Applebee’s International, Inc.
4551 W. 107th Street
Overland Park, KS 66207

 

April 9, 2007

 

Dear Stockholder:

 

 

The Applebee’s 2007 Annual Meeting of Stockholders will be held on May 25, 2007, at 9:00 a.m., CDT, at the Ritz Charles Conference Facility, which is located at 9000 West 137th Street, Overland Park, Kansas 66221. We look forward to your attendance either in person or by proxy. The Notice of Annual Meeting of Stockholders, Proxy Statement and WHITE proxy card from Applebee’s Board of Directors are enclosed.

 

Details of the business to be conducted at the Annual Meeting are provided in the enclosed Notice of Annual Meeting of Stockholders and Proxy Statement.

 

As an Applebee’s stockholder, your vote is more important than ever in 2007. Each share of Applebee’s stock that you own represents one vote. If you do not vote your shares, you will not have a say in the important issues to be voted on at the Annual Meeting. I urge you to promptly vote and submit your proxy by phone, via the Internet, or by signing, dating and returning the enclosed WHITE proxy card. If you decide to attend the Annual Meeting, you will be able to vote in person, even if you have previously submitted your proxy.

 

Breeden Partners L.P. has provided notice that it intends to solicit proxies for and nominate at the Annual Meeting its own slate of four nominees for election as directors. Your Board of Directors believes this is not in your best interest. Your Board urges you not to sign or return any proxy card that you may receive from Breeden Partners L.P. and only execute and return the WHITE proxy card you receive from the Company voting for each of the Board’s nominees.

 

If you have any questions about voting your shares or the matters to be considered at the Annual Meeting, please contact the firm assisting us with the solicitation of proxies, Innisfree M&A Incorporated, toll-free at 1 (877) 825-8631.

 

Sincerely yours,

 

Lloyd L. Hill

Chairman of the Board

Applebee’s International, Inc.

APPLEBEE’S INTERNATIONAL, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

May 25, 2007

 

Dear Stockholder:

 

It is my pleasure to invite you to the 2007 Annual Meeting of Stockholders for Applebee’s International, Inc. We will hold the meeting on May 25, 2007, at 9:00 a.m., CDT, at the Ritz Charles Conference Facility, which is located at 9000 West 137th Street, Overland Park, KS 66221.

 

At the meeting, we will:

 

 

We have attached a Proxy Statement to this notice that more fully describes each of these items of business.

 

Your Board of Directors has chosen March 26, 2007, as the date used to determine the stockholders who will be able to attend and vote at the Annual Meeting. If you owned stock in Applebee’s International, Inc. at the close of business on that date, you are cordially invited to attend the Annual Meeting. Seating at the meeting will be limited to Applebee’s stockholders, proxy holders, and invited guests of the Company. If you are a stockholder of record in your own name, please bring photo identification to the Annual Meeting. If you hold shares through a bank, broker or other third party, please bring photo identification and a current brokerage statement. Cameras, recording equipment and other electronic devices will not be permitted at the meeting.

 

Your vote is important. If you decide not to attend the Annual Meeting in person, you may vote on these proposals by proxy. To do so, please complete, date, sign, and return the enclosed WHITE proxy card promptly. We have enclosed a postage-prepaid envelope to expedite the return of your completed WHITE proxy card. You may also vote by telephone or over the Internet as indicated on the WHITE proxy card instructions. If you have voted by mail or by telephone or over the Internet and later decide to attend the Annual Meeting, you may come to the meeting and vote in person.

 

Breeden Partners L.P. (“Breeden”) has provided notice that it intends to solicit proxies for and nominate at the Annual Meeting its own slate of four nominees for election as directors. We do not believe this is in your best interest. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR ELECTION OF EACH OF THE BOARD’S NOMINEES ON THE ENCLOSED WHITE PROXY CARD. WE URGE YOU NOT TO VOTE FOR ANY INDIVIDUALS THAT MAY BE NOMINATED BY BREEDEN AND TO NOT SIGN OR RETURN ANY PROXY CARD YOU MAY RECEIVE FROM BREEDEN.

 

The names of stockholders of record entitled to vote at the Annual Meeting will be available at the Annual Meeting and for ten days prior to the Annual Meeting for any purpose germane to the Annual Meeting, between the hours of 8:45 a.m. and 4:30 p.m., at our principal executive offices at 4551 W. 107th Street, Overland Park, Kansas 66207, by contacting the Secretary of the Company.

 

 

We look forward to seeing you at the meeting.

 

By Order of the Board of Directors

 

 

Rebecca R. Tilden, Secretary

 

Overland Park, Kansas

April 9, 2007

 

APPLEBEE’S INTERNATIONAL, INC.
PROXY STATEMENT

 

TABLE OF CONTENTS

 

APPLEBEE’S INTERNATIONAL, INC

 

 

 

 

PROXY STATEMENT

 

 

 

 

 

Why did you send this Proxy Statement to me?

 

The Board of Directors of Applebee’s International, Inc. (sometimes referred to herein as “Applebee’s,” “we,” “us,” “our,” or the “Company”) is soliciting the enclosed proxy to be used at the Annual Meeting of Stockholders on May 25, 2007, at 9:00 a.m., CDT, and at any adjournment or postponement of that meeting. The meeting will be held at the Ritz Charles Conference Facility, which is located at 9000 West 137th Street, Overland Park, KS 66221.

 

The purpose of the meeting is to:

 

 

We mailed this Proxy Statement and the accompanying WHITE proxy card on or about April 9, 2007, to all stockholders entitled to vote at the Annual Meeting.

 

How many votes do I have?

 

If we had your name on record as owning stock in Applebee’s International, Inc. at the close of business on March 26, 2007, then you are entitled to vote at the Annual Meeting. You are entitled to one vote for each share of Applebee’s common stock you owned as of that date. At the close of business on March 26, 2007, 74,555,997 shares of the Company’s common stock were outstanding and eligible to vote.

 

How do I vote by proxy?

 

Whether you plan to attend the Annual Meeting or not, we encourage you to complete, sign, date, and return the enclosed WHITE proxy card. We have enclosed a postage-prepaid envelope for your convenience. You may also submit your proxy by telephone or over the Internet as indicated on the WHITE proxy card instructions. Submitting your proxy by returning the enclosed WHITE proxy card, or by telephone or over the Internet, will not affect your right to attend the Annual Meeting and vote in person.

 

What should I do if I receive a proxy card from Breeden?

 

Breeden may solicit proxies. DO NOT SIGN OR RETURN ANY PROXY CARD FURNISHED BY BREEDEN. Even a vote against Breeden’s nominees on their card will cancel any previous proxy given to the Company. If you have already sent a proxy card to Breeden, you may revoke it and provide your support to the Board’s four nominees by signing, dating and returning the enclosed WHITE proxy card. Only your latest dated proxy will count.

 

How do I attend the Annual Meeting in person?

 

Seating at the Annual Meeting will be strictly limited to Applebee’s stockholders or their proxyholders and our invited guests. If you are a holder of record in your own name, please bring photo identification to the Annual Meeting. If you hold shares through a bank, broker or other third party, please bring photo identification and a current brokerage statement. Cameras, recording equipment and other electronic devices will not be permitted at the meeting. The Annual Meeting will begin promptly at 9:00 a.m., CDT, so please plan to arrive sufficiently early to make certain that you are admitted before the meeting begins.

 

May I revoke my proxy?

 

You may change your vote or revoke your proxy any time before the Annual Meeting by:

 

 

Who pays for the solicitation of proxies and how are they solicited?

 

Applebee’s pays the entire cost of the solicitation of these proxies. This includes preparation, assembly, printing, and mailing of this Proxy Statement and any other information we send to stockholders. We have hired Innisfree M&A Incorporated to distribute and solicit proxies. We will pay them a retainer fee of $50,000, plus reasonable expenses, for these services. As a result of the proxy contest threatened by Breeden, we will incur substantial additional costs, including an additional amount of $350,000, plus any additional expenses, that we will pay Innisfree for assistance in the proxy contest. In addition, directors, officers, or other regular employees of Applebee’s may contact you personally. We will not pay directors, officers, or other regular employees any additional compensation for their proxy solicitation efforts.

 

Can I vote if my shares are held in “street name”?

 

If the shares you own are held in “street name” by a bank or brokerage firm, your bank or brokerage firm, as the record holder of your shares, is required to vote your shares according to your instructions. In order to direct the voting of your shares, you will need to follow the directions your bank or brokerage firm provides you. If you do not give instructions to your bank or brokerage firm, it will still be able to vote your shares with respect to certain “routine” items, but will not be allowed to vote your shares with respect to certain “non-routine” items. In the case of non-routine items, the shares will be treated as “broker non-votes.” To be able to vote your shares held in street name in person at the meeting, you will need to obtain a proxy from the holder of record. Proposals 1 and 2 are non-routine and Proposal 3 is routine.

 

What constitutes a quorum?

 

In order for business to be conducted at the meeting, a quorum must be present. A quorum consists of the holders of a majority of the shares of common stock issued, outstanding and entitled to vote at the meeting. For purposes of the 2007 Annual Meeting, the holders of 37,277,999 shares will be required for a quorum. Shares of common stock represented at the meeting in person or by proxy (including broker non-votes and shares that abstain or do not vote with respect to one or more of the matters to be voted upon) will be counted for the purpose of determining whether a quorum exists. If a quorum is not present, the meeting will be adjourned until a quorum is obtained.

 

What vote is required to approve each proposal?

 

 

 

How will my proxy get voted?

