UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant x
Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
ý Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12

Applebee’s International, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o No fee required.
x Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

1) Title of each class of securities to which transaction applies: Common Stock, par value $.01 per share.

2) Aggregate number of securities to which transaction applies: 75,158,544 shares of common stock outstanding as of September 13, 2007, options to purchase 3,288,069 shares, 1,358,984 stock appreciation rights, and 9,775 restricted stock units (including only in-the-money stock options and stock appreciation rights).

3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): The proposed maximum aggregate value of the transaction for purposes of calculating the filing fee is $1,946,494,808. The filing fee was based upon the sum of (A) $1,916,542,872 (75,158,544 common shares multiplied by $25.50 per share) and (B) $29,951,936 (the aggregate amount payable upon cancellation of stock options, stock appreciation rights and restricted stock units, calculated based on the difference between $25.50 and the weighted average exercise price of options and stock appreciation rights, $17.80 and $22.26, respectively, and $25.50 multiplied by the number of outstanding restricted stock units) (the “Total Consideration”). The filing fee equals the product of 0.0000307 multiplied by the Total Consideration.

4) Proposed maximum aggregate value of transaction: $1,946,494,808.

5) Total fee paid: $59,757.

ý Fee paid previously with preliminary materials.

o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

2) Form, Schedule or Registration Statement No.:

3) Filing Party:

4) Date Filed:

 

Applebee’s International, Inc.

4551 W. 107th Street

Overland Park, KS 66207

 

September 27, 2007

 

Dear Stockholder:

 

 

We invite you to attend a special meeting of the stockholders of Applebee’s International, Inc., a Delaware corporation, to be held on October 30, 2007 at 10:00 a.m. local time. The meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210.

 

At the special meeting, you will be asked to adopt the agreement and plan of merger, dated July 15, 2007, among Applebee’s, IHOP Corp. (“IHOP”) and CHLH Corp. (“Merger Sub”), a wholly-owned subsidiary of IHOP, providing for the merger of Merger Sub with and into Applebee’s. If the merger is completed, each holder of shares of our common stock will be entitled to receive $25.50 in cash in exchange for each share of our common stock held, as more fully described in the enclosed proxy statement, and Applebee’s will become a wholly-owned subsidiary of IHOP.

 

After careful consideration, our board of directors approved the merger agreement and the merger and has declared the merger agreement and the merger advisable and in the best interests of Applebee’s and our stockholders. Our board of directors recommends that you vote FOR the adoption of the merger agreement and the approval of the merger.

 

The merger agreement must be adopted and the merger approved by the affirmative vote of holders of a majority of the outstanding shares of common stock that are entitled to vote at the special meeting. The completion of the merger is also subject to the satisfaction or waiver of other conditions. More information about the merger is contained in the enclosed proxy statement. We urge you to read carefully the enclosed proxy statement and the merger agreement, a copy of which is included in the proxy statement as Exhibit A.

 

Your vote is very important. Whether you plan to attend the special meeting or not, please either complete the enclosed proxy card and return it as promptly as possible or submit your proxy or voting instructions by telephone or Internet. The enclosed proxy card contains instructions regarding voting. If you attend the special meeting, you may continue to have your shares voted as instructed in the proxy or you may withdraw your proxy at the special meeting and vote your shares in person. If you fail to vote by proxy or in person, or fail to instruct your broker on how to vote, it will have the same effect as a vote against adoption of the merger proposal.

 

This Proxy Statement is dated September 27, 2007 and is first being mailed, along with the enclosed proxy card, to our stockholders on or about September 27, 2007.

 

Sincerely,

 

 

Rebecca R. Tilden

Secretary

APPLEBEE’S INTERNATIONAL, INC.
4551 W. 107th Street
Overland Park, KS 66207

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
to be held October 30, 2007

 

To Our Stockholders:

 

NOTICE IS HEREBY GIVEN that Applebee’s International, Inc. will hold a Special Meeting of Stockholders at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 on October 30, 2007, at 10:00 a.m. local time for the following purposes:

 

 

All holders of record of shares of our common stock as of the close of business on September 13, 2007 are entitled to notice of and to vote at the special meeting or any postponements or adjournments of the special meeting. Regardless of the number of shares you own, your vote is important. If you do not plan to attend the meeting and vote your shares of common stock in person, please submit your proxy by either marking, signing, dating and promptly returning the enclosed proxy card in the postage-paid envelope or by submitting your proxy or voting instructions by telephone or Internet. Any proxy may be revoked at any time prior to its exercise by delivery of a written notice of revocation, or a later-dated proxy card or by voting in person at the special meeting.

 

A stockholder’s list will be available at our executive offices at 4551 W. 107th Street, Overland Park, KS 66207 for inspection by any stockholder entitled to vote at the special meeting for any purpose germane to the meeting beginning no later than ten days before the date of the special meeting and continuing through the special meeting.

 

We encourage you to read this proxy statement carefully. If you have any questions or need assistance, please call Innisfree M&A Incorporated, toll free at 877-687-1866. These documents may also be obtained for free from Applebee’s by directing a request to Applebee’s International, Inc., Investor Relations, 4551 W. 107th Street, Overland Park, Kansas 66207.

 

By Order of the Board of Directors,

 

Rebecca R. Tilden, Secretary

 

Overland Park, Kansas

September 27, 2007

IMPORTANT:

 

Whether or not you plan to attend the special meeting, please promptly either complete, sign, date and mail the enclosed form of proxy or submit your proxy or voting instructions by telephone or Internet. A self-addressed envelope is enclosed for your convenience. Details are outlined in the enclosed proxy card. If you hold your shares through a broker, dealer, trustee, bank or other nominee, you may also be able to submit your proxy or voting instructions by telephone or by Internet in accordance with the instructions your broker, dealer, trustee, bank or other nominee provides. Returning a signed proxy will not prevent you from attending the meeting and voting in person, if you wish to do so. Please note that if you execute multiple proxies for the same shares, the last proxy you execute revokes all previous proxies.

TABLE OF CONTENTS

 

 

SUMMARY

 

This summary highlights material information in this proxy statement relating to the merger contemplated by the merger agreement, which we refer to in this proxy statement as the “merger,” and may not contain all of the information that is important to you. To understand the merger and the related transactions fully and for a more complete description of the legal terms of the transactions contemplated by the merger agreement, you should carefully read this entire document as well as the additional documents to which it refers, including the merger agreement, which is attached to this proxy statement as Exhibit A and incorporated herein by reference. In this proxy statement, the terms “Applebee’s”, “we”, “us” and “our” refer to Applebee’s International, Inc.

 

The Parties (Page 13)

 

Applebee’s International, Inc.
4551 W. 107th Street
Overland Park Kansas 66207
(913) 967-4000

 

Applebee’s is a Delaware corporation that develops franchises and operates restaurants in the bar and grill segment of the casual dining industry under the name “Applebee’s Neighborhood Grill & Bar”^®. With 1,950 Applebee’s restaurants in operation as of August 26, 2007, (1,441 franchised and 509 company owned), Applebee’s is the largest casual dining concept in the world in terms of the number of restaurants and market share.

 

IHOP Corp.
450 North Brand Boulevard
Glendale, California 91203

 

IHOP Corp. is a Delaware corporation. The IHOP family restaurant chain has been serving a wide variety of breakfast, lunch and dinner selections for more than 45 years. IHOP restaurants are franchised and operated by Glendale, California-based IHOP Corp. As of June 30, 2007, the end of IHOP’s second quarter, there were 1,319 IHOP restaurants in 49 states, Canada, Mexico and the U.S. Virgin Islands. IHOP Corp. common stock is listed and traded on the NYSE under the symbol “IHP”.

 

CHLH Corp.
450 North Brand Boulevard
Glendale, California 91203

 

CHLH Corp., or Merger Sub, is a Delaware corporation and was organized solely for the purpose of acquiring Applebee’s pursuant to the merger agreement. Merger Sub has not conducted any activities to date other than activities incidental to its formation and in connection with the proposed merger. Merger Sub is wholly-owned by IHOP.

 

The Merger (Page 13)

 

 

When the Merger Will be Completed

 

We are working to complete the merger as soon as possible. We anticipate completing the merger in the fourth quarter of 2007, subject to adoption of the merger agreement by our stockholders and the satisfaction of the other closing conditions. In addition, IHOP is not obligated to complete the merger until the expiration of a 15 consecutive business day “marketing period” throughout which IHOP shall have certain specified financial

information of Applebee’s, IHOP’s closing conditions are satisfied and Applebee’s auditors have not withdrawn their audit opinions for any applicable required financial information. We expect the marketing period to begin to run on the third business day after the adoption of the merger agreement by our stockholders.

 

Merger Consideration (Page 13)

 

If the merger is completed, each share of our common stock that is issued and outstanding immediately prior to the effective time of the merger, including shares of restricted stock (other than shares of our common stock owned by Applebee’s, IHOP, Merger Sub or any subsidiary of Applebee’s or shares held by stockholders who properly demand statutory appraisal rights under Delaware law), will be cancelled and automatically converted into the right to receive an amount in cash equal to $25.50, without interest, less any required withholding taxes.

 

Each outstanding option to purchase shares of common stock granted under our equity incentive plans, whether vested or unvested, will be cancelled and will entitle the holder to receive a cash payment equal to the excess, if any, of the per share merger consideration over the per share exercise price of the applicable stock option, multiplied by the number of shares subject to the stock option, less any applicable taxes required to be withheld and without interest. Each outstanding stock appreciation right granted under our equity incentive plans, whether vested or unvested, will be cancelled and will entitle the holder to receive a cash payment equal to the excess, if any, of the per share merger consideration over the per share exercise price of the applicable stock appreciation right, multiplied by the number of shares subject to the stock appreciation right, less any applicable taxes required to be withheld and without interest. Each outstanding restricted stock unit granted under our equity incentive plans, whether vested or unvested, will be cancelled and will entitle the holder to receive a cash payment equal to the per share merger consideration multiplied by the number of shares of common stock issuable pursuant to the restricted stock unit, less any applicable taxes required to be withheld and without interest.

 

Our employee stock purchase plans will terminate upon the earlier of the date the merger closes and the end of the third quarter offering period. Each share of our common stock purchased on the last day of the offering periods will be converted into the right to receive the per share merger consideration.

 

The Special Meeting

 

Place, Date and Time of the Special Meeting

 

The special meeting will be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210, on October 30, 2007, at 10:00 a.m. local time.

 

Purpose (Page 10)

 

The purpose of the special meeting is for you to consider and vote upon a proposal to adopt the merger agreement and approve the merger and to vote upon any proposal to vote for adjournment of the special meeting for the purpose of soliciting additional proxies because there are insufficient votes at the special meeting to approve the merger proposal.

 

Record Date and Quorum (Page 10)

 

The holders of record of Applebee’s common stock as of the close of business on the record date, which was September 13, 2007, are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were 75,158,544 shares of Applebee’s common stock outstanding. The holders of a majority of the outstanding shares of our common stock on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. For purposes of determining whether a quorum exists, broker non-votes and abstentions will be counted. You will have one vote at the special meeting for each share of Applebee’s common stock held on the record date.

 

Required Vote; Abstentions and Broker Non-Votes (Page 10)

 

Completion of the merger requires adoption of the merger agreement and approval of the merger by the affirmative vote of the holders of a majority of the outstanding shares of Applebee’s common stock that are entitled

to vote at the special meeting. Because the required vote is based on the number of shares of Applebee’s common stock outstanding rather than on the number of votes cast, failure to vote your shares (including as a result of broker non-votes) and abstentions will have the same effect as voting against adoption of the merger agreement and approval of the merger.

 

Approval of any proposal to adjourn the meeting requires that the votes cast in favor exceed the votes cast against. Abstentions and broker non-votes will have no effect on this proposal.

 

Share Ownership of Directors and Executive Officers (Page 56)

 

As of September 13, 2007, our executive officers and directors beneficially owned an aggregate of approximately 9,674,077 shares of Applebee’s common stock (in the form of 7,794,597 shares and stock options (vested or that vest within 60 days) with respect to an additional 1,879,480 shares), representing 12.6% of the total beneficial ownership of Applebee’s common stock and entitling them to exercise approximately 12.6% of the voting power of Applebee’s common stock entitled to vote at the special meeting.

 

Interests of Applebee’s Directors and Executive Officers in the Merger (Page 35)

 

When you consider the recommendation of Applebee’s board of directors that you vote for the adoption of the merger agreement and approval of the merger, you should be aware that certain of our directors and executive officers may have interests in the merger that are different from, or in addition to, yours, including the following:

 

 

 

Our board of directors was aware of these interests and considered them, among other matters, in making its decisions.

 

Opinion of Citigroup Global Markets Inc. (Page 27 and Exhibit B)

 

In connection with the merger, our board of directors received a written opinion, dated July 15, 2007, from Citigroup Global Markets Inc., which we refer to as Citi, as to the fairness, from a financial point of view and as of the date of the opinion, of the $25.50 per share consideration to be received in the merger by holders of our common stock. The full text of Citi’s written opinion is attached to this proxy statement as Exhibit B. Holders of our common stock are encouraged to read this opinion carefully in its entirety for a description of the assumptions made, procedures followed, matters considered and limitations on the review undertaken. Citi’s opinion was provided to our board of directors in connection with its evaluation of the merger consideration from a financial point of view and does not address any other aspects or implications of the merger. Citi’s opinion does not address Applebee’s underlying business decision to effect the merger, the relative merits of the merger as compared to any alternative business strategies that might exist for Applebee’s or the effect of any other transaction in which Applebee’s might engage. Citi’s opinion does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matters relating to the proposed merger.

 

Financing (Page 34)

 

IHOP estimates the total amount of funds necessary to complete the merger and the related transactions to be approximately $2.3 billion, which includes approximately $1.9 billion to be paid out to our stockholders and holders of other equity based interests in Applebee’s, with the remainder to be applied to refinance our outstanding debt and

pay related fees and expenses in connection with the merger, the financing arrangements and the related transactions. These payments are expected to be funded by a combination of preferred equity and debt financing.

 

IHOP’s debt financing is expected to consist of two separate securitization transactions consisting of an additional issuance of asset-backed notes under the existing IHOP securitization program and the issuance of asset-backed notes under a securitization program to be established for Applebee’s assets.

 

In connection with the execution and delivery of the merger agreement, IHOP has obtained bridge facility commitments to provide up to $2.139 billion in bridge credit facilities to fund the transaction pending completion of both securitizations. IHOP and Merger Sub have agreed to use reasonable best efforts to arrange the debt financing on the terms and conditions described in the commitments. In addition, IHOP has obtained an aggregate of $168.8 million in equity commitments from MSD Capital, L.P. and Chilton Investment Company, LLC, and their respective affiliates.

 

IHOP’s bridge facility commitments are subject to the satisfaction of certain customary conditions, including the execution of satisfactory documentation, the consummation of IHOP’s equity financing, receipt of IHOP’s and Applebee’s interim financial statements and other financial information, the satisfaction of the conditions in the merger agreement that are material to the interests of the lenders under the bridge facilities, the accuracy of certain specified representations and warranties, the granting of liens for the benefit of the lenders under the bridge facilities and the obtaining by IHOP of waivers and amendments to the existing IHOP securitization program.

 

The closing of the merger is not conditioned on the receipt of the financing by IHOP. IHOP, however, is not required to consummate the merger until after the completion of the marketing period, as described in further detail under “The Merger Agreement — Effective Time; The Marketing Period” beginning on page 42.

 

Limitation on Considering other Takeover Proposals (Page 49)

 

The merger agreement contains restrictions on our ability to solicit or engage in discussions or negotiations with a third party regarding specified transactions involving Applebee’s or our subsidiaries. Notwithstanding these restrictions, under certain limited circumstances required for our board to comply with its fiduciary duties, our board of directors may respond to an unsolicited written bona fide proposal for an alternative acquisition or terminate the merger agreement and enter into an acquisition agreement with respect to a superior proposal.

 

Conditions to Merger (Page 51)

 

Completion of the merger is subject to the satisfaction or waiver of a number of conditions, such as:

 

 

 

In addition, IHOP is not obligated to complete the merger until the expiration of a 15 consecutive business day “marketing period” throughout which IHOP shall have certain specified financial information of Applebee’s, IHOP’s closing conditions are satisfied and Applebee’s auditors have not withdrawn their audit opinions for any applicable required financial information. We expect the marketing period to begin to run on the third business day after the adoption of the merger agreement by our stockholders.

 

Termination of the Merger Agreement (Page 52)

 

We and IHOP may agree in writing to terminate the merger agreement at any time without completing the merger whether before or after the adoption of the merger agreement and approval of the merger by Applebee’s stockholders. Under certain circumstances, prior to the closing of the merger, either we or IHOP may terminate the merger agreement without the consent of the other party.

