasonably satisfactory to Indemnitee. From and after the Corporation's assumption of the defense of the Proceeding, the Corporation will not be liable to Indemnitee under this Agreement for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding. (ii) Indemnitee shall have the right to employ Indemnitee's own counsel in the defense of the Proceeding, but the fees and expenses of such counsel incurred after the Corporation has assumed the defense of such Proceeding, shall be at the expense of Indemnitee unless (I) the employment of counsel by Indemnitee has been authorized by a majority of the directors of the Corporation, excluding Indemnitee, (II) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of the defense of the Proceeding, and such conclusion is supported by an opinion of counsel, or (III) the Corporation shall not in fact have timely employed counsel to assume the defense of the Proceeding, in each of which cases the Expenses of Indemnitee shall be advanced by the Corporation pursuant to Section 5 and indemnified pursuant to Section 2. -7- (c) The Corporation shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Proceeding or Permitted Action effected without the Corporation's prior written consent, which consent shall be determined by majority vote of the Corporation's directors, excluding Indemnitee. The Corporation shall not settle any action or claim in any manner which would impose any penalty, limitation, Expense or Liability on Indemnitee without Indemnitee's prior written consent. Neither the Corporation nor Indemnitee will unreasonably withhold their consent to any proposed settlement. 8. No Obligation or Right of Indemnitee or Corporation to Continuation of Indemnitee's Official Capacity. (a) The Corporation expressly confirms and agrees that it has entered into this Agreement, and assumed the obligations imposed on the Corporation in this Agreement, in order to induce Indemnitee to serve or continue to serve the Corporation in Indemnitee's Official Capacity, and acknowledges that Indemnitee is relying upon this Agreement in serving or continuing to serve in such Official Capacity. The rights to indemnification and advancement of Expenses created by or provided pursuant to this Agreement are bargained-for conditions of Indemnitee's acceptance and/or maintenance of Indemnitee's Official Capacity with the Corporation. Such rights shall continue after Indemnitee has ceased to serve the Corporation or any Other Enterprise in Indemnitee's Official Capacity, and shall inure to the benefit of Indemnitee and Indemnitee's Affiliates. (b) Indemnitee agrees that neither the terms of this Agreement, nor the rights and benefits conferred on the Corporation, any Other Enterprise or Indemnitee under this Agreement, prohibits, limits or in any way restricts the Board of Directors of the Corporation from (i) seeking Indemnitee's resignation from his Official Capacity with the Corporation or any Other Enterprise, (ii) removing, or seeking the removal of Indemnitee from his Official Capacity with the Corporation or any Other Enterprise, or (iii) declining to re-nominate or re-engage Indemnitee for his Official Capacity with the Corporation or any Other Enterprise, nor shall this Agreement be construed or interpreted as creating a contract of employment or other engagement with Indemnitee. (c) The Corporation agrees that neither the terms of this Agreement, nor the rights and benefits provided to Indemnitee under this Agreement, prohibit, limit, or restrict in any way, Indemnitee's rights to resign Indemnitee's Official Capacity with the Corporation or any Other Enterprise at any time subsequent to the execution of this Agreement. 9. Enforcement of this Agreement by Indemnitee or Indemnitee's Affiliates. To the fullest extent permitted by the laws of the State of Delaware or otherwise, Indemnitee and Indemnitee's Affiliates shall have the right to institute a Proceeding to enforce and/or recover damages for breach of the rights of indemnification and advancement of Expenses created by, or provided pursuant to the terms of, this Agreement, the Governing Documents, Delaware or other law, or any other agreement entered into between Indemnitee and the Corporation subsequent to the execution of this Agreement, and such Proceeding shall be a Permitted Action for purposes of this Agreement. -8- 10. Non-attribution of Actions of any Indemnitee to any Other Indemnitee. For purposes of determining whether Indemnitee is entitled to indemnification or advancement of expenses by the Corporation pursuant to this Agreement or otherwise, the actions or inactions of any other indemnitee or group of indemnitees shall not be attributed to Indemnitee. 11. Non-Exclusivity. The rights to indemnification and advancement of Expenses provided to Indemnitee pursuant to this Agreement shall not be deemed exclusive of any other rights of indemnification or advancement of Expenses to which Indemnitee may be entitled under any statute, common law, other agreement, the Governing Documents, a vote of stockholders or disinterested directors, insurance policy or otherwise, both as to actions in Indemnitee's Official Capacity, and as to actions in any other capacity while holding Indemnitee's Official Capacity with the Corporation or any Other Enterprise, and shall not limit in any way any right the Corporation may have to create additional or independent or supplementary indemnity obligations for the benefit of Indemnitee. 12. Severability. Each of the provisions of this Agreement is a separate and distinct agreement independent of the others, and if any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid illegal or unenforceable by a final judgment of a court, administrative agency or arbitration panel, having jurisdiction of the matter, for any reason whatsoever, the remaining provisions of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby. The parties hereto expressly agree that any provision hereof that is determined to be invalid, illegal or unenforceable shall be construed and modified by the court, administrative agency or arbitration panel finding such provision invalid, illegal or unenforceable to the extent necessary so as to render such provision valid and enforceable as against all persons or entities to the maximum extent permitted by law. 13. Governing Law. This Agreement shall be governed, interpreted and construed in accordance with the laws of the State of Delaware without regard to any of its conflict of law rules. 