 

If you properly fill in and return the enclosed WHITE proxy card, or submit your proxy by telephone or over the Internet, the designated Proxies (the individuals named on your proxy card) will vote your shares as you have directed. If you sign the WHITE proxy card but do not make specific choices, the designated Proxies will vote your shares as recommended by the Board of Directors as follows:

 

 

How will voting on “any other business” be conducted?

 

Although we do not know of any business to be considered at the Annual Meeting other than the proposals described in this Proxy Statement, if any additional business is presented at the Annual Meeting, your signed or electronically transmitted proxy card gives authority to the designated Proxies to vote on such matters in their discretion.

 

How do I submit a proposal for next year’s Annual Meeting or a nomination for the Board of Directors?

 

Under the rules of the Securities and Exchange Commission (“SEC”), if a stockholder wants us to include a proposal in our Proxy Statement and form of proxy for presentation at our 2008 Annual Meeting of Stockholders, the proposal must comply with SEC rules and must be received by us at our principal executive offices by December 11, 2007. The proposal should be sent to the attention of our Corporate Secretary.

 

If you have a proposal that you would like us to consider at the 2008 Annual Meeting of Stockholders, or if you would like to nominate at the 2008 Annual Meeting an individual for a position on our Board of Directors, our Bylaws require that you submit your proposal and/or nomination to the Corporate Secretary 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.

 

Proposals and nominations must be sent to the attention of the Corporate Secretary and (a) if sent by mail, mailed to our principal executive offices at 4551 W. 107th Street, Overland Park, Kansas 66207; (b) if sent by facsimile, faxed to (913) 341-1696; or (c) if sent by electronic mail, e-mailed to corporatesecretary@applebees.com. If you would like your proposal to be included in our Proxy Statement and proxy relating to that meeting, it must comply with the SEC rules and be submitted no later than December 11, 2007.

 

Nominations must include all information regarding the nominee(s) required by Regulation 14A under the Securities Exchange Act of 1934 (“Exchange Act”). All proposals and/or nominations must also include all other information required by our Bylaws. Please note that if our 2008 annual meeting will be held either 30 days or more before or after (not including meetings held later because of adjournment) the anniversary of the 2007 annual meeting, your notices for proposals or Board of Director nominations will still be considered timely if they are delivered not later than the close of business on the later of (a) the 60th day before the 2008 annual meeting and (b) the 10th day after our first public announcement of the date of the 2008 annual meeting.

 

We will not entertain any proposals or nominations that do not meet these requirements. If the stockholder does not also comply with certain SEC requirements we may exercise discretionary voting authority under proxies we solicit on any such stockholder proposal or nomination.

 

ELECTION OF FOUR DIRECTORS

 

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF

EACH COMPANY NOMINEE.

 

Your WHITE proxy card will be used to vote for the election of the Nominees named below unless you withhold the authority to do so when you send in your proxy. If any Nominee becomes unavailable for election, we will use your shares to vote for a substitute Nominee that we would propose. Each person nominated for election has consented to being named in this Proxy Statement and has agreed to serve if elected, and we have no reason to believe that any Nominee will be unable to serve. We have included additional information concerning our Nominees in the section below entitled Board Nominees and Incumbents.

 

BREEDEN PARTNERS L.P. HAS PROVIDED NOTICE THAT IT INTENDS TO SOLICIT PROXIES FOR AND NOMINATE AT THE ANNUAL MEETING ITS OWN SLATE OF FOUR NOMINEES FOR ELECTION AS DIRECTORS. YOUR BOARD OF DIRECTORS BELIEVES THIS IS NOT IN YOUR BEST INTEREST. THE BOARD OF DIRECTORS URGES YOU NOT TO VOTE FOR ANY INDIVIDUALS WHO MAY BE NOMINATED BY BREEDEN AND TO ONLY EXECUTE AND RETURN THE ENCLOSED WHITE PROXY CARD VOTING FOR THE NOMINEES SET FORTH BELOW.

 

Our Board of Directors has three classes. Directors in each class serve three-year terms. The Corporate Governance/Nominating Committee has recommended to the Board of Directors, and the Board of Directors has nominated for election by the stockholders, the four persons listed below, each of whom will, if elected, be considered Class III directors. If elected, each of the Nominees below will serve until the 2010 Annual Meeting of Stockholders or until his or her successor is elected and qualified. A director’s term may end sooner due to death, resignation or removal.

 

 

The Board of Directors is divided into three classes. Directors in each class serve for three-year terms.

 

 

Below, we have furnished information for each of the four persons being nominated for election as a Class III director to a new three-year term (“Nominees”). We have also furnished information for each person who is continuing as a Class I or Class II director (“Incumbents”).

 

ERLINE BELTON, age 63 (Incumbent — Class I term expiring in 2008). Ms. Belton became a director of the Company in September 1998. Since November 1991, Ms. Belton has served as President and Chief Executive Officer of The Lyceum Group, a human resource consulting firm located in Roxbury, Massachusetts. From April 1990 until September 1991, Ms. Belton served as Senior Vice President of Human Resources and Organizational Development for Progressive Insurance Companies in Cleveland, Ohio. She also served as International Human Relations Director, as well as several other human resources positions, with Digital Equipment Corporation from 1978 through April 1990. Ms. Belton serves as Chair of a sub-committee of the Executive Compensation Committee and as a member of the Executive Compensation Committee and the Corporate Governance/Nominating Committee.

 

GINA R. BOSWELL, age 44 (Incumbent — Class I term expiring in 2008). Ms. Boswell became a director of the Company in October 2005. Ms. Boswell joined Avon Products, Inc. in 2003 as Senior Vice President of Corporate Strategy and Business Development and was named to the position of Senior Vice President and Chief Operating Officer for Avon North America in February 2005. Ms. Boswell joined Ford Motor Company in 1999 to serve as Vice President, CRM/Consumer eBusiness. In 2001, she was appointed Director of Vehicle Personalization and in 2002 was appointed Director of Business Strategy, with responsibility for the business strategy for Ford’s global enterprise. Ms. Boswell served as Vice President, Investor Relations from 1995 to 1997 and Vice President of New Business Development from 1997 to 1999 for The Estee Lauder Companies, Inc. She also serves as a member of the Board of Directors of Manpower, Inc. Ms. Boswell serves as a member of the Corporate Governance/Nominating Committee.

 

DOUGLAS R. CONANT, age 55 (Incumbent — Class II term expiring in 2009). Mr. Conant became a director of the Company in December 1999. In January 2001, Mr. Conant joined Campbell Soup Company as President and Chief Executive Officer and was elected to their Board of Directors. He was President of Nabisco Foods Company, a subsidiary of Nabisco Group Holdings Corp., from July 1995 until January 2001. He had been with Nabisco since 1991, having served in a number of other executive positions. Prior to joining Nabisco, Mr. Conant spent more than 16 years with the General Mills and Kraft Foods organizations in a variety of senior strategic and marketing management positions. Mr. Conant serves as Chair of the Executive Compensation Committee.

 

D. PATRICK CURRAN, age 62 (Incumbent — Class II term expiring in 2009). Mr. Curran became a director of the Company in November 1992. He has served as Chief Executive Officer of the Curran Companies in North Kansas City, Missouri since August 1979, and as Chairman of Cook Composites and Polymers, a joint venture with Total Petroleum Corp. (France), since its formation in 1990. Mr. Curran serves as a member of the Audit Committee.

 

DAVID L. GOEBEL, age 56 (Incumbent — Class I term expiring in 2008). Mr. Goebel was employed by Applebee’s in February 2001 as Senior Vice President of Franchise Operations and was promoted to Executive Vice President of Operations in December 2002. In January 2004, Mr. Goebel was promoted to Chief Operating Officer. In January 2005, he was also named President. In January 2006, Mr. Goebel was named to the Board of Directors and he assumed additional responsibilities including serving as principal executive officer. In September 2006, Mr. Goebel was promoted from Chief Operating Officer to Chief Executive Officer and retained his title as President. Prior to joining Applebee’s, Mr. Goebel headed a management company that provided consulting and strategic planning services to various businesses from April 1998 to February 2001. Prior to 1998, he was a franchise principal with an early developer group of the Boston Market concept. Mr. Goebel’s business experience also includes positions as Vice President of Business Development for Rent-a-Center (a subsidiary of Thorn, EMI) and Vice President of Operations for Ground Round restaurants.

 

ERIC L. HANSEN, age 58 (Incumbent — Class I term expiring in 2008). Mr. Hansen became a director of the Company in January 1991. He is presently a shareholder in the Kansas City law firm of Holman, Hansen & Colville, P.C., a professional association. From September 1984 to December 1990, he served as a tax partner at Deloitte & Touche LLP, and from September 1974 to September 1984, he was a certified public accountant with Deloitte & Touche LLP. Mr. Hansen serves as Chair of the Audit Committee and as a member of the Corporate Governance/Nominating Committee.

 

JACK P. HELMS, age 54 (Nominee — Class III term expiring in 2007). Mr. Helms became a director of the Company in March 1994. He is presently a principal and shareholder in the investment banking firm of Goldsmith,

Agio, Helms and Company in Minneapolis, Minnesota. From May 1978 to January 1986, Mr. Helms was an attorney in the law firm of Fredrikson & Byron, P.A. in Minneapolis, Minnesota. Mr. Helms serves as a member of the Audit Committee and as Chair of the Corporate Governance/Nominating Committee.