 

Termination Fees and Expenses (Page 53)

 

Under certain circumstances in connection with the termination of the merger agreement, we will be required to pay to IHOP an aggregate termination fee of $60 million.

 

Specific Performance (Page 54)

 

The parties to the merger agreement are entitled to an injunction or injunctions to prevent breaches of merger agreement and to enforce specifically the terms and provisions of the merger agreement in any court of the State of Delaware or any Federal court sitting in the State of Delaware.

 

Certain Material United States Federal Income Tax Consequences (Page 40)

 

If you are a U.S. holder of our common stock, receipt of the merger consideration will be a taxable transaction to you for federal income tax purposes. Although your tax consequences will depend on your particular situation, most U.S. holders generally recognize gain or loss measured by the difference, if any, between the cash received in the merger and their adjusted tax basis in their shares of Applebee’s common stock. If you are a non-U.S. holder of our common stock, the merger will generally not be a taxable transaction to you under federal income tax laws unless you have certain connections to the United States. You should consult your own tax advisor for a full understanding of the tax consequences of the merger to you.

 

Regulatory Approvals (Page 37)

 

Other than approval pursuant to the HSR Act, no other material federal or state regulatory approvals are required to be obtained by us, IHOP or Merger Sub in connection with the merger. On August 9, 2007, Applebee’s and IHOP each filed a Notification and Report Form with the Antitrust Division of the Department of Justice and the Federal Trade Commission. Under the HSR Act and related rules, the merger may not be completed until the expiration or termination of the statutory waiting period. Early termination was granted effective as of August 23, 2007.

 

Market Price of Applebee’s Common Stock (Page 55)

 

Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “APPB.” The closing sale price of our common stock on February 12, 2007, which was the last trading day before we announced that our board of directors was exploring strategic alternatives, including a potential sale of Applebee’s, was $24.23 per share. On July 13, 2007, which was the last trading day before we made a public announcement about the merger, the closing price of Applebee’s common stock was $24.38 per share. On September 21, 2007, the latest practicable date before this proxy statement was finalized, the closing price of Applebee’s common stock was $24.82 per share.

Procedure for Receiving Merger Consideration (Page 43)

 

Within two business days after the effective time of the merger, a paying agent will mail a letter of transmittal and instructions to you and the other Applebee’s stockholders. The letter of transmittal and instructions will tell you how to surrender your stock certificates in exchange for the merger consideration. You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

Appraisal Rights (Page 37)

 

Under Delaware law, you are entitled to appraisal rights in connection with the merger. As a result, you will have the right under Delaware law to have the “fair value” of your Applebee’s common shares determined by the Delaware Chancery Court. This right to appraisal is subject to a number of restrictions and procedural requirements. Generally, in order to exercise your appraisal rights, you must:

 

 

Merely voting against the adoption of the merger agreement will not protect your rights to an appraisal, which requires you to take all the steps provided under Delaware law. Delaware law requirements for exercising appraisal rights are described in further detail in this proxy statement. See “Appraisal Rights” beginning on page 37. In addition, Section 262 of the General Corporation Law of the State of Delaware, which is the section of Delaware law regarding appraisal rights, is reproduced and attached as Exhibit C to this proxy statement.

 

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

 

The following questions and answers address briefly some questions you may have regarding the special meeting and the proposed merger. These questions and answers may not address all questions that may be important to you as a stockholder of Applebee’s. Please refer to the more detailed information contained elsewhere in this proxy statement, as well as the additional documents to which it refers or which it incorporates by reference, including the merger agreement, a copy of which is attached to this proxy statement as Exhibit A.

 

 

 

 

 

 

 

THE SPECIAL MEETING

 

The Proposal

 

This proxy statement is being furnished to our stockholders in connection with the solicitation of proxies by the Applebee’s board of directors for use at a special meeting to be held at the Doubletree Hotel, 10100 College Blvd., Overland Park, Kansas 66210 on October 30, 2007, at 10:00 a.m. local time. The purpose of the special meeting is for you to consider and vote upon a proposal to adopt the merger agreement and approve the merger of Merger Sub with and into Applebee’s with the result that Applebee’s will become a wholly-owned subsidiary of IHOP, to consider and vote upon any proposal to adjourn the special meeting for the purpose of soliciting additional proxies and to transact any other business that may properly come before the special meeting or any adjournment or postponement thereof. A copy of the merger agreement is attached as Exhibit A to this proxy statement.

 

Record Date; Stock Entitled to Vote; Quorum

 

The holders of record of our common stock as of the close of business on September 13, 2007 which is the record date for the special meeting, are entitled to receive notice of, and to vote at, the special meeting.

 

On the record date, there were 75,158,544 shares of our common stock outstanding held by approximately 2,050 stockholders of record. The holders of a majority of the outstanding shares of our common stock on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Each holder of our common stock is entitled to one vote per share of our common stock held. Both abstentions and broker “non-votes” will be counted as present for purposes of determining the existence of a quorum. In the event that a quorum is not present at the special meeting, we currently expect that we will adjourn or postpone the meeting to solicit additional proxies. If a new record date is set for an adjourned or postponed special meeting, then a new quorum must be established. “Broker non-votes” result when the beneficial owners of shares of common stock do not provide specific voting instructions to their brokers with respect to a particular matter.

 

Vote Required

 

Completion of the merger requires adoption of the merger agreement and approval of the merger by the affirmative vote of the holders of a majority of Applebee’s outstanding common stock entitled to vote at the special meeting. Approval of any proposal to adjourn the special meeting for the purpose of soliciting additional proxies requires that the votes cast in favor of the proposal exceed the votes cast against the proposal. Abstentions and broker non-votes will have no effect on this proposal.

 

Each holder of shares of Applebee’s common stock that was outstanding on the record date is entitled to one vote at the special meeting for each share held. Because the required vote with respect to the merger is based on the number of shares of Applebee’s common stock outstanding rather than on the number of votes cast, failure to vote your shares (including as a result of broker non-votes) and abstentions with respect to the merger proposal will have the same effect as voting against adoption of the merger agreement and approval of the merger. Accordingly, in order for your shares of common stock to be included in the vote, you must either have your shares voted by returning the enclosed proxy card or by following voting instructions by telephone or Internet, or you must vote in person at the special meeting.

 

Our board of directors recommends by a vote of nine to five that you vote FOR the adoption of the merger agreement and the approval of the merger and FOR any proposal to adjourn the special meeting for the purpose of soliciting additional proxies if there are insufficient votes at the special meeting to adopt the merger proposal.

 

Proxies

 

Record holders may cause their shares of Applebee’s common stock to be voted using one of the following methods:

 

 

 

Regardless of whether you plan to attend the special meeting, we request that you complete and return a proxy for your shares of Applebee’s common stock as described above as promptly as possible.

 

If you hold your shares of Applebee’s common stock through a bank, brokerage firm or nominee (i.e., in “street name”), you must provide voting instructions in accordance with the instructions on the voting instruction card that your bank, brokerage firm or nominee provides to you. You should instruct your bank, brokerage firm or nominee as to how to vote your shares, following the directions contained in such voting instruction card. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker, who can give you directions on how to vote your shares of Applebee’s common stock.

 

As of September 13, 2007, our executive officers and directors beneficially owned an aggregate of approximately 9,674,077 shares of Applebee’s common stock (in the form of 7,794,597 shares and stock options (vested or that vest within 60 days) with respect to an additional 1,879,480 shares), representing 12.6% of the total beneficial ownership of Applebee’s common stock and entitling them to exercise approximately 12.6% of the voting power of Applebee’s common stock entitled to vote at the special meeting. The five directors who voted against approval of the merger, who beneficially own an aggregate of 3,892,689 (5.1%) shares of our common stock (including 820,270 stock options vested or that vest within 60 days) have informed the company that they intend to vote all of their shares which are entitled to vote at the meeting against the merger.

 

Stockholders who have questions or requests for assistance in completing and submitting proxy cards should contact our proxy solicitor, Innisfree at 877-687-1866.

 

Revocation

 

If you submit a proxy, your shares will be voted at the special meeting as you indicate on your proxy. If no instructions are indicated on your signed proxy card, your shares of Applebee’s common stock will be voted “FOR” the adoption of the merger agreement and approval of the merger, “FOR” the proposal to vote for adjournment of the special meeting for the purpose of soliciting additional proxies if there are insufficient votes at the special meeting to approve the merger proposal and “FOR” the authorization of the proxies to vote on such other matters as may properly come before the special meeting or any adjournment or postponement thereof.

 

You may revoke your proxy at any time, but only before the proxy is voted at the special meeting, in any of three ways:

 

 

Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. If you hold your shares of Applebee’s common stock in street name, you may revoke or change a previously given proxy by following the instructions provided by the bank, brokerage firm, nominee or other party that is the registered owner of the shares.

 

Solicitation of Proxies

 

Applebee’s will pay the costs of soliciting proxies for the special meeting. In addition, our officers and directors and employees may solicit proxies by telephone, e-mail, telegram or personal interview for no additional compensation. We will also request that individuals and entities holding shares in their names, or in the names of

their nominees, that are beneficially owned by others, send proxy materials to and obtain proxies from those beneficial owners, and will reimburse those holders for their reasonable expenses in performing those services. We have engaged Innisfree to solicit proxies and distribute materials to brokerage houses, banks, custodians, nominees and fiduciaries for a fee not to exceed $75,000. We will reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable out-of-pocket expenses for forwarding solicitation materials to stockholders.

 

Adjournments and Postponements; Other Business

 

Adjournments may be made for the purpose of, among other things, soliciting additional proxies because there are insufficient votes at the time the meeting to adopt the merger agreement. Such adjournment to solicit additional votes requires that holders of more of Applebee’s common stock vote in favor of adjournment than vote against adjournment without further notice other than by an announcement made at the special meeting of the date, time and place at which the meeting will be reconvened. If no instructions are indicated on your proxy card, your shares of our common stock will be voted “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies. Any adjournment of the special meeting for the purpose of soliciting additional proxies will allow our stockholders who have already sent in their proxies to revoke them at any time prior to their use at the adjourned special meeting. We do not currently intend to seek an adjournment of the special meeting.

 

We do not expect that any matter other than Proposals 1 and 2 will be brought before the special meeting. If, however, other matters are properly presented at the special meeting, the persons named as proxies will vote in accordance with their best judgment with respect to those matters.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements about our plans, objectives, expectations and intentions. Forward-looking statements include information concerning possible or assumed future results of operations of our company, the expected completion and timing of the merger and other information relating to the merger. Generally these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate,” “believe,” “estimate,” “expect,” “may,” “should,” “plan,” “intend,” “project” and similar expressions. For each of these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should read statements that contain these words carefully. They discuss our future expectations or state other forward-looking information, and may involve known and unknown risks over which we have no control. Those risks include, without limitation:

 

 

 

We believe that the assumptions on which our forward-looking statements are based are reasonable. However, we cannot assure you that the actual results or developments we anticipate will be realized or, if realized, that they will have the expected effects on our business or operations. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this proxy statement and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Forward-looking statements speak only as of the date of this proxy statement or the date of any document incorporated by reference in this document. Except as required by applicable law or regulation, we do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances.

 

PROPOSAL 1 — ADOPTION OF THE MERGER AGREEMENT

 

THE MERGER

 

This discussion of the merger is qualified by reference to the merger agreement, which is attached to this proxy statement as Exhibit A. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

 

The Parties to the Merger

 

Applebee’s

 

Applebee’s International, Inc. is a Delaware corporation that develops, franchises and operates restaurants in the bar and grill segment of the casual dining industry under the name “Applebee’s Neighborhood Grill & Bar”^®. With 1,950 Applebee’s restaurants in operation as of August 26, 2007 (1,441 franchised and 509 company owned), Applebee’s is the largest casual dining concept in the world in terms of the number of restaurants and market share.

 

IHOP

 

IHOP Corp. is a Delaware corporation. The IHOP family restaurant chain has been serving a wide variety of breakfast, lunch and dinner selections for more than 45 years. IHOP restaurants are franchised and operated by Glendale, California-based IHOP Corp. As of June 30, 2007, the end of IHOP’s second quarter, there were 1,319 IHOP restaurants in 49 states, Canada, Mexico and the U.S. Virgin Islands. IHOP Corp. common stock is listed and traded on the NYSE under the symbol “IHP”.

 

Merger Sub

 

Merger Sub is a Delaware corporation and was organized solely for the purpose of effecting the proposed transaction. Merger Sub has not conducted any activities to date other than activities incidental to its formation and in connection with the proposed transaction. Merger Sub is wholly-owned by IHOP. If the transaction is consummated, Merger Sub would cease to exist after it merges with Applebee’s.

 

Structure of the Transaction

 

The proposed transaction is a merger of Merger Sub with and into Applebee’s, with Applebee’s surviving the merger as a wholly-owned subsidiary of IHOP. The following will occur in connection with the merger:

 

 

 

Background of the Merger

 

Beginning in August 2004 and continuing through 2005, we saw evidence of weakening trends in the casual dining segment as well as our results, including weaker same-store sales and negative traffic trends. For example, same-store sales at company restaurants, which had increased by more than 4.5 percent for six consecutive quarters through the second quarter of 2004, were up only 1.1 percent and guest traffic at our company owned stores was flat in the third quarter of 2004. Same-store sales increased 0.1 percent and guest traffic at our company owned stores declined by 1.0 to 1.5 percent in the fourth quarter of 2004, and same-store sales increased 0.3 percent and guest traffic at our company owned stores declined by 0.5 to 1.0 percent in the first quarter of 2005. The magnitude of traffic declines accelerated markedly beginning in June 2005 with guest traffic at our company owned stores declining by more than 4.5 percent in the last half of 2005, and the streak of 31 consecutive quarters of system-wide same-store sales growth ended in the second quarter of 2006. Because of these developments, in the summer of 2005, we began a focused effort to analyze the macro-economic and company and system specific causes of our weaker results. Our 2006 business plan focused on operational changes, like menu improvements, in an effort to

improve the key drivers of earnings growth: unit growth, same-store sales growth, improving restaurant margins, and controlling general and administrative costs. Our management and Board monitored these performance measures closely through the early part of 2006, but despite our efforts, our sales and traffic continued to weaken and, as a result, our restaurant margins were lower than expected. For instance, while system-wide comparable sales increased 4.8 percent for fiscal year 2004, including a 3.8 percent increase for company restaurants, system-wide comparable sales increased 1.8 percent for fiscal year 2005, including a 0.9 percent decline for company restaurants. Further deterioration was seen in fiscal year 2006 as system-wide comparable sales decreased 0.6 percent, including a 1.0 percent decline for company restaurants. Comparable guest traffic in company owned restaurants in fiscal year 2005 and fiscal year 2006 declined 3.0 percent and 3.5 percent, respectively, after increasing during the prior several years.

 

In the summer of 2006, our Board became increasingly concerned about the adverse conditions in the casual dining segment, our operating results and our depressed stock price, and directed management to work with a financial advisor to conduct a review of our operating results, balance sheet, cash flows and growth prospects in order to consider alternative ways to enhance stockholder value, including the attractiveness of a stock buyback program at the then-current trading prices of our stock. Applebee’s retained Banc of America Securities LLC (“Banc of America Securities”) to act as its financial advisor in connection with this project. Prior to this time, Banc of America Securities had reviewed with the Board a variety of capital structure alternatives, including dividend policy and share repurchases. From this initial work, we announced on October 26, 2005, a 233 percent increase in our annual dividend to $0.20 per share.

 

On July 27, 2006, representatives of Breeden Partners L.P. (“Breeden Partners”) informed us that they had acquired approximately 3 million shares of our common stock.

 

In early August, 2006, Mr. Lumpkin met with two financial sponsors at an introductory meeting arranged by Banc of America Securities to gauge their knowledge and views on the restaurant industry and their history of doing transactions in our industry. A third introductory meeting with a financial sponsor, also arranged by Banc of America Securities, was held with Mr. Lumpkin, Mr. Goebel and Mr. Hill (at the time in his capacity as CEO).

 

Our Board held its annual strategic retreat on August 23-25, 2006. The retreat focused on the competitive and consumer issues in the casual dining restaurant segment, macro-economic issues facing the restaurant industry, management’s operating plan and budgets, our ability to add significant amounts of debt and ways to use debt proceeds and/or future cash flow to enhance returns to our stockholders. Management and Banc of America Securities also briefed the Board on stockholder activism and M&A activity in the restaurant group. In addition, management reviewed with the full Board the August meetings with financial sponsors and what was learned in those meetings about the individual firms and how they approached investing in the restaurant industry. Further, Banc of America Securities reviewed with the Board at the August strategic retreat an overview of the industry as well as preliminary financial analysis using different metrics based on management’s then five-year projections and discussed strategic alternatives to enhance stockholder value. The strategic alternatives discussion focused on two potential alternatives: (1) a leveraged recapitalization involving an expanded share repurchase program that would involve increasing the total debt to EBITDA leverage ratio to approximately three times and (2) a confidential market test for a possible sale of the company. It did not focus on or include an analysis of a plan to refranchise our company owned stores. Following this, the Board decided it needed a detailed plan from management addressing the macro-economic and industry specific issues facing Applebee’s before it could thoughtfully evaluate value enhancing alternatives, and asked management to provide such a plan prior to the next board meeting.