14. Consent to Jurisdiction and Venue. The Corporation and Indemnitee each consent to the jurisdiction and venue of the courts of the State of Kansas, or the federal courts, located in Kansas City, Kansas, and to holding any arbitration permitted under this Agreement in Kansas City, Kansas, for all purposes in connection with any Proceeding which arises out of or relates to this Agreement. 15. Notices. (a) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) personally delivered to, and receipted for by, the intended receiving party, or an authorized representative of the intended receiving party, (ii) mailed by certified or registered mail, postage prepaid, within the United States, on the third business day after the date on which it is mailed, (iii) delivered by reputable overnight courier on the date of delivery evidenced by such carrier, or (iv) transmitted by facsimile machine on the date of receipt indicated by recipient's facsimile machine. -9- (b) Such notices shall be given as follows: (i) If to Indemnitee to the following address or facsimile number, or such other address or facsimile number as Indemnitee may furnish in writing: ----------------------------------------- ----------------------------------------- ----------------------------------------- Facsimile No.: --------------------------- Attention: ------------------------------- (ii) If to the Corporation to: Applebee's International, Inc. 4551 West 107th Street, Suite 100 Overland Park, Kansas 66207 Facsimile No. 913-341-1694 Attention: Chief Executive Officer and Corporate General Counsel 16. Modification; Survival. No amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing and signed by both parties hereto. The provisions of this Agreement shall survive the termination of Indemnitee's Official Capacity with the Corporation, and inure to the benefit of Indemnitee and Indemnitee's Affiliates. 17. Period of Limitations. No Proceeding shall be brought by or in the right of either party hereto against the other after the expiration of three (3) years from the date of accrual of the cause of action giving rise to the Proceeding, and any such cause of action of such party shall be extinguished and deemed released unless asserted by the timely bringing of a Proceeding within such three (3) year period; provided, however, that if any shorter period of limitations is otherwise applicable to such cause of action, such shorter period shall govern. 18. Subrogation. In the event of payment of Expenses or Liabilities pursuant to this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee and Indemnitee's Affiliates against any person or organization. Indemnitee and Indemnitee's Affiliates shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring a Proceeding to enforce such rights. 19. Binding Effect; Successors. This Agreement shall be binding upon and inure to the benefit of, and be enforceable by, the Corporation, Indemnitee and Indemnitee's Affiliates, and their respective successors in interest, including with respect to the Corporation, succession by purchase, merger, consolidation, or sale of substantially all of the business and/or assets of the Corporation. The Corporation shall require and cause any successor entity to all, substantially all, or a substantial part of, the business and/or assets of the Corporation, by written agreement to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no succession had taken place. -10- 20. Prior Agreements; Conflict With Governing Documents. This Agreement shall supersede and replace any other agreement among the parties executed prior to the date of this Agreement with respect to the subject matter hereof. To the fullest extent permitted by law, in the event of a conflict between the terms of this Agreement and the terms of the Governing Documents, the terms of this Agreement shall prevail. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement and affixed their signatures hereto as of the date first above written. ----------------------------------------- -----------------------------, Indemnitee APPLEBEE'S INTERNATIONAL, INC. a Delaware corporation By: ----------------------------------------- Lloyd L. Hill, Chairman/CEO -11- EX-10 6 scheduleofparties.txt SCHEDULE OF PARTIES FOR RETIREMENT PLAN SCHEDULE OF PARTIES Michael Czinege David L. Goebel David R. Parsley Harry B. Stroup Carin L. Stutz Rebecca R. Tilden EX-31 7 q204302certlloyd.txt Q2 LLOYD 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)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 28, 2004 By:/s/ Lloyd L. Hill -------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer (principal executive officer) EX-31 8 q204302certsteve.txt Q2 STEVER 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)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 28, 2004 By:/s/ Steven K. Lumpkin -------------------------------------- Steven K. Lumpkin Executive Vice President and Chief Financial Officer (principal financial officer) EX-32 9 q204906cert.txt Q2 906 CERTIFICATION EXHIBIT 32.1 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 27, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and dates indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 28, 2004 By: /s/ Lloyd L. Hill ---------------------------- -------------------------------------- Lloyd L. Hill Chairman and Chief Executive Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Applebee's International, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 27, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and dates indicated below, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 28, 2004 By: /s/ Steven K. Lumpkin ---------------------------- -------------------------------------- Steven K. Lumpkin Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----