 

LLOYD L. HILL, age 63 (Nominee — Class III term expiring in 2007). Mr. Hill became a director of the Company in August 1989 and was appointed Executive Vice President and Chief Operating Officer of the Company in January 1994. In December 1994, he assumed the role of President in addition to his role as Chief Operating Officer. Effective January 1, 1997, Mr. Hill assumed the role of Co-Chief Executive Officer. In January 1998, Mr. Hill assumed the full duties of Chief Executive Officer. In May 2000, Mr. Hill was elected Chairman of the Board of Directors. In September 2006, Mr. Hill retired as Chief Executive Officer. Mr. Hill continues to serve as the Chairman of the Board of Directors. Prior to joining Applebee’s, he served as President of Kimberly Quality Care, a home health care and nurse personnel staffing company, from December 1989 to December 1993, where he also served as a director from 1988 to 1993, having joined that organization in 1980.

 

STEVEN K. LUMPKIN, age 52 (Incumbent — Class II term expiring in 2009). Mr. Lumpkin became a director of the Company in January 2004. He was employed by the Company in May 1995 as Vice President of Administration. In January 1996, he was promoted to Senior Vice President of Administration. In November 1997, he assumed the position of Senior Vice President of Strategic Development and in January 1998 was promoted to Executive Vice President of Strategic Development. He was named Chief Development Officer in March 2001. In March 2002, Mr. Lumpkin assumed the position of Chief Financial Officer and Treasurer. Prior to joining Applebee’s, Mr. Lumpkin was a Senior Vice President of a division of the Olsten Corporation, Kimberly Quality Care, from July 1993 until January 1995. From June 1990 until July 1993, Mr. Lumpkin was an Executive Vice President and a member of the Board of Directors of Kimberly Quality Care. From January 1978 until June 1990, Mr. Lumpkin was employed by Price Waterhouse LLP, where he served as a management consulting partner and certified public accountant.

 

ROGELIO REBOLLEDO, age 62 (Incumbent — Class II term expiring in 2009). Mr. Rebolledo became a director of the Company in May 2006. Mr. Rebolledo was appointed President and Chief Executive Officer of Pepsi Bottling Group Mexico in January 2004 and elected to Pepsi Bottling Group’s Board in May 2004. From 2000 to 2003, Mr. Rebolledo was President and Chief Executive Officer of Frito-Lay International (“FLI”), a subsidiary of PepsiCo, Inc., operating in Latin America, Asia Pacific, Australia, Europe, Middle East and Africa. From 1997 to 2000, Mr. Rebolledo was the President of the Latin America/Asia Pacific region for FLI. Mr. Rebolledo joined PepsiCo, Inc. in 1976 and held several senior positions including serving as President and Chief Executive Officer of the Latin America Region of PepsiCo Foods International and President of the Sabritas, Gamesa, Brazil and Spain PFI operations. He also serves as a member of the Board of Directors of Best Buy Corporation. Mr. Rebolledo serves as a member of the Audit Committee.

 

BURTON M. SACK, age 69 (Nominee — Class III term expiring in 2007). Mr. Sack became a director and was appointed an Executive Vice President of the Company in October 1994. He was the principal shareholder, a director and the President of Pub Ventures of New England, Inc., a former franchisee that was acquired by the Company in October 1994. In January 1996, Mr. Sack was appointed Executive Vice President of New Business Development with responsibility for international franchising. Mr. Sack retired as an officer of the Company at the end of the 1997 fiscal year, but continues to serve as a director. Mr. Sack is a private investor and is a past Chairman and officer of the National Restaurant Association. Mr. Sack serves as a member of the Executive Compensation Committee and the Corporate Governance/Nominating Committee.

 

MICHAEL A. VOLKEMA, age 51 (Nominee — Class III term expiring in 2007). Mr. Volkema has been a director since 2004. Since 1995, he has been employed by Herman Miller, Inc., a furniture manufacturer, in various executive positions, including as Chief Executive Officer and Chairman of the Board. Currently, Mr. Volkema serves as Chairman of the Board of Herman Miller, Inc. From 1994 to 1995, he was a consultant to Herman Miller, Inc. and later served as President and Chief Executive Officer of Coro, Inc. From 1993 to 1994, Mr. Volkema was Chairman of the Board for Meridian, Inc. Both Meridian, Inc. and Coro, Inc., are wholly-owned subsidiaries of Herman Miller, Inc. He also serves as a member of the Board of Directors of Wolverine World Wide, Inc. Mr. Volkema serves as a member of the Audit Committee and the Executive Compensation Committee.

 

Board of Directors

 

The Board provides oversight with respect to our overall performance, strategic direction and key corporate policies. It approves major initiatives, advises on key financial and business objectives, and monitors progress with respect to these matters. The Board is kept informed by various reports provided to it on a regular basis, including reports made at Board and Committee meetings by our management. The Board has three standing Committees, the principal responsibilities of which are described below.

 

A director is independent if, in the opinion of the Board, he or she has no relationship which would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and otherwise satisfies the independence requirements of the applicable Nasdaq listing standards and SEC rules. The Board of Directors has reviewed the independence of its current non-employee directors and nominees and found that, except for Mr. Hill, each of them is independent.

 

In determining independence, the Board of Directors discusses relevant business relationships between the Company and any companies with which the director is affiliated, any social or charitable organizations that the Company, executives or directors may have relationships with and any other material business relationships. There were no relationships that required any disclosure in this Proxy Statement or that the Board determined had an impact on the independence of any of the directors.

 

During 2006, the Board of Directors held six meetings. During 2006, each director attended at least 75% of the aggregate of the total number of Board meetings and meetings of the committees on which he or she serves.

 

The Company publishes in this Proxy Statement and our SEC filings the names of its directors, any of whom may be contacted in writing in care of the Company at our principal executive offices. Written communication addressed to the Board in general is reviewed by the Chairman for appropriate handling. Written communication addressed to an individual Board member is forwarded to that person directly.

 

The Company expects its Board members to attend the Annual Meeting of Stockholders and schedules Board and Committee meetings to coincide with the stockholder meeting to facilitate this. All of the then-current directors attended the 2006 Annual Meeting of Stockholders.

 

Audit Committee

 

The Audit Committee, acting pursuant to its written charter, assists the Board of Directors in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing and financial reporting practices of the Company. It engages the Company’s independent registered public accounting firm, reviews and approves services performed by such accountants, reviews and evaluates the Company’s accounting system and its system of internal controls, and performs other related duties delegated to the Audit Committee by the Board of Directors as set forth in its charter. The Audit Committee Charter is attached hereto as Appendix A and is available on our website at www.applebees.com under the Investors section and Corporate Governance tab. The charter was revised in December 2006.

 

The Audit Committee consists of the following directors, each of whom the Board has determined is independent under the applicable Nasdaq listing standards and SEC rules: Mr. Curran, Mr. Hansen, Chair, Mr. Helms, Mr. Rebolledo and Mr. Volkema. The Board of Directors has determined that Mr. Hansen is an “audit committee financial expert” as defined in Item 407(d)(5) of SEC Regulation S-K. During 2006, the Audit Committee met ten times.

 

Executive Compensation Committee

 

The Executive Compensation Committee, acting pursuant to its written charter, is responsible for setting executive compensation levels, bonus plan participation and target levels and executive and overall compensation policies. It also reviews and approves the various executive benefit plans and makes awards under the Company’s equity plans and performs such other duties delegated to it by the Board of Directors as set forth in its charter. The charter is available on our website at www.applebees.com under the Investors section and Corporate Governance

tab. The Executive Compensation Committee may delegate executive compensation decisions to subcommittees except for awards of equity compensation. See Compensation Discussion and Analysis for additional discussion on the process and procedures of the Executive Compensation Committee. Except for the compensation paid to the non-executive Chairman, non-employee director compensation is determined by the Corporate Governance/Nominating Committee. See Director Compensation below for discussion on how director compensation is determined.

 

The Executive Compensation Committee has retained Hay Group (“Hay”) as compensation consultants to the Committee. The Executive Compensation Committee requests Hay to provide it with certain information related to the Company’s compensation practices and peer group comparisons. During its review of executive officer compensation, the Committee considers the information it receives from Hay together with management recommendations. The Committee determines the scope of the engagement of Hay, and approves any compensation paid to Hay. Members of management interact with Hay as necessary to provide them with information concerning the Company. See Compensation Discussion and Analysis for additional discussion of Hay and their role with the Executive Compensation Committee and Executive Compensation Committee procedures.

 

The Executive Compensation Committee consists of the following directors, each of whom the Board has determined is independent under the applicable Nasdaq listing standards and SEC rules: Ms. Belton, Mr. Conant, Chair, Mr. Sack and Mr. Volkema. Ms. Belton is Chair of a sub-committee of the Executive Compensation Committee that is responsible for conducting the annual CEO performance review. During 2006, the Executive Compensation Committee met five times.

 

Corporate Governance/Nominating Committee

 

The Corporate Governance/Nominating Committee, acting pursuant to its written charter, reviews corporate and board governance matters and evaluates and recommends candidates for nomination to the Board of Directors. Except compensation for Mr. Hill’s service as non-executive Chairman, which is set by the Executive Compensation Committee, the Corporate Governance/Nominating Committee determines and approves non-employee director compensation and recommends this to the Board for approval and ratification. See Director Compensation below for a discussion on how director compensation is determined. The Committee is responsible for reviewing any stockholder proposals to nominate Board candidates. The Committee also performs an annual assessment of the Board’s performance and periodically assesses each director’s performance. The Corporate Governance/Nominating Committee consists of the following directors, each of whom the Board has determined is independent under the applicable Nasdaq listing standards and SEC rules: Ms. Belton, Ms. Boswell, Mr. Hansen, Mr. Helms, Chair and Mr. Sack. The Corporate Governance/Nominating Committee Charter is available on our website at www.applebees.com under the Investors section and Corporate Governance tab. During 2006, the Corporate Governance/Nominating Committee met four times.