 

Our stock price increased from $17.29 on August 1, 2006 to $22.39 on October 9 even though our performance measures had not significantly improved. The result of this price increase was that the attractiveness of significantly increasing our stock buyback program diminished.

 

Mr. Goebel, Mr. Lumpkin and other members of management met with representatives of Breeden Partners on September 20, 2006 to exchange perspectives. During this meeting, representatives of Breeden Partners recommended, among other things, that we sell nearly half of our owned stores to franchisees, increase our leverage and aggressively buy back our stock. On October 10, 2006, Breeden Partners filed a Statement on Schedule 13D disclosing ownership of 5.24% of our common stock and recommending that we take certain steps to enhance

stockholder returns by, among other things, refranchising a substantial number of our owned restaurants, significantly reducing capital expenditures and increasing cash returned to our stockholders.

 

Throughout the Autumn of 2006, management and the Board continued to consider potential changes in our business operations and, with the assistance of Banc of America Securities, the feasibility of an increase in our debt levels to a range of two to three times EBITDA in order to fund a leveraged recapitalization. On November 10, 2006, at a special Board meeting in Chicago, management presented a three-year strategic plan for restaging the Applebee’s brand with a goal of returning to and exceeding our historic levels of operating and financial performance. In addition, Banc of America Securities updated their prior industry and company reviews and discussed with the Board a potential share repurchase program of not less than $200 million, a potential increase of our readily-available financing and the possibility of pursuing a highly confidential market test for a possible sale of the company. Following this, we announced on November 14, 2006 that we had increased our share repurchase authority to a total of $250 million and planned to implement a new revolving credit facility. Later that month, on November 27, 2006, we reported that system wide domestic comparable sales decreased 3.1 percent and that guest traffic at our company owned stores declined by 3.0 to 3.5 percent for the four-week period ended November 19, 2006, and on December 20, 2006, we announced the implementation of a new $400 million credit facility.

 

On December 11, 2006, in accordance with our bylaws, Breeden Partners delivered a formal notice of its intention to nominate four candidates for election to our Board at our 2007 Annual Meeting.

 

On December 16, 2006, a teleconference meeting of all the non-management members of the Board of Directors was held to discuss our 2007 outlook and available alternatives. At this meeting, some of these directors noted the company’s stock price and its relationship to their view of the company’s intrinsic value. This led to a discussion of various strategic alternatives for the company and resulted in a preliminary decision to embark on a strategic review led solely by non-management directors that would consider these alternatives, including (1) a modest recapitalization of our company involving a modest increase in our debt and return of cash to our stockholders, (2) a significant recapitalization involving a significant level of debt and return of cash to our stockholders and (3) a sale of the entire company.

 

Based on the discussions described above between management and private equity financial sponsors and following discussions with Banc of America Securities, the Board and senior management expected that most potential acquirers of our company would be financial sponsors that might wish to offer management an opportunity to participate in the buying group. In light of the potential conflict of interest such a transaction might create, the Board determined also that the process for evaluating strategic alternatives should be conducted by non-management directors.

 

On December 19, 2006, the Board unanimously formed a strategy committee (the “Committee”), and Messrs. Curran, Hansen, Helms, Sack and Volkema were chosen as its members. The Committee was vested with the power and authority to conduct an in-depth review of the desirability and feasibility of certain potential transactions. The Committee also was authorized to retain, at our expense, financial, legal and other advisors, consultants or experts as the Committee determined would be necessary or appropriate to assist the Committee. Due to the potential impact of a proxy fight on the Committee’s strategic review, the Committee also monitored our response to the Breeden Partners’ announced plans for a proxy contest.

 

On December 21, 2006, an organizational meeting of the Committee was held by teleconference. At this meeting the Committee selected the law firm of Cravath, Swaine & Moore, LLP (“Cravath”) as its independent counsel, also decided it would benefit from receiving advice from Blackwell Sanders Peper Martin LLP (“Blackwell Sanders”), the company’s long time outside counsel, and discussed the criteria for selecting a financial advisor. In this regard, the Committee determined to interview several investment banking firms. The Committee selected Messrs. Helms and Hansen to serve as its co-chairmen and determined that the co-chairmen would keep management apprised of the Committee’s activities as appropriate. The Committee discussed the potential for conflicts of interest if we were to pursue a transaction in which members of management might participate with a buyout group. Messrs. Helms and Hansen discussed with senior management these potential conflicts of interest in a sale and directed management not to communicate with any potential buyer on their own behalf or to solicit interest from potential buyers without the Committee’s express permission. Management acknowledged that they would follow this direction.

On January 16, 2007, the Committee completed its interviews of investment banking firms and selected Citigroup Global Markets Inc. (“Citi”) as its independent financial advisor, subject to negotiation of an acceptable fee. Banc of America Securities continued to serve as financial advisor to Applebee’s. The Committee believed this allocation of responsibility would give the Committee access to independent financial advice from an investment banking firm that did not have a history of working closely with management (which might be perceived as raising a conflict if management were to become part of a buyout group) while maintaining access to the experience Banc of America Securities had developed from its prior work for the company, including its periodic reviews of the market with the company and the Board, and its expertise in the casual dining sector. Further, the Committee determined that the process for a sale of the company may require the delivery to potential bidders of a financing commitment, commonly referred to as a “stapled commitment”. This allocation of responsibility enabled us to request that Banc of America Securities provide a stapled commitment without potential conflict, which was a concern for the Committee. In addition, the Committee instructed both investment banks to work together in assisting Applebee’s in its preparation of the necessary materials related to the evaluation process and in contacting potential acquirers. In particular, the Committee informed both investment banks that (1) Banc of America Securities’ principal role would be to assist the company, jointly with Citi, in preparing marketing materials and making contacts and interfacing with certain potential bidders on behalf of Applebee’s and (2) in addition to sharing the roles assigned to Banc of America Securities, Citi would have the primary role in assisting with the negotiation of any bids made by potential acquirers and in assisting with the evaluation of those bids and other alternatives and in evaluating the fairness, from a financial point of view, of the consideration proposed for any transaction. Throughout the remainder of this month, Citi and Banc of America Securities coordinated with the company in gathering and reviewing operational and financial data.

 

On January 30, 2007, the Committee met with members of management, Banc of America Securities, Citi, Cravath and Blackwell Sanders to review and discuss our various operating and financial strategic alternatives. Also at this meeting, the Committee, following discussions with Citi and Banc of America Securities, determined that it should develop more fully and compare the potential values available to stockholders from either a possible sale of our company or a significant revision of our business plan and capital structure, including incurring significantly higher levels of debt and selling a substantial portion of our owned stores to franchisees. We refer to the second of these alternatives as the “standalone plan”. In that connection, the Committee instructed Citi and Banc of America Securities to pursue an active solicitation of interest in a purchase of Applebee’s and directed management, working with the financial advisors, to complete work on the standalone plan.

 

After this meeting our management directors proposed to the Chairmen of the Committee that instead of a broad solicitation of potential buyers at that time, management should be permitted to organize a management led buyout group that would enter into a definitive acquisition agreement, with a post-signing active solicitation of alternative buyers through a so-called go-shop period of approximately 45 days. Management pledged its full cooperation in providing due diligence and access to management as well as offering to continue as management if its bid was not ultimately successful. The next day, the Committee, after discussing this request with its advisors, unanimously decided to reject this proposal because of its potential to create conflicts of interest, the difficulty of assuring other potential purchasers of a level playing field in the sale process and its belief that a comprehensive auction process would provide greater access to a greater number of qualified private equity firms, thereby increasing the likelihood of more favorable terms, including a better price, than the process proposed by management.

 

On February 13, 2007, we publicly disclosed the formation of the Committee and the ongoing consideration of strategic alternatives for the company, including a possible sale.

 

During the next several weeks and in accordance with the Committee’s instructions, Citi and Banc of America Securities contacted 35 potential purchasers of Applebee’s. The list of potential purchasers included other companies in the restaurant business and sponsors of leveraged buyout transactions. Twenty-six potential purchasers executed a confidentiality agreement and received an offering memorandum with non-public information during the week of March 18, 2007. Potential purchasers were asked to submit preliminary indications of interest on April 12, 2007.

Throughout February, March and April 2007, our advisors and management updated the Committee and our Board on the progress of the sale process and the development of the standalone plan. With respect to the standalone plan, the Committee, after discussions with the entire Board at a regularly scheduled Board meeting, directed management to include a sale of a significantly greater number of our company owned restaurants than favored by management and increased leverage in our capital structure significantly beyond the level favored by management. In addition, the Committee and the full Board met several times to discuss the status of Breeden Partners’ proxy contest. Because decisions about the direction of the strategic review process and the response to Breeden Partners’ activities were becoming more interconnected, the Board agreed the Committee should take a more active role in the conduct of the proxy contest, including evaluating whether a settlement with Breeden Partners should be pursued. During March, members of the Committee and Mr. Goebel met with Breeden Partners to negotiate a possible settlement, but those negotiations were not successful.

 

In analyzing the financing for the standalone plan or a sale of the company, the Committee determined that a stapled commitment involving a whole company securitization had the potential to yield higher value to stockholders than the more customary senior secured/high yield financing commitment. This view was based in part on the Committee’s understanding that (1) whole company securitization enables suitable companies to raise debt at a reduced cost, by isolating the company’s assets and associated revenues into special purpose entities to obtain investment grade ratings from ratings agencies, and bond insurance from monoline insurers and (2) the market for AAA rated asset backed securitization financings is more liquid and less volatile than the markets for customary senior secured/high yield financings, thereby providing greater certainty of completion. The Committee therefore directed management to work with financing sources, other than Citi so as not to create any conflict with respect to its role as financial advisor to the Committee, that would provide a whole company securitization stapled commitment. Based on the analysis of a whole company securitization for Applebee’s which management had conducted with Lehman Brothers Inc. (“Lehman”) since August of 2006, the Committee determined that Lehman had unique capabilities in structuring whole company securitization financings, as demonstrated by its successful completion of several of those transactions in our industry. We subsequently began working with Lehman and Banc of America Securities to deliver a whole company securitization stapled commitment to potential bidders. Although Lehman was directed to analyze and structure a securitization in the context of a sale of our company, we also anticipated that this financing structure could be adapted to be used as part of a standalone plan.

 

On April 14, 2007, Citi and Banc of America Securities informed the Committee that we received four preliminary indications of interest in purchasing our company. Citi reported that these indications of interest had indicative per share prices ranging from $26.50 to $30.50. IHOP’s indication of interest included a price range of $28 to $29 per share. Our per share market price at the close of business on April 12, the date the indications of interest were presented, was $25.03. Five other potential bidders asked for additional time to submit an indication of interest but, despite being given additional time, did not do so. Some of these potential bidders had indicated to Citi that a primary reason for their withdrawal from the process was an inability to reach a valuation of our company at a premium to (or in some cases even equal to) the then current trading prices of our shares.

 

The Chairmen of the Committee updated the non-management directors who were not members of the Committee about these developments by telephone on April 16.

 

As is typical, these indications of interest were non-binding and contained numerous conditions, including due diligence conditions. The Committee discussed these price ranges, the capability of the bidders to pursue a transaction and the valuation implied by the bids. After reviewing the initial indications of interest with Citi’s assistance, the Committee decided to allow these four bidders, including IHOP, to continue to the next phase of the sale process which involved more detailed due diligence, including access to a data room and participation in multi-day management presentations. Subsequently, on May 2, 2007, we reported that system-wide domestic comparable sales decreased 4.0 percent and guest traffic at our company owned stores declined 5.0 to 5.5 percent for the first quarter of 2007. We had previously reported that system-wide domestic comparable sales and guest traffic at our company owned stores had declined 5.8 percent and 8.0 percent, respectively, in January and 4.0 percent and 5.5 to 6.0 percent, respectively, in February; thus the May 2nd release reported a sequential improvement in results for March and April as system-wide domestic comparable sales declined 2.7 percent and 0.7 percent, respectively, and guest traffic at our company owned stores for the same periods declined 2.5 to 3.0 percent and 2.0 to 2.5 percent, respectively.

By mid April, our Board concluded following discussions with its advisors that a number of potential bidders for Applebee’s might become reluctant to continue expending significant effort on due diligence, in part, because of uncertainty that the Breeden Partners proxy fight created as to who would be representing our interests in any future negotiations. This conclusion was driven in large part by the fact that at that point in time the contemplated deadline for final submission of bids was shortly before the date of Applebee’s annual meeting, at which some or all of Breeden Partners’ nominees might be elected to the Board and replace certain members of our Board who were on the Committee. In light of the concerns about a potential adverse impact on the sale process, the need for our management team to devote time to the proxy contest and the fact that the Committee had already begun working with our management on many of the business initiatives being advocated by Breeden Partners, a majority of our Board endorsed a renewed effort by the Committee to settle the proxy contest and the Committee initiated renewed discussions with Breeden Partners. On April 25, 2007, we reached an agreement with Breeden Partners that ended its proxy contest and added Richard Breeden and Laurence Harris to our Board of Directors and also added Mr. Breeden as a member of the Committee. This agreement was publicly disclosed the morning of April 26. This same day, we provided publicly an update on the activities of the Committee, including entering into a second round of detailed due diligence discussions with parties that submitted indications of interest and a concurrent evaluation of a recapitalization alternative. The closing stock price on April 25, 2007 was $25.84.

 

During April and May, all four remaining potential bidders continued their due diligence activities. In addition, all four received a draft merger agreement and were asked to submit final, definitive offers, including a proposed contract, by June 11. In response to an inquiry about how management should react if a private equity buyer sought to induce management to continue to serve as management with an equity participation, the Committee reiterated that management was not permitted to have any discussions with potential buyers about their personal interests until they were released to do so by the Committee. No financial sponsor ever asked the Committee or its advisors for permission to speak with members of management about participating in a buyout. We formally engaged Lehman for its role in obtaining a whole company securitization financing on May 21, 2007. Lehman was not retained as a financial advisor by us or the Committee. On May 30, we reported that system-wide domestic comparable sales declined 2.1 percent and guest traffic at our company owned stores declined 3.0 to 3.5 percent for our May period illustrating a reversal of improvements noted in April.

 

In meetings held May 29 and June 6, 2007, the Committee focused on the standalone plan developed by management, which remained preliminary at this time because (1) the Committee, while having settled on the amount of refranchising, was still considering, within relatively small ranges, the extent of leverage and the size of the dividend that they thought would be appropriate and (2) significant difference of opinion between the Committee and management as to the appropriate extent of refranchising, increased debt levels and reductions in general and administrative expenses. The Committee discussed various debt levels for a leveraged recapitalization, possible cuts in our general and administrative expenses and potential effects of significantly increased leverage and cost cutting on our business, and directed management to continue work on a more aggressive plan.

 

In accordance with the Committee’s directive and subsequent to the June 6 meeting, management delivered a standalone plan that contemplated refranchising of company owned stores to get to a 5 percent ownership of the Applebee’s system over a 24-36 month period, increasing adjusted debt levels to 5.0 to 5.6 times EBITDAR (which could yield a one-time dividend of $13 to 15 per share) and significantly reducing our general and administrative expenses. Management was subsequently directed by the Committee to reduce the time to refranchise the company’s stores to 18 months or less and to increase the adjusted debt leverage assumptions to a range of 6 to 7 times EBITDAR in order to yield a larger dividend.

 

On June 11, 2007, Citi informed the Committee by telephone that no bidder had submitted a definitive offer prior to our deadline. Two of the remaining bidders had decided to drop out of the sale process entirely. The other remaining bidder besides IHOP, a consortium of a financial sponsor and a significant franchisee of our restaurants that we call “Bidder B”, had submitted a letter stating it had concluded changes in the company’s operating model would be critical to the success of any investment, that it was unable to make a proposal because it had not yet been able to evaluate the refranchising and general and administrative expense reduction plan recently developed by management, and needed a meeting with management to discuss the changes reflected in that plan. Bidder B indicated that its preferred alternative was to continue working with us on an exclusive basis toward a cash purchase of the company at a price that approximated our market price, which on June 11 was $25.19. Bidder B’s interest was

subject to satisfactory resolution of its business due diligence and financing discussions, which it stated would be completed within a few days. Bidder B also indicated that as an alternative it would be willing to consider (1) making a significant minority equity investment in us as part of a recapitalization at price and terms described as “customary” and “consistent with prevailing market levels” or (2) buying up to all of the Applebee’s restaurants owned by us for a value of approximately five times the adjusted EBITDA of these stores, which was described as the midpoint of the range articulated by management. Bidder B did not provide any assurance of financing and expressed a need for further study of the proposed securitization. To our knowledge, Bidder B had not been working actively with Lehman on a whole company securitization.

 

IHOP had not yet submitted a proposal, but had informed Citi it was planning to do so. Later that night IHOP submitted a non-binding proposal letter with a price of $27.00 per share. IHOP indicated it would finance its bid through a combination of an Applebee’s whole company securitization structured by Lehman, borrowings raised on IHOP’s existing balance sheet and new equity capital privately placed by IHOP for which term sheets were provided. This financing did not require approval of IHOP’s stockholders. This indication of interest was lower than IHOP’s initial indication of interest of $28 to $29 per share. IHOP’s proposal was further subject to detailed financing term sheets from Lehman regarding a whole company securitization that were acceptable to IHOP and not materially different from the draft term sheets previously supplied to IHOP, appropriate time and necessary access to our management and records to complete confirmatory due diligence, and permission to speak to certain of our franchisees. Orally, IHOP indicated its willingness to proceed was conditioned upon our agreeing to negotiate exclusively with IHOP for an unspecified but limited period of time.

 

The Committee met with its legal and financial advisors on June 15. After discussion, the Committee concluded that IHOP’s proposal was more attractive than Bidder B’s and should be pursued, but that work on the standalone plan should continue as well. In response to a question as to whether management would recommend that the Board accept an offer from IHOP of $27.50 per share over the standalone plan, they stated that they would because of its relatively greater degree of certainty as compared to the standalone plan, primarily due to the challenges associated with the accelerated timetable for refranchising to 5% ownership of the system, the significantly higher level of debt contemplated by the final standalone plan directed by the Committee, and the accelerated reductions in general and administrative expenses.

 

Subsequently, at the direction of the Committee, Citi informed IHOP that the Committee encouraged IHOP to raise its offer to at least $28 per share and informed Bidder B that it would need to enhance its proposal significantly before it would be attractive to the Committee. Bidder B chose not to revise its offer and ceased conducting due diligence or pursuing financing and did not thereafter engage in any substantive discussions regarding a bid. IHOP verbally presented a revised offer of $27.50 per share, and based on this revised offer, we entered into an exclusivity agreement with IHOP on June 19, 2007 that expired by its terms on July 4, 2007. The exclusivity agreement would terminate immediately, by its terms, if IHOP reduced their bid from $27.50 and was signed only after satisfactory discussions between Cravath and counsel for IHOP about the Committee’s expectations for limited closing conditions in any definitive agreement. We did not inform Bidder B or any other party that had participated in the sale process of this exclusivity agreement.

 

At the June 15 meeting, the Committee also received a detailed presentation from Lehman regarding a securitization financing program that would be available either to IHOP in a sale of the company or to the company in a standalone recapitalization. Lehman advised the Committee that all aspects of the preparation process were substantially complete and that a securitization term sheet for a securitization relating to the sale of our company had been approved by the rating agencies and by the monoline bond insurers. Lehman also noted that market dynamics as of June 15 were favorable for a successful securitization financing. The securitization envisioned at that time was based on a sale of the company with new equity being invested and relied only on revenues generated by Applebee’s business operations. Lehman informed the Committee that virtually all of their work on the securitization prior to June 15 related to a sale of the company alternative. Based on concerns that a simultaneous offering of a whole company securitization for financing of the merger and the standalone plan would create confusion with the rating agencies, the monoline bond insurers and the securitization market as a whole, Lehman was directed to pursue and finalize only the former at that time. In addition, Lehman noted that because the IHOP merger included additional equity contributions, the market would accept greater leverage for the IHOP merger than the standalone plan. However, at that time Lehman indicated that they did not envision substantial delay or difficulty

in converting the whole company securitization to finance the merger into financing for the standalone plan, but Lehman did indicate that certain elements of the securitization relating to the standalone plan would need to be reviewed by the rating agencies and monoline insurers prior to their approval. In particular, these parties would need to review a different set of projections than had been reviewed in connection with the securitization for the IHOP merger and different from the projections relating to a standalone plan initially provided by the Company, which did not contemplate a refranchising of our company owned stores. The Committee believed that focusing on the securitization financing for the merger would enable the financing for the standalone plan to be finalized within a few weeks if the standalone plan became the preferred alternative and instructed Lehman to continue working with IHOP on its acquisition financing.

 

During the remainder of June and the first weeks of July, we continued to negotiate a possible transaction with IHOP and to work on refining the standalone plan and completing a securitized financing. The exclusivity agreement with IHOP expired, as scheduled, on July 4, 2007. IHOP did not request an extension. No other potential purchasers approached us during the exclusivity period or after it expired. We did not approach any other potential purchasers after the exclusivity period expired. The Committee met several times during this period, principally to monitor work on the standalone plan and related financing.

 

The Chairmen of the Committee updated the other directors about the status of the strategic review process during telephonic meetings on June 16 and June 26.

 

On July 6, the Committee met with its financial and legal advisors, management and Banc of America Securities to review the financial and cash flow analysis relating to the standalone plan that would be presented to the entire Board as an alternative to a sale to IHOP. The Committee determined that further refinements would be required regarding the assumptions underlying the standalone plan and asked the two advisors to assist management in refining the standalone plan. Based on its understanding at that time that securitization financing would likely be available to us in connection with the standalone plan within a few weeks, the Committee voted by majority vote to recommend that any recapitalization include a special cash dividend of a least $16 per share (2 members voted for a dividend of $15 rather than $16).

 

On July 9, Citi and IHOP’s financial advisor discussed, among other things, certain matters relating to IHOP’s due diligence results, including IHOP’s discussions with some of our franchisees. IHOP’s financial advisor indicated that these due diligence results had not been satisfactory, and from this discussion, Citi recognized that it was likely that IHOP would be reducing their per share offer price from $27.50 and that such reduction could be as low as $25.00. IHOP, however, made no definitive proposal regarding a purchase price reduction at that time. During the course of this conversation and subsequent conversations during the week of July 9, Citi informed IHOP’s financial advisor, based on instructions from the chairmen of the Committee, that (1) any reduction, particularly a significant reduction, would be difficult for the Committee to accept and would make pursuing the standalone plan more attractive, (2) we were working diligently to be prepared to announce a standalone plan with a significant dividend as early as the following week and (3) the Committee was scheduled to meet on July 13 and the full Board was scheduled to meet on July 15 to finalize either a standalone plan or the IHOP merger. Separately, Cravath and Blackwell also substantially completed negotiation of a merger agreement with IHOP except for a handful of open items, including price.

 

On July 11, management held a conference call with representatives of Lehman to confirm that the whole company securitization financing available to the company under the standalone plan was, in Lehman’s view, going to support debt leverage levels of the amount being contemplated for the standalone plan. Management was informed by Lehman that the credit markets were becoming more difficult and more volatile due to worsening subprime credit concerns as well as the lack of liquidity for a number of recent LBO financings, and that while the whole company securitization form of financing had been holding up in the marketplace, they were beginning to see indications that these difficulties to some degree were adversely affecting securitization financings. Lehman indicated that they had been devoting their efforts to the IHOP financing and that if we were to use the securitization for our standalone plan, it would take two to three weeks to obtain approval from the ratings agencies and monoline bond insurers for a securitization for a standalone plan and to negotiate a binding bridge commitment facility, followed by some 90 days or more of additional work with rating agencies and bond insurers to complete the financing.

 

On July 13, shortly after the meeting of the Committee began, IHOP definitively informed Citi that IHOP would reduce its proposed acquisition price to $25.50, a level it described as “final”. During the meeting, the

Committee discussed what action to take in response to IHOP’s lowered offer. The Committee then reviewed the standalone plan in a discussion led by Citi. The Committee also reviewed with Citi the revised IHOP offer, based on (1) a price of $25 because IHOP had not specified its actual proposed price of $25.50 in advance of the meeting, and (2) the company’s recent operating performance. The Committee noted that IHOP’s revised bid was closer to the possible value indicated in Bidder B’s June 11 letter, but also noted that Bidder’s B’s June 11 letter was not a definitive offer and that as of June 11 Bidder B had neither completed its due diligence or delivered a financing commitment with its letter. Citi noted that Bidder B had not performed due diligence in several weeks and would therefore need additional time to prepare a definitive, financed proposal and that the due diligence issues identified by IHOP’s advisor may also cause Bidder B to reduce its valuation. After considering the foregoing as well as Cravath’s description of the Board’s right to consider superior proposals in the merger agreement that had been negotiated with IHOP’s counsel, the Committee decided not to resolicit Bidder B. After discussion, the Committee instructed Citi to respond to IHOP with a counter-offer of $26.75 and to state that a $26.75 transaction would be recommended unanimously by the Committee. IHOP did not communicate further about the price of its offer on July 13 or July 14.

 

Our full Board met on July 15 with representatives of Cravath, Blackwell, Citi and management to address the proposed IHOP merger and the standalone plan. Shortly before the Board meeting began, IHOP’s financial advisor advised Citi that IHOP was unwilling to raise its offer from $25.50 and that this offer was final.

 

Our Board meeting began with an update from Citi and a presentation by Cravath on certain matters related to Delaware law. Citi then described the history of the negotiations with IHOP in more detail and Cravath summarized the terms of the proposed merger agreement with IHOP.

 

Citi provided the Board with an overview of the standalone plan prepared at the direction of the Committee, which reflected the following elements:

 

 

Citi outlined the potential financial and cash flow impact of the standalone plan using various illustrative scenarios. In the July 15 overview, Citi illustrated a means of analyzing the standalone plan using pro forma 2007 EBITDA of $182.4 million and a multiple range to 8.0x to 10.0x, which generated an indicative range for the standalone plan of $19.08 to $23.87 per share. This discussion was not intended as a valuation of the standalone plan. Instead, it was intended to illustrate how an analyst covering our company might analyze an announcement of the standalone plan. Citi also pointed out that the near term trading prices of our shares after a large special cash dividend could be volatile and were impossible to predict. This illustrative discussion was similar to preliminary discussions with the Committee on July 6, 2007, except that the pro forma EBITDA of $182.4 million was based on estimated EBITDA for 2007 that was supported by management, with pro forma adjustments made as if the refranchising was completed by January 1, 2007, rather than a projected EBITDA for 2009 of $200 to $210 million, discussed on July 6. Because the 2007 EBITDA estimate was more certain than a 2009 EBITDA estimate, it was determined that it would potentially be more representative of how an analyst covering our company might analyze the standalone plan. This resulted in a lower indicative per share range of $19.08 to $23.87 (revised from $24.25 to $27.50 discussed on July 6). In addition, the range of EBITDA multiples was widened from 9.0x to 10.0x to 8.0x to 10.0x to correlate more closely with the trading multiples of selected companies in our industry.

Citi also noted that if the Board rejected IHOP’s bid it would be desirable to announce promptly the standalone plan. In particular, Citi expressed its view that a public commitment to a specified large cash dividend and an aggressive refranchising plan could mitigate the risk of a significant market price reduction in our stock upon an announcement that we had terminated efforts to sell our company.

 

Following this discussion, a representative of Lehman updated the Board on the potential securitization financing. Lehman’s presentation contained two pages that provided updated and more negative information than the June 15 presentation to the Committee and the July 11 call with management on the same subject. In particular, Lehman noted that a combination of, among other things, (1) heightened sensitivity by the ratings agencies and monoline bond insurers to enterprise valuation, reflected by ratios of enterprise value to EBITDA, in light of these deteriorating market dynamics, and that the enterprise valuation under the standalone plan alternative would likely be significantly lower than under the sale of the company alternative, (2) significant recent volatility in the interest rate and credit market, punctuated by a significant increasing of treasury yields and widening credit spreads resulting from the downgrade of the subprime market and the building difficulties in the high yield/LBO credit markets and (3) the need to review with ratings agencies and monoline bond insurers the updated standalone plan, which would take two to three weeks, made the amount and terms of the securitization we could obtain in connection with the standalone plan much less certain than on June 15. Lehman advised the Board that it was firmly committed to financing an IHOP transaction but noted that due to recent adverse developments in the debt markets, the terms of the IHOP financing had become more expensive for IHOP. In addition, Lehman informed the Board that IHOP had determined it was necessary to rely on cash generated by IHOP’s existing operations in addition to our credit in order to obtain a commitment satisfactory to IHOP. Furthermore, Lehman told our Board that because of the foregoing it was no longer confident we could successfully obtain the amount of a securitized indebtedness that had been anticipated at the time the Committee voted to recommended a recapitalization that included a $16 per share special dividend in the event that the standalone alternative was selected. In particular, Lehman noted that in the event our stock price fell into the low $20 range following an announcement that we had terminated efforts to sell our company, our capacity to raise securitized debt could be significantly reduced because of the adverse change in the equity value to loan amount ratio in the financing, and that prior to completing a two to three week analysis with ratings agencies and monoline insurers, Lehman could not predict any specific result for either stockholders or for us from the securitization. In light of the foregoing, the Board concluded that the uncertainty about how much debt could be obtained and how large of a dividend could be paid in connection with the standalone plan meant we could not commit to a large cash dividend in any public announcement made in the near future, including any potential announcement that the sales process had been unsuccessful.

 

Following this, the Board received an update from Cravath on the status of the other elements of IHOP’s financing and a potential recapitalization. Citi then reviewed with the Board the efforts undertaken on behalf of the Committee with respect to a potential sale of our company, focusing on the efforts (1) to identify potential buyers and (2) to negotiate with IHOP. Citi reviewed its financial analysis of the consideration proposed by IHOP with the Board and stated that it was prepared to render an oral opinion, which it formally provided later in the meeting and confirmed by delivery of a written opinion dated July 15, 2007, to the effect that, as of that date and based on and subject to the matters described in its opinion, the $25.50 per share merger consideration was fair, from a financial point of view, to the holders of our common stock. Citi was asked to make this presentation to the entire Board because it had been the sole financial advisor to the Committee in evaluating the indications of interest and proposals we had received and in the conduct of the negotiations with IHOP.

 

The management directors then presented their view that the final standalone plan, including a refranchising program targeting 95% of the system and based on a $1.4-$1.5 billion recapitalization, was preferable to the IHOP offer in the long term. Mr. Goebel and Mr. Lumpkin stated that, as directors, they would vote to reject the IHOP proposal due to their belief that the price was not fair to stockholders in comparison to the higher value they believed would be produced by the standalone plan. They also stated that they were committed to implementing the standalone plan and that they believed the financing and other execution risks inherent in it could be overcome. The management directors also asserted that the credibility of the negative views presented by Lehman was suspect in view of the change in those views and the fact that Lehman would receive a larger total fee in the near term from a combined Applebee’s and IHOP securitization. Although the terms of a specific engagement in the context of a recapitalization transaction for the standalone plan had not been negotiated, the financing fees from the IHOP

transaction could be $10-15 million higher than the financing fees from the standalone plan, based on a number of factors including the amount of debt, the percentage fees and the allocation of those fees, and the fact that there would be a materially lower capital commitment by Lehman Brothers in a recapitalization transaction for the standalone plan. The management directors currently maintain the view, although not expressed by them until subsequent to the July 15 board meeting, that further negotiations should have been conducted with IHOP to increase the amount of their bid and that the projected EBITDA used in the sensitized discounted cash flow analysis performed by Citi in its financial analysis was too low. As described in “The Merger — Opinion of Citigroup Global Markets Inc.”, Citi applied certain sensitivities to take into account the difference between our projected same-store sales and our trailing three-year average same-store sales. The base case discounted cash flow analysis utilized management same-store estimates without any sensitivities.

 

As it completed its work, the Committee had anticipated it would make a formal recommendation regarding the IHOP transaction and the standalone plan. However, at its July 13 meeting, the Committee was not able to do so because of uncertainty about a number of relevant factors, including the price IHOP would agree to pay after receiving the Committee’s counter offer and the level of commitment management would make to a standalone plan that had more refranchising and leverage than management had recommended. Rather than delaying the meeting of the entire Board for another Committee meeting on July 15, the Committee did not make a formal recommendation and the Committee Chairmen instead led an open and thorough discussion and analysis of the IHOP transaction and the standalone plan with the entire Board. As noted below, five of the six members of the Committee voted in favor of the IHOP merger.