 

Annually, the Corporate Governance/Nominating Committee follows a process designed to consider the re-election of existing directors and seek individuals qualified to become new board members for recommendation to the Board to fill any vacancies. The Corporate Governance/Nominating Committee believes that having directors with relevant experience in business and industry, finance and other areas is beneficial to the Board as a whole. Directors with such backgrounds can provide a useful perspective on significant risks and competitive advantages and an understanding of the challenges the Company faces. The Corporate Governance/Nominating Committee monitors the mix of skills and experience of directors and committee members to assess whether the Board has the appropriate tools to perform its oversight function effectively.

 

With respect to nominating existing directors, the Corporate Governance/Nominating Committee reviews relevant information available to it, including the latest Board evaluations for such persons, and assesses their continued ability and willingness to serve as a director. The Corporate Governance/Nominating Committee also assesses each person’s contribution in light of the mix of skills and experience the Corporate Governance/Nominating Committee deems appropriate for the Board.

 

With respect to considering nominations of new directors when the opportunity arises, the Corporate Governance/Nominating Committee conducts a thorough search to identify candidates based upon criteria the Corporate Governance/Nominating Committee deems appropriate and considers the mix of skills and experience

necessary to complement existing Board members. The Corporate Governance/Nominating Committee then reviews selected candidates and makes a recommendation to the Board. The Corporate Governance/Nominating Committee may seek input from other Board members or senior management in identifying candidates.

 

Stockholders may submit persons to be considered for nomination, and the Corporate Governance/Nominating Committee will consider such persons in the same way it evaluates other individuals for nomination as a new director. Nominations or requests for nominations must be submitted to the Corporate Governance/Nominating Committee in the same time frames and with the same information as required by our Bylaws for a nomination by a stockholder at an annual meeting. See “How do I submit a proposal for next year’s Annual Meeting or a nomination for the Board of Directors?” in the Questions and Answers About the Meeting and Voting section above for an additional discussion of the Bylaw provisions.

 

Corporate Governance Principles

 

The Corporate Governance/Nominating Committee has developed, and the Board has adopted, certain corporate governance principles designed to formalize several existing practices and enhance governance efficiency and effectiveness. Among other things, these principles:

 

 

Our corporate governance principles and our Code of Conduct are available on our website at www.applebees.com under the Investors section and Corporate Governance tab.

 

During fiscal 2006, none of our executive officers served on the board of directors of any entities whose directors or officers served on our Executive Compensation Committee. Except for Mr. Sack, who served as an officer of the Company from 1994 to 1997, no current or past officers or employees of the Company serve on our Executive Compensation Committee. The following directors served as members of the Executive Compensation Committee during 2006: Ms. Belton, Mr. Conant, Mr. Sack and Mr. Volkema.

 

Non-employee directors are paid through a cash retainer (which can be exchanged for stock options) and equity grants, that can be restricted shares and/or stock appreciation rights. Employee directors do not receive any compensation for their service on the Board. For director compensation purposes, Ms. Belton, Ms. Boswell, Mr. Conant, Mr. Curran, Mr. Hansen, Mr. Helms, Mr. Rebolledo, Mr. Sack and Mr. Volkema were considered “non-employee directors” throughout 2006. During 2006, Mr. Goebel and Mr. Lumpkin were “employee directors.” Through September 4, 2006, the effective date of Mr. Hill’s retirement as Chief Executive Officer, Mr. Hill was an “employee director.” Beginning September 5, 2006, Mr. Hill was considered a “non-employee director.”

 

In 2006, each non-employee director, except for Mr. Rebolledo and Mr. Hill, received an annual cash retainer of $35,000 for service as a director, including participation on the three standing committees. Committee and

sub-committee Chairs received an additional $10,000 annually, except for the Audit Committee Chair and the Executive Compensation sub-committee Chair, each of whom received $15,000 annually. Mr. Rebolledo received a pro rata share of the annual cash retainer from his appointment date. Compensation, if any, for service on special committees is determined by the Board at the time of establishment of the special committee.

 

For his services as non-executive Chairman of the Board, beginning September 5, 2006, Mr. Hill received the following annual compensation: cash compensation of $292,500; personal use of the Company airplane in the amount of $45,000, computed using the incremental cost method; $2,500 cash allowance for a physical; and approximately 10 hours per week of administrative assistance. Effective March 1, 2007, personal use of the Company airplane was eliminated and Mr. Hill’s cash compensation was increased accordingly. Mr. Hill’s compensation was determined based upon a peer group analysis provided by Hay and approved by the Executive Compensation Committee. In 2006, Mr. Hill received a pro rata portion of these amounts. Mr. Hill has reimbursed the Company for any personal use of the Company airplane in 2006 that exceeded the annual amount of $45,000.

 

The Amended and Restated 1995 Equity Incentive Plan (“1995 Plan”) also permits non-employee directors to elect to have their annual cash retainer paid by the grant of stock options. If, on or before December 15th, a non-employee director elects to receive stock options in lieu of all or a portion of his or her cash retainer for the following year, the director will receive in the following January an option to purchase the number of shares equal to the cash amount foregone divided by three-tenths of the exercise price, rounded to the next higher multiple of ten. For example, a non-employee director electing to forego $35,000 of retainer, assuming a share price of $30.00, would receive an option to buy 3,890 shares at $30.00 per share. In 2005, Mr. Conant and Mr. Sack elected to receive all of their cash retainer for 2006 in stock options and, accordingly, in January of 2006, received 5,130 options each.

 

Cash compensation paid and stock appreciation rights (“SARs”) and restricted stock granted to Mr. Goebel, Mr. Hill and Mr. Lumpkin for services rendered to the Company as an employee in fiscal 2006 are shown in the Summary Compensation Table.

 

In December 2005, the Board, upon the approval and recommendation of the Corporate Governance/Nominating Committee, approved, pursuant to Section 9.1(a) of the 1995 Plan, the amount and mix of cash and equity compensation to be paid to the Company’s non-employee directors for their services to the Company in 2006. The total annual compensation, valued at $171,000, provided overall compensation equal to the 75th percentile of non-employee director compensation paid by a selected peer group of public companies. As discussed above, each non-employee director received $35,000 of this amount in cash as an annual retainer and could elect to receive all or a portion of this retainer in stock options. The remaining $136,000 in value of annual compensation was paid in stock options or a combination of stock options and restricted stock. The number of stock options or restricted stock equal to $136,000 in value is determined by using the Black-Scholes methodology. A director may elect to take the restricted stock in the form of stock options at a rate of one share of restricted stock per option to purchase three shares of stock. In 2006, Ms. Belton, Mr. Conant, Mr. Curran, Mr. Rebolledo, Mr. Sack and Mr. Volkema elected to receive stock options.

 

Although Hay determined for 2007 that $171,000 provided overall compensation that was below the 75th percentile of the selected peer groups of public companies, the Board determined that director compensation levels for 2007 will be the same as they were in 2006.

 

2006 Director Compensation Table

 

The following table sets forth the compensation paid to our non-employee directors in 2006. Mr. Hill was an employee director through September 4, 2006, the effective date of his retirement. Beginning September 5, 2006, Mr. Hill was a non-employee director. Please see the footnotes to the Summary Compensation Table for a description of the compensation received by Mr. Hill for his service as a non-employee director in 2006.

 

 

 

 

										Aggregate
		2006				2006				Number of Shares
		Awards Grant				Restricted				of Restricted
Name		Date Fair Value				Stock Granted				Stock at Year End
Ms. Belton			—				—				—
Ms. Boswell		$	63,756				2,800				2,800
Mr. Conant			—				—				—
Mr. Curran			—				—				—
Mr. Hansen			63,756				2,800				2,800
Mr. Helms			63,756				2,800				2,800
Mr. Rebolledo			—				—				—
Mr. Sack			—				—				—
Mr. Volkema			—				—				—

 

 

 

										Aggregate
										Number of Shares
		2006				2006				Underlying
		Awards Grant				Awards				Stock Options
Name		Date Fair Value				Granted				at Year End
Ms. Belton		$	90,072				13,900				105,425
Ms. Boswell			35,640				5,500				11,000
Mr. Conant			123,314				19,030				164,012
Mr. Curran			90,072				13,900				165,837
Mr. Hansen			35,640				5,500				66,750
Mr. Helms			35,640				5,500				192,169
Mr. Rebolledo			94,520				13,900				13,900
Mr. Sack			123,314				19,030				192,824
Mr. Volkema			90,072				13,900				39,650

 

Information regarding the executive and other senior officers of the Company, who are not also current directors, is as follows:

 

 

Carin L. Stutz was employed by Applebee’s in November 1999 as Senior Vice President of Company Operations. In January 2005, she was promoted to Executive Vice President of Operations. Prior to joining Applebee’s, Ms. Stutz was Division Vice President with Wendy’s International from July 1994 to November 1999. From 1993 to 1994, she was Regional Operations Vice President for Sodexho, USA. From 1990 to 1993, Ms. Stutz was employed by NutriSystem, Inc. as Vice President of Corporate Operations. Prior to 1990, Ms. Stutz was employed for 12 years with Wendy’s International.

 

Stanley M. Sword was employed by Applebee’s in August 2005 as Executive Vice President and Chief People Officer. Prior to joining Applebee’s, Mr. Sword was employed for seven years as an executive with Cerner Corporation. Hired in August 1998 as Senior Vice President and Chief People Officer, he became President of Cerner’s Great Lakes region in August of 2003. Prior to Cerner, Mr. Sword spent five years with AT&T (three years as the Vice President of Organization Development of NCR Corporation and two years as a client partner in the outsourcing practice of AT&T Solutions). Prior to joining AT&T, Mr. Sword spent ten years with Accenture Consulting in a variety of roles within their systems integration practice.