 

The Board discussed all of this information in detail as a full Board and, because aspects of the standalone plan involved an evaluation of the current management’s ability to execute the standalone plan, in an executive session excluding management directors and our Chairman and former chief executive officer, Mr. Hill. Consistent with its practice throughout the strategic review process and without objection from Mr. Hill, the Board excused Mr. Hill from this executive session in light of his recent service as our chief executive officer and his close relationship with existing management. These discussions centered on:

 

 

 

During these discussions, Mr. Sack, Mr. Hill and Ms. Belton stated that they would join Mr. Goebel and Mr. Lumpkin in voting against the merger with IHOP for the reasons articulated by management and for the reasons noted below. These directors indicated that they would oppose the merger because they had confidence in our management’s ability to execute the standalone plan. These directors noted their belief that the execution risks in the standalone plan could be overcome, that the casual dining business would improve, and that superior value could be returned for stockholders in the long-term (which these directors accepted was an undefined period) by remaining independent. These directors also noted their belief that despite the adverse conditions in the debt markets noted by Lehman, we could still announce a special dividend in connection with the standalone plan in the immediate future. We have been informed by these directors that they presently intend to vote their shares against the IHOP transaction. For a description of the number of shares owned by our directors and management, see “Security Ownership of Management and Certain Beneficial Owners”.

 

A majority of our Board, however, concluded that even though management firmly believed a financial analysis of the standalone plan showed it had the potential to produce greater long term value if successfully executed on a timely basis, when this potential was properly adjusted for risk, the more certain value offered by the IHOP bid was a better alternative for our stockholders. The Board noted that the value of the standalone plan consisted of (1) a specified dollar value to be distributed by dividend to stockholders and (2) the unspecified value of the remaining equity following such dividend. Because of the unspecified value of this remaining equity value, the Board further noted that there could be no guarantee, even if the standalone plan was fully successful, of how long such a plan would take to return improved value to stockholders, and that there was a significant risk the plan would not be fully successful. In particular, the Board noted adverse market trends, some of which were caused by factors beyond our control, the long-term decline we had experienced in same-store sales and customer traffic, the fact that over the past year management had lowered its projected results for years after 2007 due to continued challenges to our business, the shortfall in sales for the first six months of 2007, the difficulty in completing a rapid sale of 425 stores to franchisees and, notwithstanding the Board’s confidence in management, the fact that management would be addressing numerous challenges it had not faced in the past in an environment of pressure from increased leverage. The Board considered our experience in 1997 to 1999, when a franchisee owning 279 Applebee’s stores took 16 months to divest their restaurants. The Board also noted, as described above, that the Committee and the Board had conducted a publicly announced, comprehensive sale process of our company, and that only one definitive offer was received as a result of that process. Moreover, the Board believed that Lehman’s revised views and the tightening of the credit markets cast considerable doubt on our ability to execute the more definitive, near-term component of the standalone plan. In particular, the Board noted that the risk on our ability to borrow sufficient funds to complete the recapitalization contemplated by the standalone plan would not allow us to announce a special dividend in the range of $15 to $16 per share in the immediate future. The Board also believed that this risk was exacerbated by its view that our stock price likely would react highly negatively to an announcement that we had terminated our sale process if we did not concurrently announce a standalone plan with a dividend in this range.

Mr. Sack moved to table the vote on the IHOP merger for further analysis of the financing component of the standalone plan. The motion did not carry. A majority of our Board decided that it had sufficient information to evaluate the attractiveness of the IHOP bid and the standalone plan, that the matter was ready for a decision and that a delay might put the IHOP transaction at risk. Mr. Sack then recommended that before the Board accepted IHOP’s proposal it should continue negotiations and predicted that IHOP would raise its price if it believed the Board was going to reject the proposal. The Board then discussed this recommendation. Several directors noted that (1) IHOP had refused to increase its bid, despite several attempts to get them to do so, (2) there was risk that IHOP might withdraw its proposal if it were not accepted promptly, (3) no other definitive proposal had been made to acquire the company, and (4) the fact that the proposed merger agreement permitted the Board to pursue any superior proposal that might emerge after announcement of an IHOP transaction, subject to payment of a $60 million termination fee and IHOP’s right to match such a proposal. Citi also expressed its view, when asked to do so, that IHOP would likely not accept a counter-proposal unless we expressed to IHOP that we would “walk away” from the negotiations. In light of the foregoing, a majority of the directors concluded that the IHOP proposal should be voted on at that time.

 

After taking into account all of the considerations described above, the Board approved by a majority vote of nine to five the merger with IHOP at $25.50 per share and recommended that our stockholders adopt the merger agreement with IHOP. Ms. Boswell, Mr. Breeden, Mr. Conant, Mr. Curran, Mr. Hansen, Mr. Harris, Mr. Helms, Mr. Rebolledo and Mr. Volkema voted in favor of approving the merger with IHOP. Our chairman and former chief executive officer, Mr. Hill, our current chief executive officer, Mr. Goebel, our current chief financial and strategy officer, Mr. Lumpkin, Ms. Belton and Mr. Sack voted against approving the merger with IHOP, for the reasons set forth above.

 

The merger agreement was then finalized, and executed during the night of July 15, 2007, as disclosed in our Current Report of Form 8-K, filed with the SEC on July 18, 2007, which contained a copy of the executed merger agreement.

 

Reasons for the Merger and Recommendation of Our Board of Directors

 

The board of directors of Applebee’s determined by a majority vote that the merger and the merger agreement are advisable and are fair to, and in the best interest of, Applebee’s and its stockholders and that the consideration to be paid for each share of Applebee’s common stock in connection with the merger is fair to Applebee’s stockholders. Applebee’s board of directors recommends that Applebee’s stockholders vote FOR the adoption of the merger agreement.

 

In evaluating the merger, the members of the board of directors consulted with management and legal and financial advisors and considered a number of factors concerning the merger and the stand-alone plan that are discussed in detail under “Background of the Merger”.

 

The reasons for recommending the Merger and the potential benefits of the Merger over the stand-alone plan included the factors discussed below:

 

 

The members of the board of directors also considered and balanced against the foregoing factors a number of risks and other countervailing factors concerning the merger, including those described below:

 

 

The foregoing discussion and the discussion under “The Merger — Background of the Merger” of the factors considered by the board of directors are not intended to be exhaustive, but rather include the material factors considered by the board of directors. The board of directors did not assign relative weights to the above factors or the other factors considered by them. In addition, the board of directors did not reach any specific conclusion on each factor considered, but, with the assistance of management and their advisors, conducted an overall review of these factors. Individual members of the board of directors may have given different weights to different factors.

 

Opinion of Citigroup Global Markets Inc.

 

Applebee’s has retained Citi to act as financial advisor to the Committee in connection with the merger. In connection with this engagement, the Committee requested that Citi evaluate the fairness, from a financial point of view, of the consideration to be received in the merger by holders of Applebee’s common stock. On July 15, 2007, at a meeting of Applebee’s board of directors held to evaluate the merger, Citi rendered to Applebee’s board of directors an oral opinion, which was confirmed by delivery of a written opinion dated July 15, 2007, to the effect that, as of that date and based on and subject to the matters described in its opinion, the $25.50 per share merger consideration was fair, from a financial point of view, to the holders of Applebee’s common stock.

 

The full text of Citi’s written opinion, dated July 15, 2007, which describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached to this proxy

statement as Exhibit B and is incorporated into this proxy statement by reference. Citi’s opinion was provided to Applebee’s board of directors in connection with its evaluation of the per share merger consideration from a financial point of view. Citi’s opinion does not address any other aspects or implications of the merger and does not constitute a recommendation to any stockholder as to how such stockholder should vote or act on any matters relating to the proposed merger.

 

In arriving at its opinion, Citi:

 

 

In rendering its opinion, Citi assumed and relied, without assuming any responsibility for independent verification, on the accuracy and completeness of all financial and other information and data publicly available or provided to or otherwise reviewed by or discussed with Citi and on the assurances of Applebee’s management that it was not aware of any relevant information that was omitted or remained undisclosed to Citi. With respect to financial forecasts and other information and data (including sensitivities) relating to Applebee’s provided to or otherwise reviewed by or discussed with Citi, Citi was advised by Applebee’s management, and Citi assumed, with the consent of Applebee’s, that the forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of Applebee’s management as to the future financial performance of Applebee’s under the alternative business scenarios and sensitivities reflected in such forecasts and estimates. Citi assumed, with the consent of Applebee’s, that the merger would be consummated in accordance with its terms, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining the necessary regulatory or third party approvals, consents, releases and waivers for the merger, no delay, limitation, restriction or condition would be imposed that would have an adverse effect on Applebee’s or the merger.

 

Citi did not make, and it was not provided with, an independent evaluation or appraisal of the assets or liabilities, contingent or otherwise, of Applebee’s, and Citi did not make any physical inspection of the properties or assets of Applebee’s. In connection with Citi’s engagement and at the direction of the Committee, Citi was requested to approach, and held discussions with, third parties to solicit indications of interest in the possible acquisition of Applebee’s. Citi’s opinion does not address any terms or other aspects or implications of the merger (other than the $25.50 per share merger consideration to the extent expressly specified in the opinion). Citi expressed no view as to, and its opinion does not address, the underlying business decision of Applebee’s to effect the merger, the relative merits of the merger as compared to any alternative business strategies that might exist for Applebee’s or the effect of any other transaction in which Applebee’s might engage. Citi’s opinion was necessarily

based on information available to Citi, and financial, stock market and other conditions and circumstances existing and disclosed to Citi, as of the date of its opinion. Except as described above, Applebee’s imposed no other instructions or limitations on Citi with respect to the investigations made or procedures followed by Citi in rendering its opinion.

 

In preparing its opinion, Citi performed a variety of financial and comparative analyses, including those described below. The summary of these analyses is not a complete description of the analyses underlying Citi’s opinion. The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. Citi arrived at its ultimate opinion based on the results of all analyses undertaken by it and assessed as a whole, and did not draw, in isolation, conclusions from or with regard to any one factor or method of analysis for purposes of its opinion. Accordingly, Citi believes that its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses, could create a misleading or incomplete view of the processes underlying its analyses and opinion.

 

In its analyses, Citi considered industry performance, general business, economic, market and financial conditions and other matters existing as of the date of its opinion, many of which are beyond the control of Applebee’s. No company, business or transaction used in those analyses as a comparison is identical or directly comparable to Applebee’s or the merger, and an evaluation of those analyses is not entirely mathematical. Rather, the analyses involve complex considerations and judgments concerning financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the companies, business segments or transactions analyzed.

 

The estimates contained in Citi’s analyses and the valuation ranges resulting from any particular analysis are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by its analyses. In addition, analyses relating to the value of businesses or securities do not necessarily purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold. Accordingly, the estimates used in, and the results derived from, Citi’s analyses are inherently subject to substantial uncertainty.

 

The type and amount of consideration payable in the merger was determined through negotiations between Applebee’s and IHOP and the decision to enter into the merger was solely that of Applebee’s board of directors. Citi’s opinion was only one of many factors considered by Applebee’s board of directors in its evaluation of the merger and should not be viewed as determinative of the views of Applebee’s board of directors or management with respect to the merger or the merger consideration.

 

The following is a summary of the material financial analyses presented to Applebee’s board of directors in connection with Citi’s opinion. The financial analyses summarized below include information presented in tabular format. In order to fully understand Citi’s financial analyses, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Citi’s financial analyses.

 

Selected Publicly Traded Companies Analysis.  

 

Citi reviewed financial and stock market information of Applebee’s and 15 selected publicly held companies, three of which are in the casual dining industry, two of which are in the family dining industry and 10 of which are in the quick service and fast-casual restaurant industry. These companies were selected because, among other reasons, they possessed certain operational or business characteristics which in Citi’s view were similar to those of Applebee’s or otherwise relevant for purposes of comparison. Citi reviewed, among other things, equity values of the selected companies based on closing stock prices on July 12, 2007 as a multiple of calendar year 2007 estimated earnings per share, commonly referred to as EPS. Citi also reviewed enterprise values of the selected companies, calculated as fully diluted equity value based on closing stock prices on July 12, 2007, plus total debt and minority

interests, less investments in unconsolidated affiliates, cash and marketable securities, as a multiple of calendar year 2007 estimated earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA. These selected companies and multiples were as follows (data which was not publicly available as of July 12, 2007 has been designated as “NM”):

 

 

 

 

Using the multiples above as a general guide (with particular focus on the selected companies in the casual dining segment given that Applebee’s develops, franchises and operates restaurants in the bar and grill segment of the casual dining industry) and taking into account, among other things, differences in Applebee’s and the selected companies, Citi then applied a range of selected multiples of calendar year 2007 estimated EPS of 15.0x to 18.0x and calendar year 2007 estimated EBITDA of 7.0x to 9.0x derived from the selected companies to Applebee’s calendar year 2007 EPS and EBITDA (after stock-based compensation expense in the case of EBITDA), respectively. Estimated financial data of the selected companies were based on research analysts’ mean consensus estimates as compiled by Reuters, public filings and other publicly available information. Estimated financial data of Applebee’s were based on internal estimates of Applebee’s management. This analysis indicated the following implied per share equity reference ranges for Applebee’s, as compared to the per share merger consideration:

 

 

Citi noted that the per share merger consideration of $25.50 implied a calendar year 2007 estimated EPS multiple for Applebee’s of 20.7x (based on internal estimates of the management of Applebee’s) and 21.6x (based on research analysts’ mean consensus estimates for Applebee’s as compiled by Reuters). Citi further noted that the per share merger consideration of $25.50 implied a calendar year 2007 estimated EBITDA multiple for Applebee’s of 9.5x (based on internal estimates of Applebee’s management, after stock-based compensation expense).

Selected Precedent Transactions Analysis.  

 

Using publicly available information, Citi reviewed 10 selected transactions in the casual dining and quick service restaurant industry. These transactions were selected because, among other reasons, they involved companies which operated in the segment of the restaurant industry in which Applebee’s operates or which in Citi’s view were otherwise relevant for purposes of comparison. Citi reviewed transaction values, calculated as the purchase price paid for the target company’s equity, plus debt, less cash, in the selected transactions as a multiple of latest 12 months EBITDA. These transactions and multiples were as follows (data for which information was not publicly available at the time of announcement of the relevant transaction has been designated as “NA”):

 

 

Using the multiples above as a general guide and taking into account, among other things, differences in the proposed merger or Applebee’s and the selected transactions or companies involved in such transactions, Citi then applied a range of selected multiples of latest 12 months EBITDA of 8.0x to 10.0x derived from the selected transactions to Applebee’s latest 12 months (as of April 1, 2007) EBITDA, before stock-based compensation expense. Financial data for the selected transactions were based on public filings and publicly available financial information at the time of announcement of the relevant transaction. Financial data for Applebee’s were based on internal estimates of Applebee’s management. This analysis indicated the following implied per share equity reference range for Applebee’s, as compared to the per share merger consideration:

 

 

Citi noted that the per share merger consideration of $25.50 implied a latest 12 months (as of April 1, 2007) EBITDA multiple for Applebee’s of 9.0x (based on internal estimates of Applebee’s management, before stock-based compensation expense).

 

Discounted Cash Flow Analysis.  

 

Citi performed a discounted cash flow analysis of Applebee’s to calculate the estimated present value of the standalone unlevered, after-tax free cash flows that Applebee’s could generate for the last quarter of fiscal year 2007 through the full fiscal year 2011, based on internal estimates of Applebee’s management under two cases reflecting alternative business scenarios. One case, which we refer to as the no refranchising case, was based on Applebee’s current franchising structure, and the second case, which we refer to as the refranchising case, assumed that Applebee’s would sell a substantial portion of Applebee’s company-operated facilities to new or existing franchisees and halt development of new company-operated facilities. Citi also evaluated these two cases after applying

certain sensitivities to take into account the difference between Applebee’s projected same store sales performance and Applebee’s trailing three-year average same store sales performance. Estimated terminal values for Applebee’s were calculated by applying a range of perpetuity growth rates of 1.5% to 2.5% to Applebee’s fiscal year 2011 estimated free cash flows. The cash flows and terminal values were then discounted to present value as of September 30, 2007 using discount rates ranging from 8.5% to 9.5%. This analysis indicated the following implied per share equity reference ranges for Applebee’s based on the no refranchising case and the refranchising case, both before and after giving effect to certain sensitivities, as compared to the per share merger consideration:

 

 

Miscellaneous.  