 

George S. Williams was employed by Applebee’s in February 2007 as Executive Vice President and Chief Marketing Officer. From 2002 until joining Applebee’s, Mr. Williams was an independent marketing consultant and founder of Williams Enterprises, where he provided marketing consulting services to the restaurant and lodging industry. From 1997 to 2002, Mr. Williams was Senior Vice President of U.S. Marketing for Blockbuster, Inc. Mr. Williams spent a total of seven years in corporate brand marketing positions with Pearle Vision, Inc., where he was Vice President of Field Marketing and Sales, Long John Silver’s, where he was Vice President of Advertising

and Promotions, and Days Inns of America Inc., where he was Vice President of Marketing. Mr. Williams also has 12 years of advertising agency experience with Marc U.S.A.

 

Rohan St. George was employed by Applebee’s in November 2004 as President of the International Division. Prior to joining Applebee’s, Mr. St. George was a managing director for Yum Restaurants International which included responsibility for Puerto Rico, the U.S. Virgin Islands and Venezuela. From 1998 to 2003, he was Vice President of Global Operations for KFC, Pizza Hut and Taco Bell. Prior to 1998, Mr. St. George had 14 years operations experience with Pizza Hut and KFC in various management positions.

 

Philip R. Crimmins was employed by Applebee’s in August 2002 as Vice President of Operations Excellence. In September 2003, Mr. Crimmins was promoted to Senior Vice President of Development. Prior to joining Applebee’s, he was employed by Pizza Hut, Inc. for 27 years, most recently as Vice President of Service Strategies. While at Pizza Hut, Inc., Mr. Crimmins held several other positions of increasing responsibility, including senior leadership positions in research and development, concept development, customer satisfaction, field training, and restaurant operations.

 

Michael Czinege was employed by Applebee’s in April 2004 as Senior Vice President and Chief Information Officer. Prior to joining Applebee’s, Mr. Czinege was Executive Vice President of North American operations for Celerant Consulting. From 1996 to 2004, he was a partner and later Vice President of Cap Gemini Ernst & Young, one of the world’s leading providers of consulting, technology and outsourcing services. Mr. Czinege has nearly three decades of industry and consulting experience in manufacturing and supply chain management operations, business planning, sales and marketing, and information systems.

 

Kurt Hankins was employed by Applebee’s in August 2001 as Vice President of Research and Development. In December 2003, Mr. Hankins was promoted to Senior Vice President of Menu Development and Innovation. Prior to joining Applebee’s, he served as Vice President of Food and Beverage for Darden Restaurants, Inc. from July 1999 through July 2001. From August 1994 to July 1999, he served as Director of Food Research and Development for Darden Restaurants, Inc. Prior to his employment with Darden Restaurants, Inc., he held various positions in food and beverage research and development within the restaurant industry.

 

David R. Parsley was employed by Applebee’s in April 2000 as Senior Vice President of Purchasing and Distribution. In January 2003, Mr. Parsley was named Senior Vice President of Supply Chain Management. Prior to joining Applebee’s, Mr. Parsley held several positions with Prandium, Inc., operator of El Torito, Chi-Chi’s and Koo Koo Roo, from November 1996 to April 2000, most recently as Senior Vice President of Quality and Supply Chain Management. He has also held purchasing positions with The Panda Management Company, Carl Karcher Enterprises, Proficient Food Company, Inc., and Baxter Healthcare Corporation.

 

Carol A. DiRaimo was employed by Applebee’s in November 1993 as Associate Director of Financial Planning and Reporting and was promoted to Director in 1995. She was named Director of Treasury and Corporate Analysis in 1998 and Director of Investor Relations and Corporate Analysis in April 2000. She was promoted to Executive Director of Investor Relations in January 2003 and Vice President of Investor Relations in February 2004. Prior to joining Applebee’s, she was employed by Gilbert/Robinson, Inc. from May 1989 to November 1993. Ms. DiRaimo, a certified public accountant, was also employed by Deloitte Haskins & Sells for six years.

 

Beverly O. Elving was employed by Applebee’s in June 1998 as Director of Corporate Accounting. In September 2002, Ms. Elving was promoted to Vice President of Accounting. In February 2005, she was named Vice President and Controller. Prior to joining Applebee’s, she was Chief Financial Officer from 1996 to 1998 for Integrated Medical Resources, a publicly-held management services company. From 1990 to 1996, Ms. Elving was employed by the Federal Deposit Insurance Corporation as Director of Financial Operations and was later promoted to Vice President of Financial Operations & Accounting. Ms. Elving, a certified public accountant, was also employed by Arthur Andersen & Co for five years.

 

Rebecca R. Tilden was employed by Applebee’s in November 2003 and became Vice President and General Counsel in January 2004. Prior to joining Applebee’s, Ms. Tilden was an independent consultant specializing in corporate compliance and ethics issues. From 1987 to 2000, Ms. Tilden was employed by Aventis Pharmaceuticals, Inc., in various positions of increasing responsibility and served most recently as Vice President, Assistant General Counsel and Secretary.

 

The following table sets forth information, as of the dates set forth in the footnotes below, regarding the ownership of common stock, our only class of outstanding securities, by each person known by the Company to own beneficially more than 5% of the outstanding shares of common stock.

 

 

 

 

 

 

The following table sets forth information, as of March 14, 2007, regarding the ownership of common stock, our only class of outstanding securities, by (i) each director and nominee for director and each executive officer named in the Summary Compensation Table and (ii) all executive officers and directors of the Company as a group. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned.

 

 

 

 

Section 16(a) of the Exchange Act requires our officers, directors, and persons who own more than 10% of the common stock to file certain reports of ownership and changes in ownership with the SEC and to furnish us with copies of all such reports.

 

Based on our review of the copies of the reports we received and other written communication, we believe that our officers, directors, and greater-than-10% beneficial owners complied with all filing requirements during the fiscal year ended December 31, 2006, except for one inadvertent late filing by Mr. Czinege in connection with the acquisition of 2,150 shares of common stock through an IRA. The acquisition occurred on February 10, 2006 and the Form 4 was filed on March 21, 2006.

 

We have no transactions with related persons that must be disclosed in this Proxy Statement.

 

The Board has adopted a written Policy and Procedure Governing Related Party Transactions (the “Related Party Policy”). The Related Party Policy requires the Corporate Governance/Nominating Committee to review each Related Party Transaction (defined below) and determine whether it will approve or ratify such transaction.

 

For purposes of the Related Party Policy, a “Related Party Transaction” is any transaction, arrangement or relationship where the Company is a participant, the Related Party (defined below) had, has or will have a direct or indirect material interest and the aggregate amount involved is expected to exceed $120,000 in any calendar year. “Related Party” includes (a) any person who is or was (at any time during the last fiscal year) an executive officer, director or nominee for election as a director; (b) any person or group who is a beneficial owner of more than 5% of the Company’s voting securities; (c) any immediate family member of a person described in provisions (a) or (b) of this sentence; or (d) any entity in which any of the foregoing persons is employed, is a partner or has a greater than 5% beneficial ownership interest. Certain specified transactions are deemed preapproved by the Corporate Governance/Nominating Committee.

 

In determining whether a Related Party Transaction will be approved or ratified, the Corporate Governance/Nominating Committee may consider factors such as (a) the extent of the Related Party’s interest in the transaction; (b) the availability of other sources of comparable products or services; (c) whether the terms are competitive with terms generally available in similar transactions with persons that are not Related Parties; (d) the benefit to the Company; and (e) the aggregate value of the transaction.

 

There were no transactions in 2006 which required review, approval or ratification by the Corporate Governance/Nominating Committee.

 

The following discussion of executive compensation contains descriptions of various employee benefit plans and agreements. These descriptions are qualified in their entirety by reference to the full text or detailed descriptions of the plans and agreements which are filed as exhibits to our SEC filings.

 

Introduction

 

This section presents an overview and perspective on executive compensation at Applebee’s. We discuss our compensation philosophy and objectives and describe the structure and process for making executive compensation decisions. We also discuss the design of the major elements of our executive compensation programs and provide additional detail on the compensation of our “named executive officers” for 2006 as defined by SEC rules.

 

The SEC has delineated certain reporting requirements for the five most highly compensated officers of a public company. In some years, such as 2006, more than five officers will be shown in accordance with SEC rules. In this case, Mr. Hill retired as CEO during the year but continues to be shown in our named executive officer tables. Our named executive officers for 2006 as shown in the Summary Compensation Table are as follows:

 

 

Applebee’s Culture and Company-wide Compensation Philosophy

 

Because organizations are often competing for the same talent in an effort to differentiate their performance, you will see many similarities in the compensation philosophies, elements, policies, programs, and pay levels of peer companies. At Applebee’s, we believe that it is ultimately how — not how much — an individual is rewarded that best enables a culture of engagement, performance, and competitive advantage.

 

We emphasize pay for performance throughout the Company and design our compensation at all levels with that as our primary goal. The compensation design is not significantly different for our executives than it is for all associates — each position is paid competitively relative to the market for that type of role and level of responsibility. Here are a few examples of how reward programs work in our Company:

 

 

Philosophy and Objectives of Executive Compensation

 

We operate in the challenging, dynamic casual dining sector of the restaurant industry, where quality food and great service must be consistently delivered to our guests. In our business, success depends on a strong culture and

an engaged workforce. Our results are driven, in large part, by our ability to attract, retain and motivate outstanding leaders and associates.

 

In keeping with our Company-wide philosophy, our executive compensation philosophy is designed to fulfill three primary objectives:

 

 

To achieve these objectives, we utilize a mix of compensation components including base salary, short-term cash incentives, long-term equity incentives, and benefits.

 

Structure and Process for Compensation Decisions

 

The Executive Compensation Committee (the “Committee”) of our Board has overall responsibility for evaluating and approving our executive officer compensation plans, policies and programs and making decisions regarding specific compensation to be paid or awarded to our executive officers. The Committee also approves compensation for our Non-Executive Chairman of the Board. A copy of the Committee Charter can be found on-line at www.applebees.com under the Investors section and Corporate Governance tab. The Charter is subject to annual review and was last revised in May 2006. The Committee is scheduled to meet at least three times a year, and more frequently as circumstances dictate. The Committee chair works with management to set the agenda for each meeting.

 

In 2006, the Committee was made up of four independent directors who collectively offer extensive experience in general management and human resources. Members of the Committee for 2006 were Mr. Conant, Committee Chairperson; Ms. Belton; Mr. Sack; and Mr. Volkema.

 

The Committee has authority to engage outside consultants, approve all fees and terminate the services of consultants. In carrying out its duties and responsibilities for 2006, the Committee engaged Hay, a global consultancy with recognized expertise in compensation, benefit programs and workplace issues. Hay works on behalf of the Committee and works with our human resources department in the design and analysis of executive compensation programs. The Committee directs Hay to provide peer-group research and recommendations on compensation levels and structure within our philosophy. Hay then develops and recommends to the Committee the compensation structure and targets for the named executive officers. In addition, Hay reviews and approves the design and analysis performed by our human resources department on base salary, bonus, long-term incentive structure and target opportunity for other executive officers. Hay provides this information to the Committee for evaluation and review.

 

Management plays a significant role in the compensation-setting process, including recommending performance targets, evaluating performance and recommending salary levels. Personnel from the human resources department, other than named executive officers, work with Hay to discuss our philosophy and structure and deal with relevant tax and accounting issues. Based on this input, our Chief Executive Officer, Chief People Officer,  VP-HR Design & Services, and Hay regularly present this information to the Committee for discussion and approval of compensation and benefit plans, policies and programs. Our Chief Executive Officer plays no role in setting his own compensation.

 

The Committee reviewed, provided input and approved all strategies and elements of compensation for our executive officers in 2006. The 2006 process included meetings beginning in December 2005, through 2006, until a final session in March 2007. Among the steps in the Committee’s process were the following:

 

 

The Committee also assessed the services provided and fees charged by Hay. The assessment included a review of Hay’s independence, expertise, understanding of the business environment and dynamics, emerging trends in executive compensation and their applicability to the Company, and the ability to clearly summarize their findings to the Committee and management. The Committee determined that Hay demonstrated expertise in these areas and that fees charged for services were reasonable and within competitive practice.

 

During discussions, the Committee reviewed tally sheets for each of the named executive officers. The tally sheet provides a summary of annual compensation, including the value of salary, target annual bonus, long-term incentive awards, perquisites, and health and welfare benefits. Also included was the total remuneration the named executive officer could receive in the event of a termination following a change-in-control or an involuntary not-for-cause termination, including (to the extent applicable) the accelerated vesting of stock options and SARs and immediate lapsing of restrictions on restricted stock.

 

The Committee’s process includes a thorough annual review of the performance of the chief executive officer. Ms. Belton, an experienced human resources consultant, is Chair of a sub-committee responsible for reviewing the performance of the CEO. The 2006 review included interviews with Mr. Goebel, other officers who report to Mr. Goebel, members of the Board of Directors, and a cross-section of franchise principals and Company associates. The process also included a review of both internal and external information regarding the status and performance of the Company and Mr. Goebel. With the approval of the Committee, Ms. Belton met with Mr. Goebel in early 2007 and presented the results of this review of his 2006 performance. Through this process we are able to evaluate leadership, performance and other key factors that benefit stockholders, the Board and the CEO by providing a structured opportunity for accountability and communication regarding the performance of the CEO.

 

Summary of Executive Compensation Design

 

Our compensation programs are designed to support the Company’s business strategy, promote our pay for performance philosophy and attract and retain highly qualified senior executives. In keeping with our compensation philosophy, we have developed an executive compensation program designed to be competitive with our peer group and reward senior executives over the short-term and long-term for achieving Company financial objectives and increasing stockholder value. As a result, a substantial portion of our named executive officers’ compensation is contingent upon achievement of those objectives.

 

For 2006, as we do each year, with the assistance of the Committee’s outside consultants from Hay, we set target ranges for total compensation that are competitive with those offered by a group of our peers in the restaurant business. To do this, we review publicly available compensation information for a broad range of restaurant

companies, selecting them based on several criteria including revenue size, market capitalization, revenue and earnings growth rates, and market segment. The restaurant companies reviewed for these comparisons include:

 

 

In addition, we compare our targeted compensation ranges to those in a broad-based group of companies with similar revenue size, to ensure that our compensation is competitive with that of companies outside the restaurant industry.

 

Our approach to compensation design includes four major elements for all named executive officers. These elements support our pay-for-performance culture, working together to provide varied incentives linked to our short-term and long-term performance, as well as individual performance goals. Following is a summary of each element, its purpose and the method used to determine target ranges of executive compensation for our named executive officers in 2006:

 

 

Percentages of total compensation actually earned from each element will vary based on a number of factors, including performance against objectives and the value of equity awards upon any disposition of the underlying stock. We do not have a specific policy governing the mix of these elements, but view them in light of market conditions and our overall compensation philosophy.

 

The Committee periodically reviews the competitiveness of all of these elements in comparison to companies in our peer group. During 2006, the Committee reviewed our compensation philosophy, peer group companies used for benchmarking, and the target level and mix of compensation for executives to determine if the current approaches met our objectives and were aligned with the marketplace and the interests of stockholders. As a result of that review, changes were made to the composition of the peer group companies and the design of the long-term incentive compensation for 2007. The long-term incentive design change for 2007 includes the use of four-year vesting for all equity grants for named executives and the use of performance-based restricted stock in addition to time-vested restricted stock. Certain specified percentages of the performance-based restricted stock will vest in four years if the Company’s total shareholder return reaches certain levels in relation to the total shareholder return of the restaurant companies comprising the Bear Stearns Restaurant Index. If a minimum level of return is not met, the restricted stock will be forfeited at the end of the four year period. Named executive officers will no longer be allowed to choose additional SARs in place of restricted stock.

 

The Committee recognizes that the engagement of strong talent in critical functions may, at times, entail recruiting new executives and involve negotiations with individual candidates. As a result, the Committee may determine in a particular situation that it is in our best interests to negotiate packages that deviate from the established norms and stated compensation design.

 

Explanation of Material Elements of Compensation

 

The following provides a more detailed discussion of our decision-making process for each of the major elements of our executive compensation programs.

 

Base Salary

 

Base salary target ranges are set using the peer group data as discussed above. The Committee then reviews the individual performance of each executive officer when determining base salary adjustments within the target range. In reviewing performance, the Committee considers several criteria including certain strategic, operational and leadership goals for each individual. The Committee believes that a competitive base salary is essential to help ensure that the executive team remains in place to focus on the short- and long-term business strategy. Base salaries for named executive officers are generally reviewed by the Committee in February of each year and any increases are effective in March. Based on market data for the positions and the Committee’s assessment of individual performance, the base salaries of our named executive officers for 2006 were as follows:

 

 

 

 

During 2006, we had written employment agreements in effect with Mr. Hill, Mr. Lumpkin and Mr. Goebel. These agreements address only first year base salary levels. These agreements are described later in this Proxy Statement.

 

Short-Term Incentive Compensation

 

We provide annual cash incentive bonuses under two cash bonus plans. The 2001 Senior Executive Bonus Plan (“2001 Plan”) has been approved by the stockholders to allow compliance with section 162(m) of the Internal Revenue Code. Under the 2001 Plan, each year the Committee sets objective performance measures chosen from certain predetermined categories set forth in the 2001 Plan, either on a Company-wide basis or with respect to a

certain business unit. Performance measures may be different from person to person and must be set forth in writing in accordance with section 162(m) requirements. The 2001 Plan requires that the performance measures be set by the deadline for setting such measures that must be met in order for the compensation to be “performance based” within the meaning of section 162(m) of the Internal Revenue Code. The Committee also sets the target threshold and maximum amounts for each performance measure and the bonus percentage to be paid if the performance measures are met. In 2006, Mr. Hill’s bonus was paid pursuant to this plan.

 

Other bonuses were paid under our 1999 Management and Executive Incentive Plan, which provides additional flexibility. Under the 1999 Plan, the Committee may choose such measures of financial or individual performance as it deems appropriate for that year, together with the bonus percentage to be paid if the goals are met. The Committee retains discretion to revise or waive any measure.

 

In 2006, the performance measures for earning bonuses under the annual cash incentive plans were the same for all named executive officers, with the exception of Mr. Hill, due to his retirement as discussed below, and Mr. St. George, whose performance objectives were based 100% on achieving certain international business results discussed later in this section. No adjustments to the performance measures were made by the Committee when approving final 2006 bonuses. In 2006, the payment of annual cash bonuses for the named executive officers was based solely on achievement of corporate performance measures; individual performance did not affect the executive’s bonus payment.