 

Under the terms of Citi’s engagement, Applebee’s has agreed to pay Citi for its financial advisory services in connection with the merger an aggregate fee of approximately $8.7 million, $1 million of which was payable upon delivery of its opinion and approximately $7.7 million of which is contingent upon consummation of the merger. The terms of Citi’s engagement also provided that upon payment of a special dividend of the type contemplated by the standalone plan, Citi would be entitled to a fee determined using the methodology used for determining the above fee related to the merger. Given this, the fee Citi would have been entitled to receive if the standalone plan had been implemented would have been approximately the same as the above fee. Applebee’s also has agreed to reimburse Citi for reasonable travel and other expenses incurred by Citi in performing its services, including reasonable fees and expenses of its legal counsel, and to indemnify Citi and related persons against liabilities, including liabilities under the federal securities laws, arising out of its engagement.

 

Citi and its affiliates in the past have provided, currently are providing and in the future may provide services to Applebee’s unrelated to the proposed merger, for which services Citi and its affiliates have received, and expect to receive, compensation, including, among other things, having acted or acting as syndication agent for, and/or a lender under, credit facilities of certain franchisees of Applebee’s, borrowings under which, with respect to certain such facilities, are partially guaranteed by Applebee’s. In the ordinary course of business, Citi and its affiliates may actively trade or hold the securities of Applebee’s and IHOP for its own account or for the account of its customers and, accordingly, may at any time hold a long or short position in such securities. In addition, Citi and its affiliates (including Citigroup Inc. and its affiliates) may maintain relationships with Applebee’s, IHOP and their respective affiliates.

 

The Committee selected Citi to act as its financial advisor in connection with the merger based on Citi’s reputation and experience. Citi is an internationally recognized investment banking firm which regularly engages in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes.

 

Certain Projected Financial Data

 

We do not, as a matter of course, make public forecasts or projections as to future sales, earnings or other income statement data, except for periodic guidance that we provided in connection with the release of our quarterly results of operations prior to the beginning of the strategic review process described under “The Merger — Background of the Merger.”

 

In connection with performing its financial analysis, Citi requested financial projections for fiscal years 2007 through 2011. These projections were not prepared in the same manner or process in which we would prepare projections for budgeting or other planning purposes. The projections provided to Citi were prepared using the same methodology as the projections delivered to potential bidders with the delivery of a confidential information memorandum during the week of March 18, 2007 as described under “The Merger — Background of the Merger.” However, the projections provided to Citi, which are set forth below under “No Refranchising Projections”, were updated to reflect actual results through May 2007. These updated projections reflect lower sales, revenues and earnings because the actual results through May were lower than had been projected earlier by management in 2007.

The projections set forth below under “No Refranchising Projections” do not reflect any of the effects of the merger or other changes, including any refranchising of our company owned restaurants, that may in the future be appropriate concerning our assets, business, operations, properties, policies, corporate structure, capitalization and management in light of the circumstances then existing.

 

Management developed a second set of projections that assumed completion of a refranchising program as described in greater detail below. These projections, which are set forth below under “Refranchising Projections”, were used by Citi in connection with its discounted cash flow analysis as described under “Opinion of Citigroup Global Markets Inc. — Discounted Cash Flow Analysis”. The four bidders who were granted access to a data room as described under “The Merger — Background of the Merger” were provided access to a set of projections that applied similar assumptions and used similar methodologies as the projections under “Refranchising Projections”. The projections set forth below, however, were updated principally to reflect actual results through May 2007 and to apply a more aggressive assumption regarding the reduction of our general and administrative expense. As with the projections under “No Refranchising Projections”, these projections were not prepared in the same manner or process in which we would prepare projections for budgeting or other planning purposes.

 

None of these projections were prepared with the view toward public disclosure or compliance with published guidelines of the SEC or the American Institute of Certified Public Accountants regarding forward-looking information or generally accepted accounting principles. Neither our registered public accounting firm auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information contained in these projections nor have they expressed any opinion or given any form of assurance on this information or its achievability.

 

In preparing these projections, numerous assumptions were made, many of which are beyond our control and may prove not to have been, or may no longer be, necessarily reflective of actual future results. Except as otherwise indicated, this information does not reflect changes in general business and economic conditions since the date such projections were prepared or any other transaction that has occurred since the date of preparation, or that may occur in the future and that we did not anticipate at the time we prepared this information.

 

In particular, the projections under “Refranchising Projections” assumed that (1) we would successfully sell approximately 425 stores to franchisees so that 95% of the system’s stores would be owned by franchisees, (2) these sales would be completed by the end of 2008, (3) the proceeds from these sales would be 5x adjusted EBITDA of such stores, less taxes, (4) our general and administrative expense would be significantly reduced, (5) franchise royalties would equal 4% of sales and (6) we would continue to own the underlying real estate of our stores. There are uncertainties and risks as to whether these sales of stores would be completed in a timely fashion and whether these sales and franchise arrangements would be on favorable terms. As described in “The Merger — Background of the Merger”, these risks, among others, were considered by the Board in considering the IHOP transaction.

 

Accordingly, this information is not necessarily indicative of current values or future performance, which may be significantly more favorable or less favorable than as set forth below, and you should not regard our including these projections in this proxy statement as a representation that such projections will or could in fact be achieved.

 

THE PROJECTIONS SET FORTH BELOW ARE NOT GUARANTEES OF PERFORMANCE. THEY INVOLVE RISKS, UNCERTAINTIES AND ASSUMPTIONS. FUTURE FINANCIAL RESULTS AND SHAREHOLDER VALUE OF OUR COMPANY MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR BASED ON THESE PROJECTIONS. MANY OF THE FACTORS THAT WILL DETERMINE FUTURE RESULTS AND VALUES ARE BEYOND OUR ABILITY TO CONTROL OR PREDICT.

 

No Refranchising Projections
(dollar amounts in millions)

 

 

Refranchising Projections
(dollar amounts in millions)

 

 

 

 

Financing

 

IHOP estimates the total amount of funds necessary to complete the merger and the related transactions to be approximately $2.3 billion, which includes approximately $1.9 billion to be paid out to our stockholders and holders of other equity based interests in Applebee’s, with the remainder to be applied to refinance our outstanding debt and pay related fees and expenses in connection with the merger, the financing arrangements and the related transactions. These payments are expected to be funded by a combination of preferred equity and debt financing.

 

IHOP’s debt financing is expected to consist of two separate securitization transactions consisting of an additional issuance of asset-backed notes under the existing IHOP securitization program and the issuance of asset-backed notes under a securitization program to be established for Applebee’s assets.

 

In connection with the execution and delivery of the merger agreement, IHOP has obtained bridge facility commitments to provide up to $2.139 billion in bridge credit facilities to fund the transaction pending completion of both securitizations. IHOP and Merger Sub have agreed to use reasonable best efforts to arrange the debt financing on the terms and conditions described in the commitments. In addition, IHOP has obtained an aggregate of $168.8 million in equity commitments from MSD Capital, L.P. and Chilton Investment Company, LLC, and their respective affiliates.

 

IHOP’s bridge facility commitments are subject to the satisfaction of certain customary conditions, including the execution of satisfactory documentation, the consummation of IHOP’s equity financing, receipt of IHOP’s and Applebee’s interim financial statements and other financial information, the satisfaction of the conditions in the merger agreement that are material to the interests of the lenders under the bridge facilities, the accuracy of certain specified representations and warranties, the granting of liens for the benefit of the lenders under the bridge facilities and the obtaining by IHOP of waivers and amendments to the existing IHOP securitization program.

 

The closing of the merger is not conditioned on the receipt of the financing by IHOP. IHOP, however, is not required to consummate the merger until after the completion of the marketing period, as described in further detail under “The Merger Agreement — Effective Time; The Marketing Period” beginning on page 42.

 

Delisting and Deregistration of Applebee’s Common Stock

 

If the merger is completed, our common stock will be delisted from the Nasdaq Global Select Market and deregistered under the Securities Exchange Act of 1934, and we will no longer file periodic reports with the SEC.

 

Litigation Concerning the Merger

 

On July 26, 2007, the New Jersey Building Laborers Pension and Annuity Funds filed a putative class action complaint in the Court of Chancery of the State of Delaware for New Castle County against Applebee’s International, Inc., its directors, and IHOP Corporation. On September 14, 2007, the plaintiff in this matter filed an amended complaint against the same defendants. The amended complaint alleges, among other things, that the proposed transaction with IHOP is unfair to Applebee’s stockholders. As relief, the amended complaint seeks to enjoin the transaction and seeks monetary damages in an unspecified amount. The lawsuit is in a preliminary stage. Applebee’s and IHOP each believes that this lawsuit is without merit and intends to defend it vigorously.

 

INTERESTS OF CERTAIN PERSONS IN THE MERGER

 

Applebee’s Restricted Stock, Stock Options, Stock Appreciation Rights and Restricted Stock Units

 

As of September 13, 2007, an aggregate of 474,559 shares of restricted stock and 3,772,981 shares of our common stock subject to stock options and stock appreciation rights were held by our directors and executive officers under our equity incentive plans. None of our directors or executive officers held restricted stock units as of such date.

 

Holders of restricted stock will receive the per share merger consideration of $25.50 for each share of restricted stock that they hold, without interest and less any required withholding taxes. All outstanding options and stock appreciation rights will be cancelled at the effective time of the merger. Each holder of options or stock appreciation rights, whether vested or unvested, will have the right to receive, as soon as practicable after the effective time of the merger, with respect to each option or stock appreciation right he or she holds, a cash payment, without interest (less any required withholdings) equal to the product of (1) the excess, if any, of $25.50 over the applicable exercise price per share of the option or stock appreciation and (2) the number of shares of common stock of Applebee’s issuable upon exercise of the option or subject to the stock appreciation right.

 

The following table summarizes the restricted stock and vested and unvested options and stock appreciation rights held by each of our directors and executive officers as of September 13, 2007, and the consideration (calculated prior to any reduction for any required withholding taxes) that each of them will receive pursuant to the merger agreement in connection with the conversion of restricted stock and cancellation of options and stock appreciation rights in the merger:

 

 

 

 

Indemnification of Officers and Directors

 

The merger agreement provides for indemnification and insurance arrangements for Applebee’s current and former directors and officers that will continue for six years following the effective time of the merger. The merger agreement provides that from and after the effective time of the merger, IHOP will, and will cause Applebee’s as the surviving corporation in the merger to, fulfill and honor in all respects, the obligations of Applebee’s pursuant to any indemnification, exculpation or advancement of expenses provisions in favor of the current or former directors, officers, employees or agents of Applebee’s or any of its subsidiaries, or any of their respective predecessors, under the certificate of incorporation, bylaws, organizational documents of Applebee’s or its subsidiaries or any agreement between these indemnified persons and Applebee’s or its subsidiaries in effect as of the date of the merger agreement.

 

The merger agreement also provides that for a period of six years after the effective time of the merger IHOP will cause to be maintained the company’s directors and officers’ liability insurance policies in respect of the acts or omissions occurring at or prior to the effective time of the merger. The policies will cover each indemnified party on terms and amounts no less favorable than those policies in effect prior to the effective time. The surviving corporation may substitute the policies of a reputable and financially sound insurance company containing terms no less favorable to any indemnified party. The merger agreement provides that IHOP will not be required to pay for coverage for any twelve month period aggregate premiums for insurance in excess of 250% of the last annual premium paid by Applebee’s prior to the date of the merger agreement, but IHOP will be required to provide as much coverage as may be obtained for that amount.

 

Potential Severance Payments to Executive Officers

 

We have employment agreements with Mr. Goebel and Mr. Lumpkin which provide for certain payments if their employment terminates after a change in control. The employment agreements for Mr. Goebel and Mr. Lumpkin are substantially the same with respect to payments upon a change in control.

 

If, prior to expiration of the agreement, the executive’s employment were terminated for any reason by us or by the executive, and if such termination were to occur within 12 months following a “change in control,” which will occur in connection with the merger, then:

 

(1) A lump sum payment will be made to the executive within 10 days of the termination equal to two times the sum of (a) his base salary in effect immediately prior to the change in control, plus (b) the greater of (i) the average of his actual bonuses attributable to each of the preceding three fiscal years or (ii) his target bonus amount for the fiscal year in which the termination occurs multiplied by the average percentage bonus attainment of the executive over the preceding three fiscal years;

 

(2) We will pay health, life and disability plan premiums and continue to credit our matching portion to the nonqualified deferred compensation plan (or any replacement retirement arrangement), in both cases for 24 months;

 

(3) All unvested stock options, stock appreciation rights and other equity based awards will be immediately vested as of the day immediately preceding the effective date of termination and all restrictions on restricted share awards will be removed and deemed satisfied and any vested periods will be accelerated;

 

(4) The executive will receive an accelerated payment under our FlexPerx benefit for the year in which the termination occurs, if such payment was earned by him at the effective time of the termination; and

 

(5) The executive will be bound by non-competition obligations for 24 months following the effective date of termination of employment.

 

We currently value these benefits (excluding the acceleration of equity awards) for Mr. Goebel at $2,051,675 and for Mr. Lumpkin at $1,652,629.

 

Our other executive officers are each parties to a Change in Control, Noncompete Agreement with us. The agreement provides for a lump sum payment and other benefits in the event the officer resigns with good reason (which includes reduction in compensation or benefits, relocation of more than 50 miles and reduction in

responsibilities) or is terminated without cause (as defined in the agreement) within eighteen months following a change in control of the company. The payment equals a “multiple” of the sum of (a) the officer’s annual base salary plus (b) the greater of (i) the officer’s average bonus for the three preceding fiscal years or (ii) the officer’s target bonus for the fiscal year in which his or her employment terminates. The “multiple” is two for senior team members and one and two-thirds for other executive officers. The other benefits are (i) continued participation in our health plan at our expense for the executive and his or her spouse (or eligible domestic partner) and eligible dependents for a “period”, and (ii) immediate vesting of any unvested options, restricted shares and other equity compensation issued after January 1, 2004. The “period” is two years for senior team members and 20 months for other executive officers. We currently value the aggregate amount of these benefits (excluding the acceleration of equity awards) at $8,205,060.

 

If the total amount payable to an executive pursuant to the employment agreements or any Change in Control, Noncompete Agreement would create an “excess parachute payment”, as defined in Section 280G of the Code, the executive’s payments will be reduced to an amount $1 less than the maximum amount allowed to be paid under the Code without triggering the excise tax under Section 4999 of the Code, if such reduction would result in a greater after-tax payment to the executive.

 

In addition, executive officers who become eligible for and fulfill the obligations imposed by our executive retirement plan will receive certain additional benefits following retirement. A termination that qualifies for benefits under the employment agreements for Messrs. Goebel or Lumpkin or under the Change in Control, Noncompete Agreements may also qualify the individual for benefits under the executive retirement plan. These benefits include (i) continued group health, life and disability coverage for the executive and his or her spouse (or eligible domestic partner) and eligible dependents under a plan sponsored by the Company at the officer’s expense following the period of company-covered costs pursuant to the employment or Change in Control, Noncompete Agreements (this generally ends on the date of Medicare eligibility); (ii) payment of a prorated target bonus for the year of retirement; (iii) waiver of any requirement that the officer be employed on the bonus payment date in order to be eligible to receive any bonus earned for the year preceding retirement; (iv) payment of accrued vacation; and (v) continued participation in certain benefits of the FlexPerx plan for officers. Mr. Goebel, Mr. Lumpkin, Mr. Parsley, Mr. Crimmins and Ms. Elving are currently eligible for the executive retirement plan or will be eligible by the end of 2007.

 

Consequently, the merger, combined with other circumstances, could result in one or more executives becoming entitled to receive severance payments under these agreements and plans.

 

REGULATORY APPROVALS

 

Other than approval pursuant to the HSR Act, no other material federal or state regulatory approvals are required to be obtained by us, IHOP or Merger Sub in connection with the merger. On August 9, 2007, Applebee’s and IHOP each filed a Notification and Report Form with the Antitrust Division of the Department of Justice and the Federal Trade Commission. Under the HSR Act and related rules, the merger may not be completed until the expiration or termination of the statutory waiting period. Early termination was granted effective as of August 23, 2007.

 

APPRAISAL RIGHTS

 

Under the General Corporation Law of the State of Delaware, or “DGCL,” you have the right to demand an appraisal of your shares in connection with the merger and to receive payment in cash for the fair value of your Applebee’s common shares as determined by the Delaware Court of Chancery, together with a fair rate of interest, if any, as determined by the court, in lieu of the consideration you would otherwise be entitled to pursuant to the merger agreement. These rights are known as appraisal rights. Our stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. Applebee’s will require strict compliance with the statutory procedures in connection with the merger.

 

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to perfect appraisal rights. This summary, however, is not a

complete statement of all applicable requirements and should be read in conjunction with Section 262 of the DGCL, the full text of which appears in Exhibit C to this proxy statement. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL may result in a termination or waiver of your appraisal rights.