 

Performance objectives for short term incentive awards are generally developed through the following process. First, management, including the named executive officers, develops preliminary recommendations for Committee review based on a review of business plans for the upcoming year. Next, the Committee and Hay review management’s recommendation (and relevant peer group benchmarks provided by Hay) and the Committee establishes the final goals. In establishing the final goals, the Committee seeks to ensure that the incentives are consistent with the strategic goals set by the Board, that the goals are sufficiently ambitious so as to provide meaningful incentive and that bonus payments, assuming target levels of performance are attained, would be consistent with the overall compensation program established by the Committee. Each performance measure has a payout range of threshold, target, and maximum designed to reward certain levels of achievement above and below target. However, no bonus is earned for any performance metric that is achieved at a level below threshold. The Committee sets the target level for each performance measure based on our budget levels for that year and certain benchmarks relative to our peers. We believe these target levels are aggressive but achievable if our executives implement our business plan. Maximum levels are designed to reward exceptional performance and are not easily attainable.

 

In 2006, the performance measures approved by the Committee for all named executive officers except Mr. St. George, were earnings per share, restaurant operating profit, guest traffic growth, new restaurant development, restaurant management retention and hourly new hire retention. Each of the six performance measures in the annual incentive plan is weighted. The weightings ranged from 10% to 25%. These six performance metrics were selected because management and the Committee believe that the achievement of these objectives is important for the ongoing success of the organization and its stockholders. In order for named executive officers to receive any payout under the bonus plans, the Company had to achieve a certain level of earnings per share, which we did in 2006.

 

In certain exceptional circumstances, the Committee may determine to remove the effect of certain items from the earnings per share calculation. These could include the impact of significant stock repurchases, one-time non-cash accounting charges or stock-based compensation awards. In 2006, only stock-based compensation awards were excluded from the earnings per share performance metric.

 

Due to Mr. Hill’s retirement as CEO in 2006, under our Executive Retirement Plan (see Potential Payments Upon Termination or Change-in-Control below for further discussion), Mr. Hill was entitled to receive a cash bonus equal to his target bonus, prorated through August 31, 2006. Mr. Hill’s target bonus was $691,667 (125% of his annual salary, prorated for eight months of service as CEO in 2006). Even though he was entitled to receive this amount, Mr. Hill elected to be paid a bonus based on the Company’s actual achievement of its performance measures through August 31, 2006. As of August 31, 2006, the Company’s achievement of its performance measures was 52.8%. As a result, Mr. Hill was paid a bonus equal to 52.8% of his target bonus, or $365,200.

 

Mr. St. George’s performance measures were selected to focus the international division on increasing profitability and expanding restaurant operations. The performance measures were comparable same store sales, profit plan for franchise operations, new business development, restaurant unit openings, and new sites approved for future restaurant openings. Each of the five performance measures in the annual incentive plan is weighted. The weightings ranged from 15% to 25%

 

Following is a definition of each of our bonus performance metrics and a brief explanation of their alignment with our business strategy:

 

 

 

The Committee sets target bonuses at a specified percentage of base salary based on our compensation philosophy for cash bonuses. The target bonus is paid if the performance measures are achieved at the target levels. Bonuses, as a specified percentage of base salary, may be paid below the target bonus, if the performance measures are achieved at lower, threshold levels, or above the target bonus if the performance measures are achieved at higher, maximum levels. Actual bonuses are paid on a sliding scale between threshold and maximum levels based on actual achievement of the performance measures. The following reflects the bonus that could have been paid for 2006, as a percentage of base salary, for each named executive officer, if the performance measures were achieved at the threshold, target and maximum levels.

 

 

The Committee believes the overall design of the annual cash incentive plan for 2006 supported the key initiatives of the Company, are strong industry indicators, and enhanced the linkage between Company performance and stockholder value. With the exception of International Operations, our performance against these objectives fell short of expectations and the overall bonus payout of 43.6% reflected that performance. Three of the performance measures — earnings per share, restaurant operating profit, and guest traffic growth — did not meet the threshold level of performance for a payout. Contributing to these performance results was the overall industry decline in guest traffic in the casual dining segment and economic pressures for our guests due to fuel prices and interest rate uncertainty. The actual bonuses paid in 2006 are shown on the Summary Compensation Table in the Non-Equity Incentive Plan Compensation column.

 

Our international results were above expectations. Year-over-year same store sales at international franchise restaurants and profitability of the International Division were at or near the top of the International Division performance plan, while positioning us for continued growth and profitability in 2007. The overall bonus payout for the International Division was 130.8% of target.

 

Long-Term Incentive Compensation

 

We utilize a mix of equity awards, in lieu of cash compensation, to comprise the long-term incentive program. Our program design keeps us competitive with emerging trends in executive compensation, with other companies for which we compete for executive talent, and links the success of the Company to increases in stockholder value.

 

Grants are made under the 1995 Plan. The Committee uses a combination of SARs or stock options and restricted stock. The mix of SARs and restricted stock promotes a balance among long-term growth for the organization, executive retention, and stockholder value. Initial award values are set based on a ratio of two-thirds SARs and one-third restricted stock. This ratio was set after reviewing trends in equity compensation that showed a majority of long-term incentive was being delivered in stock options. However, because we value independent choice and flexibility, a named executive officer could elect to have the Committee grant SARs in exchange for restricted stock at a preset value. Ms. Stutz selected this alternative.

 

The Committee approved in February 2006 the aggregate equity awards to be granted to each named executive officer and approved the quarterly grant dates of the first business day of March, June, September and December. By granting the equity on a quarterly basis, the Company is able to spread the compensation expense for the grants throughout the year. Mr. Hill did not receive the December 1st quarterly grant because he was no longer the CEO at the time. On December 1st, to reflect Mr. Goebel’s role as President and CEO, he received a larger grant of SARs and restricted stock. Details of all the named executive officer grants are included in the Summary Compensation Table and the Grants of Plan-Based Awards table.

 

The SARs, any stock options, and restricted stock are subject to a three year vesting period from the March grant date. All SARs and stock options have an exercise price equal to the closing stock price on the date of grant. Equity award agreements have a provision that extends the cancellation date of the award and allows for continued vesting under the terms of our Executive Retirement Plan. These agreements also include a provision that the impact of a change in control shall be as set forth in any change in control or employment agreement to which the named executive officer is a party or pursuant to the 1995 Plan if there is no such agreement. Upon approval by the Committee, SARs and stock options are transferable to certain family members. Upon exercise of the SARs, the executives receive the number of shares of common stock equal in value to the difference between the fair market value on the grant date and the fair market value on the exercise date times the number of shares. Executives holding shares of restricted stock are eligible to receive all dividends and other distributions paid during the restriction period. The 1995 Plan prohibits the repricing, replacing or regranting of outstanding stock options either in connection with the cancellation of such stock option or by amending an award agreement to lower the strike price of the stock option.

 

The Committee may determine in special circumstances to make additional equity grants during the year. In connection with his new employment agreement in January 2006, Mr. Lumpkin received a grant of 150,000 stock options which cliff vest in five years.

 

Incentive stock option grants were made to Mr. Sword and Mr. St. George, in lieu of one or more of their quarterly SARs grants, to encourage early attainment of their stock ownership guidelines.

 

Benefits

 

Executive Retirement Plan

 

We maintain the Applebee’s International, Inc. Executive Retirement Plan, which enables eligible officers to receive certain benefits from the Company following retirement. In addition to providing certain retirement benefits for eligible officers, this plan is designed to protect the Company’s interests under various circumstances in which executives might leave the Company. See Potential Payments Upon Termination or Change-in-Control in this Proxy Statement for a discussion of the Executive Retirement Plan.

 

Executive Health Plan

 

We maintain the Applebee’s International, Inc. Executive Health Plan, pursuant to which the Company will provide eligible officers of the Company and retired officers who elect to participate in the Executive Retirement Plan with group health coverage. The terms and cost of the coverage will be determined by the Company and may vary from participant to participant, but generally provide ongoing access to group health insurance at the same COBRA rate that is offered to all associates who leave the Company as specified by ERISA except that the eligibility period is extended beyond the statutory timeline in accordance with the definitions in the executive retirement plan.

 

Deferred Compensation Plan

 

Applebee’s does not offer a 401(k) plan to our executives because their participation could reduce the opportunity for other associates to contribute based on ERISA standards for qualified plans. Instead, we maintain the Applebee’s International, Inc. Nonqualified Deferred Compensation Plan pursuant to which eligible employees can elect to defer up to 50% of their base salary, up to 100% of any cash bonuses, and up to 100% of any compensation that we cannot deduct as a result of section 162(m) of the Internal Revenue Code. We make a matching contribution on behalf of each participant at the same rate as the 401(k) plan (a 50 cents-on-the-dollar match up to 4% of compensation). A participant is always 100% vested in his or her deferral and matching contributions. The participant may select from among a number of investment alternatives for his or her deferrals, which are the same investment alternatives for 401(k) participants. Generally, a participant’s account will be paid out based on his or her election upon termination of employment or, if earlier, upon a termination of the plan under qualifying circumstances. A participant may request an earlier distribution in the event of an unforeseeable financial emergency.

 

Executive Nonqualified Stock Purchase Plan

 

In May 2004, stockholders approved the Applebee’s International, Inc. Executive Nonqualified Stock Purchase Plan (the “Purchase Plan”). The purpose of the Purchase Plan is to provide eligible employees the opportunity to acquire a proprietary interest in the Company through the purchase of our Common Stock and to develop a stronger incentive to work for the continued success of the Company and increase stockholder value. The Purchase Plan is in addition to the shares permitted to be purchased under the Applebee’s International, Inc. Employee Stock Purchase Plan (the “Qualified Plan”), a qualified employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986.

 

An eligible employee who elects to participate in the Purchase Plan may authorize the Company to make payroll deductions of a specified fixed dollar amount or whole percentage of the employee’s regular pay or bonus. As of the last day of each quarterly purchase period, the amounts withheld for a participant in the Purchase Plan will be used to purchase shares of Common Stock. Amounts credited to a participant’s payroll deduction account will first be used to purchase shares under the Qualified Plan, up to the maximum allowed under the Qualified Plan, and then will be used to purchase shares under the Purchase Plan. The purchase price of each share will be equal to 85% of the lesser of the Fair Market Value of a share of Common Stock on either the first or last day of the purchase period. All amounts withheld will be used to purchase the number of shares of Common Stock (including fractional shares) that can be purchased with such amounts at such price.

 

Payroll deductions under the Purchase Plan will be made on an after-tax basis. Participants will recognize ordinary income at the time of each purchase of shares under the Purchase Plan equal to the fair market value of the shares on the date of purchase minus the purchase price of the shares to the participant.

 

Perquisites

 

FlexPerx Program.  Effective January 2005, the Board of Directors approved the Applebee’s International, Inc. FlexPerx Program, which provides annual cash payments to officers of the Company. The program is intended to promote health and foster a balanced lifestyle, supporting the productivity of the leadership team. The payments may be used at the sole discretion of the officer for benefits such as health expenses, financial planning expenses, home security and maintenance expenses, other perquisites and charitable deductions. There are four benefit levels: (i) the Chief Executive Officer is eligible to receive $13,500 per year; (ii) Senior Team members are eligible to receive $8,500 per year; (iii) Executive Vice Presidents and Senior Vice Presidents that are not Senior Team members are eligible to receive $6,000 per year; and (iv) Vice Presidents are eligible to receive $3,500 per year. The participants in this program have elected to not receive any benefits under the FlexPerx Program in 2007.

 

Airplane Use.  In 2006, the Company maintained two airplanes for business travel by Applebee’s personnel. One of these was sold in 2007. With more than 1,900 restaurants in 49 states and 16 countries, Applebee’s business necessitates frequent travel to facilitate management of the Company-owned restaurants, relationships with franchisees and other business partners, and meetings with investors and other stakeholders. In addition to business travel, in 2006, named executive officers were allowed to use the airplanes for personal travel within specified guidelines. The named executive officers reported income with respect to this travel at the applicable tax rates. In this Proxy Statement, the value of this compensation to the named executive officer is based on the incremental cost to the Company, as shown in the Summary Compensation Table. In March 2007, the Committee eliminated the use of the corporate airplane for personal use, except in the case of a medical emergency.

 

We provide no other perquisites to our executives.

 

Employment Agreements and Elements of Post-Termination Compensation

 

We have written employment agreements with Mr. Goebel and Mr. Lumpkin. Mr. Hill had an employment agreement prior to his retirement. We believe employment agreements with persons in these positions are important in attracting and retaining such persons, are in keeping with competitive standards and provide the Company with important protections if these persons leave our employ. No other executives have employment agreements

 

Mr. Hill’s agreement was for an original term of one year, expiring in January 1995, and automatically renewed for successive one-year terms. The agreement terminated upon his retirement on September 4, 2006. The agreement provided for a base salary which may be periodically increased by the Committee and permitted participation in the Company’s executive bonus plan for vice presidents as well as additional bonuses as determined by the Committee. See the Director Compensation above and Potential Payments Upon Termination or Change-In-Control below for a description of the impact of retirement on Mr. Hill’s benefits and compensation.

 

Mr. Goebel entered into an employment agreement with a three-year term commencing on January 3, 2006, which automatically renews for additional one-year terms unless otherwise terminated as provided in the agreement. Mr. Goebel received an initial annual base salary of $550,000 and a 2006 target bonus of 100% (increased to 105% when Mr. Goebel became CEO) of his annual base salary, which may be increased by the Board in its sole discretion. Mr. Goebel’s base salary was increased to $650,000 in September when he became chief executive officer. The agreement also provides for additional compensation and bonuses as may be determined in the sole discretion of the Board. In the event of a termination by the Company without cause, or by Mr. Goebel for good reason or following a change in control, Mr. Goebel is entitled to certain benefits. See the Potential Payments Upon Termination or Change-in-Control for a description of these benefits.

 

Mr. Lumpkin entered into an employment agreement with a three-year term commencing on January 3, 2006 which supersedes his prior employment agreement. The terms are substantially the same as Mr. Goebel’s employment agreement except that Mr. Lumpkin’s initial annual base salary was $475,000 and his target bonus for 2006 was 85% of his annual base salary. Mr. Lumpkin also received a grant of 150,000 options on January 11, 2006 in connection with his new employment agreement.

 

We have a Severance Plan for officers which provides certain benefits in case of termination. See Potential Payments Upon Termination or Change-in-Control below for a discussion of this Severance Plan. We believe this plan is in keeping with competitive practice within our peer group and is necessary to attract and retain talented executives.

 

Our other named executive officers are each a party to a change in control and noncompete agreement which provides certain benefits in the event of a change in control. See Potential Payments Upon Termination or Change-in-Control for a discussion of this agreement. We believe this agreement contains standard triggers, is conservative in that it requires a termination before benefits can be received and provides important protections to the Company in the event these individuals leave our employ.

 

Executive Stock Ownership Guidelines

 

Aligning our executives’ well-being with the stockholders’ interests through equity ownership is a long-established principle in our compensation philosophy. In 1998, the Committee established stock ownership guidelines that became effective for the Chairman and CEO through Senior Vice President levels as of July 1, 1998, and for Vice Presidents as of January 1, 1999.

 

The targeted stock ownership requirements for the executive officer group were modified in 2004 and are as follows:

 

 

These ownership requirements are based upon competitive benchmark information provided by Hay. These guidelines, together with vesting restrictions on long-term incentive awards, function to place executives at financial risk based on the performance of the Company’s stock.

 

An executive must achieve the applicable targeted ownership level, generally, within five years in order to continue to receive one or more of the following after that date: stock options, SARs, and restricted stock. If a participating executive achieves the applicable targeted level within three years, he or she will receive a restricted share bonus of 50% of base salary, up to $125,000. The bonus is restricted until five years of participation have been achieved. As of the end of 2006, all named executive officers who had participated in the share ownership program for at least three years had exceeded his or her required share ownership level and, as a result, qualified for the restricted share bonus. Mr. Sword and Mr. St. George have not participated for three years. Mr. Goebel met his initial share ownership requirements in 2004 and has five years to reach the increased requirement for the chief executive officer.

 

The table below sets forth the required level of ownership for each named executive officer and their ownership of our stock as of December 31, 2006. Mr. Hill is no longer an executive officer and is not subject to these requirements.

 

 

Impact of Accounting and Tax Treatments

 

In designing executive compensation programs, the Committee takes into consideration the impact of various regulatory issues such as Section 162(m) and Section 409A of the Internal Revenue Code. SFAS 123(R) has also had an impact on the design of equity compensation programs. Key design changes made as a result of SFAS 123(R) are: the use of restricted stock for a portion of the long-term incentive award; performance-vested restricted stock and longer vesting periods for all equity grants (beginning with the 2007 equity grants); a shorter expiration term for stock options and SARs; and the use of quarterly grants to spread the compensation expense.

 

Section 162(m) of the Internal Revenue Code denies a tax deduction to any publicly held corporation for compensation in excess of $1 million paid in a year to any individual who, on the last day of that year, is a named executive officer, unless such compensation qualifies as performance-based under Section 162(m) of the Internal Revenue Code. Generally, the Committee believes that it is in the best interest of our stockholders to only pay compensation which is deductible by the Company. However, where it is deemed necessary and in our best interest to continue to attract and retain the best possible executive talent, and to motivate executives to achieve the goals of our business strategy, the Committee may approve compensation to executive officers which may exceed the limits of deductibility.

 

Timing of Compensation Decisions

 

The Committee develops an annual agenda to assist it in fulfilling its responsibilities. In the fourth quarter of the preceding year, in connection with our annual budget process, the Committee establishes performance criteria for the current year bonus program. In the first quarter of each year, the Committee:

 

 

This timing has been selected to match our budget planning process and to address a variety of tax considerations. In order to satisfy the deductibility requirements under Section 162(m) of the Internal Revenue Code, performance objectives under our 2001 Plan must be established in the first 90 days of the performance period. In addition, in order to avoid being considered deferred compensation under Section 409A of the Internal Revenue Code, and to be deductible for the year preceding the year of payment bonus awards with respect to a fiscal year must be paid out prior to the 15th day of the third month after the end of that year.

 

We have established written guidelines for the grant, delivery, documentation and recording of equity awards. Equity awards may be made only by the Committee or those authorized by the Committee in accordance with applicable laws and our equity plan, subject to pre-established limitations on individual awards and total awards. Grants can only be authorized in writing. Authorizations of amendments, modifications or changes to awards must be in writing and can only be adopted with the approval of the Committee. For option and SAR awards, the awards must be granted at the closing price of our stock on the grant date.

 

Generally, for associates, we target granting quarterly awards on the first business day of March, June, September and December of each year, unless another date is determined by the Committee. The amount and timing is approved in February of each year. New hire grants, grants upon promotions and other awards that occur during a quarter normally are made at the time of the next quarterly grant. The quarterly date was selected because it allows a consistent practice over time among all employee recipients, including executives, and spreads the compensation expense for the equity grants throughout the year.

 

The Executive Compensation Committee of the Company has reviewed and discussed the Compensation Discussion and Analysis contained in this Proxy Statement with management. Based on such review and discussions, the Executive Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

 

EXECUTIVE COMPENSATION COMMITTEE

Douglas R. Conant, Chairman
Erline Belton
Burton M. Sack
Michael A. Volkema

 

The table below summarizes the total compensation paid or earned by each of the named executive officers for 2006.

 

 

 

 

 

 

 

 

 

 

 

 

The following table provides information about non-equity and equity awards granted to the named executive officers in 2006.