 

Section 262 requires that stockholders be notified that appraisal rights will be available not less than 20 days before the stockholders’ meeting to vote on the merger. A copy of Section 262 must be included with such notice. This proxy statement constitutes our notice to you of the availability of appraisal rights in connection with the merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Exhibit C since failure to timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under Delaware law.

 

If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:

 

 

If you fail to comply with either of these conditions and the merger is completed, you will be entitled to receive the cash payment for your Applebee’s common shares as provided for in the merger agreement, but you will have no appraisal rights with respect to your Applebee’s common shares.

 

All demands for appraisal should be addressed to Applebee’s 4551 W. 107th Street, Overland Park, Kansas 66207 Attention: Corporate Secretary, and must be delivered before the vote on the merger agreement is taken at the special meeting, and should be executed by, or on behalf of, the record holder of the Applebee’s common shares. The demand must reasonably inform Applebee’s of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

 

To be effective, a demand for appraisal by a holder of Applebee’s common shares must be made by, or in the name of, such registered stockholder, fully and correctly, as the stockholder’s name appears on his or her stock certificate(s). Beneficial owners who do not also hold the shares of record may not directly make appraisal demands to Applebee’s. The beneficial holder must, in such cases, have the registered owner, such as a broker or other nominee, submit the required demand in respect of those shares. If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may exercise his or her right of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner.

 

If you hold your Applebee’s common shares in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

 

Within 10 days after the effective time of the merger, the surviving corporation must give written notice that the merger has become effective to each Applebee’s stockholder who has properly filed a written demand for appraisal and who did not vote in favor of the merger agreement. At any time within 60 days after the effective time, any

stockholder who has demanded an appraisal has the right to withdraw the demand and to accept the cash payment specified by the merger agreement for his or her Applebee’s common shares. Within 120 days after the effective date of the merger, any stockholder who has complied with Section 262 shall, upon written request to the surviving corporation, be entitled to receive a written statement setting forth the aggregate number of shares not voted in favor of the merger agreement and with respect to which demands for appraisal rights have been received and the aggregate number of holders of such shares. Within 120 days after the effective time, any stockholder who has complied with the requirements of Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. Upon the filing of the petition by a stockholder, service of a copy of such petition shall be made upon the surviving corporation. The surviving corporation has no obligation to file, and has no intention to file, such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previously written demand for appraisal.

 

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Register in Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached by the surviving corporation. After notice to dissenting stockholders who demanded appraisal of their shares, the Chancery Court is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Chancery Court may require the stockholders who have demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Chancery Court may dismiss the proceedings as to that stockholder.

 

After determination of the stockholders entitled to appraisal of their Company’s common shares, the Chancery Court will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any. When the value is determined, the Chancery Court will direct the payment of such value, with interest thereon accrued during the pendency of the proceeding, if the Chancery Court so determines, to the stockholders entitled to receive the same, upon surrender by such holders of the certificates representing those shares.

 

In determining fair value, the Chancery Court is required to take into account all relevant factors. You should be aware that the fair value of your shares as determined under Section 262 could be more than, the same as, or less than the value that you are entitled to receive under the terms of the merger agreement. You should also be aware that investment banking opinions as to the fairness, from a financial point of view, of the consideration payable in a merger are not opinions as to fair value under Section 262.

 

Costs of the appraisal proceeding may be imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Chancery Court as the Chancery Court deems equitable in the circumstances. Upon the application of a stockholder, the Chancery Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective time of the merger, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior to the effective time; however, if no petition for appraisal is filed within 120 days after the effective time of the merger, or if the stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the terms of the merger within 60 days after the effective time of the merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the cash payment for shares of his, her or its Applebee’s common shares pursuant to the merger agreement. Any withdrawal of a demand for appraisal made more than 60 days after the effective time of the merger may only be made with the written approval of the surviving corporation. In addition, no appraisal proceeding may be dismissed as to any stockholder without the approval of the Chancery Court, and such approval may be conditioned upon such terms as the Chancery Court deems just.

 

In view of the complexity of Section 262, if you wish to pursue appraisal rights with respect to the merger, you should consult your legal advisor.

 

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

 

The following describes generally the material United States federal income tax consequences of the receipt of cash to U.S. holders (i.e., an individual citizen or resident of the United States or a domestic corporation) of our common stock pursuant to the merger. The summary is based on the Internal Revenue Code of 1986, as amended, which we refer to in this proxy statement as the “Code”, applicable current and proposed United States Treasury Regulations, judicial authority, and administrative rulings and practice, all of which are subject to change, possibly with retroactive effect, and to differing interpretation. This discussion assumes that U.S. holders hold the shares of our common stock as a capital asset within the meaning of Section 1221 of the Code. This discussion does not address all aspects of United States federal income taxation that may be relevant to holders in light of their particular circumstances, or that may apply to holders that are subject to special treatment under the United States federal income tax laws (including, for example, persons who are not U.S. holders, insurance companies, dealers in securities or foreign currencies, tax-exempt organizations, financial institutions, mutual funds, partnerships or other pass-through entities and persons holding our common stock through a partnership or other pass-through entity, United States expatriates, U.S. holders who hold shares of our stock as part of a hedge, straddle, constructive sale or conversion transaction, who are subject to the alternative minimum tax or who acquired our common stock through the exercise of employee stock options or other compensation arrangements). In addition, the discussion does not address any tax considerations under state, local or foreign laws or federal laws other than United States federal income tax laws that may be applicable to one of our stockholders.

 

If a partnership holds our common stock, the tax treatment of a partner will generally depend on the status of the partners and the activities of the partnership. If you are a U.S. holder that is a partner in a partnership holding our common stock, you should consult your tax advisor.

 

We urge you to consult your own tax advisor to determine the particular tax consequences of the merger to you (including the application and effect of any state, local or foreign income and other tax laws), especially with respect to alternative minimum tax.

 

The receipt of cash in the merger by U.S. holders of our common stock will be a taxable transaction for United States federal income tax purposes (and may also be a taxable transaction under applicable state, local, foreign and other tax laws). In general, for United States federal income tax purposes, a U.S. holder of shares of our common stock will be deemed to sell our shares of common stock and recognize capital gain or loss equal to the difference, if any, between (i) the amount of cash received in exchange for such shares and (ii) the holder’s adjusted tax basis in such shares. Such gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period of the shares of our common stock is more than one year at the time the merger is completed. Long-term gains recognized by U.S. holders that are not corporations generally will be subject to a maximum U.S. federal income tax rate of 15% (subject to application of the alternative minimum tax). The deductibility of a capital loss recognized on the exchange is subject to limitations. If a U.S. holder acquired different blocks of our stock at different times or different prices, such holder must determine its tax basis and holding period separately with respect to each block of our stock.

 

Backup Withholding

 

Under the Code’s backup withholding rules, unless an exemption applies, the surviving corporation generally is required to and will withhold 28% of all payments to which a stockholder or other payee is entitled in the merger, unless the stockholder or other payee (i) is a corporation or comes within other exempt categories and demonstrates this fact or (ii) provides its correct tax identification number (social security number, in the case of an individual, or employer identification number in the case of other stockholders), certifies under penalties of perjury that the number is correct (or properly certifies that it is awaiting a taxpayer identification number), certifies as to no loss of exemption from backup withholding and otherwise complies with the applicable requirements of the backup withholding rules. Each stockholder of ours and, if applicable, each other payee, should complete, sign and return to the paying agent for the merger the substitute Form W-9 that each stockholder of ours will receive with the letter of transmittal following completion of the merger in order to provide the information and certification necessary to avoid backup withholding, unless an applicable exception exists and is proved in a manner satisfactory to the paying agent. The exceptions provide that certain stockholders of ours (including, among others, all corporations and

certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, however, he or she must submit a signed Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.” Backup withholding is not an additional tax. Generally, any amounts withheld under the backup withholding rules described above can be refunded or credited against a holder’s United States federal income tax liability, if any, provided that the required information is furnished to the United States Internal Revenue Service in a timely manner.

 

The foregoing discussion of certain material United States income tax consequences is included for general information purposes only and is not intended to be, and should not be construed as, legal or tax advice to any holder of shares of our common stock. We urge you to consult your own tax advisor to determine the particular tax consequences of the merger to you (including the application and effect of any state, local or foreign income and other tax laws).

 

THE MERGER AGREEMENT

 

The following is a summary of the material terms of the merger agreement. However, because the merger agreement is the primary legal document that governs the merger, you should carefully read the complete text of the merger agreement for its precise legal terms and other information that may be important to you. The merger agreement is attached as Exhibit A to this proxy statement to provide investors with information concerning the terms of the merger agreement. Information on our company is available in our Annual Reports on Form 10-K, our quarterly reports on Form 10-Q and other documents filed with the Securities and Exchange Commission.

 

The merger agreement has been included to provide you with information regarding its terms, and we recommend that you read carefully the merger agreement in its entirety. Except for its status as a contractual document that establishes and governs the legal relations among the parties thereto with respect to the merger, we do not intend for its text to be a source of factual, business or operational information about Applebee’s. The merger agreement contains representations, warranties and covenants that are qualified by information in the disclosure letter referenced in the merger agreement that Applebee’s delivered to IHOP in connection with the execution of the merger agreement. Representations and warranties may be used as a tool to allocate risks between the respective parties to the merger agreement, including where the parties do not have complete knowledge of all facts, instead of establishing such matters as facts. Furthermore, the representations and warranties may be subject to different standards of materiality applicable to the contracting parties, which may differ from what may be viewed as material to stockholders. While we do not believe that the disclosure letter contains non-public information that applicable securities laws require us to publicly disclose (other than information that has already been disclosed or is disclosed in this proxy statement), the disclosure letter does contain information that modifies, qualifies and creates exceptions to the merger agreement, including to the representations and warranties of Applebee’s. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts, because (i) they were only made as of the date of the merger agreement or a prior, specified date, (ii) in some cases they are subject to materiality, material adverse effect or knowledge qualifiers, and (iii) they are modified in important part by the confidential disclosure letter. The confidential disclosure letter contains information that has been included in Applebee’s prior public disclosures, as well as non-public information. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement, which subsequent information may or may not be fully reflected in Applebee’s public disclosures. Information about Applebee’s can be found elsewhere in this proxy statement and in such other public filings we make with the Securities and Exchange Commission, which are available without charge at www.sec.gov.

 

Form of the Merger

 

The merger agreement provides that at the effective time of the merger, Merger Sub will be merged with and into Applebee’s. As a result of the merger, the separate corporate existence of Merger Sub will cease and Applebee’s will continue as the surviving corporation following the merger as a wholly-owned subsidiary of IHOP. The surviving corporation will succeed to all the properties, rights, privileges, powers, franchises and assets, and all debts, liabilities and duties of Applebee’s and Merger Sub.

 

Effective Time; The Marketing Period

 

The effective time of the merger will occur at the time that we file a certificate of merger with the Secretary of State of the State of Delaware on the closing date of the merger (or such later time as provided in the certificate of merger). The closing date will occur on the second business day after all of the conditions to the merger set forth in the merger agreement have been satisfied or waived and the marketing period has been completed (or such other date as we and IHOP may agree). In the event that all conditions have been satisfied but the marketing period has not expired, then the parties are not required to effect the closing until the earlier of:

 

 

The “marketing period” is defined in the merger agreement as the first period of 15 consecutive business days following the third business day after the adoption of the merger agreement by our stockholders (it being understood

and agreed that IHOP will commence the marketing period on an earlier date if reasonably practicable to do so in its good faith judgment, but not more than 15 business days prior to the date of the special meeting) throughout which:

 

 

Certificate of Incorporation and Bylaws

 

The certificate of incorporation and bylaws of Applebee’s will be amended at the closing to read the same as the certificate of incorporation (with the name changed to Applebee’s) and the bylaws of Merger Sub in effect immediately prior to the closing.

 

Directors and Officers

 

The directors and officers of Merger Sub at the effective time of the merger will be the initial directors and officers of the surviving corporation. The directors and officers will serve in accordance with the certificate of incorporation and bylaws of the surviving corporation.

 

Merger Consideration

 

The merger agreement provides that each share of common stock of Applebee’s (other than shares owned by Applebee’s, IHOP or Merger Sub, or any subsidiary of Applebee’s or that is held by stockholders who have properly demanded appraisal rights under Delaware law) issued and outstanding immediately prior to the effective time will be automatically cancelled and cease to exist and will be converted into the right to receive an amount in cash equal to $25.50, without interest, less any required withholding taxes. Each share of common stock of Applebee’s that is owned by Applebee’s, IHOP or Merger Sub, or any of their respective subsidiaries, will automatically be cancelled and cease to exist at the effective time of the merger and no consideration will be delivered in exchange for those shares.

 

Exchange and Payment Procedures

 

At or prior to the effective time of the merger, IHOP will deposit, or will cause the surviving corporation to deposit, cash in an amount sufficient to pay the merger consideration and the other equity amounts due to each holder of shares of our common stock or other equity holders with a bank or trust company (the “paying agent”) reasonably acceptable to us. Within two business days after the effective time of the merger, IHOP will cause the paying agent to mail a letter of transmittal and instructions to you and the other stockholders. The letter of transmittal and instructions will tell you how to surrender your common stock certificates in exchange for the merger consideration.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as may reasonably be required by the paying agent. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. In addition, the person who surrenders such certificate must either pay

any fiduciary or surety bonds or any transfer or other similar taxes or establish to the reasonable satisfaction of the surviving corporation that such taxes have been paid or are not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates. The surviving corporation or the paying agent will be entitled to deduct and withhold, and pay to the appropriate taxing authorities, any applicable taxes from the merger consideration and the option amounts. Any sum which is withheld and paid to a taxing authority by the surviving corporation or the paying agent will be deemed to have been paid to the person with regard to whom it is withheld.

 

At the close of business on the day on which the effective time of the merger occurs, our stock transfer books will be closed, and there will be no further registration of transfers of outstanding shares of our common stock. If, after the close of business on the day on which the effective time of the merger occurs, certificates are presented to the surviving corporation for transfer, they will be cancelled and exchanged for the merger consideration.

 

None of Applebee’s, the surviving corporation, IHOP or the paying agent will be liable to any person for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration that remains unclaimed as of a date that is immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental authority will, to the extent permitted by applicable law, become the property of the surviving corporation free and clear of any claims or interest of any person previously entitled to the merger consideration.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to make an affidavit of that fact and, if required by the surviving corporation, post a bond or surety in such reasonable amount as the surviving corporation may direct as indemnity against any claim that may be made against it with respect to that certificate.

 

Effect on Restricted Stock, Stock Options, Stock-Based Awards and Employee Stock Purchase Plans

 

At the effective time:

 

 

All payments with respect to common stock, restricted stock, cancelled options, stock appreciation rights and restricted stock units will be made by the surviving corporation as promptly as reasonably practicable after the effective time of the merger. No interest will be paid or accrued for the benefit of holders of equity incentives on the consideration payable in respect of their equity incentives.

Representations and Warranties

 

We make various representations and warranties in the merger agreement, including with respect to, among other things:

 

 

For the purposes of the merger agreement, “material adverse effect” means any change, effect, event, occurrence or state of facts that individually or together with any other change, effect, event, occurrence or state of

facts is materially adverse to the business, financial condition or results of operations of Applebee’s and our subsidiaries, taken as a whole.

 

A “material adverse effect” will not have occurred, however, as a result of any change, effect, event, or occurrence resulting from:

 

 

The merger agreement also contains various representations and warranties made by IHOP, including with respect to, among other things:

 

 

The representations and warranties of each of the parties to the merger agreement will expire upon the effective time of the merger. You should be aware that these representations and warranties made by Applebee’s to IHOP or by IHOP to Applebee’s, as the case may be, are subject to important limitations and qualifications agreed to by the parties to the merger agreement, may or may not be accurate as of the date they were made and do not purport to be accurate as of the date of this proxy statement.

 

Conduct of Business Pending the Merger

 

From the date of the merger agreement until the effective time or the termination of the merger agreement, unless IHOP otherwise agrees in writing, Applebee’s and its subsidiaries will:

 

 

Applebee’s also agreed that, until the effective time of the merger, Applebee’s will not, and will cause its subsidiaries not to, take any of the following actions (subject to agreed exceptions) without the prior written consent of IHOP:

 

 

 

Financing Commitments; Cooperation of Applebee’s

 

IHOP has agreed to use, and to cause their respective affiliates to use, reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to arrange the financing on the terms and conditions described in the financing commitments, including using reasonable best efforts to:

 

 

In the event any portion of the financing becomes unavailable on the terms and conditions set forth in the financing commitments, IHOP is required to promptly notify Applebee’s, and IHOP is required to use its reasonable best efforts to obtain, as promptly as practicable, alternative financing from alternative sources on terms not materially less favorable, taken as a whole, to IHOP than those contained in the financing commitments.

 

IHOP is required to keep us reasonably informed of the status of their efforts to obtain the financing and to provide us with copies of agreements pursuant to which any alternative source shall have committed to provide IHOP with any portion of the financing.

 

We have agreed to, and have agreed to cause our subsidiaries (and to use our reasonable best efforts to cause our and their respective representatives) to, provide such reasonable cooperation as may be reasonably requested by IHOP in connection with the debt financing, including using reasonable best efforts to:

 

 

No Solicitation of Transactions

 

We have agreed that we and our subsidiaries and our and their directors, officers, employees and representatives will not directly or indirectly:

 

 

A “takeover proposal” means any inquiry, proposal or offer (other than the transactions contemplated by the merger agreement) from any person or group relating to:

 

 

 

 

Prior to adoption of the merger agreement by our stockholders, however, we may (and may authorize and permit our subsidiaries, directors, officers, employees and representatives to), in response to a bona fide written takeover proposal, (1) furnish information with respect to us and our subsidiaries to the person making such takeover proposal and its representatives pursuant to a customary confidentiality agreement containing confidentiality provisions substantially similar to those set forth in the confidentiality agreement we previously entered into with IHOP and (2) participate in discussions and negotiations with such person and its representatives regarding such takeover proposal if, prior to taking any such actions, Applebee’s is in compliance with its obligations described under this section, and our board of directors determines in good faith, after consultation with its independent financial advisor and outside counsel, that such takeover proposal constitutes or is reasonably likely to lead to a “superior proposal”.

 

For purposes of the merger agreement, “superior proposal” means any bona fide takeover proposal that:

 

 

Neither our board of directors nor any committee thereof may directly or indirectly make an “adverse recommendation change” or approve or recommend, or publicly propose to approve or recommend, or cause or

permit us or any of our subsidiaries to enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement or other similar agreement related to any takeover proposal. At any time prior to the adoption of the merger agreement by our stockholders, however, our board of directors may (subject to the payment of a termination fee as described below), if it receives a takeover proposal which it concludes in good faith constitutes a superior proposal and it determines (after consultation with outside counsel) that the failure to take such action would be inconsistent with its fiduciary duties under applicable law, make an adverse recommendation change or cause or permit Applebee’s to terminate the merger agreement, but only:

 

 

For purposes of the merger agreement, “adverse recommendation change” means any action whereby our board of directors or any committee thereof directly or indirectly:

 

 

We have also agreed:

 

 

Employee Benefits

 

The surviving corporation has agreed to provide cash compensation (excluding severance) to each employee of Applebee’s that is not less favorable than the cash compensation provided to such employee prior to the effective time.

 

The surviving corporation will also, subject to specified limitations, recognize each employee’s service with Applebee’s with respect to determining eligibility to participate, level of benefits, vesting, benefit accruals and early retirement subsidies under the surviving corporation’s employee benefit plans.

 

Agreement to Use Reasonable Best Efforts

 

Upon the terms and subject to the conditions set forth in the merger agreement, each party has agreed to use its reasonable best efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the merger and the other transactions contemplated by the merger agreement, including using reasonable best efforts to accomplish the following:

 

 

We and our subsidiaries are not required to pay, prior to the effective time, to any person whose consent, approval or waiver under certain contracts and leases with respect to the merger is being solicited any fee, penalty or other consideration, other than de minimis amounts or amounts advanced by IHOP.

 

We and our board of directors have also agreed to take all action necessary to ensure that no state takeover statute is or becomes applicable to the merger and if any state takeover statute becomes applicable to the merger, to take all action necessary to ensure that the merger may be consummated as promptly as practicable on the terms contemplated by the merger agreement and otherwise to minimize the effect of such statute on the merger.

 

Stockholders Meeting

 

The merger agreement requires us, as promptly as reasonably practicable after July 15, 2007, to establish a record date for, duly call, give notice of and hold a meeting of our stockholders to adopt the merger agreement. Except in limited circumstances after receipt of a superior proposal, our board of directors has agreed to recommend that our stockholders vote in favor of adoption of the merger agreement. We have also agreed to use commercially reasonable efforts to solicit proxies from our stockholders in favor of adopting the merger agreement.

 

Conditions to the Merger

 

The respective obligations of each party to complete the merger are subject to the satisfaction or written waiver of the following conditions:

 

 

Applebee’s obligations to complete the merger are also subject to satisfaction or written waiver of the following conditions:

 

 

 

IHOP’s and Merger Sub’s obligations to complete the merger are also subject to satisfaction or written waiver of the following conditions:

 

 

Termination of the Merger Agreement

 

The merger agreement may be terminated at any time prior to the effective time of the merger, whether before or after stockholder approval has been obtained, as follows:

 

 

 

 

 

 

Fees and Expenses

 

We have agreed to pay to IHOP a termination fee of $60 million if:

 

 

 

 

For purposes of determining whether a termination fee is payable by us, a “takeover proposal” means any inquiry, proposal or offer (other than the transactions contemplated by the merger agreement) from any person or group relating to:

 

 

 

 

Amendment

 

The merger agreement may be amended by the parties at any time before or after adoption of the merger agreement by our stockholders. The merger agreement may not be amended except by Applebee’s, IHOP and Merger Sub in writing, provided that after adoption of the merger agreement by our stockholders, no amendment may be made without the further approval of our stockholders if and to the extent such approval is required under applicable law.

 

Specific Performance

 

The parties to the merger agreement are entitled to an injunction or injunctions to prevent breaches of merger agreement and to enforce specifically the terms and provisions of the merger agreement in any court of the State of Delaware or any Federal court sitting in the State of Delaware.

 

PROPOSAL 2 — ADJOURNMENT OF THE SPECIAL MEETING

 

If at the special meeting the number of shares of Applebee’s common stock present or represented and voting in favor of the approval of the merger agreement is insufficient to approve the merger agreement under Delaware law, we may move to adjourn the special meeting in order to enable our Board of Directors to continue to solicit additional proxies in favor of the approval of the merger agreement. In that event, we will ask you to vote only upon the adjournment proposal and not the merger proposal.

 

In this proposal, we are asking you to authorize the holder of any proxy solicited by our Board of Directors to vote in favor of adjourning the special meeting and any later adjournments. If the stockholders approve the adjournment proposal, we could adjourn the special meeting, and any adjourned session of the special meeting, to use the additional time to solicit additional proxies in favor of the proposal to approve the merger agreement, including the solicitation of proxies from Applebee’s stockholders that have previously voted against the merger proposal. Among other things, approval of the adjournment proposal could mean that, even if we had received proxies representing a sufficient number of votes against the proposal to approve the merger agreement, we could adjourn the special meeting without a vote on the proposal to approve the merger agreement and seek to convince the holders of those shares to change their votes to votes in favor of the approval of the merger agreement.

 

The adjournment proposal requires that holders of more of Applebee’s common stock vote in favor of the adjournment proposal than vote against the proposal. Accordingly, abstentions and broker non-votes will have no effect on the outcome of this proposal. If no instructions are indicated on your proxy card, your shares will be voted “FOR” any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Our Board of Directors believes that if the number of shares of Applebee’s common stock present or represented at the special meeting and voting in favor of the proposal to approve the merger agreement is insufficient to approve the merger agreement, it is in the best interests of the Applebee’s stockholders to enable the Board, for a limited period of time, to continue to seek to obtain a sufficient number of additional votes to approve the merger agreement.

 

The Board of Directors recommends that you vote “FOR” any proposal to adjourn the special meeting.

 

MARKET PRICE AND DIVIDEND DATA

 

Applebee’s common stock is listed on the Nasdaq Global Select Market under the symbol “APPB”. The following tables sets forth the high and low sale prices of our common stock for the indicated part of our current fiscal year and for our 2006 and 2005 fiscal years, as reported on the Nasdaq Global Select Market.

 

 

 

 

On February 12, 2007, which was the day before the public announcement that we were exploring strategic alternatives, including the possible sale of the company, the closing price of our common stock was $24.23 per share. On July 13, 2007, which was the last trading day before we made a public announcement about the merger, the closing price of our common stock was $24.38 per share. On September 21, 2007, the latest practicable date before the date of this proxy statement, the closing price of our common stock was $24.82.

 

As of September 13, 2007, there were approximately 2,050 holders of record of our common stock. We declared an annual dividend of $0.22 per common share on December 7, 2006 for stockholders of record on December 22, 2006 and the dividend was paid on January 22, 2007. We declared an annual dividend of $.20 per common share in October 2005 for stockholders of record on December 23, 2005 and the dividend was paid on January 23, 2006.

 

If the merger is consummated, our common stock will be delisted from the Nasdaq Global Select Market, there will be no further public market for shares of our common stock, and each share of our common stock will be automatically cancelled and cease to exist and will be converted into the right to receive $25.50 in cash, without interest.

 

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

 

The following table sets forth certain information with respect to the beneficial ownership of shares of our common stock (including shares underlying options) as of September 13, 2007, by each of our directors, our executive officers named in the summary compensation table of the proxy statement for our annual meeting, all executive officers and directors as a group and the beneficial owners of 5% or more of our outstanding common stock. Unless otherwise specified, the address for each holder is 4551 W. 107th Street, Overland Park, Kansas, 66207.

 

 

 

 

 

 

 

FUTURE STOCKHOLDER PROPOSALS

 

If the merger agreement described in Proposal 1 is approved and the merger is completed, we will no longer have any public stockholders and we will not hold an annual meeting of stockholders in 2008. However, if the merger is not completed for any reason, we expect to hold a 2008 Annual Meeting of Stockholders in the second quarter of 2008. Under the rules of the Securities and Exchange Commission, if a stockholder wants us to include a proposal in our proxy statement and form a proxy for presentation at our 2008 Annual Meeting it must be received by us at our principal executive offices by December 11, 2007. Under our bylaws, if a stockholder has a proposal that they would like us to consider at the 2008 Annual Meeting or if a stockholder would like to nominate an individual for a position on the board of directors, the proposal must be submitted not more than 165 days nor less than 120 days prior to the date on which we mailed our proxy materials for the 2007 Annual Meeting, which for the 2008 Annual Meeting is between October 27, 2007 and December 11, 2007.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, proxy statements or other information that we file with the SEC at its Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Our public filings are also available to the public from document retrieval services and the Internet website maintained by the SEC at www.sec.gov.

 

We incorporate by reference into this proxy statement any Current Reports on Form 8-K filed by us pursuant to the Exchange Act after the date of this proxy statement and prior to the date of the special meeting. This means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this proxy statement, and later information that we file with the SEC will update and supersede that information.

 

Information furnished under Items 2.02 and 7.01 of any Current Report on Form 8-K, including related exhibits, is not and will not be incorporated by reference into this proxy statement.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements, reports and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to us at Applebee’s International, Inc., 4551 W. 107th Street, Overland Park, KS 66207, (913) 967-4000 or from the SEC through the SEC’s website at the address provided above. Documents incorporated by reference are available without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference into those documents.

 

No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated September 27, 2007. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to stockholders shall not create any implication to the contrary.

 

If you have any questions about this proxy statement, the special meeting or the merger or need assistance with the voting procedures, you should contact our proxy solicitor, Innisfree at 877-687-1866.

 

By Order of the Board of Directors,

 

Rebecca R. Tilden, Secretary

Applebee’s International, Inc.

4551 W. 107th Street

Overland Park, KS 66207

 

September 27, 2007

Overland Park, Kansas

 

EXHIBIT A

 

 

The merger agreement has been included to provide you with information regarding its terms.

 

The merger agreement contains representations and warranties made by Applebee’s and IHOP to each other as of specific dates. The statements embodied in those representations and warranties were made for purposes of the merger agreement and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of the merger agreement. In addition, some of those representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from that generally applicable to stockholders or may have been used for the purpose of allocating risk between the parties to the merger agreement rather than establishing matters as facts.

 

 

EXECUTION COPY

 

 

AGREEMENT AND PLAN OF MERGER
dated as of July 15, 2007,
among
IHOP CORP.,
CHLH CORP.
and
APPLEBEE’S INTERNATIONAL, INC.

 

TABLE OF CONTENTS

 

AGREEMENT AND PLAN OF MERGER (this “Agreement”) dated as of July 15, 2007, among IHOP CORP., a Delaware corporation (“Parent”), CHLH CORP., a Delaware corporation and a wholly owned Subsidiary of Parent (“Sub”), and APPLEBEE’S INTERNATIONAL, INC., a Delaware corporation (the “Company”).

 

WHEREAS, the Board of Directors of each of the Company and Sub has approved and declared advisable, and the Board of Directors of Parent has approved, this Agreement and the merger of Sub with and into the Company (the “Merger”), upon the terms and subject to the conditions set forth in this Agreement, whereby each issued and outstanding share of common stock, par value $0.01 per share, of the Company (“Company Common Stock”), other than (a) shares of Company Common Stock held by the Company, as treasury stock, or otherwise owned by Parent, Sub or any subsidiary of the Company and (b) the Appraisal Shares (as defined herein), will be converted into the right to receive $25.50 in cash; and

 

WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger and also to prescribe various conditions to the Merger.

 

NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement, and subject to the conditions set forth herein, the parties hereto agree as follows:

 

ARTICLE I

 

Definitions

 

SECTION 1.01.  Certain Defined Terms.  As used in this Agreement, the following terms shall have the following meanings:

 

“Affiliate” of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person.

 

“business day” means any day on which banks are not required or authorized to be closed in the City of New York.

 

“Company Disclosure Letter” means the letter dated as of the date of this Agreement delivered by the Company to Parent and Sub.

 

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

 

“Intellectual Property Rights” shall mean all intellectual property rights of any kind or nature throughout the world, including all (i) U.S. and foreign patents, patent applications, patent disclosures, and all continuations, continuations-in-part, divisionals, reissues, re-examinations, substitutions, and extensions thereof (“Patents”), (ii) U.S. and foreign trademarks, service marks, company names, trade names, Internet domain names, logos, slogans, trade dress, and other designations of source or origin, together with the goodwill connected with the use of and symbolized by any of the foregoing (“Trademarks”), (iii) U.S. and foreign copyrights and copyrighted subject matter (including, to the extent applicable, Software and databases) (“Copyrights”), (iv) rights of publicity, (v) trade secrets and other know-how, inventions and proprietary processes (including proprietary Software and operating procedures), formulae, models and methodologies (“Trade Secrets”) and (vi) applications, registrations, renewals, and recordings for the foregoing.

 

“Knowledge” means (i) with respect to the Company, the actual knowledge of any of the persons set forth in Section 1.01 of the Company Disclosure Letter and (ii) with respect to Parent or Sub, the actual knowledge of the chief executive officer, chief financial officer and general counsel of Parent.

 

“Material Adverse Effect” means any change, effect, event, occurrence or state of facts that, individually or together with any other change, effect, event, occurrence or state of facts that is materially adverse to the business, financial condition or results of operations of the Company and its Subsidiaries, taken as a whole, other than any change, effect, event or occurrence resulting from (i) economic, financial market or geopolitical conditions in general, (ii) changes in Law or applicable accounting regulations or principles or interpretations thereof,

(iii) conditions in the casual dining or restaurant industries generally, (iv) any change in the Company’s stock price or trading volume, in and of itself, or any failure, in and of itself, by the Company to meet published revenue or earnings projections, (v) any outbreak or escalation of hostilities or war or any act of terrorism and (vi) the announcement of the Company’s intention or desire to enter into this Agreement or a similar agreement or the announcement of this Agreement and the transactions contemplated hereby and performance of obligations under this Agreement (including any action or inaction as a result thereof by the Company’s franchisees, employees, vendors or competitors) except, in the case of clauses (i), (iii) and (v), to the extent the Company and its Subsidiaries, taken as a whole, are disproportionately affected thereby as compared to other companies in the casual dining and restaurant industries generally.

 

“Parent Material Adverse Effect” means any change, effect, event, occurrence or state of facts that prevents or materially impedes, interferes with, hinders or delays the consummation by Parent or Sub of the Merger or the other transactions contemplated by this Agreement.

 

“person” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.

 

“Software” means computer programs and other software (whether in source code, object code, or other form) and related documentation, other than in each case “shrink wrap,” “click wrap,” and other “off the shelf” software commercially available to the public generally.

 

“Subsidiary” of any person means another person, an amount of the voting securities, other voting rights or voting partnership interests of which is sufficient to elect at least a majority of its board of directors or other governing body (or, if there are no such voting interests, more than 50% of the equity interests of which) is owned directly or indirectly by such first person.

 

“WARN Act” shall mean the Worker Adjustment and Retraining Notification Act of 1988, as amended.

 

SECTION 1.02.  Index of Defined Terms.  Each of the following defined terms is defined in the corresponding Section of this Agreement listed in the following index: