-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I4UUT8i8eEQWK355bEVVeU7RnWdXj0ngHizWSsT0vLXds800pa5KTmXH+a4sKqIz qbMVsEnJy7BsgmhTs/TI+Q== 0000931763-98-000800.txt : 19980331 0000931763-98-000800.hdr.sgml : 19980331 ACCESSION NUMBER: 0000931763-98-000800 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980330 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AFC ENTERPRISES INC CENTRAL INDEX KEY: 0001041379 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 582016606 STATE OF INCORPORATION: MN FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-29731 FILM NUMBER: 98578076 BUSINESS ADDRESS: STREET 1: SIX CONCOUSE PARKWAY SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 7703919500 MAIL ADDRESS: STREET 1: SIX CONCOUSE PARKWAY SUITE 1700 CITY: ATLANTA STATE: GA ZIP: 30328 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1997 OR [] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from..............to.............. Commission file number ........... AFC ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Minnesota 58-2016606 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) Six Concourse Parkway, Suite 1700 Atlanta, Georgia 30328-5352 (Address of principal executive offices) (Zip Code) (770) 391-9500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Exchange Act: None Securities registered pursuant to Section 12 (g) of the Exchange Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Not applicable The aggregate market value of the common stock of AFC Enterprises, Inc. held by non-affiliates of AFC Enterprises, Inc. is not applicable as the common stock of AFC Enterprises, Inc. is privately held. As of March 15, 1998, there were 34,448,604 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The exhibit index is contained in Part IV herein on page 61. AFC ENTERPRISES, INC. INDEX TO FORM 10-K
PART I Item 1. Business......................................................... 3 Item 2. Properties....................................................... 24 Item 3. Legal Proceedings................................................ 26 Item 4. Submission of Matters to a Vote of Security Holders.............. 26 PART II Item 5. Market for Registrant's Common Stock and Related Stockholders Matters.......................................... 27 Item 6. Selected Consolidated Financial Data............................. 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 31 Item 8. Financial Statements and Supplementary Data...................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 46 PART III Item 10. Directors and Executive Officers of the Registrant............... 47 Item 11. Executive Compensation........................................... 50 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 58 Item 13. Certain Relationships and Related Transactions................... 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 61
PART I ITEM 1. BUSINESS. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward- looking statements relate to the plans, objectives and expectations of the Company for future operations. In light of the risks and uncertainties inherent in any discussion of the Company's expected future performance or operations, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that these will be realized. Such performance could be materially affected by a number of factors, including without limitation those factors set forth in this section. GENERAL AFC Enterprises, Inc., a Minnesota corporation and its wholly-owned subsidiary, AFC Properties, Inc., a Georgia corporation, (collectively "AFC" or the "Company"), is the second largest quick-service chicken restaurant company in the world, operating and franchising quick-service restaurants ("QSRs") under the primary trade names of Popeyes Chicken and Biscuits(R) ("Popeyes") and Churchs Chicken(R) ("Churchs"). The Company also franchises and operates quick- service bagel bakery restaurants under the primary trade name of Chesapeake Bagel Bakery ("Chesapeake" or "CBB"). Total restaurants by brand as of December 28, 1997 were as follows:
Popeyes Churchs CBB Total ------- ------- --- ----- Domestic franchised..................... 830 590 154 1,574 Domestic Company-operated............... 119 480 1 600 International (all franchised).......... 182 286 - 468 ----- ----- --- ----- Total...................... 1,131 1,356 155 2,642 ===== ===== === =====
The Company's principal executive offices are located at Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328-5352 and its telephone number is (770) 391-9500. RESTAURANT LOCATIONS As of December 28, 1997, the Company's 2,642 systemwide restaurants were located in 45 states, the District of Columbia and 23 foreign countries. Popeyes restaurants were located in 40 states, the District of Columbia and 18 foreign countries. The 119 Company-operated Popeyes restaurants are concentrated primarily in the states of Texas, Louisiana and Georgia. Over 70% of the 830 domestic franchised Popeyes restaurants are located in the states of Texas, Louisiana, Florida, California, Illinois, Maryland and Mississippi. Over 60% of the 182 international franchised Popeyes restaurants are located in Korea. Churchs restaurants were located in 29 states and seven foreign countries. The 480 Company-operated Churchs restaurants are concentrated primarily in the states of Texas, Louisiana, Georgia, Alabama, Florida, Mississippi and Arizona. Almost 60% of the 590 domestic franchised Churchs restaurants are located in Texas, California, Louisiana, Georgia, Florida, Michigan and Illinois. Over 70% of the 286 international franchised Churchs restaurants are in Canada, Puerto Rico and Indonesia. Chesapeake restaurants are located in 31 states and the District of Columbia. The Company-operated Chesapeake restaurant is in the state of Georgia. The 154 franchised Chesapeake restaurants are concentrated primarily in the District of Columbia, Maryland and Virginia. 3 STRATEGY The Company has adopted a global strategy to increase revenues and profits by the franchise development of its existing Popeyes, Churchs and Chesapeake brands and the acquisition of additional branded concepts. The Company's strategy is to (i) deliver world class service and support to its franchisees by capitalizing on the Company's size, state-of-the-art technology and leadership position, (ii) promote franchisee development of traditional and non-traditional formats in new and existing markets and (iii) provide new and existing franchisees with investment opportunities in high value/high growth branded concepts outside of the quick-service chicken restaurant industry. The Company believes that by following this strategy it will become Franchisor of Choice(TM) which, when combined with the Company's market leadership position, superior brand awareness and strong franchisee relationships, will result in continued growth. To reflect this strategy, the Company changed its name in October 1996 from America's Favorite Chicken Company to AFC Enterprises, Inc. COMPANY STRENGTHS LEADING MARKET POSITION. The Company is the second largest quick-service chicken restaurant company in the world, with 2,487 Popeyes and Churchs restaurants located in the United States and 23 foreign countries. In 1998, the Company expects to franchise and open over 200 new chicken restaurants in the U.S. and over 100 new chicken restaurants internationally. At December 28, 1997, the Popeyes system included 949 domestic restaurants and the Churchs system included 1,070 domestic restaurants. From industry data gathered at the end of 1997, the Company believes that the Popeyes system generated approximately 8.0% of sales in the domestic quick-service chicken restaurant industry, while the Churchs system generated approximately 6.0% of sales in that industry. HIGH BRAND AWARENESS. With Popeyes' New Orleans style fried chicken and Churchs' traditional Southern fried chicken, management believes Popeyes and Churchs have achieved a high level of positive brand awareness with both franchisees and consumers. Over Popeyes' 25 years of operation and Churchs' 45 years of operation, the Company's restaurants have become two of the most highly recognized brand names in the QSR industry. Management believes that the Company's reputation for offering a unique selection of high quality food products and value pricing, combined with a high level of customer service, has created a valuable franchise with strong brand name recognition and customer loyalty. STRONG FRANCHISEE RELATIONSHIPS. The Company enjoys strong relationships with its franchisees as a result of its ongoing efforts to develop the Popeyes and Churchs brands globally and develop the Chesapeake brand in the United States by (i) investing capital to re-image and renovate Company-operated restaurants in each of the systems, (ii) providing strong operational, marketing and technological support to franchisees, (iii) delivering operating efficiencies and economies of scale to franchisees and (iv) promoting restaurants within non-traditional formats. Additionally, the Company 4 seeks to provide new investment opportunities to its franchisees by acquiring and franchising high value/high growth branded concepts. The number of total franchised restaurants for all brands has grown from 1,162 at year-end 1992 to 2,042 at December 28, 1997, and the number of commitments to open new franchised restaurants has increased to 1,715 at December 28, 1997, compared with 372 commitments at year-end 1992. SIGNIFICANT OPERATIONAL EFFICIENCIES. By virtue of its size and leadership position in the quick-service restaurant industry, the Company benefits from significant operational efficiencies. The Company's large number of restaurants, centralized corporate management structure and ongoing implementation of state-of-the-art management information systems enable the Company to (i) tightly control restaurant and corporate-level costs, (ii) capture economies of scale by leveraging its existing corporate overhead structure and (iii) continuously monitor point-of-sale data in its Company- operated restaurants to more efficiently manage restaurant operations. The Company and its franchisees have experienced substantial levels of savings as a result of the Company's size and related bargaining power, particularly with respect to food, beverage and paper goods, and advertising and marketing programs. In addition, the Company has achieved reductions in its general corporate overhead expenses. These operational efficiencies have contributed to the improvement of the Company's EBITDA margin from 8.0% in fiscal 1993 to 15.3% in fiscal 1997. STRONG MANAGEMENT TEAM. The Company's management team, led by Frank J. Belatti and Dick R. Holbrook, has overseen a period of increasing total revenues and EBITDA, as defined, from fiscal 1993 to fiscal 1997. Mr. Belatti and Mr. Holbrook previously held senior executive positions at Hospitality Franchise Systems, Inc. and, prior to that, at Arby's, Inc., and each has substantial experience in the franchising and operation of restaurant service and hotel enterprises. With an average of more than 19 years of experience in the QSR and related industries, the Company's top eight executives have substantial expertise in developing brand awareness and enjoy an excellent reputation in the industry. Members of the Company's management team possess a diverse skill base that includes brand marketing, restaurant operations, product and concept development and technology systems integration. OPERATING STRATEGY RE-IMAGE AND RENOVATE EXISTING RESTAURANTS. The Company believes that significant opportunities exist to increase the Company's revenues and gain efficiencies in its current markets by re-imaging and renovating franchised and Company-operated Popeyes and Churchs restaurants. Substantially all of the costs of re-imaging and renovating franchised restaurants is borne by the franchisee. By the end of 1999, the Company expects to substantially complete its initiative to (i) add new signage, new decor, contemporary lighting and, where appropriate, drive-thru service and (ii) improve the efficiencies of its restaurant operating systems, including the installation of energy efficient equipment at all of its Company-operated Popeyes and Churchs restaurants. Partly as a result of its re-imaging and renovation efforts, Popeyes and Churchs 5 systemwide comparable restaurant sales have increased every year since the implementation of this program in 1994. The Company, in cooperation with its franchisees, intends to begin transforming all Chesapeake restaurants with a new image, format and brand positioning during fiscal 1998. The transformations will begin in the Washington, D.C./Baltimore area and then throughout the remainder of the system. The Company hopes to complete such transformations by the end of 1998. INCREASE DOMESTIC FRANCHISED RESTAURANTS. The Company believes that significant opportunities exist to increase the number of domestic franchised restaurants operated by both new and existing franchisees and that growth through franchising can provide significant additional revenue growth at relatively low levels of capital expenditures by the Company. The Company intends to target restaurant growth in markets where it has or can achieve sufficient penetration to justify television advertising because sales at restaurants in the Company's media efficient markets are generally 5% to 10% higher than sales in non-media efficient markets. The number of domestic franchised restaurants has increased from approximately 9903 at the beginning of 1993, to 1,574 at December 28, 1997, and the Company anticipates that domestic franchisees will open over 200 new restaurants in 1998, many of which will be in the Company's target markets. CAPITALIZE ON ADDITIONAL GROWTH OPPORTUNITIES. The Company intends to aggressively pursue selected growth opportunities by (i) expanding its existing brands to new domestic and international markets, (ii) promoting the development of new points of distribution and (iii) acquiring additional branded concepts to provide franchisees with a broad range of investment opportunities, thereby generating a larger and more diversified stream of franchise revenues to the Company. These initiatives include the following: . NON-TRADITIONAL FORMATS. In response to new marketing opportunities and consumer demand, the Company intends to continue to promote the expansion of the number and type of non-traditional formats from which it sells Popeyes, Churchs and Chesapeake food products. In addition to the traditional stand-alone models, the Company has franchised and opened Popeyes, Churchs and Chesapeake restaurants within community shopping plazas, convenience stores, mall food courts, airports and other transportation centers and grocery stores. For example, the Company has opened both franchised and Company-operated restaurants in various locations of The Kroger Co., one of the nation's largest supermarket operators. . CO-BRANDING INITIATIVES. The Company intends to selectively enter into co-branding arrangements in which Popeyes and Churchs restaurants share facilities with other QSRs. Management believes that co-branding represents an attractive revenue growth opportunity that provides brand awareness in new markets and faster opening times (as restaurants are constructed within existing QSR facilities), together with reduced costs of entry and lower ongoing capital expenditures. The Company has entered 6 into several such arrangements including franchising Churchs restaurants in 93 Cara Operations Limited Harvey's hamburger restaurants in Canada and in 61 White Castle hamburger restaurants throughout the Midwest, Southeast and Northeast. . EXPANSION IN INTERNATIONAL MARKETS. Management believes that international expansion is an attractive growth opportunity due to (i) advantageous per unit economics, resulting largely from lower food and/or labor costs and less QSR competition abroad, (ii) foreign economies with an expanding group of QSR consumers and (iii) well established markets for quick-service chicken restaurants in over 80 countries around the world. The Company's international operations have increased from 172 franchised restaurants in 14 foreign countries at the beginning of 1993, to 468 franchised restaurants in 23 foreign countries at December 28, 1997. Additionally, commitments to develop international franchised restaurants have risen from 161 at the beginning of 1993, to 799 at December 28, 1997. The Company anticipates that international franchisees will open over 100 new restaurants in 1998. . NEW BRANDED CONCEPTS. Management intends to identify and acquire additional high value/high growth brands which would benefit from the Company's operating efficiency, management experience, state-of-the- art technology, service commitment to franchisees and shared administrative infrastructure. In line with this strategy, in May 1997 the Company acquired all of the intangible assets relating to the franchise business of Chesapeake, comprising 158 franchised bagel bakery restaurants concentrated in Washington, D.C., Maryland and Virginia. Additionally, in March 1998, the Company acquired 100% of Seattle Coffee Company's common stock. This transaction included the acquisition of 58 Company-operated and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands. INCREASE OPERATIONAL EFFICIENCIES AND LEVERAGE INFORMATION TECHNOLOGY. The Company's customized management information systems, typically not affordable by smaller QSR chains, provide both the Company and its franchisees with the ability to quickly capitalize on restaurant sales enhancement and profit opportunities. The Company utilizes its management information systems to (i) minimize waste and control labor costs, (ii) efficiently schedule labor, (iii) effectively manage inventory and (iv) analyze product mix and various promotional programs using point-of-sale information. For example, the Company has installed a new point-of-sale FasFax(TM) system in its Company-operated restaurants, as part of an ongoing program that was completed in July 1997. This touch-screen cash register system provides management with real time information on customer trends, sales mix, inventory management and product pricing. The Company intends to demonstrate to new and existing franchisees the efficiencies afforded by this system and other new technologies. Management also believes that additional opportunities exist to improve operational efficiencies and will 7 continue to implement a "back office" automation system to better manage food and labor costs. In 1998, management intends to launch AFC Online, an intranet for franchisees that will provide operational support, a restaurant development roadmap, a business planning template, marketing information and certain other relevant information on a 24 hours a day, seven days a week basis. MAINTAIN HIGH QUALITY PRODUCTS, SUPERIOR CUSTOMER SERVICE AND STRONG COMMUNITY RELATIONS. The Company seeks to ensure overall customer satisfaction through consistency in food quality, service and restaurant appearance. The Company maintains rigorous and ongoing quality control procedures over suppliers and distributors to ensure that its product specifications are maintained. In addition, the Company has taken an important leadership role in the neighborhoods and communities it serves. Through its involvement in Habitat for Humanity, the United Negro College Fund and the Hispanic Association of Colleges and Universities, among others, the Company has established a meaningful presence in the local communities it serves, while building customer loyalty and brand awareness. FRANCHISOR OF CHOICE(TM). The Company has adopted the Franchisor of Choice global strategy, which will be implemented by (i) promoting distinctly positioned brands, currently Popeyes, Churchs and Chesapeake, with other branded concepts to be acquired in the future, (ii) developing multi-unit development territories, (iii) providing high quality service and support to franchisees, (iv) providing franchisees with alternative formats in innovative market settings, (v) redesigning business processes to provide additional support to franchisees, including a multi-million dollar investment in new technology, (vi) eliminating barriers to growth for existing and new franchisees through new financial and real estate support mechanisms and (vii) providing on-site or field support including site selection, construction expertise, multi-national supply and distribution, marketing, operations and training. BRANDS The Company franchises and operates restaurants catering to different segments of the QSR industry. POPEYES CHICKEN AND BISCUITS. Popeyes Chicken and Biscuits was founded in New Orleans in 1972 and is the market leader in the Cajun segment of the QSR industry. With more than 1,100 restaurants worldwide, Popeyes was the second largest quick-service chicken restaurant chain in 1997, in terms of sales. Popeyes specialty menu item is fresh, hand-battered, bone-in fried chicken sold in two flavors--New Orleans Spicy and Louisiana Mild. Popeyes chicken is complemented with a wide assortment of spicy and signature Cajun cuisine side dishes, including red beans and rice, Cajun rice, Cajun fries and fresh, buttermilk biscuits. Popeyes is positioned as a premium fried chicken for customers who seek its full flavor and specialty blend of seasonings and spices. Popeyes is also known for its "limited time offers" of unique items that complement its base menu. Popeyes restaurants are generally found in urban areas in traditional standalone locations, 8 as well as in non-traditional formats such as airports and other travel centers, supermarkets and mass merchandisers. The following table sets forth selected restaurant data regarding Popeyes Company-operated and franchised restaurants.
Year Ended ----------------------------------------------------------------------------------- December 26, December 25, December 31, December 29, December 28, 1993 1994 1995 1996 1997 ------------- -------------- ------------- -------------- --------------- Total Company and franchised restaurants open at beginning of period.................. 807 814 907 964 1,021 ------------ ----------- --------- ---------- ----------- COMPANY RESTAURANTS: Open at beginning of period.................. 115 110 113 117 120 Opened or acquired........................... 1 1 6 1 1 Closed....................................... (3) (1) (2) (6) (3) Sold to franchisees.......................... (3) - - (1) (2) Acquired from franchisees.................... - 3 - 9 3 ------------ ----------- --------- ---------- ----------- Open at end of period........................ 110 113 117 120 119 ------------ ----------- --------- ---------- ----------- Net Sales (in thousands)..................... $ 84,138 $ 87,690 $ 93,686 $ 92,145 $ 97,006 Percentage increase/(decrease) in comparable sales....................... 0.8% 4.2% 2.2% (2.4)% 4.7% DOMESTIC FRANCHISED RESTAURANTS Open at beginning of period................. 654 659 740 772 774 Opened or acquired........................... 30 117 60 51 77 Closed....................................... (28) (33) (28) (41) (20) Acquired from Company........................ 3 - - 1 2 Sold to Company.............................. - (3) - (9) (3) ------------ ----------- --------- ---------- ----------- Open at end of period........................ 659 740 772 774 830 ------------ ----------- --------- ---------- ----------- Net sales (in thousands)..................... $ 484,589 $ 526,464 $ 566,526 $ 584,598 $ 630,466 Percentage increase in comparable sales...... 0% 1.2% 0.9% 1.4% 3.4% INTERNATIONAL FRANCHISED RESTAURANTS Open at beginning of period.................. 38 45 54 75 127 Opened or acquired........................... 9 11 39 58 59 Closed....................................... (2) (2) (18) (6) (4) ------------ ----------- --------- ---------- ----------- Open at end of period........................ 45 54 75 127 182 ------------ ----------- --------- ---------- ----------- Net sales (in thousands)..................... $ 32,662 $ 35,726 $ 50,628 $ 85,365 $ 125,454 Percentage increase/(decrease) in comparable sales....................... (10.3)% (2.2)% 11.6% 4.3% 1.3% Total Company and franchised restaurants open at end of period............ 814 907 964 1,021 1,131 ============ =========== ========= ========== ===========
9 CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952, is one of the United States' oldest QSR chains and has approximately 1,350 restaurants worldwide, making Churchs the second largest quick-service chicken restaurant chain, in terms of number of outlets. Churchs restaurants focus on serving traditional Southern fried chicken in a simple, no frills restaurant setting. Churchs menu items also include other Southern specialties including fried okra, coleslaw, mashed potatoes and gravy, corn on the cob and honey butter biscuits. Churchs is positioned as a value-oriented brand, providing simple, traditional meals to price conscious consumers. Churchs restaurants are traditionally found in urban areas where the reputation of a "neighborhood" restaurant has been established. With its small footprint and a simple operating system, Churchs is rapidly expanding into non-traditional formats such as convenience stores, grocery stores and co-branding locations. Internationally, Churchs has been very popular in the Far East, operating under the brand name Texas Chicken(TM). 10 The following table sets forth selected restaurant data regarding Churchs Company-operated and franchised restaurants.
Year Ended ------------------------------------------------------------------------------- December 26, December 25, December 31, December 29, December 28, 1993 1994 1995 1996 1997 ------------- ------------ ------------ ------------- ------------- Total Company and franchised restaurants open at beginning of period................. 1,078 1,078 1,165 1,219 1,257 ------------- ------------ ------------ ------------- ------------- COMPANY RESTAURANTS: Open at beginning of period................. 608 605 604 589 622 Opened or acquired.......................... 1 4 2 - 75 Closed...................................... (1) (2) (9) (13) (1) Sold to franchisees......................... (6) (4) (8) (10) (148) Acquired from franchisees................... 3 1 - 56 0 ------------- ------------ ------------ ------------- ------------- Open at end of period....................... 605 604 589 622 480 ------------- ------------ ------------ ------------- ------------- Net Sales (in thousands).................... $ 295,608 $ 314,165 $ 333,021 $ 338,135 $ 306,176 Percentage increase in comparable sales..... 4.6 % 6.2 % 5.6 % 4.3 % 5.2 % DOMESTIC FRANCHISED RESTAURANTS Open at beginning of period................. 336 327 333 364 367 Opened or acquired.......................... 11 23 27 76 93 Closed...................................... (23) (20) (4) (27) (186) Acquired from Company....................... 6 4 8 10 148 Sold to Company............................. (3) (1) - (56) 0 ------------- ------------ ------------ ------------- ------------- Open at end of period....................... 327 333 364 367 590 ------------- ------------ ------------ ------------- ------------- Net sales (in thousands).................... $ 144,611 $ 150,844 $ 167,953 $ 187,512 $ 268,179 Percentage increase in comparable sales..... 3.3 % 2.8 % 2.5 % 5.1 % 2.9 % INTERNATIONAL FRANCHISED RESTAURANTS Open at beginning of period................. 134 146 228 266 268 Opened or acquired.......................... 14 87 52 41 32 Closed...................................... (2) (5) (14) (39) (14) ------------- ------------ ------------ ------------- ------------- Open at end of period....................... 146 228 266 268 286 ------------- ------------ ------------ ------------- ------------- Net sales (in thousands).................... $ 112,410 $ 125,252 $ 146,772 $ 150,349 $ 149,633 Percentage increase/(decrease) in comparable sales....................... (4.4)% 3.4 % 0.9 % (2.1)% 2.6 % Total Company and franchised restaurants open at end of period........... 1,078 1,165 1,219 1,257 1,356 ============= ============ ============ ============= =============
11 CHESAPEAKE. On May 5, 1997, the Company acquired all of the intangible assets of the franchise business of Chesapeake from The American Bagel Company. Located primarily in Washington, D.C., Maryland and Virginia, Chesapeake currently franchises 154 bagel restaurants and has development agreements for over 200 additional restaurants, of which approximately 20 restaurants are expected to open in 1998. In 1997, Chesapeake was the fourth largest bagel company in the world and the world's largest "made from scratch" bagel company. "Made from scratch" means that the bagels are prepared fresh at each location each day. Chesapeake restaurants offer a variety of freshly made items, including a wide assortment of bagels and other baked goods, sandwiches, salads, fountain drinks and specialty coffees. Several of the restaurants have viewing areas that allow customers to experience the bagel making process. The acquisition of Chesapeake gives the Company a presence in the growing bagel segment of the QSR industry, provides a platform to expand into the growing bakery cafe segment and diversifies its current brand portfolio, supporting the Company's Franchisor of Choice(TM) global strategy. MANUFACTURING OPERATIONS ULTRAFRYER SYSTEMS. The Company's Ultrafryer Systems ("Ultrafryer") division (f.k.a. Far West Products) is a manufacturer of restaurant equipment and is located in San Antonio, Texas. Ultrafryer's focus is to provide equipment for Company-operated and franchised Popeyes and Churchs restaurants domestically and internationally, as well as other QSR customers. Ultrafryer's main product is the Ultrafryer(TM) gas fryer. SITE SELECTION The Company has an extensive domestic site selection process for the establishment of new Popeyes, Churchs and Chesapeake restaurant locations, commencing with an overall market plan for each intended area of development compiled by the Company and the relevant area developer, if any. This market plan divides each such area into trading areas based on a detailed computer analysis taking into account such factors as competitor locations, locations of shopping centers and other commercial draws, natural and other boundaries, residential and workplace populations and customer profile information that measures propensities and demand for various restaurant segments as well as for individual brands. Once a market plan is established for a particular area, local real estate managers of the Company or area developers together with local real estate brokers focus on the most desirable sites in each designated trade area, taking into account such factors as visibility, ready accessibility (particularly for evening drive-time traffic), parking, signage and adaptability of any current structure, as well as a determination of the availability of the site and the costs relating thereto. A thorough analysis of each site, including the foregoing types of information, photographs of the site and neighboring area, and a proposed layout and site elevations, as well as other materials, must be submitted to the Company for approval. In addition, leases must contain certain terms and provisions and are subject to the approval of the Company. The Company emphasizes free-standing pad sites and end-cap locations with ample parking and easy dinner-time access 12 from high traffic roads. Highly visible signage consistent with trade dress and local laws and regulations is also aggressively pursued. The Company's involvement in the international site selection process is less significant due to the relative size and sophistication of the Company's international franchisees, who independently conduct extensive site investigations. International sites are often located in highly concentrated urban areas and are built with a multi-floor layout to accommodate the higher percentage of dine-in customers. FRANCHISE DEVELOPMENT The Company's global strategy includes the opening of substantially all new restaurants through franchising additional restaurants to new and existing franchisees. The Company enjoys strong relationships with its franchisees as a result of its ongoing efforts to (i) develop Popeyes and Churchs globally and Chesapeake in the U.S. by investing capital to re-image and renovate Company- operated restaurants in each of the systems, (ii) provide strong operational, marketing and technological support to franchisees, (iii) deliver operating efficiencies and economies of scale to its franchisees and (iv) promote the expansion of points of distribution to non-traditional formats and new markets for existing brands, and by acquiring and franchising high value/high growth branded concepts. DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide for the development of a specified number of restaurants within a defined domestic geographic territory in accordance with a schedule of restaurant opening dates. Development schedules generally cover three to five years and typically have benchmarks for the number of restaurants to be opened and in operation at six- to twelve-month intervals. Area developers currently pay a development fee of $10,000 for the first restaurant to be developed and $5,000 for each additional restaurant to be developed under the same development agreement. Such development fees are non-refundable and paid when the area development agreement is executed. The Company currently offers exclusive and non-exclusive development agreements. Under exclusive development agreements, developers are granted a geographic area (the "Development Area") to develop a Popeyes, Churchs or Chesapeake restaurant within which the Company agrees to neither open nor grant the right to open to anyone other than the developer another Popeyes, Churchs or Chesapeake restaurant (as the case may be) until 60 days after the expiration of the development schedule set out in the development agreement subject, to the other terms of such agreement. The Development Area generally does not include military bases, public transportation facilities, toll road plazas, universities, recreational theme parks and the interior structural confines of shopping malls, even though such facilities may be located within a given Development Area. If a developer fails to comply with the development schedule contained in its development agreement, or otherwise defaults under the development agreement or under any other agreement with the Company, the Company may, among other things (i) terminate or reduce the territorial exclusivity in the Development Area or reduce the size of the Development Area, (ii) terminate the development agreement, (iii) reduce the 13 number of restaurants that the developer can develop under the development agreement, (iv) accelerate the development schedule, (v) withhold site approval or (vi) refuse to permit the opening of restaurants under construction. Under non-exclusive development agreements, the developer is not afforded any territorial exclusivity and the Company reserves the right to establish or franchise any restaurants in proximity to the development territory described under such agreement. INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development agreements with qualifying parties to develop Popeyes or Churchs franchised restaurants in jurisdictions outside of the United States ("International Development Rights"). International Development Rights may include one or more countries or limited geographic areas within a particular country. The terms of the development agreements for International Development Rights are, in most respects, similar to domestic development agreements. International development agreements also require the payment of a non-refundable "territorial fee" for granting development rights in the new country as well as a pre-payment of a portion of the franchise fee for each franchised restaurant to be developed under the agreement. International development agreements also include additional provisions necessary to address the multi-national nature of the transaction (including foreign currency exchange, taxation matters and international dispute resolution provisions) and are also subject to modifications necessary to comply with the requirements of applicable local laws, such as laws relating to technology transfers, export/import matters and franchising. FRANCHISE AGREEMENTS. Once a site has been approved by the Company and the property has been acquired by the developer either by purchase or lease, the Company and the area developer enter into a franchise agreement under which the area developer becomes the franchisee for the specific restaurant to be developed at such site. Current franchise agreements typically provide for payment of a franchise fee of $15,000 per restaurant. Franchise fees for mass merchandise locations (including department stores and supermarkets) are generally $10,000 for the first location and $5,000 for each additional mass merchandise location under the same development agreement. In addition, the Popeyes and Churchs franchise agreements require franchisees to pay a 5% royalty on net restaurant sales and a 3% (with respect to Popeyes) and 4% (with respect to Churchs) national advertising fund contribution (reduced to a maximum of 1% if a local advertising co-operative is formed). The Chesapeake franchise agreements require franchisees to pay a 4% royalty on net restaurant sales and a 2% national advertising fund contribution. Certain of the Company's older franchise and area development agreements provide for lower royalties and reduced franchise and area development fees. Such older forms of agreements constitute a decreasing percentage of all franchise agreements. The Company now offers franchise agreements which provide for an area of limited exclusivity (the "Protected Area") surrounding the Popeyes, Churchs and Chesapeake franchise in which the Company may neither develop nor grant to others the right to develop another Popeyes, Churchs or Chesapeake restaurant (as the case may be), except that the Company generally excepts from such Protected Area certain specified locations. The Protected Area generally 14 consists of an area equal to the lesser of (i) a one-mile radius from the franchised restaurant or (ii) an area surrounding the franchised restaurant, encompassing a population (residential and/or daytime commercial) of 50,000 people. The Protected Area does not include (i) enclosed shopping malls, (ii) existing franchised restaurants and/or franchised restaurants for which franchise agreements were previously granted or (iii) alternative venues, including transportation facilities, toll roads and major thoroughfares, educational facilities, institutional dining facilities, governmental facilities, military bases, amusement parks and other locations, even though such facilities may be located within the Protected Area. All of the Company's franchise agreements require that each restaurant operates in accordance with the operating procedures, adheres to the menu established by the Company and meets applicable quality, service and cleanliness standards. The Company may terminate the franchise rights of any franchisee who does not comply with such standards. The Company is specifically authorized to take accelerated action if any franchised restaurant presents a health risk. The Company believes that maintaining superior food quality, a clean and pleasant environment and excellent customer service are critical to the reputation and success of the Popeyes, Churchs and Chesapeake systems and it intends to aggressively enforce applicable contractual requirements. Franchisees may contest such terminations. The terms of international franchise agreements are substantially similar to domestic franchise agreements, except that such agreements may be modified to reflect the multi-national nature of the transaction and to comply with the requirements of applicable local laws. In addition, royalty rates may differ from domestic franchise agreements due to the relative size and sophistication of international franchisees. The international developer is required to partially pre-pay a franchise fee (typically $20,000) at the time the development agreement is entered into, along with a development fee (usually $5,000 to $10,000 for each development commitment). TURNKEY DEVELOPMENT. In order to expedite development of domestic franchised restaurants, the Company may build restaurants in certain markets, which will be subsequently sold to qualifying franchisees as franchised restaurants ("Turnkey Units"). In 1997, the Company entered into an agreement with Banco Popular De Puerto Rico to provide up to $15 million in revolving construction financing to AFC and permanent financing to qualifying franchisees for these Turnkey units. The Company expects to have up to 30 sites in various stages of development during 1998 under the Turnkey Program. 15 MARKETING AND COMMUNITY ACTIVITY Popeyes, Churchs and Chesapeake products are marketed to their respective customer bases using a three-tiered marketing strategy. First, electronic media (local TV and radio) create awareness for the products and spark consumer interest in particular product offerings. Second, print media (newspaper ads, free-standing inserts and direct mail) generate trial by offering a purchase incentive--often a coupon--to buy a new product or promotional item. Finally, signage and point-of-purchase materials at Popeyes, Churchs and Chesapeake restaurants support the promotional activity. Each of Popeyes, Churchs and Chesapeake offer consumers a new program each month to maintain consumer product interest. New product introductions and "limited time only" promotional items also play major sales building roles and create regular repeat customers. Both franchised and Company-operated Popeyes, Churchs and Chesapeake restaurants contribute to a national advertising fund to pay for the development of marketing materials and to a local advertising fund to support programs in their local markets. For the fiscal year ended December 28, 1997, the Company contributed approximately $20.1 million to the Popeyes, Churchs and Chesapeake advertising funds. AFC is also heavily involved in community activities and support programs that often have an educational theme. Through The AFC Foundation, Inc., a non- profit foundation, the Company has agreed to sponsor and help construct 200 homes worldwide through Habitat For Humanity, a non-profit sponsor of housing construction for the poor. In addition, the Company supports the United Negro College Fund and the Hispanic Association of Colleges and Universities with promotional fund raisers. Both brands also sponsor Adopt-A-School programs. COMPETITION The QSR industry is intensely competitive with respect to price, customer service, concept, location, convenience and food quality. The industry is mature and competition can be expected to increase. In addition, there are many well established food service competitors with substantially greater financial and other resources than the Company. Franchised and Company-operated restaurants compete with a number of national and regional restaurant chains, as well as with locally-owned restaurants offering low-priced and medium-priced foods. Convenience stores, grocery stores, delicatessens, food counters, cafeterias and other purveyors of moderately priced and quickly prepared foods also compete with the Company. The Company's primary competitor in the quick-service chicken restaurant market is KFC, which has a majority of the quick-service chicken restaurant market. The Company's next largest competitors in the quick-service chicken restaurant market are a number of regional chicken restaurant chains. From recently gathered industry data, management believes that Company sales are over five times the sales of the Company's next largest chicken QSR competitor. Other QSR competitors include hamburger, pizza, sandwich and Chinese 16 food QSRs, other purveyors of carry-out food and convenience dining establishments, including national restaurant chains. The Company believes that product quality, taste, name recognition, convenience of location, speed of service, menu variety, price and ambiance are the most important competitive factors in the QSR industry and that its restaurants effectively compete in such categories. The Company regularly monitors its competitors' prices and adjusts its prices and marketing strategy in light of existing conditions. MANAGEMENT INFORMATION SYSTEMS In 1994, the Company entered into a ten-year outsourcing agreement with IBM Global Services, a division of IBM ("IGS"). Under this agreement, IGS is in the process of customizing the Company's management information systems. Typically not affordable by smaller quick-service restaurant chains, the IGS management information system provides the Company with the ability to quickly capitalize on restaurant sales enhancement and profit opportunities. The Company utilizes its management information systems to (i) minimize waste and control labor costs, (ii) efficiently schedule labor, (iii) effectively manage inventory and (iv) analyze product mix and various promotional programs using point-of-sale information. The IGS agreement allowed the Company to complete the implementation of a new point-of-sale FasFax(TM) system in each of its Company- operated restaurants in July 1997. This touch-screen cash register system allows for a significant increase of timely information on customer trends, sales mix, inventory management and product pricing. The Company intends to demonstrate to new and existing franchisees the efficiencies afforded by the FasFax(TM) system and other new technologies. Management believes that the IGS agreement has provided the Company with a number of additional opportunities to improve operational efficiencies. In that regard, the Company will continue to implement a "back office" automation system to better control food and labor costs. In 1998, management intends to launch AFC Online, an intranet for franchisees that will provide operational support, a restaurant development roadmap, a business planning template, marketing information and certain other relevant information on a 24 hours a day, seven days a week basis. Finally, the IGS agreement has allowed the Company's numerous departments to join a common computer network using a common infrastructure. See Notes 9 and 14 to the Company's Consolidated Financial Statements. YEAR 2000 ISSUES In the process of customizing the Company's management information systems, the Company established procedures to ensure that its new systems were year 2000 compliant. In addition, during 1997 the Company formalized a plan to analyze all of its financial and operating computer systems to ensure any corrective action necessary to eliminate problems before the beginning of the year 2000. This plan includes analyses of existing systems, new systems to be implemented in 1998 and 1999, systems used by its vendors and customers that are needed for the proper functioning of the Company's systems and all other known Company processes that use computer systems to function. 17 While the analysis phase of the plan has not been completed as of December 28, 1997, the Company believes that, with the completion of its system upgrades, a significant portion of the potential year 2000 issues will be resolved. Although the analysis is not yet complete, the Company believes that the cost, if any, to make other systems year 2000 compliant will not be material to its results of operations. SUPPLIERS Franchisees are generally required to purchase all ingredients, products, materials, supplies, and other items necessary in the operation of their businesses solely from suppliers who (i) demonstrate, to the continuing satisfaction of the Company, the ability to meet the Company's standards and specifications for such items, (ii) possess adequate quality controls and capacity to supply franchisees' needs promptly and reliably and (iii) have been approved in writing by the Company. Notwithstanding the above, Company-operated restaurants are obligated by various agreements to serve certain Coca-Cola(R) or Dr Pepper(R) beverages exclusively. The Company also has an agreement with Diversified Foods and Seasonings, Inc. ("Diversified"), which terminates in March 2029, under which the Company is required to purchase certain proprietary products made exclusively by Diversified. Moreover, Diversified is the sole supplier of certain proprietary products for the Popeyes system. Diversified sells only to Company approved distributors who in turn sell to franchised and Company-operated restaurants. In the fiscal year ended December 28, 1997, the Popeyes system purchased approximately $32.2 million of proprietary products made by Diversified. The Company recently settled an action brought by Diversified relating to the Diversified supply agreement. See "Item 3. Legal Proceedings". The Popeyes and Churchs systems purchase fresh chicken from 14 suppliers from 33 plant locations. Supplies are generally provided to franchised and Company-operated restaurants in the Popeyes and Churchs systems pursuant to supply agreements negotiated by Popeyes Operators Purchasing Cooperative Association, Inc. ("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"), respectively, each a not-for-profit corporation that was created for the purpose of consolidating the collective purchasing power of the franchised and Company- operated restaurants and negotiating favorable terms therefor. COPA also purchases certain ingredients and supplies for Chesapeake franchised and Company-operated restaurants in order to further leverage the collective buying power of AFC. The purchasing cooperatives are not obligated to purchase, and do not bind their members to commitments to purchase, any supplies. Membership in each cooperative is open to all franchisees. Since 1995, the Company's franchise agreements have required that each franchisee joins its respective purchasing cooperative as a member. All Company-operated Popeyes and Churchs restaurants are members of POPCA or COPA, as the case may be. Substantially all of the Company's domestic franchisees participate in POPCA or COPA. 18 TRADEMARKS AND LICENSES The Company owns a number of trademarks and service marks that have been registered with the United States Patent and Trademark Office, including the marks Popeyes(R), Churchs(R), Popeyes Chicken and Biscuits(R), Chesapeake Bagel Bakery(R) and each brand's logo utilized by the Company and its franchisees in virtually all Popeyes, Churchs and Chesapeake restaurants domestically. The Company also has trademark applications pending for a number of additional marks, including Gotta Love It(TM), Day of Dreams(TM) and Franchisor of Choice(TM). In addition, the Company has registered or made application to register the marks (or, in certain cases, the marks in connection with additional words or graphics) in approximately 100 foreign countries, although there can be no assurance that any mark is registrable in every country registration is sought. The Company considers its intellectual property rights to be important to its business and actively defends and enforces them. FORMULA AGREEMENT. The Company has a formula licensing agreement, as amended (the "Formula Agreement"), with Alvin C. Copeland ("Copeland"), the former owner of the Popeyes and Churchs restaurant systems, and Diversified, which calls for the worldwide exclusive licensing to the Popeyes system of the spicy fried chicken formula and certain other ingredients used in Popeyes products. The Company recently settled an action brought by Copeland and Diversified in connection with the Formula Agreement. See "Item 3. Legal Proceedings". The Formula Agreement provides for monthly royalty payments of $237,500 until April 1999, and, thereafter, monthly royalty payments of $254,166 until March 2029. KING FEATURES AGREEMENTS. The Company currently has a number of domestic and international agreements with The Hearst Corporation, King Features Syndicate Division ("King Features") under which the Company has the exclusive license to use the image and likeness of the cartoon character "Popeye" (and certain companion characters such as "Olive Oyl") in connection with the operation of franchised and Company-operated Popeyes restaurants worldwide. Under the current agreements, the Company is obligated to pay to King Features a royalty of 0.1% of the first $1 billion of Popeyes systemwide sales and 0.05% for the next $2 billion of such sales. The King Features agreements automatically renew annually. ACQUISITION STRATEGY One of the Company's core strategies is to grow through the acquisition of additional high value/high growth franchiseable concepts, leveraging the implementation of such concepts over its existing franchise system infrastructure. In that regard, the 1997 Credit Facility (see Note 8 in the footnotes to the Consolidated Financial Statements) includes a $100 million Acquisition Facility. To implement this strategy successfully, the Company will be dependent on its ability to identify and acquire such concepts and to successfully integrate the operation of such concepts into the Company. There can be no assurance that the Company will be able to identify 19 appropriate concepts or that such concepts will be available on terms and at prices that will be attractive and profitable to the Company. EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS The Company's global strategy will depend heavily on growing its franchise operations. At December 28, 1997, the Company franchised 1,574 Popeyes, Churchs and Chesapeake restaurants domestically and 468 Popeyes and Churchs restaurants internationally. The Company's success is dependent upon its franchisees and the manner in which they develop and operate Popeyes, Churchs and Chesapeake restaurants. As the Company expands it will also need to find new franchisees who are capable of promoting the Company's strategy. The opening and success of franchised restaurants will depend on various other factors, including the availability of suitable sites, the negotiation of acceptable lease or purchase terms for new locations, permitting and regulatory compliance, the ability to meet construction schedules, the financial and other capabilities of the Company's franchisees and developers, the ability of the Company to manage this anticipated expansion and hire and train personnel, and general economic and business conditions. Not all of the foregoing factors are within the control of the Company or its franchisees or developers. INTERNATIONAL OPERATIONS As of December 28, 1997, the Company franchises 468 restaurants to franchisees in 23 foreign countries and plans to expand its foreign franchising program significantly in the future. There are no Chesapeake operations outside the U.S. The Company does not own any property, operate any restaurants or have equity ownership in any companies that are located in foreign countries. Included in the Company's revenues are foreign franchise royalties and other fees that are based, in part, on sales generated by its foreign franchised restaurants, including a significant number of franchised restaurants in Asia. Therefore, the Company is exposed, to a limited degree, to changes in international economic conditions and currency fluctuations. The Company has not historically and did not at the end of 1997 maintain any hedges against foreign currency fluctuations. Losses recorded by the Company during the past three years related to foreign currency fluctuations have not been material to the Company's results of operations. For fiscal years 1995, 1996 and 1997, royalties and other revenues from foreign franchisees represented 2.2%, 2.4% and 2.4%, respectively, of total revenues of the Company. FOOD SERVICE INDUSTRY Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns and the type, number and location of competing restaurants. Multi-unit food service chains such as Popeyes, Churchs and Chesapeake can also be adversely affected by publicity resulting from food quality, illness, injury or other health concerns or operating issues stemming from just one restaurant or a limited number of restaurants. 20 Dependence on frequent deliveries of fresh food products also subjects food service businesses such as the Company to the risk that shortages or interruptions in supply caused by adverse weather or other conditions could adversely affect the availability, quality and cost of ingredients. In addition, material changes in, or the Company's or its franchisees' failure to comply with, applicable Federal, state and local government regulations, and such factors as inflation, increased food, labor and employee benefits costs, such as the recent, Federally-mandated increase in the minimum wage, regional weather conditions and the unavailability of experienced management and hourly employees may also adversely affect the food service industry in general and the Company's results of operations and financial condition in particular. FLUCTUATIONS IN COST OF CHICKEN The Company's and its franchisees' principal raw material is fresh chicken. For both fiscal years ended December 29, 1996 and December 28, 1997, approximately 60% of the Company's restaurant cost of sales were attributable to the purchase of fresh chicken. As a result, the Company is significantly affected by increases in the cost of chicken, which can be affected by, among other factors, the cost of grain and overseas demand for chicken products. Due to extremely competitive conditions in the QSR industry, following increases in raw material costs such as chicken, the Company has generally not raised retail prices sufficiently to pass all such costs on to the consumer. While the Company's purchase agreements with its fresh chicken suppliers generally provide for a "ceiling", or highest price, and a "floor", or lowest price, that the Company will pay for chicken over the contract term, the ceilings are generally set at prices well above the current market price, exposing the Company to a risk of price increases. Additionally, such supply contracts are generally for one to two years, thereby exposing the Company to regular cost increases if the price of fresh chicken continues to rise. INSURANCE The Company carries property, liability, business interruption, crime, and workers' compensation insurance policies, which it believes are customary for businesses of its size and type. Franchisees are also required to maintain certain minimum standards of insurance with insurance companies satisfactory to the Company pursuant to their franchise agreements, including commercial general liability insurance, workers' compensation insurance, all risk property and casualty insurance and automobile insurance. Under the current form of franchise agreement, such insurance must be issued by insurers approved by the Company. SEASONALITY The Company has historically experienced the strongest operating results at Popeyes, Churchs and Chesapeake restaurants during the summer months while operating results have been somewhat lower during the winter season. Certain holidays and inclement winter weather reduce the volume of consumer traffic at quick-service restaurants and may impair the ability of certain restaurants to conduct regular operations for short periods of time. 21 REGULATION The Company is subject to various Federal, state and local laws affecting its business, including various health, sanitation, fire and safety standards. Newly constructed or remodeled restaurants are subject to state and local building code and zoning requirements. In connection with the remodeling and alteration of the Company's restaurants, the Company may be required to expend funds to meet certain Federal, state and local regulations, including regulations requiring that remodeled or altered restaurants be accessible to persons with disabilities. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the opening of new restaurants in particular areas. The Company is also subject to the Fair Labor Standards Act and various state laws governing such matters as minimum wage requirements, overtime and other working conditions and citizenship requirements. A significant number of the Company's food service personnel are paid at rates related to the Federal minimum wage and increases in the minimum wage, including those recently enacted by the Federal government, have increased the Company's labor costs. Certain states and the Federal Trade Commission require franchisors such as the Company to transmit specified disclosure statements to potential franchisees before granting a franchise. Additionally, some states require franchisors to register their franchise with the state before it may offer a franchise. The Company believes that its Uniform Franchise Offering Circulars (together with any applicable state versions or supplements) comply with both the Federal Trade Commission guidelines and all applicable state laws regulating franchising in those states in which it has offered franchises. The Company is also subject to various Federal, local and state laws regulating the discharge of pollutants into the environment. The Company believes that it conducts its operations in substantial compliance with applicable environmental laws and regulations as well as other applicable laws and regulations governing its operations. ENVIRONMENTAL MATTERS Approximately 200 of the Company's owned and leased properties are known or suspected to have been used by prior owners or operators as retail gas stations, and a few of these properties may have been used for other environmentally sensitive purposes. Many of these properties previously contained underground storage tanks ("USTs") and some of these properties may currently contain abandoned USTs. As a result of the use of oils and solvents typically associated with automobile repair facilities and gas stations, it is possible that petroleum products and other contaminants may have been released at these properties into the soil or groundwater. Under applicable Federal and state environmental laws, the Company, as the current owner or operator of these sites, may be jointly and severally liable for the costs of investigation and remediation of any such contamination. As a result, after an analysis of its property portfolio, including testing of soil and groundwater at a representative sample of its facilities, the Company believes it has accrued adequate reserves for environmental remediation liabilities. 22 While the Company is currently not subject to any administrative or court order requiring remediation at any of its properties, the Company is considering active remediation at a limited number of facilities containing USTs. EMPLOYEES AND PERSONNEL As of December 28, 1997, the Company employed approximately 1,800 full-time salaried employees and approximately 9,600 full-time and part-time hourly employees. Of the Company's full-time salaried employees, 70 are involved in overseeing restaurant operations, 1,300 are involved in the management of individual restaurants and all remaining salaried employees are responsible for corporate administration, franchise administration and business development. None of the Company's employees are covered by a collective bargaining agreement. The Company believes that the dedication of its employees is critical to its success, and that its relationship with its employees is good. 23 ITEM 2. PROPERTIES The Company either owns or leases the land and buildings for its Company- operated restaurants. In addition, in certain circumstances, the Company owns or leases land and buildings which it then leases or subleases to its franchisees and third parties. While the Company expects to continue to lease many of its sites in the future, the Company also may purchase the land and/or buildings for restaurants to the extent acceptable terms are available. The majority of the Company's restaurants are located in retail community shopping centers and freestanding, well-trafficked locations. Restaurants leased to the Company are typically leased under "triple net" leases that require the Company to pay real estate taxes, maintenance costs and insurance premiums and, in some cases, to pay percentage rent based on sales in excess of specified amounts. Generally, the Company's leases have initial terms of 20 years with options to renew for two additional five-year periods. Typical leases or subleases by the Company to franchisees are triple net to the franchisee, provide for a minimum rent, based upon prevailing market rental rates, and have a term that usually coincides with the term of the franchise agreement for the location, often being 20 years with renewal options. Such leases are typically cross-defaulted against the corresponding franchise agreement for that site. The following table sets forth the locations by state of the Popeyes Company-operated restaurants as of December 28, 1997:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Texas.......................... 19 40 59 Louisiana...................... 3 36 39 Georgia........................ 2 19 21 -- -- --- Total Popeyes................ 24 95 119 == == ===
24 The following table sets forth the locations by state of the Churchs Company-operated restaurants as of December 28, 1997:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Texas................... 147 99 246 Georgia................. 32 17 49 Louisiana............... 21 19 40 Alabama................. 23 11 34 Arizona................. 15 9 24 Florida................. 21 2 23 Mississippi............. 11 5 16 Oklahoma................ 15 1 16 Tennessee............... 11 1 12 New Mexico.............. 5 2 7 Missouri................ 6 - 6 Arkansas................ 4 1 5 Kansas.................. 2 - 2 --- --- --- Total Churchs......... 313 167 480 === === ===
The following table sets forth the locations by state of the Chesapeake Company-operated restaurants as of December 28, 1997:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Georgia............................... - 1 1 -------- -------- ----- Total Chesapeake..................... - 1 1 ======== ======== =====
The Company's headquarters are located in approximately 102,000 square feet of leased and subleased office space in Atlanta, Georgia. The leased space, covering approximately 87,000 square feet, is subject to extensions through 2013, and the subleased space is subject to extensions through 2003. The company's Popeyes division will be relocating to another facility in Atlanta, Georgia starting July 1, 1998. The Company believes that its existing headquarters provides sufficient space to support its current needs. The Company's accounting and computer facilities and its Ultrafryer Systems manufacturing facilities are located in San Antonio, Texas and are housed in three buildings that are located on approximately 16 acres of land owned by the Company. Substantially all of the properties and assets of the Company are pledged as collateral against the Company's bank credit facility (See Note 8 to the Company's Consolidated Financial Statements). 25 ITEM 3. LEGAL PROCEEDINGS In June 1996, the Company was named as a defendant to a certain lawsuit commenced by Alvin C. Copeland and Diversified against Flavorite Laboratories, Inc. ("Flavorite") alleging misappropriation of certain trade secrets and tortious interference with contractual relations, among other things, with respect to the formula used in the preparation of Popeyes fried chicken products and the supply of certain ingredients used in such products. In June 1997, this lawsuit was settled and, among other things, the parties agreed (a) to extend the term of the existing Diversified supply agreement until March 2029, subject to further renewal, and (b) that the Formula Agreement will be extended through March 2029 at the monthly royalty rate in effect in 1999. See "Item 1. Business --Suppliers" and "--Trademarks and Licenses". In July 1997, CP Partnerships ("CP") filed a complaint against the Company alleging patent infringement regarding the design of the proprietary gas fryer manufactured by its Ultrafryer Systems division. Due to the early stages of this dispute, the ultimate liability, if any, to the Company cannot be quantified. It is management's belief that the final outcome will not have a material adverse effect on the Company's consolidated financial position or results of operations. While the Company is party to a number of other pending legal proceedings that have arisen in the ordinary course of its business, management does not believe that the Company is a party to any pending legal proceeding, the resolution of which would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 26 PART II. ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCK-HOLDER MATTERS There is no established public trading market for the common stock of the Company. As of March 15, 1998, the number of record holders of the Company's common stock was 34,448,604. The Company has not declared or paid cash dividends to its shareholders. The Company anticipates that all of its earnings in the near future will be retained for the development and expansion of its business and, therefore, does not anticipate paying dividends on its common stock in the foreseeable future. Declaration of dividends on the common stock will depend, among other things, upon levels of indebtedness, future earnings, the operating and financial condition of the Company, its capital requirements and general business conditions. The agreements governing the Company's indebtedness contain provisions which restrict the ability of the Company to pay dividends on its common stock. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 27 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected historical consolidated financial information for the Company for the periods and the dates indicated. The balance sheet data and statement of operations data for the years ended December 26, 1993, December 25, 1994, December 31, 1995, December 29, 1996 and December 28, 1997 set forth below have been derived from the financial statements of the Company, which have been audited by Arthur Andersen LLP, independent public accountants. This selected historical consolidated financial information should be read in conjunction with, and is qualified in its entirety by (i) "Management's Discussion and Analysis of Financial Condition and Results of Operations" and (ii) the audited Consolidated Financial Statements for the Company and the notes thereto, each of which is included elsewhere in this report.
Year Ended (1) ---------------------------------------------------------------------- December 26, December 25, December 31, December 29, December 28, 1993 1994 1995 1996 1997 ------------ ------------ ------------ ------------ ------------ REVENUES: Restaurant sales........ $ 379,745 $ 401,855 $ 426,707 $ 430,280 $ 403,285 Revenues from franchising............ 37,198 41,581 47,916 51,336 63,650 Revenues from manufacturing.......... 7,718 12,026 9,969 11,431 7,647 Other revenues.......... 9,029 8,252 8,320 8,005 8,766 ------------ ------------ ------------ ------------ ------------ Total revenues......... 433,690 463,714 492,912 501,052 483,348 COSTS AND EXPENSES: Restaurant cost of sales 118,997 133,893 139,286 142,199 131,374 Restaurant operating expenses............... 207,303 206,862 215,391 212,579 197,803 Manufacturing cost of sales.................. 8,401 11,705 7,273 8,867 5,032 General and administrative......... 65,837 72,249 80,002 77,614 80,485 Executive compensation award (2).............. - - 10,647 - - Depreciation and amortization........... 24,892 25,438 28,665 30,904 33,803 Gain on sale of fixed assets from AFDC transaction....... - - - - (5,319) ------------ ------------ ------------ ------------ ------------ Total costs and expenses............ 425,430 450,147 481,264 472,163 443,178 ------------ ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS..... 8,260 13,567 11,648 28,889 40,170 OTHER EXPENSES:............ Interest, net........... 19,246 19,172 23,444 15,875 20,645 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS................... (10,986) (5,605) (11,796) 13,014 19,525 Income tax (expense) benefit................ 3,216 553 2,969 (5,163) (8,525) ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS....... (7,770) (5,052) (8,827) 7,851 11,000 Extraordinary loss, net of taxes (3)............... (277) - - (4,456) - ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS).......... (8,047) (5,052) (8,827) 3,395 11,000 8% Preferred Stock dividends................. 4,460 4,467 4,555 1,316 - 10% Preferred Stock dividends payable in kind........... - - - 3,956 2,240 Accelerated accretion of 8% Preferred Stock discount upon retirement............... - - - 8,719 - Accretion of 8% Preferred Stock discount............ 1,967 2,250 2,571 813 - ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK........... $ (14,474) $ (11,769) $ (15,953) $ (11,409) $ 8,760 ============ ============ ============ ============ ============ OTHER FINANCIAL DATA: EBITDA, as defined (4).. $ 34,731 $ 43,435 $ 55,342 $ 64,866 $ 74,017 EBITDA margin (5)....... 8.0% 9.4% 11.2% 12.9% 15.3%
28
CASH FLOWS PROVIDED BY (USED IN): Operating activities.... 27,011 22,673 28,031 47,801 52,515 Investing activities.... (9,462) (11,493) (20,114) (29,388) (35,782) Financing activities.... (19,147) (17,530) (10,721) (12,806) (2,985) Cash capital expenditures (6) Maintenance capital expenditures......... $ 6,808 $ 5,050 $ 5,483 $ 6,010 $ 7,756 Re-images and renovation............ 2,985 10,267 15,502 15,342 13,356 New restaurant development........... 1,831 1,999 2,272 3,215 4,588 Other.................. 5,979 3,496 1,739 9,384 16,436 Total cash capital ------------ ------------ ------------ ------------ ------------ expenditures....... $ 17,603 $ 20,812 $ 24,996 $ 33,951 $ 42,136 RATIO OF EARNINGS TO FIXED CHARGES (7)............... - - - 1.29% 1.64% BALANCE SHEET DATA: Total assets............ $ 348,852 $ 327,494 $ 328,645 $ 339,668 $ 380,002 Total debt and capital lease obligations............. 201,810 193,646 204,025 151,793 243,882 Mandatorily redeemable preferred stock................... 41,647 43,897 46,468 59,956 - Total shareholders equity (deficit).............. 4,591 (6,707) (21,665) 37,902 48,459 RESTAURANT DATA (UNAUDITED) (8): Systemwide restaurant sales (in thousands): Popeyes................ $ 601,389 $ 649,880 $ 710,840 $ 762,108 $ 853,078 Churchs................ 552,629 590,261 647,746 675,996 723,988 Chesapeake Bagel....... - - - - 50,878 ------------ ------------ ------------ ------------ ------------ Total................. $1,154,018 $ 1,240,141 $ 1,358,586 $ 1,438,104 $ 1,627,944 ============ ============ ============ ============ ============ Systemwide restaurant units: Popeyes................ 814 907 964 1,021 1,131 Churchs................ 1,078 1,165 1,219 1,257 1,356 Chesapeake Bagel....... - - - - 155 ------------ ------------ ------------ ------------ ------------ Total................. 1,892 2,072 2,183 2,278 2,642 ============ ============ ============ ============ ============ Systemwide percentage change in comparable restaurant sales(9): Popeyes................ (0.4)% 1.4% 1.6% 1.1% 3.3% Churchs................ 2.4% 4.8% 3.9% 2.8% 3.9% Total commitments outstanding, end of period (10).... 668 1,047 1,083 1,319 1,715
(1) The company has a 52/53-week fiscal year ending on the last Sunday in December which normally consists of 13 four-week periods. The fiscal year ended December 31, 1995 included 53 weeks of operations. (2) During 1995, the Board of Directors granted a special award of $10.0 million to the CEO of the Company and his designees contingent upon the happening of certain events related to a recapitalization of the Company. See "Item 11. Executive Compensation -- Note (2)". The award became payable at the time of the Recapitalization. This award was paid in 1996 in approximately 3.0 milion shares of the Company's common stock valued at $3.317 per share, the market value of the Company's common stock at the date of issuance. As a result of the Recapitalization, certain senior executive officers became fully vested in certain stock options pursuant to the terms of the 1992 Stock Option Plan resulting in a recognition of $647,000 of compensation expense in 1995. (3) The extraordinary loss recorded in fiscal years 1993 and 1996 represents the loss associated with the prepayment of certain debt obligations of the company, net of related income tax effects. (4) EBITDA is defined as income from operations plus depreciation and amortization; adjusted for non-cash items related to gains/losses on asset dispositions and write-downs, compensation expense related to stock option activity (deferred compensation), the executive compensation award (see Note 2) and non-cash officer notes receivable items related to the executive compensation award. EBITDA, as defined, should not be construed as a substitute for income from operations or as a better indicator of liquidity than cash flow from operating activities, which is determined in accordance with generally accepted accounting principles. EBITDA, as defined, is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. In addition, management believes that certain investors find EBITDA, as defined, to be a useful tool for measuring the ability of the Company to service its debt. EBITDA, as defined, is not necessarily a measure of the Company's ability to fund its cash needs. See the Consolidated Statements of Cash Flows of the Company and the related Notes to the Consolidated Financial Statements thereto attached. (5) EBITDA margin represents EBITDA, as defined, divided by total revenues. 29 (6) Capital expenditures (excluding expenditures funded through capital leases) have been segregated into the following categories to provide additional information: . Maintenance capital expenditures-represents day to day expenditures related to restaurant equipment replacements and general restaurant capital improvements. . Re-images and renovation-represents significant restaurant renovations and upgrades pursuant to the Company's re-imaging and renovation activities. . New restaurant development-represents new Company-operated restaurant construction and development. . Other-represents capital expenditures, at various corporate offices and new restaurant equipment such as fryers and security systems. (7) The company had a deficiency of earnings to fixed charges for the fiscal years December 26, 1993, December 25, 1994 and December 31, 1995, of approximately $11,128,000, $5,869,000 and $12,284,000, respectively. Earnings consist of income (loss) before taxes, plus fixed charges (excluding capitalized interest). Fixed charges consist of interest expense, amortization of debt issuance cost and debt discount, preferred stock dividend requirements and accretion (including related tax effects), and one-third of rent expense on operating leases considered representative of the interest factor attributable to rent expense. (8) Represents restaurant sales for all franchised and Company-operated restaurants. Sales information for franchised restaurants is as reported by franchisees or, in some instances, estimated by the Company based on other data, and is unaudited. (9) Comparable sales figures are not provided for Chesapeake Bagel for the periods presented, since the Company did not acquire the franchise rights until May 1997. (10) Commitments represent commitments to open franchised restaurants, as set forth in development agreements. On a historical basis, a number of such commitments have not resulted in restaurant openings. There can be no assurance that parties to development agreements will open their respective number of restaurants. 30 ITEMS 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended. Such forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. In light of the risks and uncertainties inherent in any discussion of the Company's expected future performance or operations, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that these will be realized. Such performance could be materially affected by a number of factors, including without limitation those factors set forth in the "Item 1. Business" section in this filing. ACQUISITIONS AND DIVESTITURES AFDC TRANSACTION On March 24, 1997 the Company closed a transaction (the "AFDC Transaction") with Atlanta Franchise Development Company ("AFDC") whereby the Company sold the rights to operate 100 previously Company-operated Churchs restaurants in eight domestic markets to AFDC, which is now the Company's largest domestic franchisee. The Company also sold the land, building and equipment for 51 of these restaurants, and it sold the building and equipment and leased the land for 49 of the restaurants to AFDC. The Company received approximately $19.9 million in cash, along with a warrant to acquire, for nominal consideration, a 5.0% equity interest in AFDC. In connection with the AFDC Transaction, AFDC has committed to (i) re-image and renovate all 100 restaurants, (ii) develop 100 additional Churchs restaurants and (iii) install new point-of-sale systems at all of its restaurants. As a result of this transaction, the Company recorded $2.5 million in franchise fees and approximately $5.3 million of gain associated with the sale of the property in the second quarter of 1997. Included in the $19.9 million payment was $1.0 million representing the development fees on the additional 100 Churchs restaurants which will be developed by AFDC over the next ten years. These development fees were deferred and will be taken into income as the restaurants open. During 1996, these restaurants contributed $54.4 million in sales and $5.0 million in income to operations to the Company. Based upon 1996 sales figures, the Company would have received approximately $2.4 million in royalty fees and $0.6 million in rental income from AFDC during 1996 had these restaurants been franchised units. The Company's capital expenditures were reduced by approximately $11.0 million in 1997 because the planned re-imaging and renovation of these restaurants will be funded by AFDC. Management believes it is unlikely that the Company will originate another sale of restaurants of this magnitude in the foreseeable future. 31 CHESAPEAKE BAGEL ACQUISITION On May 5, 1997, the Company acquired the franchise business and rights of Chesapeake Bagel from The American Bagel Company. As a result of this acquisition, the Company became the franchisor of 158 franchised Chesapeake restaurants located primarily in Washington D.C., Maryland and Virginia. The net purchase price of the acquisition was approximately $11.8 million, plus a potential earn out of up to $3.5 million, contingent upon the number of restaurants which open over the next five years out of the existing pool of franchise commitments. Substantially all of the purchase price was allocated to intangible assets including franchise rights and trademarks. Based upon 1996 unaudited financial information received from Chesapeake ,royalty revenue and operating income generated from this acquisition would have been approximately $2.0 million and $0.6 million, respectively, had Chesapeake been owned by the Company in 1996. PINETREE FOODS ACQUISITION On February 10, 1998 the Company acquired the assets of Pinetree Foods, Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree included 81 franchised restaurant units located primarily in North Carolina, South Carolina and Georgia. The assets were acquired in cash for a total purchase price of $24.3 million, with a significant portion of the purchase price allocated to an intangible asset - goodwill. The Company borrowed $16.0 million under its $100.0 million acquisition facility in order to complete the transaction. A majority of the restaurant units will be converted from their current franchised brand into Company-operated Popeyes. The remaining restaurant units will be closed. The acquisition will provide Popeyes with an opportunity to grow in geographical areas in which it formerly had little or no presence. SEATTLE COFFEE COMPANY ACQUISITION On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for a purchase price of approximately $70 million plus the assumption of approximately $5 million of debt. The Company paid approximately $41 million in cash funded by its Acquisition Facility (See Note 8 to the consolidated financial statements) and approximately $29 million in AFC common stock. Included in the purchase price is a contingent payment up to $3.8 million, based upon SCC operations achieving a level of earnings, as defined in the agreement, over a 52-week period from October 1, 1997 to September 30, 1998. SCC has two wholly-owned operating subsidiaries, Seattle's Best Coffee, Inc. and Torrefazione Italia, Inc. As a result of the merger, AFC will acquire (i) a coffee roasting and packaging facility, (ii) 58 Company-operated cafes 32 and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands, (iii) a wholesale business (including 13 offices) and more than 5,000 wholesale accounts and (iv) a soon-to-be-opened Chicago distribution center. OPERATING RESULTS REVENUES The Company's revenues consist primarily of four elements: (i) restaurant sales at Company-operated restaurants, (ii) revenues from franchising, (iii) revenues from manufacturing and (iv) other revenues. RESTAURANT SALES. The Company's restaurant sales consist of gross cash register receipts at Company-operated restaurants, net of sales tax. REVENUES FROM FRANCHISING. The Company earns franchise revenues through three types of agreements: (i) domestic development agreements, (ii) international development agreements and (iii) franchise agreements. Domestic development fees, international development fees and franchise fees are recorded as deferred revenues when received and are recognized as revenue when the restaurants covered by the fees are opened and/or all material services or conditions relating to the fees have been substantially performed or satisfied by the Company. The Company's standard franchise agreement also includes the payment of a royalty fee based on net restaurant sales of franchisees. The Company benefits from increases in franchised restaurant sales since it collects a percentage of sales as royalties from franchisees. The royalty percentages vary by franchisee, depending on the franchise agreement, with an average royalty of approximately 4.4%. See "Item 1. Business--Franchise Development". REVENUES FROM MANUFACTURING. The Company's revenues from manufacturing consist primarily of sales of proprietary fryers and other custom-fabricated restaurant equipment from its manufacturing business to distributors and franchisees. OTHER REVENUES. The Company's other revenues consist of net rental income from properties owned and leased by the Company which are leased or subleased to franchisees and third parties and interest income earned on notes receivable from franchisees and third parties. OPERATING COSTS AND EXPENSES RESTAURANT COST OF SALES. The Company's cost of sales consists of food and paper costs (including napkins, straws, plates, take-out bags and boxes). The primary elements affecting cost of sales are sales volumes and chicken prices. Other factors such as the Company's menu pricing, product mix, the amount of dark meat purchased and promotional activities can also materially affect the level of cost of sales as well as cost of 33 sales as a percentage of restaurant sales. Chicken prices are seasonal and are normally higher during the summer months when demand for chicken is at its peak. RESTAURANT OPERATING EXPENSES. Restaurant operating expenses are comprised of personnel expenses, occupancy expenses, marketing expenses and other operating expenses incurred at the restaurant level. MANUFACTURING COST OF SALES. Manufacturing cost of sales represent the cost of raw materials and direct labor used to manufacture the restaurant equipment sold to franchisees and third parties and direct manufacturing overhead applied during the manufacturing process. GENERAL AND ADMINISTRATIVE. The Company's general and administrative expenses consist of personnel expenses, occupancy expenses and other expenses incurred at the corporate level. Corporate level expenses are primarily incurred at the corporate offices of the Company in Atlanta, Georgia and San Antonio, Texas along with those incurred by field executives located throughout the United States. DEPRECIATION AND AMORTIZATION. The Company's depreciation consists of the depreciation of buildings, leasehold improvements and equipment owned by the Company, and amortization consists mainly of the amortization of intangible assets. 34 RESULTS OF OPERATIONS The following table presents selected revenues and expenses as a percentage of total revenues for the Company's audited Consolidated Statements of Operations for the fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997. PERCENTAGE RESULTS OF OPERATIONS
Year Ended (1) ------------------------------------------------------------ December 31, December 29, December 28, 1995 1996 1997 ---- ---- ---- REVENUES: Restaurant sales................... 86.6 % 85.9 % 83.4 % Revenues from franchising.......... 9.7 10.2 13.2 Revenues from manufacturing........ 2.0 2.3 1.6 Other revenues..................... 1.7 1.6 1.8 ------- ------- ------- Total revenues.................... 100.0 % 100.0 % 100.0 % ------- ------- ------- COSTS AND EXPENSES: Restaurant cost of sales (1)....... 32.6 % 33.0 % 32.6 % Restaurant operating expenses (1).. 50.5 49.4 49.0 Manufacturing cost of sales (2).... 73.0 77.2 65.8 General and administrative......... 16.2 15.5 16.7 Depreciation and amortization...... 5.8 6.2 7.0 Executive compensation award....... 2.2 Gain on sale of fixed assets from AFDC transaction.................. - - (1.1) Total costs and expenses.......... 97.6 94.2 91.7 Income from operations.............. 2.4 5.8 8.3 Interest expense, net............... 4.7 3.2 4.3 Net income before extraordinary loss and taxes..................... (2.3) 2.6 4.0 Income tax expense/(benefit)........ (0.6) 1.0 1.8 Net income before extraordinary items................ (1.7) % 1.6 % 2.2 %
(1) Expressed as a percentage of restaurant sales by Company-operated restaurants. (2) Expressed as a percentage of revenues from manufacturing. 35 SELECTED FINANCIAL DATA The following table sets forth certain financial information and other restaurant data relating to Company-operated and franchised restaurants (as reported to the Company by franchisees) for the fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997:
Year Ended --------------------------------------------------------------------------------- December 31, December 29, % Change December 28, % Change 1995 1996 1995 - 1996 1997 1996 - 1997 ------------ ------------ ----------- ------------ ----------- (dollars in millions) EBITDA, as defined (1)....................... $ 55.3 $ 64.9 17.2 % $ 74.0 14.1 % Capital Expenditures......................... 37.8 46.3 22.3 62.9 36.0 Restaurant data (unaudited): Systemwide restaurant sales: Popeyes.......................... $ 710.8 $ 762.1 7.2 % $ 853.0 11.9 % Churchs.......................... 647.8 676.0 4.4 724.0 7.1 Chesapeake....................... N/A N/A N/A 50.9 N/A ------------ ------------ ------------ Total......................... $ 1,358.6 $ 1,438.1 5.9 % $ 1,627.9 13.2 % ============ ============ ============ Systemwide restaurant openings: Popeyes.......................... 105 110 46.8 % 137 24.6 % Churchs.......................... 81 117 44.4 132 12.8 Chesapeake....................... N/A N/A N/A 27 N/A ------------ ------------ ------------ Total......................... 186 227 22.0 % 296 30.4 % ============ ============ ============ Systemwide restaurants open, end of period: Popeyes.......................... 964 1,021 5.9 1,131 10.8 % Churchs.......................... 1,219 1,257 3.1 1,356 7.9 Chesapeake....................... N/A N/A N/A 155 N/A ------------ ------------ ------------ Total 2,183 2,278 4.4 % 2,642 16.0 % ============ ============ ============ Systemwide percentage change in comparable restaurant sales(2):.. Popeyes.......................... 1.6% 1.1% 3.3% Churchs.......................... 3.9 2.8 3.9
(1) EBITDA is defined as income from operations plus depreciation and amortization; adjusted for non-cash items related to gains/losses on asset dispositions and write-downs, compensation expense related to stock option activity (deferred compensation), the executive compensation award and non- cash officer notes receivable items related to the executive compensation award. (2) Comparable sales figures are not provided for Chesapeake for the periods presented, since the Company did not acquire the franchise rights until May 1997. 36 YEARS ENDED DECEMBER 28, 1997 AND DECEMBER 29, 1996 Certain items relating to prior periods have been reclassified to conform with current presentation. REVENUES Total revenues decreased 3.5%, or $17.7 million, during the fiscal year ended December 28, 1997, as compared to the fiscal year ended December 29, 1996. RESTAURANT SALES. Restaurant sales decreased 6.3%, or $27.0 million, from the prior year. The decrease was primarily attributable to the sale of the 100 AFDC restaurants. These restaurants reported restaurant sales of $43.4 million during the last three quarters of 1996. The overall sales decrease was partially offset by an increase in comparable sales for the remaining Company- operated restaurants of 5.1% for the year. REVENUES FROM FRANCHISING. Revenues from franchising increased $12.3 million or 24.0% from the prior year. Franchise royalty revenue increased $9.4 million or 21.3% and franchise fees increased $2.9 million or 40.3%. The increase in franchise royalty revenue was attributable to several factors, including but not limited to, royalty revenues recorded for 100 restaurants franchised in connection with the AFDC Transaction, royalty revenues recorded for franchised Chesapeake restaurants acquired from The American Bagel Company in 1997, an increase in the number of franchised restaurants and comparable sales increases for domestic and international franchised restaurants. The increase in franchise fees was primarily attributable to franchise fees of $2.5 million recorded in connection with the AFDC Transaction. REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 33.3%, or $3.8 million for the fiscal year ended December 28, 1997, as compared to the fiscal year ended December 29, 1996. The decrease was primarily attributable to a decrease in the sale of smallwares. The Company sold its distribution business during the first half of 1996. OPERATING COSTS AND EXPENSES RESTAURANT COST OF SALES. Cost of sales for the year decreased 7.6% or $10.8 million from the prior year. The decrease was primarily attributable to a decrease in restaurant sales. Expressed as a percentage of restaurant sales, cost of sales were 32.6% for the fiscal year ended December 28, 1997, compared to 33.0% for the fiscal year ended December 29, 1996. The decrease in the percentage was attributable to (i) small menu price increases taken in late 1996 and early 1997, (ii) usage reductions in paper items and shortening and (iii) favorable pricing on certain non-poultry food items. RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the fiscal year ended December 28, 1997 decreased $14.8 million or 7.0% from the corresponding 37 period in 1996. The decrease in restaurant operating expenses was primarily attributable to the sale of the 100 AFDC restaurants. Restaurant operating expenses as a percentage of restaurant sales were 49.0% for 1997, compared to 49.4% for 1996. Personnel expenses expressed as a percentage of restaurant sales was 28.6% for the 1997 fiscal year, versus 28.3% for the 1996 fiscal year. The increase in personnel costs as a percentage of restaurant sales was primarily due to increases in the minimum wage levels effective October 1, 1996 and September 1, 1997. Marketing expenses expressed as a percentage of restaurant sales was 7.7% for fiscal year 1997, versus 7.8% for fiscal year 1996. The decrease in the percentage was primarily due to lower food discount costs. Other restaurant operating costs expressed as a percentage of sales was 12.7% for the 1997 fiscal year, versus 13.3% for the 1996 fiscal year. The decrease in the percentage was primarily due to decreases in utility costs resulting from the installation of more energy efficient gas fryers in Company-operated restaurants. MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 43.2% or $3.8 million, for the fiscal year ended December 28, 1997, compared to the fiscal year ended December 29, 1996. The decrease was primarily attributable to the decrease in manufacturing revenues during fiscal year 1997 compared to fiscal year 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $2.9 million or 3.7% during 1997 compared to the prior year. As a percentage of total revenues, general and administrative expenses increased from 15.5% for fiscal year 1996 to 16.7% for fiscal year 1997. The increase in general and administrative expenses was due to a number of factors including, but not limited to, asset writedowns of software costs, overhead costs associated with the Chesapeake brand, an increase in franchise development marketing costs, costs associated with acquisition activity, costs associated with information technology initiatives, and deferred compensation expenses related to employee stock options. Partially offsetting these increases were decreases in legal/professional fees and insurance costs. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.9 million or 9.4% from the prior year. Depreciation and amortization as a percentage of total revenues increased from 6.2% to 7.0% from the previous to the current year. The increase was primarily due to fixed asset additions made during this period totaling $62.9 million plus the amortization expense on the intangible asset resulting from the Chesapeake acquisition in 1997. Partially offsetting the increase was a decrease in depreciation expense associated with the sale of 100 restaurants to AFDC. Overall, net fixed assets of $207.8 million at fiscal year ended December 28, 1997 were up 9.8% over net fixed assets of $189.2 million at fiscal year ended December 29, 1996. NET INTEREST EXPENSE. Interest expense, net of capitalized interest, for the year ended December 28, 1997 was $20.6 million, compared to $15.9 million for the year ended December 29, 1996. The $4.7 million increase in interest expense was due to higher levels of average debt outstanding and higher effective interest rates during 1997 as compared with the prior year. The increase in average debt outstanding was primarily 38 attributable to the refinancing transaction completed during the second quarter of 1997 (see " -Liquidity"). The refinancing transaction also led to higher effective interest rates during 1997, versus the prior year. INCOME TAXES. The Company's effective tax rate for the year ended December 29, 1997 was 43.9%, compared to an effective tax rate of 42.3% (including tax benefits recorded with respect to the extraordinary loss) for the year ended December 28, 1996. EXTRAORDINARY LOSS. During the second quarter of 1996 the Company completed a refinancing whereby it sold 21.1 million shares of its common stock for $70.0 million. Proceeds from the sale of stock were used, in part, to retire $65.0 million of the Company's existing debt. As a result, the Company recognized an extraordinary loss on the early retirement of debt (net of income taxes) in the amount of $4.4 million during the fiscal year ended December 29, 1996. Unamortized debt discounts written off in connection with the early retirement of debt totaled $7.1 million. YEARS ENDED DECEMBER 29, 1996 (52 WEEKS) AND DECEMBER 31, 1995 (53 WEEKS) Certain items relating to prior periods have been reclassified to conform with current presentation. REVENUES Total revenues increased 1.6%, or $8.1 million, during the fiscal year ended December 29, 1996, as compared to the fiscal year ended December 31, 1995. RESTAURANT SALES. Restaurant sales increased 0.8%, or $3.6 million, from the prior year. The increase in total restaurant sales is attributable to several factors including an increase in comparable sales and an increase in the number of Company-operated restaurants. Comparable sales, computed without regard to the extra week, increased by 2.9% for fiscal year 1996. At December 29, 1996, the Company operated 742 restaurants, compared to a total of 706 restaurants at December 31, 1995. The increase in restaurant sales from 1995 to 1996 was adversely affected by the fact that 1995 had 53 weeks of sales activity, while 1996 had 52 weeks of sales activity. REVENUES FROM FRANCHISING. Revenues from franchising increased $3.4 million or 7.1% from the prior year. Franchise royalty revenue increased $2.6 million or 6.3% and franchise fees increased $0.8 million or 12.5%. The increase in franchise royalty revenue was attributable to several factors including an increase in the number of franchised restaurants and a comparable sales increase of 2.3% for domestic franchised restaurants. At December 29, 1996, franchisees operated 1,536 restaurants, compared to 1,477 at December 31, 1995. The increase in franchise fees was primarily attributable to the increase in the number of franchised restaurant openings. Franchised restaurant openings for the fiscal year ended December 29, 1996 totaled 226, compared to franchised restaurant openings for the fiscal year ended December 31, 1995 of 178. 39 REVENUES FROM MANUFACTURING. Revenues from manufacturing increased 14.0%, or $1.4 million, for the fiscal year ended December 29, 1996 compared to the fiscal year ended December 31, 1995. The increase in revenues is primarily attributable to an increase in sales of proprietary fryers to franchised restaurants and others in the QSR industry. This increase was partially offset by a decrease in sales of smallwares. The Company sold its distribution business during the first half of 1996. OPERATING COSTS AND EXPENSES RESTAURANT COST OF SALES. Cost of sales increased 2.1% or $2.9 million from the prior year, primarily due to higher restaurant sales and higher chicken prices. The Company's chicken prices per pound averaged $0.551 during fiscal year 1995, while the price paid by the Company during fiscal 1996 averaged $.603 per pound. Expressed as a percentage of restaurant sales, cost of sales were 33.0% for the year ended December 29, 1996 and 32.6% for the year ended December 31, 1995. RESTAURANT OPERATING EXPENSES. Restaurant operating expenses decreased $2.8 million or 1.3% from the corresponding period in 1995. Restaurant operating expenses as a percentage of restaurant sales were 49.4% for fiscal year 1996, compared to 50.5% for fiscal year 1995. Personnel expenses were down $2.7 million or 2.2% from the prior year. Personnel expenses expressed as a percentage of restaurant sales was 28.3% for the year ended December 29, 1996 and 29.1% for the year ended December 31, 1995. The decrease in personnel expenses was primarily due to reductions in medical insurance and workers' compensation costs. Management implemented a number of changes to the Company's insurance programs during 1995 and 1996, which resulted in a decrease in insurance claims and premiums during 1996. Partially offsetting this decrease was an increase in personnel expenses due to the increase in minimum wage levels. Marketing expenses were up $1.6 million or 5.0% over the prior year, primarily due to an increase in food discount promotions used during 1996 to stimulate sales. Other restaurant operating costs were down $1.7 million or 2.9% from the prior year. The decrease was primarily attributable to a decrease in insurance expense from fiscal year 1996 to fiscal year 1997. MANUFACTURING COST OF SALES. Manufacturing cost of sales increased 20.5%, or $1.5 million, for the year ended December 29, 1996 compared to the year ended December 31, 1995. The increase is primarily attributable to the increase in revenues from manufacturing during 1996. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses, including the executive compensation award, decreased $13.0 million or 14.4% during fiscal year 1996 compared to fiscal year 1995. As a percentage of total revenues, general and administrative expenses decreased from 18.4% for the fiscal year 1995 to 15.5% for the fiscal year 1996. The decrease was a result of a one-time non-cash charge recorded during fiscal year 1995, as well as reductions in medical insurance costs and information technology costs. In 1995, the Company recorded a one-time charge related to a special 40 compensation award of $10.0 million payable in cash or common stock, at the election of the recipient, to the senior management group of the Company in recognition of exemplary performance provided to the Company since 1992. Medical insurance costs in 1996 were $1.0 million less than the prior year due to reductions in medical claims and premiums paid as a result of a new medical insurance program put in place during late 1995. Operating expenses related to the management information systems contract with IBM Global Services, a division of IBM ("IGS") decreased $2.0 million in 1996 compared to 1995, as old management information systems were replaced by more efficient new systems. Operating expenses under the information technology contract are scheduled to decline as new equipment and systems are installed. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $2.2 million or 7.7% from the prior year. Depreciation and amortization as a percentage of total revenues increased from 5.8% to 6.2% from the fiscal year ended December 31, 1995 to the fiscal year ended December 29, 1996. The increase is primarily due to an increase in depreciation, driven by fixed asset additions made during 1996 totaling $46.4 million. Net fixed assets at December 29, 1996 totaled $189.2 million, which was 8.7% greater than net fixed assets at December 31, 1995 of $174.1 million. NET INTEREST EXPENSE. Interest expense, net of capitalized interest, for the fiscal year ended December 29, 1996 was $15.9 million, compared to $23.4 million for the fiscal year ended December 31, 1995. The decrease was primarily attributable to the recapitalization that occurred during the second quarter of 1996. As a result of the recapitalization, the Company retired approximately $65.0 million of its long-term debt during 1996. INCOME TAXES. The Company's effective tax rate (including tax benefits recorded with respect to the extraordinary loss) for fiscal year ended December 29, 1996 was 42.3%, compared to (25.2)% for fiscal year ended December 31, 1995. A reconciliation of the Federal statutory rate to the Company's effective tax rate began with a federal tax expense rate of 34.0% for fiscal year 1996 and a federal tax benefit rate of (34.0)% for fiscal year 1995. Other tax rate adjustments (including nondeductible expenses and state/foreign tax expenses) used in the tax rate reconciliation totaled 8.3% and 8.8% for fiscal years 1996 and 1995, respectively. EXTRAORDINARY LOSS. During the second quarter of 1996 the Company completed a refinancing whereby it sold 21.1 million shares of its common stock for $70.0 million. Proceeds from the sale of stock were used, in part, to retire $65.0 million of the Company's existing debt. As a result, the Company recognized an extraordinary loss on the early retirement of debt (net of income taxes) in the amount of $4.4 million during the fiscal year ended December 29, 1996. Unamortized debt discounts written off in connection with the early retirement of debt totaled $7.1 million. 41 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY The Company has financed its business activities primarily with funds generated from operating activities, proceeds from the sale of shares of common stock, proceeds from long-term debt and a revolving line of credit and proceeds from the sale of certain Company-operated restaurants. Available cash and cash equivalents, net of bank overdrafts, as of December 28, 1997 was $23.2 million, compared to $8.4 million and $5.5 million at December 29, 1996 and December 31, 1995, respectively. Net cash provided by operating activities for the fiscal years ended December 28, 1997, December 29, 1996 and December 31, 1995 was $52.5 million, $47.8 million and $28.0 million, respectively. Increases in net cash provided by operating activities for the above periods were primarily attributable to increases in income from operations. The Company's working capital deficit as of December 28, 1997, December 29, 1996 and December 31, 1995 was approximately $17.8 million, $29.5 million and $26.6 million, respectively. Both the increase in available cash and cash equivalents, net of bank overdrafts and the decrease in working capital deficits from December 29, 1996 to December 28, 1997 were primarily due to net proceeds received in the debt refinancing transaction. In May 1997, the Company completed a debt offering of $175.0 million of Senior Subordinated Notes (the "Notes"). The proceeds from the Notes were used, in part, to repay the existing balances under the Company's previous credit facilities, repay and retire the Company's 10% Preferred Stock and repay certain capital lease obligations. In connection with this debt offering, the Company also entered into a new $175.0 million Senior Secured Credit Facility whereby the Company was provided with a $50.0 million term loan, a $25.0 million revolving credit facility and a $100.0 million facility to be used for future acquisitions. Under the terms of the revolving credit facility, the Company may borrow and obtain letters of credit up to an aggregate of $25.0 million. At December 28, 1997, the Company had $13.1 million in outstanding letters of credit and $11.9 million available for short-term borrowings under the revolving credit facility. Also at December 28, 1997, $100.0 million was available for borrowings under the acquisition facility. In August 1997, the $175.0 million of the Notes referred to above were exchanged for $175.0 million of publicly registered 10.25% Senior Subordinated Notes and contain substantially the same provisions as the Notes. In August 1997, the Company secured a revolving line of credit of up to $15.0 million to provide financing for the Company's Turnkey Development Program. See 42 "Item 1. Business -- Turnkey Development". Upon meeting certain conditions, the financing agreement has a provision in which the revolving line of credit can be converted into a four-year term loan beginning in February 1999. The agreement also provides for permanent financing in the event a Turnkey unit is sold to a franchisee. As of December 28, 1997, the Company had not drawn any funds against the revolving line of credit. The Company expects to have up to 30 sites in various stages of development during 1998 under the Turnkey Program. Based upon its estimates of the costs associated with developing Turnkey Program properties, the Company believes that resources provided from operating activities in addition to those provided by the revolving line of credit will be adequate to finance the ongoing Turnkey Program in the near term. As restaurants are completed, the Company intends to sell the properties to franchisees and use the proceeds to reduce the outstanding balance on the revolving line of credit. However, there can be no assurance that the Company will be able to sell properties developed under the Turnkey Program. The Company intends to operate completed Turnkey units until the time they are sold. If not sold, the Turnkey units will become Company-operated restaurants. The Company believes that proceeds from the sales of the properties as they are developed over time should be adequate to finance the Turnkey Program over time. On February 10, 1998 the Company acquired the assets of Pinetree Foods, Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree included 81 franchised restaurant units located primarily in North Carolina, South Carolina and Georgia. The assets were acquired in cash for a total purchase price of $24.3 million. The Company borrowed $16.0 million under its $100.0 million acquisition facility in order to complete the transaction. On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for a purchase price of approximately $70 million plus the assumption of approximately $5 million of debt. The Company paid approximately $41 million in cash funded by its Acquisition Facility (See Note 8 to the consolidated financial statements) and approximately $29 million in AFC common stock. Included in the purchase price is a contingent payment up to $3.8 million, based upon SCC operations achieving a level of earnings, as defined in the agreement, over a 52-week period from October 1, 1997 to September 30, 1998. During the year ended December 28, 1997, the Company invested in various capital projects totaling $62.9 million. During this period the Company invested $13.4 million in its re-imaging and renovation program, $4.6 million for new restaurant construction and $33.3 million in new management information systems. In addition, during 1997 the Company invested $11.6 million in other capital assets to update, replace and extend the lives of restaurant equipment and facilities and complete other minor projects. Approximately $20.8 million of the above capital projects were financed through capital lease obligations during fiscal 1997. The remaining capital projects were 43 financed primarily through cash flows provided from normal operating activities and proceeds from the sale of certain Company-operated restaurants. The Company expects total capital expenditures for its brands and administrative functions existing as of December 28, 1997 to be approximately $35.0 - $40.0 million during fiscal year 1998. These capital expenditures are primarily for the development of additional Company-owned restaurants, re- imaging and renovating existing restaurants, addition of new management information systems and updating, replacing and extending the lives of restaurant equipment and facilities. The Company expects to fund these capital expenditures through cash flows provided from normal operating activities. The Company entered into an agreement with IGS commencing in August 1994, for a ten-year term, to outsource the Company's information technology, programming and computer operations. This agreement allows the Company to update its corporate and restaurant systems with state-of-the-art computer hardware and software. IGS purchases the hardware and software, performs applications development and maintains and provides administrative, management and support functions. Future minimum payments under the remaining term of this agreement, exclusive of payments included as capital lease payments for systems installed to date, approximates $39.3 million as of December 28, 1997. Based upon the current level of operations and anticipated growth, management of the Company believes that available cash flow, together with the available borrowings under the Senior Secured Credit Facility and other sources of liquidity, will be adequate to meet the Company's anticipated future requirements for working capital, capital expenditures and scheduled payments under the Senior Subordinated Notes and the Senior Secured Credit Facility. NET OPERATING LOSSES AND TAX CREDIT CARRYFORWARDS As of December 28, 1997, the Company has recognized net operating losses ("NOLs") and tax credit carryforwards in the amounts of $7.7 million and $3.8 million, respectively, against its net deferred tax liabilities. The Company's NOLs of $7.7 million expire in 2005, and the $3.8 million of tax credit carryforwards expire from 2001 through 2012. The Internal Revenue Service has not reviewed the Company's federal income tax returns for years past 1990. On November 5, 1992, the Company acquired its current business from a debtor in a bankruptcy reorganization. This reorganization constituted an "ownership change" under Section 382 of the Internal Revenue Code of 1986, as amended. As a result, utilization of the pre-November 5, 1992 NOLs and tax credit carryforwards (if any) is subject to an annual limit of approximately $4.0 million of NOLs or $1.4 million of credits (but not both). The Company believes that the Section 382 limitations arising 44 from the November 5, 1992 ownership change or any subsequent ownership changes should not prevent the ultimate utilization of any existing NOLs and the tax credit carryforwards (arising both before and after November 5, 1992) before they expire. IMPACT OF INFLATION The Company believes that, over time, it has generally been able to pass along inflationary increases in its costs through increased prices of its menu items. Accordingly, the effects of inflation on the Company's net income historically have not been, nor are such effects expected to be, materially adverse. Due to competitive pressures, however, increases in prices of menu items often lag inflationary increases in costs. See "Item 1. Business-- Fluctuations in Cost of Chicken". SEASONALITY The Company has historically experienced the strongest operating results at both Popeyes and Churchs restaurants during the summer months while operating results have been somewhat lower during the winter season. Certain holidays and inclement winter weather reduce the volume of consumer traffic at quick-service restaurants and may impair the ability of certain restaurants to conduct regular operations for short periods of time. 45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company has included the financial statements and supplementary financial information required by this item immediately following Part IV of this report and hereby incorporates by reference the relevant portions of those statements and information into this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No disagreements between the Company and its accountants have occurred within the 24-month period prior to the date of the Company's most recent financial statements. 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors, executive officers and senior management of AFC are listed below.
Name Age Position ---- --- -------- Frank J. Belatti 50 Chairman, Chief Executive Officer and Director Dick R. Holbrook 45 President, Chief Operating Officer and Director Samuel N. Frankel 60 Executive Vice President, Secretary, General Counsel and Director Gerald J. Wilkins 40 Chief Financial Officer Jon Luther 54 President of Popeyes Chicken & Biscuits Hala R. Moddelmog 42 President of Churchs Chicken William M. Van Epps 50 President of International Gregg A. Kaplan 41 President of Chesapeake Mark J. Doran 34 Director Paul Farrar 63 Director Matt L. Figel 38 Director Todd W. Halloran 35 Director Kelvin J. Pennington 39 Director John M. Roth 39 Director Ronald P. Spogli 50 Director William M. Wardlaw 51 Director
FRANK J. BELATTI, Chairman, Chief Executive Officer and Director: Mr. Belatti has served as the Chairman, Chief Executive Officer and a director of AFC since it commenced operations in November 1992 following the reorganization of its predecessor. Prior to joining AFC, from 1990 to 1992, Mr. Belatti was employed by Hospitality Franchise Systems, Inc., the franchisor for Ramada and Howard Johnson hotels ("HFS"), as its President and Chief Operating Officer. From 1989 to 1990, Mr. Belatti was President and Chief Operating Officer of Arby's, Inc. ("Arby's") and from 1985 to 1989 he served as the Executive Vice President of Marketing at Arby's. From 1986 to 1990, Mr. Belatti also served as President of Arby's Franchise Association Service Corporation ("AFA"), which created and developed the marketing programs and new product development for the Arby's system. Mr. Belatti received the 1996 47 International Foodservice Management Association Silver Plate award for excellence and achievement in the food-service industry and is also the 1997 Golden Chain Award winner. He also received the NAACP's Walter White award and the President's Award for private sector initiatives. Mr. Belatti also serves as Chairman of The AFC Foundation, Inc., as well as a member of the Board of Directors for The Hank Aaron Chasing the Dream Foundation, Inc., The Schenck School, APEX Museum and The Urban League. Mr. Belatti is also a member of the Executive Steering Committee for Habitat for Humanity. DICK R. HOLBROOK, President, Chief Operating Officer and Director: Mr. Holbrook joined AFC in November 1992 as Executive Vice President and Chief Operating Officer and assumed the role of President and Chief Operating Officer in August 1995. He has been a director of AFC since 1995. From 1991 to 1992, Mr. Holbrook served as Executive Vice President of Franchise Operations of HFS. From 1972 to 1991, Mr. Holbrook served in various management positions with Arby's, starting as a crew member and working his way up to Assistant Restaurant Manager, Restaurant Manager, District Manager, Regional Director of Operations, Vice President of Operations Development and Training and Senior Vice President of Franchise Operations. SAMUEL N. FRANKEL, Executive Vice President, Secretary, General Counsel and Director: Mr. Frankel has served as Executive Vice President since 1996, and as Secretary and General Counsel of AFC as well as a director of AFC since 1992. Prior to 1996, Mr. Frankel spent 25 years with Frankel, Hardwick, Tanenbaum & Fink, P.C., an Atlanta, Georgia law firm specializing in commercial transactions and business law, including franchising, licensing and distributorship relationships. Mr. Frankel is a member of the Board of Directors of Colonial Bank, Hank Aaron Enterprises, Inc., and The Hank Aaron Chasing the Dream Foundation, Inc. GERALD J. WILKINS, Chief Financial Officer: Mr. Wilkins has served as the Chief Financial Officer of AFC since 1995. From 1993 to 1995, Mr. Wilkins was Vice President of International Business Planning at KFC International in Louisville, Kentucky. Mr. Wilkins also served in senior management positions with General Electric Corporation from 1985 to 1993, including Assistant Treasurer of GE Capital Corporation from 1989 to 1992. He has also worked with the AT&T Corporation and Peat Marwick, Mitchell & Co. JON LUTHER, President of Popeyes Chicken & Biscuits: Mr. Luther has served as President of Popeyes Chicken & Biscuits since 1997. Prior to joining AFC, Mr. Luther was President of CA One Services, Inc., a subsidiary of Delaware North Enterprises, Inc. in Buffalo, New York from 1992 to 1997. From 1987 to 1992, Mr. Luther served as President of Benchmark Services, Inc. HALA R. MODDELMOG, President of Churchs Chicken. Ms. Moddelmog has served as President of Churchs Chicken since 1996. From 1993 to 1996, Ms. Moddelmog was Vice President of Marketing and then Senior Vice President/General Manager for the Churchs brand. From 1990 to 1993, Ms. Moddelmog was Vice President of Product 48 Marketing and Strategic Planning at AFA in Atlanta. Prior to joining AFA, Ms. Moddelmog was a marketing manager for BellSouth Services in Atlanta from 1989 to 1990. WILLIAM M. VAN EPPS, President of International: Mr. Van Epps is President of International, a position he assumed in March 1998. He served as President of Chesapeake from April 1997 to February 1998. He served as President--Worldwide Business Development from 1996 to March 1997. From 1995 to 1996 Mr. Van Epps served as President--International and he was Senior Vice President-- International from 1993 to 1995. From 1988 to 1993, Mr. Van Epps was Vice President of Marketing and International at Western Sizzlin, Inc. From 1984 to 1988, Mr. Van Epps was President of Mid-American Restaurant Systems and the President of Intercontinental Foodservice from 1982 to 1984. Mr. Van Epps was with PepsiCo Foodservice International from 1977 to 1982, in a variety of positions. GREGG A. KAPLAN, President of Chesapeake: Mr. Kaplan assumed the position as President of Chesapeake in March 1998. He served as Vice President of Strategic Development with the Company from June 1996 to March 1998. Mr. Kaplan formerly served as Senior Vice President of Marketing with Shoney's, Inc. Mr. Kaplan joined Shoney's, Inc. in December 1990. MARK J. DORAN, Director: Mr. Doran joined FS&Co. in 1988. Previously, Mr. Doran was employed in the high yield department of Kidder, Peabody & Co. Incorporated. Mr. Doran became a director of AFC in April 1996 and is also a member of the Board of Directors of Brylane Inc. PAUL FARRAR, Director: Mr. Farrar served as a Senior Vice President of Canadian Imperial Bank of Commerce in Toronto, Canada from 1986 to 1993 and has been retired since then. Mr. Farrar became a director of AFC in 1992. Mr. Farrar also serves as a member of the Boards of Directors for Consumers Packaging, Inc., Anchor Glass Container Corporation, Adelaide Capital Corp., and Pendaries Petroleum, Ltd. MATT L. FIGEL, Director: Mr. Figel founded Doramar Capital, a private investment firm, in January 1997. From October 1986 to December 1996, Mr. Figel was employed by FS&Co. Mr. Figel became a director of AFC in April 1996 and is also a member of the Boards of Directors of Buttrey Food and Drug Stores Company and Calmar Inc. TODD W. HALLORAN, Director: Mr. Halloran joined FS&Co. in 1995. From 1990 to 1995, Mr. Halloran was employed by Goldman, Sachs & Co. in its Mergers and Acquisitions Department, most recently as a Vice President. Mr. Halloran joined the Board in April 1996. KELVIN J. PENNINGTON, Director: Mr. Pennington has served as Managing General Partner of PENMAN Asset Management, L.P., the general partner of PENMAN Private Equity and Mezzanine Fund, L.P., in Chicago, Illinois since 1992. Mr. Pennington became a director of AFC in May 1996. Mr. Pennington also serves as a member of the Boards of Directors for LSC Acquisition Corp., MainStreet Healthcare Corporation and TRIAD Holdings, Inc. JOHN M. ROTH, Director: Mr. Roth joined FS&Co. in March 1988 and became a general partner in March 1993. From 1984 to 1988, Mr. Roth was employed by Kidder, Peabody & Co. Incorporated, his most recent position being a Vice President in the 49 Merger and Acquisition Group. Mr. Roth became a director of AFC in April 1996 and is also a member of the Boards of Directors of EnviroSource, Inc. and Brylane Inc. RONALD P. SPOGLI, Director: Mr. Spogli is a founding partner of FS&Co. He became a director of AFC in April 1996. Mr. Spogli is the Chairman of the Board and a director of EnviroSource, Inc. and also serves on the Boards of Directors of Buttrey Food and Drug Stores Company and Brylane Inc. WILLIAM M. WARDLAW, Director: Mr. Wardlaw joined FS&Co. in March 1988 and became a general partner in January 1991. From 1984 to 1988, Mr. Wardlaw was a principal of the law firm of Riordan & McKinzie. Mr. Wardlaw became a director of AFC in April 1996 and is also a member of the Boards of Directors of Buttrey Food and Drug Stores Company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by or paid to the Chief Executive Officer and the other four of AFC's most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers") during the fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997.
Annual Compensation All Other - ---------------------------------- ---------------------------------------------------------- Name and Principal Position Year Salary Bonus/(1)(2)/ Compensation/(8)/ - ---------------------------------- ----------- ----------------- -------------------- -------------------- FRANK J. BELATTI 1997 $468,462 $ 660,000 $ 55,860 Chief Executive Officer 1996 430,000 515,045 32,943 1995 437,693 5,041,713/(3)/ 43,360 DICK R. HOLBROOK 1997 $323,077 $ 270,000 $ 21,635 President and 1996 300,000 220,000 13,643 Chief Operating Officer 1995 240,577 2,414,970/(4)/ 16,735 SAMUEL N. FRANKEL 1997 $294,231 $ 250,000 $ 50,995 Executive Vice President, 1996 275,000 200,000 32,745 Secretary and 1995 -- 2,389,220/(5)/ 14,495 General Counsel WILLIAM M. VAN EPPS 1997 $236,615 $ 90,000 $ 5,617/(9)/ President of 1996 196,720 100,000 6,108/(9)/ International 1995 170,385 187,838/(6)/ 5,680 HALA R. MODDELMOG 1997 $230,001 $ 120,000 $ 2,935/(9)/ President of Churchs Chicken 1996 178,079 80,000 3,071/(9)/ 1995 135,872 167,350/(7)/ 2,754
______________ (1) The bonus amounts shown for 1997 and 1996 for all Named Executive Officers other than Mr. Van Epps and Ms. Moddelmog reflect annual payments that were based solely on Company performance during 1997 and 1996 as determined using performance objectives established for fiscal years 1997 and 1996. The amounts shown for Mr. Van Epps and Ms. Moddelmog were largely (but not exclusively) based on performance objectives established for their individual business segments for fiscal years 1997 and 1996. (2) On December 15, 1995, the Board of Directors of AFC authorized a payment of $10 million to Frank Belatti for the benefit of himself and certain employees of AFC as determined by Mr. Belatti in the event of the occurrence, on or before June 30, 1996, of 50 (i) an initial public offering of common stock; (ii) the recapitalization or refinancing of debt, including a purchase of at least $50 million in common stock; or (iii) the repayment of $50 million of senior debt. On February 27, 1996, FS Equity Partners III, L.P. and FS Equity Partners International, L.P. (collectively "FS") executed a Stock Purchase Agreement under which FS agreed to purchase $70 million of common stock of AFC. In connection with the FS Transaction, Mr. Belatti elected to have the $10 million paid in common stock of AFC. In April 1996, the shareholders of the common stock of AFC authorized two 1996 Stock Bonus Plans contingent upon the closing of the FS Transaction authorizing the issuance of a total of 3,014,772 shares of common stock. The FS Transaction closed on April 11, 1996. On that date the Board of Directors of AFC determined the fair market value of the common stock to be $3.317 per share (without regard to restrictions and substantial risk of forfeiture) for the purpose of defining the number of shares to be issued. AFC issued 3,014,772 shares of common stock to certain employees of AFC in connection with the FS Transaction and AFC elected to accrue the $10 million stock distribution in its fiscal year ending in 1995. As part of the FS Transaction, the vesting of stock options for certain senior executives were accelerated in 1996 and AFC elected to accrue an additional $647,000 compensation expense in its fiscal year ending in 1995. (3) The amount designated as bonus for Mr. Belatti in 1995 is comprised of a cash distribution of $630,206, paid to him in 1996 pursuant to his Employment Agreement with AFC, and a distribution to him in 1996 of 1,329,969 shares of common stock, having a fair market value of $4,411,507 under the 1996 Stock Bonus Plan - Executive in connection with the FS Transaction. (4) The amount designated as bonus for Mr. Holbrook in 1995 is comprised of a cash distribution of $275,750, paid to him in 1996 pursuant to his Employment Agreement with AFC, and a distribution to him in 1996 of 660,000 shares of common stock, having, a fair market value of $2,189,220 under the 1996 Stock Bonus Plan - Executive in connection with the FS Transaction. (5) The amount designated as bonus for Mr. Frankel in 1995 is comprised of a cash distribution of $200,000, paid to him in 1996 pursuant to his Employment Agreement with AFC, and a distribution to him in 1996 of 660,000 shares of common stock, having a fair market value of $2,189,220 under the 1996 Stock Bonus Plan - Executive in connection with the FS Transaction. In addition, AFC paid life insurance premiums on behalf of Mr. Frankel in 1996 and 1995 under a split-dollar insurance plan between Mr. Frankel and AFC. (6) Mr. Van Epps' bonus for 1995 is comprised of a cash distribution of $72,738 and a stock distribution of 34,700 shares of Common Stock having a fair market value of $115,100. (7) Ms. Moddelmog's bonus for 1995 is comprised of a cash distribution of $52,250 and a stock distribution of 34,700 shares of Common Stock having a fair market value of $115,100. (8) The amounts shown under All Other Compensation reflect life insurance premiums paid by AFC with respect to split dollar life insurance policies for the benefit of the Messrs. Belatti, Holbrook and Frankel. AFC also paid $4,417, $4,633 and $4,532 in life insurance premiums in 1997, 1996 and 1995, respectively, for the split dollar life insurance policy for the benefit of Mr. Van Epps. AFC also paid $1,735 in life insurance premiums in 1997, 1996 and 1995 for the split dollar life insurance policy for the benefit of Ms. Moddelmog. (9) Includes matching contributions by AFC into the qualified employee benefit plan under Section 401(k) of the Code on behalf of (i) Mr. Van Epps of $1,200, $1,475 and $1,148 for 1997, 1996 and 1995, respectively, and (ii) Ms. Moddelmog of $1,200, $1,336 and $1,019 for 1997, 1996 and 1995, respectively. (10) Footnotes (2) and (5) above have been rewritten to correct certain factual inaccuracies contained in such notes in a prior filing. EMPLOYMENT AGREEMENTS FRANK J. BELATTI. Mr. Belatti and AFC entered into an employment agreement on November 5, 1992, as amended, on November 5, 1995 (the "Belatti Agreement"). The Belatti Agreement contains customary employment terms and provides for a current annual base salary of $480,000, subject to annual adjustment by the Board of Directors, an annual incentive bonus, stock options, fringe benefits, participation in all Company-sponsored benefit plans and such other compensation as may be approved by the Board of Directors. The term of the Belatti Agreement terminates on November 5, 2000, unless earlier terminated or otherwise renewed, pursuant to the terms thereof. Pursuant to the terms of the Belatti Agreement, if Mr. Belatti's employment is terminated without cause or if written notice not to renew his employment is given by AFC, Mr. Belatti would be entitled to, among other things, one to two-and-one-half times his base annual salary, depending on his length of service at such termination date, and the bonus payable to him for the fiscal year in which such termination occurs. Under the Belatti Agreement, upon (i) a change of control of AFC, (ii) a significant reduction in Mr. Belatti's responsibilities, title or duties or (iii) the relocation of AFC's principal office more than 45 miles from its current location (except to Atlanta, Georgia), Mr. Belatti may terminate 51 his employment and would be entitled to receive, among other things, the same severance pay he would have received had his employment been terminated by AFC without cause. DICK R. HOLBROOK. Mr. Holbrook and AFC entered into an employment agreement on November 5, 1992, as amended, on November 5, 1995 (the "Holbrook Agreement"). The Holbrook Agreement contains customary employment terms and provides for a current annual base salary of $325,000, subject to annual adjustment by the Board of Directors, an annual incentive bonus, stock options, fringe benefits, participation in all Company-sponsored benefit plans and such other compensation as may be approved by the Board of Directors. The term of the Holbrook Agreement terminates on November 5, 2000, unless earlier terminated or otherwise renewed, pursuant to the terms thereof. Pursuant to the Holbrook Agreement, if Mr. Holbrook's employment is terminated without cause or if written notice not to renew his employment is given by AFC, he would be entitled to, among other things, one to two-and-one-half times his base annual salary, depending on his length of service at such termination date, and the bonus payable to him for the fiscal year in which such termination occurs. Under the Holbrook Agreement, upon (i) a change of control of AFC, (ii) a significant reduction in Mr. Holbrook's responsibilities, title or duties not approved by Mr. Belatti or (iii) AFC relocates its principal office more than 45 miles from its current location (except to Atlanta, Georgia), Mr. Holbrook may terminate his employment and would be entitled to receive, among other things, the same severance pay he would have received had his employment been terminated by AFC without cause. SAMUEL N. FRANKEL. Mr. Frankel and AFC entered into an employment agreement on December 5, 1995 (the "Frankel Agreement"). The Frankel Agreement contains customary employment terms and provides for a base annual salary of $300,000, subject to annual adjustment by the Board of Directors, and for an annual incentive bonus. The term of the Frankel Agreement terminates on December 5, 2000, unless earlier terminated or otherwise renewed pursuant to the terms thereof. Pursuant to the Frankel Agreement, if Mr. Frankel's employment is terminated without cause or if written notice not to renew is given by AFC, he would be entitled to, among other things, two-and-one-half times his base annual salary, and the bonus payable to him for the fiscal year in which such termination occurs. Under the Frankel Agreement, upon (i) a change of control of AFC, (ii) a significant reduction in Mr. Frankel's responsibilities, title or duties not approved by Mr. Belatti or (iii) the relocation of AFC's principal office more than 45 miles from its current location (except to Atlanta, Georgia), Mr. Frankel may terminate his employment and would be entitled to receive, among other things, the same severance pay he would receive if he was terminated by AFC without cause. OPTION PLANS 1992 NONQUALIFIED STOCK OPTION PLAN The 1992 Nonqualified Stock Option Plan (the "1992 Option Plan"), provides for the grant of options to purchase shares of Common Stock to selected officers of AFC. Options under the 1992 Option Plan are not intended to qualify for treatment as incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended 52 ("Section 422A"). Options under the 1992 Option Plan became exercisable at various dates beginning on January 1, 1994. If not exercised, options under the 1992 Option Plan will expire 15 years after their issuance (if not sooner due to termination of employment). If the employment of an optionee under the 1992 Option Plan is terminated for any reason, AFC may be required to repurchase the shares of Common Stock acquired by such optionee pursuant to such plan. Up to 1,808,864 shares of Common Stock have been reserved for issuance under the 1992 Option Plan. Prior to April 1996, options with respect to 669,334, 200,000, 170,000, 35,000 and 35,000 shares of Common Stock were issued to Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms. Moddelmog, respectively, at an exercise price of $0.10. On April 11, 1996, this exercise price was adjusted to $0.08 per share and additional options with respect to 196,849, 58,860, 50,000, 10,300 and 10,300 shares of Common Stock were issued to Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms. Moddelmog, respectively, also at an exercise price of $0.08 per share. As of December 28, 1997, options with respect to 1,720,061 shares of Common Stock were outstanding under the 1992 Option Plan, of which options with respect to 1,527,854 shares of Common Stock were exercisable. 1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--EXECUTIVE Certain senior executives of AFC are eligible to participate in AFC's 1996 Nonqualified Performance Stock Option Plan--Executive (the "Executive Performance Option Plan"). Up to 1,444,053 shares of Common Stock may be issued under the Executive Performance Option Plan. Under the Executive Performance Option Plan, participants may be granted options to purchase shares of Common Stock at an option price determined by the Board of Directors of AFC. Options under the Executive Performance Option Plan are not intended to qualify for treatment as incentive stock options under Section 422A. The Executive Performance Option Plan is administered by the compensation committee of the Board of Directors (the "Compensation Committee"). All options granted under the Executive Performance Option Plan may vest over four to five years commencing on the first anniversary of the date of grant according to performance criteria relating to AFC's earnings on a fiscal year basis. Pursuant to the Executive Performance Option Plan, on April 26, 1996 AFC granted options with respect to 800,000, 400,000 and 225,000 shares of Common Stock to Messrs. Belatti, Holbrook and Frankel, respectively, at an exercise price of $3.317 per share. In 1997, AFC granted options with respect to 10,019, 4,517 and 4,517 shares of Common Stock to Messrs. Belatti, Holbrook and Frankel, respectively, at an exercise price of $4.95 per share. All options granted under the Executive Performance Option Plan will expire ten years from the date of grant unless terminated earlier due to certain circumstances. The exercisability of options under the Executive Performance Option Plan may be accelerated, at the discretion of the Compensation Committee. Additionally, the Executive Performance Option Plan provides that, at any time prior to five years after the date of grant of an option, AFC may elect to repurchase all or any portion of the shares of Common Stock acquired by the participant by the exercise of the options for a period of six months after the date of termination of the participant's employment. The purchase price for such repurchased shares shall be their "fair market value" thereof, as determined by the Board of Directors. The Executive Performance Option Plan contains provisions 53 relating to certain "tag-along" and "drag-along" rights should the FS Entities (as defined herein) find a third-party buyer for all of the Common Stock held thereby. As of December 28, 1997, options with respect to 1,444,053 shares of Common Stock were outstanding under the Executive Performance Option Plan, of which options with respect to 574,791 shares were exercisable. 1996 NONQUALIFIED PERFORMANCE STOCK OPTION PLAN--GENERAL Certain officers and key employees not covered by the Executive Performance Option Plan are eligible to receive options to purchase Common Stock under AFC's 1996 Nonqualified Performance Stock Option Plan--General ("General Performance Option Plan"). Up to 1,269,242 options to purchase shares of Common Stock are issuable under the General Performance Option Plan. Options under the General Performance Option Plan are not intended to qualify for treatment as incentive stock options under Section 422A. Pursuant to the General Performance Option Plan, on April 26, 1996, AFC granted options with respect to 100,000 shares of Common Stock to each of Mr. Van Epps and Mrs. Moddelmog at an exercise price of $3.317 per share. On October 1, 1997, AFC granted options with respect to 2,377 shares of Common Stock to Mr. Van Epps and Mrs. Moddelmog at an exercise price of $4.95 per share. The General Performance Option Plan has a number of terms that are substantially similar to terms found in the Executive Performance Option Plan. All options granted under the General Performance Option Plan may vest over four to five years commencing on the first anniversary of the date of grant according to a performance criteria relating to AFC's earnings. Such options expire ten years from the date of grant unless terminated earlier due to certain circumstances. Additionally, the General Performance Option Plan restricts employees from transferring any shares of Common Stock received on the exercise of options under the General Performance Option Plan prior to the fifth anniversary of the date of the grant. Following such fifth anniversary, AFC has a right of first refusal with respect to any proposed transfer of such shares of Common Stock. Finally, the General Performance Option Plan contains provisions relating to certain "tag-along" and "drag-along" rights should the FS Entities (as defined herein) find a third-party buyer for all of the Common Stock held thereby. As of December 28, 1997, options to purchase 1,207,894 shares of Common Stock were outstanding under the General Performance Option Plan, of which options to purchase 476,567 shares of Common Stock were exercisable. 1996 NONQUALIFIED STOCK OPTION PLAN Certain officers and key employees are eligible to receive options to purchase Common Stock under AFC's 1996 Nonqualified Stock Option Plan (the "1996 Option Plan"). The 1996 Option Plan authorizes AFC to issue up to 1,808,863 options to purchase shares of Common Stock. Options under the 1996 Option Plan are not intended to qualify for treatment as incentive stock options under Section 422A. On April 11, 1996, options to purchase 90,000, 55,000 and 35,000 shares of Common Stock were granted to Messrs. Belatti, Holbrook and Frankel, respectively, at an exercise price of $3.317 per share. On April 26, 1996, options to purchase 5,000 shares of Common Stock were granted under the 1996 Option Plan to Mr. Van Epps and Ms. Moddelmog also at 54 an exercise price of $3.317 per share. On October 1, 1997, options to purchase 32,390, 14,963, 14,963, 7,782 and 7,782 shares of Common Stock were granted to Messrs. Belatti, Holbrook, Frankel, Van Epps and Ms. Moddelmog at an exercise price of $4.95 per share. The 1996 Option Plan contains many of the same provisions of the Executive Performance Option Plan and the General Performance Option Plan. All options granted under the 1996 Option Plan vest in 25% increments upon each of the first, second, third and fourth anniversaries of the date of grant and expire seven years from the date of grant, unless terminated earlier due to certain circumstances. The 1996 Option Plan includes the same repurchase rights found in the Executive Performance Option Plan and the General Performance Option Plan. Additionally, the 1996 Option Plan contains the transfer restrictions, rights of first refusal and "tag-along" and "drag-along" rights as found in the General Performance Option Plan. As of December 28, 1997, options with respect to 641,464 shares of Common Stock were outstanding under the 1996 Option Plan, of which options to purchase 84,100 shares of Common Stock were exercisable. The following table sets forth information concerning the number and value of securities underlying unexercised options held by each of the Named Executive Officers at December 28, 1997. AFC OPTION GRANTS IN THE LAST FISCAL YEAR
Individual Grants(1) Potential Realizable ------------------------------------------------- Number of % of Total Value at Assumed Annual Securities Options Rates of Stock Price Underlying Granted to Exercise Appreciation for Option Options Employees in or Expiration Term(2) ------------------------------- Name Granted (#) Fiscal Year Base Price Date 5% 10% ---- ----------- ----------- ---------- ---- -- --- Frank J. Belatti 10,019 6.54% $4.950 10/1/07 $ 47,550 $ 95,401 32,390 10.40 4.950 10/1/04 118,163 205,001 Dick R. Holbrook 4,571 2.99 4.950 10/1/07 21,694 43,525 14,963 4.81 4.950 10/1/04 54,587 94,703 Samuel N. Frankel 4,571 2.99 4.950 10/1/07 21,694 43,525 14,963 4.81 4.950 10/1/04 54,587 94,703 William M. Van Epps 2,377 1.55 4.950 10/1/07 11,281 22,634 7,782 2.50 4.950 10/1/04 28,390 49,253 Hala R. Moddelmog 2,377 1.55 4.950 10/1/07 11,281 22,634 7,782 2.50 4.950 10/1/04 28,390 49,253
_____________ (1) Option grants to the Named Executive Officers set forth in the table were granted under the Executive Performance Option Plan, with respect to Messrs. Belatti, Holbrook and Frankel, the General Performance Stock Option Plan, with respect to Mr. Van Epps and Ms. Moddelmog, and the 1996 Option Plan, with respect to each Named Executive Officer. (2) These columns indicate the hypothetical gains of "option spreads" of the outstanding options granted, based on assumed annual compound stock appreciation rates of 5% and 10% over the options' terms. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent AFC's estimate or projection of the future prices or market value of Common Stock. 55 The following table sets forth information concerning the number and value of securities underlying unexercised options held by each of the Named Executive Officers as of December 28, 1997. AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Securities Unexercised Value of Unexercised Underlying Options at In-the-Money Options at Dec 28, 1997 (#) Dec. 28, 1997 ($)(1)(2) --------------------------------- ------------------------------ Not Not Exercisable Exercisable Exercisable Exercisable --------------- ----------- ----------- ----------- Frank J. Belatti 1,215,081 587,404 7,895,029 2,391,948 Dick R. Holbrook 433,753 299,641 2,650,452 1,223,366 Samuel N. Frankel 319,893 179,641 2,048,386 721,406 William M. Van Epps 62,553 97,906 327,724 473,522 Hala R. Moddelmog 46,374 114,085 207,676 593,570
_____________ (1) Because there is no established public trading market for Common Stock, the Board of Directors of AFC must, under certain circumstances, determine the fair market value of the Common Stock. AFC believes that the fair market value of the Common Stock was $7.50 per share as of December 28, 1997. (2) Values for "in-the-money" outstanding options represent the positive spread between the respective exercise prices of the outstanding options and the fair market value of the underlying Common Stock of $7.50 per share as described in Note 1. STOCK BONUS PLANS Officers, key employees and certain consultants of AFC have received shares of Common Stock under AFC's 1996 Employee Stock Bonus Plan--Executive (the "Executive Bonus Plan") and the 1996 Stock Bonus Plan--General (the "General Bonus Plan"). On April 26, 1996, an aggregate of 2,649,969 shares of Common Stock were issued under the Executive Bonus Plan and an aggregate of 364,803 shares of Common Stock were issued under the General Bonus Plan at a fair market value of $3.317 per share. On such date, Messrs. Belatti, Holbrook and Frankel were issued 1,329,969, 660,000 and 660,000 shares of Common Stock, respectively, under the Executive Bonus Plan and Mr. Van Epps and Ms. Moddelmog were each issued 34,700 shares of Common Stock under the General Bonus Plan. Under each such plan, at any time prior to five years after the date of grant of Common Stock bonuses, AFC has the option, in certain circumstances, to repurchase all or any portion of the shares of Common Stock acquired by the plan participant for a period of six months after the date of termination of the participant's employment. The price for such repurchase will be the fair market value of the shares as determined by the Board of Directors, except for termination of employment other than death or disability under the General Bonus Plan. In such instances, the repurchase price shall be a certain fraction of the fair market value, depending on the length of employment by such employee. This repurchase option terminates upon AFC's initial public offering of Common Stock or a change of control with respect to AFC. In addition, shares issued under the General Bonus Plan are also subject to the same transfer restrictions, rights of first refusal and "tag-along" and "drag-along" rights that are found in the General Option Plan. No further shares are available for issuance under either the Executive Bonus Plan or the General Bonus Plan. 56 In connection with the issuance of shares of Common Stock under the Executive Bonus Plan and the General Bonus Plan, AFC offered to loan the participating employee an amount sufficient to pay for the employee's tax obligation resulting from the issuance of shares of Common Stock to such employee. If accepted by the employee, such loan would be evidenced by a promissory note which will be due on December 31, 2003 and accrues interest at 6.25% per annum. Such notes are secured by the pledge of the shares issued to the employee. As of December 28, 1997, under the Executive Bonus Plan and the General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms. Moddelmog had issued promissory notes to AFC in the outstanding principal amounts of $2,078,726, $1,030,028, $1,030,028, $51,795 and $51,795, respectively. OTHER EMPLOYEE BENEFIT PLANS On April 19, 1994, AFC adopted a nonqualified retirement, disability and death benefit plan ("Retirement Plan") for certain officers. Retirement benefits under the Retirement Plan are unfunded. Annual benefits are equal to 30.0% of the executive's average base compensation for the five years preceding retirement. The benefits are payable in 120 equal monthly installments following the executive officer's retirement date. Death benefits under the Retirement Plan cover certain executive officers and are up to five times the officer's base compensation at the time of employment. AFC has the discretion to increase the employee's death benefits. Death benefits are funded by split dollar life insurance arrangements. The accumulated benefit obligation relating to the Retirement Plan was approximately $1.2 million on December 28, 1997. AFC also provides post-retirement medical benefits (including dental coverage) for certain retirees and their spouses. This benefit begins on the date of retirement and ends after 120 months or upon the death of both parties. 57 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows the total number and percentage of the outstanding shares of the Company's Common Stock beneficially owned as of March 15, 1998, with respect to each person (including any "group" as used in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) the Company knows to have beneficial ownership of more than 5% of the Common Stock. The Company computed the percentage ownership amounts in accordance with the provisions of Rule 13d-3(d), which includes as beneficially owned all shares of Common Stock which the person or group has the right to acquire within the next 60 days. The percentages are based upon 34,448,604 shares outstanding as of March 15, 1998. OWNERSHIP OF AFC COMMON STOCK
Shares of Percentage of Name(1) Common Stock Common Stock ------ ------------ ------------- Freeman Spogli & Co. Incorporated(2)(3)...................... 18,993,066 55.1% Canadian Imperial Bank of Commerce(4)........................ 6,312,724 18.3% PENMAN Private Equity and Mezzanine Fund, L.P.(5)............ 2,110,341 6.1% ML IBK Positions, Inc.(6).................................... 2,050,000 6.0% Frank J. Belatti(7)(8)....................................... 2,567,550 7.2% Dick R. Holbrook(7)(9)....................................... 1,107,503 3.2% Samuel N. Frankel(7)(10)..................................... 988,643 2.8% William M. Van Epps(7)(11)................................... 98,503 * Hala R. Moddelmog(7)(12)..................................... 83,618 * Mark J. Doran(3)............................................. -- -- Paul Farrar(13).............................................. -- -- Matt L. Figel(14)............................................ -- -- Todd W. Halloran(3).......................................... -- -- Kelvin J. Pennington(5)...................................... -- -- John M. Roth(3).............................................. -- -- Ronald P. Spogli(3).......................................... -- -- William M. Wardlaw(3)........................................ -- -- Directors and officers as a group (30 persons) (1530)........ 26,755,373 72.0% -------------
______________ * Less than 1.0% of outstanding shares of Common Stock. (1) The persons named in this table have sole voting power and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and the information contained in this table and these notes. (2) The shares shown as beneficially owned by FS&Co. are held of record as follows: 18,259,483 shares owned by FS Equity Partners III, L.P. ("FSEP III") and 733,583 shares owned by FS Equity Partners International, L.P. ("FSEP International"). FS Capital Partners, L.P. ("FS Capital"), an affiliate of FS&Co., is the sole general partner of FSEP III. FS Holdings, Inc. ("FSHI") is the sole general partner of FS Capital. The sole general partner of FSEP International is FS&Co. International, L.P. ("FS&Co. International"). The sole general partner of FS&Co. International is FS International Holdings Limited ("FS International Holdings"), an affiliate of FS&Co. As the general partners of FS Capital (which is the general partner of FSEP III) and FS&Co. International (which is the general partner of FSEP International), respectively, FSHI and FS International Holdings have the sole power to vote and dispose of the shares of AFC held by each of FSEP III and FSEP International, respectively. (3) Messrs. Spogli, Roth and Wardlaw, each of whom is a member of the Board, and Mr. Bradford M. Freeman, Mr. J. Frederick Simmons and Mr. Charles P. Rullman, Jr. are the sole directors, officers and shareholders of FS&Co., FSHI and FS International Holdings, and as such may be deemed to be the beneficial owners of the shares indicated as beneficially owned by FS&Co. Messrs. Doran and Halloran, each of whom is a member of the Board, are affiliated with FS&Co. The business address of each of FS&Co. and its general partners, FSHI and its sole directors, officers and shareholders, FS Capital and FSEP III is 11100 58 Santa Monica Boulevard, Suite 1900, Los Angeles, California 90025. The business address of each of FS International Holdings, FS&Co. International and FSEP International is c/o Paget-Brown & Company, Ltd., West Winds Building, Third Floor, P.O. Box 1111, Grand Cayman, George Town, Cayman Islands, B.W.I. The business address of Messrs. Doran and Halloran is 599 Lexington Avenue, 18th Floor, New York, New York 10022. (4) The business address for Canadian Imperial Bank of Commerce is BCE Place, Bay Street, P.O. Box 500, Toronto, Ontario MBJ258. (5) Mr. Pennington, who is a member of the Board, and Mr. Lawrence C. Manson, Jr. are general partners of PENMAN Asset Management, L.P. ("PENMAN Asset"), the general partner of PENMAN Private Equity and Mezzanine Fund, L.P. ("PENMAN Equity"), and as such may be deemed to be the beneficial owners of the shares indicated as beneficially owned by PENMAN. The business address of PENMAN Equity, PENMAN Asset and each of its general partners is 333 West Wacker Drive, Suite 700, Chicago, Illinois 60606. (6) The business address of ML IBK Positions, Inc. is c/o Merrill Lynch & Co., Inc., Corporate Credit Division, World Financial Center, South Tower, 7th Floor, New York, New York 10080. (7) The business address of AFC's executive officers is c/o AFC Enterprises, Inc., Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328. (8) Includes 1,237,581 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 15, 1998. (9) Includes 447,503 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 15, 1998. (10) Includes 328,643 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 15, 1998. (11) Includes 63,803 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 15, 1998. (12) Includes 48,918 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 15, 1998. (13) Mr. Farrar's mailing address is c/o Canadian Imperial Bank of Commerce, BCE Place, Bay Street, P.O. Box 500, Toronto, Ontario MBJ258. (14) Mr. Figel's business address is c/o Doramar Capital, 300 South Grand Avenue, Suite 2900, Los Angeles, California 90071. (15) Includes 18,993,066 shares of Common Stock held by affiliates of FS&Co., 2,110,341 shares of Common Stock held by an affiliate of PENMAN Equity and 2,721,687 shares of Common Stock issuable with respect to options granted to certain executive officers that are exercisable within 60 days as of January 30, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In April 1996, FSEP III and FSEP International (collectively, the "FS Entities") acquired from AFC 21,103,407 shares of Common Stock, for an aggregate purchase price of $70.0 million. In connection with such stock purchase, 535,152 of the 560,000 outstanding shares of AFC's 8% Redeemable Cumulative Preferred Stock ("8% Preferred Stock") were exchanged into an equal number of shares of 10% Preferred Stock including 360,545 shares held by Canadian Imperial Bank of Commerce and 60,000 shares held by ML IBK Positions, Inc. In May 1996, the FS Entities sold an aggregate of 2,110,341 shares of Common Stock to PENMAN Equity for an aggregate purchase price of $7.0 million. In August 1996, the remaining 24,848 shares of the 8% Preferred Stock then outstanding were exchanged for an equal number of shares of 10% Preferred Stock. In April 1996, the FS Entities, AFC, Messrs. Belatti, Holbrook and Frankel along with certain other holders of Common Stock, entered into a stockholders agreement ("Stockholders Agreement") whereby (i) the shareholders were granted the pro rata right to acquire any additional securities to be issued by AFC, (ii) the FS Entities granted certain "tag-along" rights to the other shareholders and, in turn, were granted certain 59 "drag-along" rights with respect to the sale of their shares of Common Stock or 10% Preferred Stock (collectively, "Capital Stock"), (iii) various transfer restrictions were agreed upon by the shareholders, (iv) certain rights of first offer prior to any transfer of shares of Capital Stock were agreed to and (v) certain Board representation rights of the FS Entities, the Chief Executive Officer of AFC, and the holders of 10% Preferred Stock were established. This Stockholders Agreement was amended in May 1996 to include PENMAN Equity and again in August 1996 to include two new shareholders. In April 1996, in connection with the issuance of shares of Common Stock under the Executive Bonus Plan and General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms. Moddelmog borrowed $1,985,178, $985,149, $985,149, $51,795 and $51,795, respectively, from AFC to cover certain income tax liabilities arising as a result the issuance of shares of Common Stock in connection with the FS Transactions. In 1997, AFC additionally loaned Messrs. Belatti, Holbrook and Frankel $93,548, $44,879 and $44,879, respectively, with respect to the above. Each officer delivered a promissory note to AFC with respect to the amount borrowed thereby and each such promissory note is due on December 31, 2003 with a simple interest rate of 6.25% per annum. In connection with these notes, each such officer also entered into a pledge agreement with AFC whereby each note is secured by the pledge of shares of Common Stock issued thereto under either the Executive Bonus Plan or the General Bonus Plan. As of December 28, 1997, under the Executive Bonus Plan and the General Bonus Plan, Messrs. Belatti, Holbrook, Frankel and Van Epps and Ms. Moddelmog had issued promissory notes to AFC in the outstanding principal amounts of $2,078,726, $1,030,028, $1,030,028, $51,795 and $51,795, respectively. In May 1996, AFC redeemed all shares of its outstanding 8% Preferred Stock and 10% Preferred Stock with proceeds from the issuance of $175 million in Senior Subordinated Notes. In 1996, AFC received legal services from Frankel, Hardwick, Tanenbaum & Fink, P.C., a law firm associated with Mr. Frankel, AFC's Executive Vice President, Secretary and General Counsel and a member of AFC's Board of Directors. During AFC's fiscal year ended December 29, 1996, the total amount paid to this law firm was approximately $448,000. This law firm has since been dissolved. AFC's executive committee of the Board of Directors oversees compensation matters. Messrs. Belatti and Frankel, two Named Executive Officers, serve on the executive committee but neither Mr. Belatti nor Mr. Frankel participated in matters regarding his own compensation. 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS The following consolidated financial statements of the Company appear immediately following this Item 14:
Pages ----- Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 29, 1996 and December 28, 1997............................................................... F-2 Consolidated Statements of Operations for the Years ended December 31, 1995, December 29, 1996 and December 28, 1997...................... F-4 Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years ended December 31, 1995, December 29, 1996 and December 28, 1997............................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997...................... F-6 Notes to Consolidated Financial Statements................................ F-8
(B) FINANCIAL STATEMENT SCHEDULES The Company has omitted all other schedules because the conditions requiring their filing do not exist or because the required information appears in the Company's Consolidated Financial Statements, including the notes to those statements. (C) EXHIBITS The Company has filed the exhibits listed below with this report. Exhibit Number Description ------ ----------- 3.1* Articles of Incorporation of AFC Enterprises, Inc. ("AFC"), as amended to date. 3.2* Amended and Restated Bylaws of AFC (formerly known as America's Favorite Chicken Company), as amended to date. 4.1* Indenture dated as of May 21, 1997 between AFC and United States Trust Company of New York, as Trustee, with respect to the 10 1/4 % Senior Subordinated Notes due 2007. 4.2* Purchase Agreement, dated May 16, 1997, by and among AFC, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Donaldson, Lufkin & Jenrette Securities Corporation. 61 4.3* Exchange and Registration Rights Agreement, dated as of May 21, 1997, by and among AFC, Goldman, Sachs & Co., CIBC Wood Gundy Securities Corp. and Donaldson, Lufkin & Jenrette Securities Corporation. 4.4* Credit Agreement dated as of May 21, 1997, between AFC and the financial institutions listed therein (collectively, "Lenders"), Goldman Sachs Capital Partners L.P., as syndication and arranging agent, and Canadian Imperial Bank of Commerce ("CIBC"), as administrative agent for Lenders. 4.5* Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.6* Pledge Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.7* Trademark Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.8* Patent and Copyright Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.9* Collateral Account Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.10* Form of Mortgage, Assignment of Rents, Security Agreement and Fixture Filing, dated as of May 21, 1997, between AFC and CIBC, as Administrative Agent. 10.1* Stock Purchase Agreement dated February 23, 1996 among AFC, FS Equity Partners, L.P. III ("FSEP III"), and FS Equity Partners International, L.P. ("FSEP International"). 10.2* Stockholders Agreement dated April 11, 1996 among FSEP III and FSEP International, CIBC, Pilgrim Prime Rate Trust, Van Kampen American Capital Prime Rate Income Trust, Senior Debt Portfolio, ML IBK Positions Inc., Frank J. Belatti, Dick R. Holbrook, Samuel N. Frankel (collectively, the "Stockholders") and AFC. 10.3* Amendment No. 1 to Stockholders Agreement dated May 1, 1996 among the Stockholders, AFC and PENMAN Private Equity and Mezzanine Fund, L.P. 10.4* Asset Purchase Agreement dated March 24, 1997 by and between AFC and Atlanta Franchise Development Company, LLC. 10.5* Asset Purchase Agreement dated May 5, 1997 among AFC, The American Bagel Company d/b/a Chesapeake Bagel Bakery, Michael Robinson, and Alan Manstof. 10.6* Form of Popeye's Development Agreement 10.7* Form of Church's Development Agreement 10.8* Form of Popeye's Franchise Agreement 62 10.9* Form of Church's Franchise Agreement 10.10* Formula Agreement dated July 2, 1979 among Alvin C. Copeland, Gilbert E. Copeland, Mary L. Copeland, Catherine Copeland, Russell J. Jones, A. Copeland Enterprises, Inc. and Popeyes Famous Fried Chicken, Inc. (a predecessor of AFC). 10.11* Amendment to Formula Agreement dated March 21, 1989 by and among Alvin Copeland, New Orleans Spice Company, Inc. and Biscuit Investments, Inc. (a predecessor of AFC). 10.12* Second Amendment to Formula Agreement dated March 21, 1989 by and among Alvin C. Copeland, Biscuit Investments, Inc. and New Orleans Spice Company, Inc. 10.13* Supply Agreement dated March 21, 1989 between New Orleans Spice Company, Inc. and Biscuit Investments, Inc. 10.14* Recipe Royalty Agreement dated March 21, 1989 by and among Alvin C. Copeland, New Orleans Spice Company, Inc. and Biscuit Investments, Inc. 10.15* Licensing Agreement dated March 11, 1976 between King Features Syndicate Division of The Hearst Corporation and A. Copeland Enterprises, Inc. 10.16* Assignment and Amendment dated January 1, 1981 between A. Copeland Enterprises, Inc., Popeyes Famous Fried Chicken, Inc. and King Features Syndicate Division of The Hearst Corporation. 10.17* Popeye License Agreement dated January 1, 1981 between King Features Syndicate Division of The Hearst Corporation and Popeyes Famous Fried Chicken, Inc. 10.18* Letter Agreement dated September 17, 1981 between King Features Syndicate Division of The Hearst Corporation, A. Copeland Enterprises, Inc. and Popeyes Famous Fried Chicken, Inc. 10.19* License Agreement dated December 19, 1985 by and between King Features Syndicate, Inc., The Hearst Corporation, Popeyes, Inc. and A. Copeland Enterprises, Inc. 10.20* Letter Agreement dated July 20, 1987 by and between King Features Syndicate, Division of The Hearst Corporation, Popeyes, Inc. and A. Copeland Enterprises, Inc. 10.21* Employment Agreement dated November 5, 1992 between AFC and Frank J. Belatti. 10.22* Amendment No. 1 to Employment Agreement dated November 5, 1995 between AFC and Frank J. Belatti. 63 10.23* Employment Agreement dated as of November 5, 1992 between AFC and Dick R. Holbrook. 10.24* Amendment No. 1 to Employment Agreement dated November 5, 1995 between AFC and Dick R. Holbrook. 10.25* Employment Agreement dated December 5, 1995 between AFC and Samuel N. Frankel. 10.26* 1992 Stock Option Plan of AFC (formerly America's Favorite Chicken Company) effective as of November 5, 1992. 10.27* First Amendment to 1992 Stock Option Plan dated July 19, 1993. 10.28* Second Amendment to 1992 Stock Option Plan dated December 17, 1993. 10.29* Third Amendment to 1992 Stock Option Plan dated April 11, 1996. 10.30* 1996 Nonqualified Performance Stock Option Plan (Executive) of AFC effective as of April 11, 1996. 10.31* 1996 Nonqualified Performance Stock Option Plan (General) of AFC effective as of April 11, 1996. 10.32* 1996 Nonqualified Stock Option Plan of AFC effective as of April 11, 1996. 10.33* Form of Nonqualified Stock Option Agreement (General) between AFC and stock option participants. 10.34* Form of Nonqualified Stock Option Agreement (Executive) between AFC and certain key executives. 10.35* 1996 Employee Stock Bonus Plan (Executive) of AFC effective as of April 11, 1996. 10.36* 1996 Employee Stock Bonus Plan (General) of AFC effective as of April 11, 1996. 10.37* Form of Stock Bonus Agreement (Executive) between AFC and certain executive officers. 10.38* Form of Stock Bonus Agreement (General) between AFC and certain key officers and employees. 10.39* Form of Secured Promissory Note issued to certain members of management. 10.40* Form of Stock Pledge Agreement between AFC and certain members of 64 management. 10.41* AFC 1994 Supplemental Benefit Plan for Executive Officers dated May 9, 1994. 10.42* AFC 1994 Supplemental Benefit Plan for Senior and Executive Staff Officers dated April 19, 1994. 10.43* AFC 1994 Supplemental Benefit Plan for Senior Officers/General Managers dated May 9, 1994. 10.44* AFC 1994 Supplemental Benefit Plan for Designated Officers dated May 9, 1994. 10.45* Settlement Agreement between Alvin C. Copeland, Diversified Foods and Seasonings, Inc., Flavorite Laboratories, Inc. and AFC dated May 29, 1997. 10.46* Sublease dated March 1, 1997 by and between AFC and Foresight Software, Inc. 10.47* Lease dated December 31, 1992 by and between Concourse VI Associates and AFC. 10.48* First Amendment to Lease Agreement dated January 1993 by and between AFC and Concourse VI Associates. 10.49* Second Amendment to Lease Agreement dated June 24, 1993 by and between AFC and Concourse VI Associates. 65 10.50* Third Amendment to Lease Agreement dated June 17, 1994 by and between AFC and Concourse VI Associates. 10.51* Indemnification Agreement dated April 11, 1996 by and between AFC and William M. Wardlaw. 10.52* Indemnification Agreement dated April 11, 1996 by and between AFC and Ronald P. Spogli. 10.53* Indemnification Agreement dated April 11, 1996 by and between AFC and John M. Roth. 10.54* Indemnification Agreement dated May 1, 1996 by and between AFC and Kelvin J. Pennington. 10.55* Indemnification Agreement dated April 11, 1996 by and between AFC and Dick R. Holbrook. 10.56* Indemnification Agreement dated April 11, 1996 by and between AFC and Todd W. Halloran. 10.57* Indemnification Agreement dated April 11, 1996 by and between AFC and Samuel N. Frankel. 10.58* Indemnification Agreement dated April 11, 1996 by and between AFC and Matt L. Figel. 66 10.59* Indemnification Agreement dated July 2, 1996 by and between AFC and Paul H. Farrar. 10.60* Indemnification Agreement dated July 2, 1997 by and between AFC and Mark J. Doran. 10.61* Indemnification Agreement dated April 11, 1996 by and between AFC and Frank J. Belatti. 10.62** Credit Agreement dated August 12, 1997, between AFC and Banco Popular ("Banco Popular") De Puerto Rico for Turnkey Development program financing. 10.63** Exhibit A (the Budget) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.64** Exhibit B (Form of Notes) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.65** Exhibit C (Form of Leasehold Mortgage) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.66** Exhibit D (Form of Owned Property Mortgage) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. Exhibit E (Form of Assignment of Contracts) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.67** Exhibit F (Form of Environmental Indemnity Agreement) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.68** Exhibit G (Form of Borrowing Certificate) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.69** Exhibit H (Terms and Conditions of Standard Franchise Loans) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.70** Exhibit I (Terms and Conditions of Popular Plus Loans) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.71** Exhibit J (Description of Borrower's "Plus Program") of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.72** Exhibit K-1 (Franchise Loan Commitment) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. Exhibit K-2 (Forms of Franchise Loan Documents) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.73** Form of Chesapeake Bagel Development Agreement 67 10.74** Form of Chesapeake Bagel Franchise Agreement 10.75 Form of Chesapeake Bagel Development Agreement 10.76 Form of Chesapeake Bagel Franchise Agreement 21.1* Subsidiaries of AFC. 23.1* Consent of Riordan & McKinzie (contained in Exhibit 5.1). 23.2* Consent of Arthur Andersen LLP. 23.3* Consent of Technomic, Inc. 23.4* Consent of CREST. 24.1* Power of Attorney. 27.1 Financial Data Schedule 99.1* Form of Letter of Transmittal with respect to the Exchange Offer. 99.2* Form of Notice of Guaranteed Delivery. ______________________ * Filed as an exhibit to the Company's Registration Statement on Form S-4 (Registration No. 333-29731) on July 2, 1997 and incorporated by reference herein. ** Filed as an exhibit to the Company's Form 10-Q for the quarter ended September 7, 1997 on October 21, 1997 and incorporated by reference herein. (D) REPORTS ON FORM 8-K None. 68 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AFC Enterprises, Inc. By: /s/ Frank J. Belatti ----------------------- Frank J. Belatti Chairman of the Board and Chief Executive Officer Date: March 15, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ---- /s/ Frank J. Belatti Chairman of the board and March 15, 1998 ------------------------------ Frank J. Belatti Chief Executive Officer (Principal Executive Officer) /s/ Gerald J. Wilkins Chief Financial Officer March 15, 1998 ------------------------------ Gerald J. Wilkins Principal Financial and Accounting Officer) /s/ Dick R. Holbrook President, Chief Operating March 15, 1998 ------------------------------ Dick R. Holbrook Officer and Director /s/ Samuel N. Frankel Executive Vice President, March 15, 1998 ------------------------------ Samuel N. Frankel Secretary, General Counsel and Director /s/ John M. Roth Director March 15, 1998 ------------------------------ John M. Roth /s/ Mark J. Doran Director March 15, 1998 ------------------------------ Mark J. Doran /s/ Paul Farrar Director March 15, 1998 ------------------------------ Paul Farrar
69 /s/ Matt L. Figel Director March 15, 1998 ------------------------------ Matt L. Figel /s/ Todd W. Halloran Director March 15, 1998 ------------------------------ Todd W. Halloran /s/ Kelvin J. Pennington Director March 15, 1998 ------------------------------ Kelvin J. Pennington /s/ Ronald P. Spogli Director March 15, 1998 ------------------------------ Ronald P. Spogli /s/ William M. Wardlaw Director March 15, 1998 ------------------------------ William M. Wardlaw
70 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of AFC Enterprises, Inc. We have audited the accompanying consolidated balance sheets of AFC Enterprises, Inc. (a Minnesota corporation) and subsidiary, as of December 29, 1996, and December 28, 1997, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for the years ended December 31, 1995, December 29, 1996, and December 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AFC Enterprises, Inc. and subsidiary, as of December 29, 1996 and December 28, 1997, and the results of their operations and their cash flows for the years ended December 31, 1995, December 29, 1996, and December 28, 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia February 13, 1998 ( Except with respect to the matters discussed in Note 18, as to which the date is March 18, 1998) F-1 AFC ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS As of December 29, 1996 and December 28, 1997 (In thousands, except per share amounts) - --------------------------------------------------------------------------------
1996 1997 -------- -------- ASSETS: CURRENT ASSETS: Cash and cash equivalents.............................. $ 19,216 $ 32,964 Accounts and current notes receivable, net of reserve.. 9,314 8,305 Income taxes refundable................................ - 1,013 Inventories............................................ 3,961 4,447 Deferred income taxes.................................. 684 662 Deposits............................................... 4,206 - Prepaid expenses and other............................. 1,415 1,539 -------- -------- Total current assets................................ 38,796 48,930 LONG-TERM ASSETS: Notes receivable, net.................................. 4,836 4,477 Deferred income taxes.................................. 5,307 1,466 Property and equipment, net............................ 189,223 207,807 Other assets........................................... 7,295 17,049 Intangible assets, net................................. 94,211 100,273 -------- -------- Total long-term assets.............................. 300,872 331,072 -------- -------- Total assets................................... $339,668 $380,002 ======== ======== LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable....................................... $ 18,370 $ 22,123 Bank overdrafts........................................ 10,812 9,707 Current portion of long-term debt and capital lease obligations................................... 11,753 10,994 Income taxes payable................................... 1,077 - Accrued interest....................................... 1,654 2,765 Accrued insurance expenses............................. 6,938 5,123 Accrued employee compensation.......................... 6,365 7,114 Accrued employee benefit expenses...................... 7,097 5,767 Other accrued expenses................................. 4,269 3,154 -------- -------- Total current liabilities........................... 68,335 66,747 LONG-TERM LIABILITIES: Long-term debt, net of current portion................. 121,806 220,150 Capital lease obligations, net of current portion...... 18,234 12,738 Other liabilities...................................... 33,435 31,908 -------- -------- Total long-term liabilities......................... 173,475 264,796 -------- -------- Total liabilities.............................. 241,810 331,543 -------- --------
(Continued) F-2 AFC ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 29, 1996 and December 28, 1997 (In thousands, except per share amounts) - --------------------------------------------------------------------------------
1996 1997 ---- ---- COMMITMENTS AND CONTINGENCIES MANDATORILY REDEEMABLE PREFERRED STOCK: 10% Cumulative Exchangeable Redeemable Preferred Stock ($.01 par value; 1,250,000 shares authorized; 560,000 and 0 issued and outstanding; 39,560 and 0 shares payable in kind; liquidation value $59,956 and $0, respectively)............... 59,956 - SHAREHOLDERS' EQUITY: Common stock ($.01 par value; 50,000,000 shares authorized; 34,373,653 and 34,448,604 shares issued and outstanding at period end, respectively).................................. 344 344 Capital in excess of par value................................... 99,482 101,840 Notes receivable - officers, including accrued interest.......... (3,841) (4,402) Accumulated deficit.............................................. (58,083) (49,323) -------- -------- Total shareholders' equity.................................... 37,902 48,459 -------- -------- Total liabilities, mandatorily redeemable preferred stock and shareholders' equity........................... $339,668 $380,002 ======== ========
See accompanying notes to financial statements. F-3 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997 (In thousands) - --------------------------------------------------------------------------------
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------- ------------- ------------- (53 Weeks) (52 Weeks) (52 Weeks) REVENUES: Restaurant sales............................................. $ 426,707 $ 430,280 $ 403,285 Revenues from franchising.................................... 47,916 51,336 63,650 Revenues from manufacturing.................................. 9,969 11,431 7,647 Other revenues............................................... 8,320 8,005 8,766 ---------- ---------- ---------- Total revenues.............................................. 492,912 501,052 483,348 COSTS AND EXPENSES: Restaurant cost of sales..................................... 139,286 142,199 131,374 Restaurant operating expenses................................ 215,391 212,579 197,803 Manufacturing cost of sales.................................. 7,273 8,867 5,032 General and administrative................................... 80,002 77,614 80,485 Depreciation and amortization................................ 28,665 30,904 33,803 Executive compensation award................................. 10,647 - - Gain on sale of fixed assets from AFDC transaction........... - - (5,319) ---------- ---------- ---------- Total costs and expenses.................................... 481,264 472,163 443,178 ---------- ---------- ---------- INCOME FROM OPERATIONS........................................ 11,648 28,889 40,170 OTHER EXPENSES: Interest, net................................................ 23,444 15,875 20,645 ---------- ---------- ---------- NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........................................... (11,796) 13,014 19,525 Income tax (expense) benefit................................. 2,969 (5,163) (8,525) ---------- ---------- ---------- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................... (8,827) 7,851 11,000 Extraordinary loss on early retirement of debt, (net of income taxes of $2,673).................................. - (4,456) - ---------- ---------- ---------- NET INCOME (LOSS)............................................. (8,827) 3,395 11,000 8% Preferred Stock dividends.................................. 4,555 1,316 - 10% Preferred Stock dividends payable in kind................. - 3,956 2,240 Accelerated accretion of 8% Preferred Stock discount upon retirement..................................... - 8,719 - Accretion of 8% Preferred Stock discount..................... 2,571 813 - ---------- ---------- ---------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK................ $ (15,953) $ (11,409) $ 8,760 ========== ========== ==========
See accompanying notes to financial statements. F-4 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997 (In thousands) ________________________________________________________________________________
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------- ------------- ------------ Common stock: Balance at beginning of period................ $ 100 $ 100 $ 344 Issuance of common stock...................... - 244 - -------- -------- -------- Balance at end of period...................... $ 100 $ 344 $ 344 -------- -------- -------- Capital in excess of par value: Balance at beginning of period................ $ 23,914 $ 24,909 $ 99,482 Issuance of common stock...................... - 73,709 6 Adjust stock issuance cost accrual to actual.. - - 135 Deferred compensation......................... 995 864 2,217 -------- -------- -------- Balance at end of period...................... $ 24,909 $ 99,482 $101,840 -------- -------- -------- Notes receivable - officers: Balance at beginning of period................ $ - $ - $ (3,841) Notes receivable additions, net of discount... - (3,593) (202) Note receivable payments...................... - - 19 Interest receivable........................... - (194) (284) Amortization of discount...................... - (54) (94) -------- -------- -------- Balance at end of period...................... $ - $ (3,841) $ (4,402) -------- -------- -------- Accumulated deficit: Balance at beginning of period................ $(30,721) $(46,674) $(58,083) Net income (loss)............................. (8,827) 3,395 11,000 Accretion of 8% Preferred Stock discount...... (2,571) (813) - Accelerated accretion of 8% Preferred Stock discount upon retirement..................... - (8,719) - 10% and 8% Preferred Stock dividends.......... (4,555) (5,272) (2,240) -------- -------- -------- Balance at end of period...................... $(46,674) $(58,083) $(49,323) -------- -------- -------- Total shareholders' equity (deficit)........... $(21,665) $ 37,902 $ 48,459 ======== ======== ========
See accompanying notes to financial statements. F-5 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997 (In thousands) ________________________________________________________________________________
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------- ------------- ------------- (53 Weeks) (52 Weeks) (52 Weeks) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income (loss)................................................. $ (8,827) $ 3,395 $ 11,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................................... 28,665 30,904 33,803 Provision for credit losses...................................... 720 816 1,214 (Gain) loss on disposition and retirement of property, plant and equipment................................. 3,889 3,019 (2,173) Amortization of notes payable discount........................... 2,505 7,729 - Amortization of debt issuance costs.............................. - - 886 Notes receivable - officers discount............................. - 876 - Amortization of notes receivable - officers discount...................................................... - (54) (94) Deferred compensation............................................ 995 864 2,217 Deferred tax expense (benefit)................................... (4,870) 380 3,863 Change in operating assets and liabilities: (Increase) decrease in accounts receivable....................... 3,034 (4,137) (905) (Increase) decrease in inventories............................... 125 2,154 (487) (Increase) decrease in prepaid expenses and other..................................................... (2,665) 1,694 4,076 (Increase) decrease in other assets.............................. (995) (856) 21 Increase (decrease) in accounts payable.......................... (3,078) 1,101 4,157 Increase (decrease) in accrued expenses.......................... 4,101 2,469 (3,097) Increase (decrease) in other liabilities......................... 4,432 (2,553) (1,966) -------- -------- -------- Total adjustments............................................. 36,858 44,406 $ 41,515 -------- -------- -------- Net cash provided by operating activities......................... $ 28,031 $ 47,801 $ 52,515 -------- -------- -------- CASH FLOWS USED BY INVESTING ACTIVITIES: Proceeds from disposition of property held for sale................................................. $ 3,050 $ 3,158 $ 19,681 Investment in property and equipment.............................. (24,996) (33,951) (42,136) Investment in trademarks.......................................... - - (14,116) Notes receivable additions........................................ (196) (136) (2,657) Payments received on notes........................................ 2,028 1,541 3,446 -------- -------- -------- Net cash used by investing activities............................. $(20,114) $(29,388) $(35,782) -------- -------- --------
(Continued) F-6 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997 (In thousands) ________________________________________________________________________________
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ (53 Weeks) (52 Weeks) (52 Weeks) CASH FLOWS USED BY FINANCING ACTIVITIES: Principal payments of long-term debt............................. $ (3,743) $(69,054) $(128,365) Proceeds from long-term debt..................................... - - 50,000 Proceeds from subordinated notes................................. - - 175,000 Increase (decrease) in bank overdrafts, net...................... (151) 2,729 (1,105) Principal payments for capital lease obligations................. (2,347) (3,904) (25,182) Redemption of 10% preferred stock................................ - - (59,957) Notes receivable additions to officers........................... - (4,469) (202) Notes receivable officers payments............................... - - 19 Notes receivable officers accrued interest....................... - (194) (284) Issuance of common stock......................................... - 70,205 6 Stock issuance costs............................................. - (6,115) - Debt issuance costs.............................................. - - (10,675) Preferred stock dividends paid................................... (4,480) (2,004) (2,240) -------- -------- --------- Net cash used by financing activities............................ (10,721) (12,806) (2,985) -------- -------- --------- Net increase (decrease) in cash and cash equivalents.............. (2,804) 5,607 13,748 Cash and cash equivalents at beginning of the period................................................... 16,413 13,609 19,216 -------- -------- --------- Cash and cash equivalents at end of the period.................... $ 13,609 $ 19,216 $ 32,964 ======== ======== ========= SUPPLEMENTAL DISCLOSURE OFCASH FLOW INFORMATION Cash interest paid (net of capitalized amounts)................... $ 21,940 $ 13,763 $19,579 Cash paid for income taxes........................................ 1,862 2,060 6,747 NONCASH INVESTING AND FINANCING ACTIVITIES Capital lease additions........................................... $ 14,049 $ 12,404 $20,485 Retirement of 8% Preferred Stock (See Note 2)..................... - (56,000) - Issuance of 10% Preferred Stock (See Note 2)...................... - 56,000 - Issuance of common stock to executives in connection with Executive Compensation Award (See Note 16)................. - 10,000 -
F-7 AFC ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1995, December 29, 1996 and December 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of AFC Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiary, AFC Properties, Inc., a Georgia corporation. All significant intercompany balances and transactions are eliminated in consolidation. The consolidated entity is referred to herein as "AFC" or "the Company". Nature of Operations and Basis of Presentation The Company operates and franchises quick-service restaurants under the primary trade names of Popeyes Chicken & Biscuits ("Popeyes"), Churchs Chicken ("Churchs") and Chesapeake Bagel Bakery ("Chesapeake"). The following table outlines the number of restaurants operated by the Company and franchised by brand at the end of the indicated periods:
December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ Popeyes: Domestic-Company-operated.. 117 120 119 Domestic-Franchised........ 772 774 830 International-Franchised... 75 127 182 ----- ----- ----- Total.................... 964 1,021 1,131 ===== ===== ===== Churchs: Domestic-Company-operated.. 589 622 480 Domestic-Franchised........ 364 367 590 International-Franchised... 266 268 286 ----- ----- ----- Total.................... 1,219 1,257 1,356 ===== ===== ===== Chesapeake: Domestic-Company-operated.. - - 1 Domestic-Franchised........ - - 154 International-Franchised... - - - ----- ----- ----- Total.................... - - 155 ===== ===== =====
F-8 A substantial portion of the domestic Company-operated restaurants are located in the South and Southwest areas of the United States. The Company does not currently own or operate any restaurants outside of the United States. The Company's international franchisees operate primarily in Mexico, Canada, Puerto Rico and numerous countries in Asia. On May 5, 1997, the Company acquired from the American Bagel Company all of the intangible assets related to the franchise business of Chesapeake Bagel Bakery, a bagel bakery and restaurant chain. As a result of this acquisition, the Company became the franchisor of 158 franchised Chesapeake restaurants (See Note 17). On March 18, 1998, the Company acquired all of Seattle Coffee Company's common stock. As a result of this transaction, the Company acquired 58 Company- operated cafes and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands, a wholesale business including 13 offices and more than 5,000 accounts and a Chicago distribution center which is scheduled to open in mid 1998 (See Note 18). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. These estimates affect the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain items in the prior period financial statements, and notes thereto, have been reclassified to conform with the current presentation. The Company has a 52/53-week fiscal year ending on the last Sunday in December. The 1995, 1996 and 1997 fiscal years consisted of 53, 52 and 52 weeks, respectively. In June 1997, Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information" (FAS 131"), was issued. FAS 131 establishes standards for reporting information about operating segments in annual and interim financial statements. FAS 131 is effective for financial statements for periods beginning after December 15, 1997 and will only impact the presentation of the financial statements for such future periods. Cash and Cash Equivalents The Company considers all money market investment instruments and certificates of deposit with maturities of three months or less to be cash equivalents for the purpose of preparing the accompanying statements of cash flows. At December 31, 1995, December 29, 1996 and December 28, 1997, cash equivalents included $6.4 million, $10.9 million and $23.2 million, respectively, of domestic commercial paper. The Company does not believe it is exposed to any significant credit risk on money market investments with commercial banks, because its policy is to make such deposits only with highly rated institutions. Bank overdrafts represent checks issued on zero balance bank accounts which do not have a formal right of offset against the Company's other bank accounts. These amounts have F-9 not yet cleared the bank and are presented as a current liability in the accompanying financial statements. Accounts Receivable Accounts receivable consists primarily of amounts due from franchisees related to royalties, rents and miscellaneous equipment sales. The accounts receivable balances are stated net of reserves for doubtful accounts. A summary of changes in the allowance for doubtful accounts is as follows (in thousands):
December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ Balance, beginning of period.. $ 2,093 $ 2,078 $ 1,457 Provisions.................... 720 816 2,423 Recoveries.................... 101 1,193 340 Write-offs.................... (836) (2,630) (180) ------ ------- ------ Balance, end of period........ $2,078 $ 1,457 $4,040 ====== ======= ======
Notes Receivable Notes receivable consists primarily of notes from franchisees and third parties to finance acquisitions of certain restaurants from the Company and to finance certain past due royalties, rents, interest or other amounts due. The Company has also provided financial support to certain franchisees in converting their restaurants to the Popeyes concept. The current portion of notes receivable of $0.6 million and $0.8 million, as of December 29, 1996 and December 28, 1997, respectively, are included in current accounts and notes receivable. The notes receivable balances are stated net of allowances for uncollectibility. The negative provision of $1.2 million in 1997 relates to several fully reserved notes that were ultimately collected in 1997. A summary of changes in the allowance for uncollectible notes is as follows (in thousands):
December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ Balance, beginning of period.. $ 4,618 $ 3,371 $ 1,871 Provisions.................... - - (1,209) Recoveries.................... 11 20 232 Write-offs.................... (1,258) (1,520) (310) ------- ------- ------- Balance, end of period........ $ 3,371 $ 1,871 $ 584 ======= ======= =======
F-10 Inventories Inventories, consisting primarily of food items, packaging materials, and restaurant equipment, are stated at the lower of cost (determined on a first-in, first-out basis) or market. Property and Equipment Property and equipment is stated at cost, including capitalized interest and overhead incurred throughout the construction period for certain assets. Provisions for depreciation and amortization are made principally on the straight-line method over the estimated useful lives of the assets or, in the case of leases, the term of the applicable lease, if shorter. The ranges of estimated useful lives used in computing depreciation and amortization are as follows:
Asset Classification Number of Years -------------------- --------------- Buildings.............................. 7 - 20 Equipment.............................. 3 - 8 Leasehold improvements................. 3 - 15 Capital lease buildings and equipment.. 3 - 20
Intangible Assets Intangible assets consist primarily of franchise value and trademarks and reorganization value in excess of amounts allocable to identifiable assets ("Goodwill"). These assets are being amortized on a straight-line basis. The estimated useful lives used in computing amortization are as follows:
Asset Classification Number of Years -------------------- --------------- Franchise value and trademarks......... 20 - 35 Goodwill............................... 20 Other.................................. 10 - 20
Long-Lived Assets Management periodically reviews the performance of restaurant properties. If it is determined that a restaurant will be closed, a provision is made to adjust the carrying value of the restaurant's property and equipment to net realizable values. Property held for sale includes closed restaurant properties and other corporate property held for sale and is recorded at its estimated net realizable value. In 1995, the Company adopted Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". It is the Company's policy to evaluate (i) operating restaurant properties on a market basis, (ii) other assets such as assets held for sale and income producing assets on an individual property basis and (iii) identifiable intangible assets based on the cash flows from the underlying operations which generated the intangible asset. The identifiable cash flows of long-lived assets and their carrying values were compared to estimates of the F-11 recoverability of the asset values. No significant impairment losses were recorded in 1995, 1996 or 1997 resulting from the implementation of SFAS No. 121. Stock-Based Employee Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. SFAS No. 123 gives entities a choice of recognizing related compensation expense by adopting the new fair value method or to continue to measure compensation using the intrinsic value approach under APB No. 25. If APB No. 25 is used by an entity, SFAS No. 123 requires supplemental disclosure to show the effects of using SFAS No. 123 for stock option issuances effective after December 15, 1994. The Company continues to account for stock options under APB No. 25. Had compensation expense for all of the Company's stock option plans been determined consistent with SFAS No. 123, the Company's net income (loss) would have been reduced or (increased) to the following pro forma amounts (in thousands):
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------- ------------ ------------ Net income (loss): As reported....... $(8,827) $3,395 $11,000 Pro Forma......... (8,827) 3,310 11,528
Because the SFAS No. 123 method of accounting has not been applied to options issued prior to December 15, 1994, the resulting pro forma compensation expense may not be representative of that to be expected in future years. The fair value of options granted in 1995 was calculated to be zero under the "minimum value" method described below; therefore, the net loss for the year ended December 31, 1995 would not have been affected by SFAS No. 123. The fair value of each option is estimated on the date of grant using the "minimum value" method with the following weighted-average assumptions used for grants in 1995, 1996 and 1997: risk-free interest rate of approximately 6.0%; expected lives of approximately 12 years, 10 years and 7 years for the 1992 Stock Option Plan, the 1996 Performance-based Stock Option Plan and the 1996 Stock Option Plan, respectively (See Note 11). Revenues from Franchising The Company generates revenues from franchising through the following agreements with its franchisees: FRANCHISE AGREEMENTS. In general, the Company's franchise agreements provide for the payment of a franchise fee for each opened franchised restaurant. The franchise agreements also generally require the franchisees F-12 to pay a royalty ranging from 4% to 5% to the Company and an advertising fund contribution of 3% for Popeyes, 4% for Churchs and 1% for Chesapeake based on net restaurant sales. Certain franchise agreements provide for lower royalties and advertising fund contributions. DOMESTIC DEVELOPMENT AGREEMENTS. Domestic development agreements provide for the development of a specified number of restaurants within a defined domestic geographic territory in accordance with a schedule of restaurant opening dates. Development schedules generally cover three to five years and typically have benchmarks for the number of restaurants to be opened and in operation at six to twelve month intervals. Development agreement payments are made when the agreement is executed and are nonrefundable. INTERNATIONAL DEVELOPMENT AGREEMENTS. International development agreements are similar to domestic development agreements but pertain to franchised restaurants in jurisdictions outside of the United States. In that regard, these agreements include provisions to address the international aspects of the franchise agreement (foreign currency exchange, taxation, dispute resolution, etc.). These agreements generally include a territorial fee related to establishing the franchise in a new country. International development agreement payments and related territorial fees are received when the agreement is executed and are nonrefundable. Franchise fees, domestic development fees and international development fees are recorded as deferred revenues when received and are recognized as revenue when the restaurants covered by the fees are opened and/or all material services or conditions relating to the fees have been substantially performed or satisfied by the Company. Royalties, are recorded as revenues by the Company when the restaurant sales by the franchisee occurs. Revenues from Manufacturing The Company's revenues from manufacturing consist primarily of sales of proprietary gas fryers and other custom-fabricated restaurant equipment from its manufacturing business to distributors and franchisees. Other Revenues The Company's other revenues consist of net rental income from properties owned and leased by the Company which are leased or subleased to franchisees and third parties and interest income earned on notes receivable from franchisees and third parties. Self-Insurance Programs The Company maintains insurance plans for general and auto liability insurance, employee medical insurance and workers' compensation insurance, except for workers' compensation liabilities in the state of Texas, where the Company is self-insured against such liabilities. All of the Company's insurance programs, including its self-insured liabilities, have provisions which limit the Company's exposure on a per-incident basis. F-13 The Company has established reserves with respect to the above described programs based on the estimated total losses the Company will experience. The portion of the reserves for the amount of claims expected to be settled during the succeeding year are included in accrued expenses in the accompanying balance sheets, and the balance of the reserves are included in other liabilities. The Company's insurance reserves are partially collateralized by letters of credit and/or cash deposits. International Operations As of December 28, 1997, the Company franchises 468 restaurants to franchisees in 23 foreign countries and plans to expand its foreign franchising program significantly in the future. The Company does not own any property, operate any restaurants or have equity ownership in any companies that are located in foreign countries. Included in the Company's revenues are foreign franchise royalties and other fees that are based, in part, on sales generated by its foreign franchised restaurants, including a significant number of franchised restaurants in Asia. Therefore, the Company is exposed, to a limited degree, to changes in international economic conditions and currency fluctuations. The Company has not historically and did not at the end of 1997 maintain any hedges against foreign currency fluctuations. Losses recorded by the Company during the past three years related to foreign currency fluctuations have not been material to the Company's results of operations. For fiscal years 1995, 1996 and 1997, royalties and other revenues from foreign franchisees represented 2.2%, 2.4% and 2.4%, respectively, of total revenues of the Company. 2. EQUITY INVESTMENT On April 11, 1996 ("Closing"), a private investor group (the "Investor Group") and the Company executed a stock purchase agreement in which the Investor Group purchased approximately 21.1 million shares of AFC common stock for a purchase price of $70.0 million (the "Recapitalization"). As a result of this purchase, the Investor Group became the majority common shareholder of AFC with 58.33 percent of the Company's common stock on a fully diluted basis. With the proceeds from the sale of common stock, the Company retired approximately $64.0 million of its Tranche A and B debt and paid transaction fees in the amount of approximately $6.0 million. The remaining Tranche A and B debt was refinanced into a new term loan and the Company's 8% Preferred Stock was exchanged for new 10% Preferred Stock. The new 10% Preferred Stock was subsequently repaid pursuant to a debt offering completed in May 1997 (Note 8 of these financial statements discusses these transactions in more detail). 3. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company: Current assets and current liabilities: The carrying value approximates fair value due to the short term maturity of these items. Long-term notes receivable: The fair value of long-term notes receivable approximates the carrying value as management believes the respective interest rates are commensurate with the F-14 credit and interest rate risks involved. In addition, management maintains reserves for doubtful note receivable accounts (See Note 1). Long-term debt: The fair value of the Company's Term Loans, Lines of Credit and Other notes (See Note 8) are based on secondary market indicators. Since these debt instruments are not quoted, estimates are based on each obligation's characteristics, including remaining maturities, interest rate, credit rating, collateral, amortization schedule and liquidity. The carrying value approximates fair value. The fair value of the Company's 10.25% Senior Subordinated Notes (See Note 8) is based on quoted market prices. The carrying amount and fair value of the Company's 10.25% Senior Subordinated Notes at December 29, 1996 and December 28, 1997 are as follows (in thousands):
1996 1997 ------------------- --------------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ------ 10.25% Senior Subordinated Notes $ - $ - $175,000 $184,625
4. INVENTORIES The major components of inventory are as follows (in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Food items, food preparation and packaging materials............................ $ 2,578 $ 2,390 Restaurant equipment................................. 1,383 2,057 -------- -------- $ 3,961 $ 4,447 ======== ========
F-15 5. PROPERTY AND EQUIPMENT The major components of property and equipment are as follows (in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Owned properties: Land............................. $ 44,933 $ 40,491 Buildings........................ 67,526 65,423 Equipment........................ 79,951 113,715 Leasehold improvements........... 36,384 42,260 Construction work in process..... 4,892 5,336 Properties held for sale......... 5,116 2,960 Capital leases: Buildings........................ 4,238 3,863 Equipment........................ 24,336 21,514 -------- -------- 267,376 295,562 Less: accumulated depreciation and amortization................. 78,153 87,755 -------- -------- $189,223 $207,807 ======== ========
Depreciation and amortization expense related to property and equipment was approximately $22.8 million, $25.0 million and $27.2 million for the years ended December 31, 1995, December 29, 1996 and December 28, 1997, respectively. 6. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Franchise value and trademarks.... $110,000 $124,116 Goodwill.......................... 5,642 4,765 Other............................. 3,729 2,771 -------- -------- 119,371 131,652 Less: accumulated amortization.. 25,160 31,379 -------- -------- $ 94,211 $100,273 ======== ========
Amortization expense for the years ended December 31, 1995, December 29, 1996 and December 28, 1997, was approximately $5.9 million, $5.9 million and $6.6 million, respectively. F-16 7. OTHER LIABILITIES A summary of other liabilities is as follows (in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Insurance reserves............ $11,928 $11,015 Deferred franchise revenues... 4,743 7,143 Litigation and environmental.. 9,267 7,393 Other......................... 7,497 6,357 ------- ------- $33,435 $31,908 ======= =======
8. LONG-TERM DEBT As a result of the Recapitalization (See Note 2), the Company's term loan and revolving line of credit agreements with Canadian Imperial Bank of Commerce ("CIBC") were amended and restated effective April 11, 1996. In connection therewith, the Company wrote off the unamortized balances of debt discounts associated with the Tranche A and B term loans and other unamortized debt- related costs. The write-off of such balances is included as an extraordinary loss in the accompanying statements of operations. A new credit agreement was entered into in conjunction with the Recapitalization (the "1996 Term Loan") whereby the remaining indebtedness after repayment of approximately $64.0 million of Tranche A and B term debt was refinanced into a new term loan and revolving credit facility. Debt issuance costs of $0.2 million were incurred during the refinancing. In May 1997, the Company completed a debt offering of $175.0 million of Senior Subordinated Notes (the "Notes") under Rule 144A of the Securities Act of 1933, as amended (the "Rule 144A Offering"). In connection with the Rule 144A Offering, the Company also entered into a new $175.0 million Senior Secured Credit Facility (the "1997 Credit Facility") whereby the Company was provided with a $50.0 million term loan (the "1997 Term Loan"), a $25.0 million revolving credit facility ("Revolving Facility") and a $100.0 million facility to be used for future acquisitions ("Acquisition Facility"). The 1997 Term Loan and the Notes were funded at closing, providing $225.0 million which was used to repay the existing balances under the Company's 1996 Term Loan, repay and retire the 10% Preferred Stock, repay certain capital lease obligations, pay fees and expenses associated with the above described transactions and provide working capital. F-17 A summary of the Company's long-term debt is as follows (in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Term Loans: 1997 Term Loan................. $ - $ 49,000 1996 Term Loan................. 127,139 - Lines of Credit: Revolving Facility............. - - Acquisition Facility........... - - 10.25% Senior Subordinated Notes.. - 175,000 Other notes....................... 1,072 1,143 -------- -------- 128,211 225,143 Less: current maturities..... 6,405 4,993 -------- -------- $121,806 $220,150 ======== ========
The following is a schedule of the aggregate maturities of long-term debt as of December 28, 1997, for each of the succeeding five years and thereafter (dollars in thousands):
YEAR AMOUNT ---- ------ 1998..................................... $ 4,993 1999..................................... 7,637 2000..................................... 12,275 2001..................................... 7,698 2002..................................... 17,540 Thereafter............................... 175,000 -------- $225,143 ========
The Company's 1997 Term Loan and certain letter of credit facilities described below were provided by various financial institutions some of which hold a minority of the common stock of the Company. 1997 Credit Facility The 1997 Credit Facility bears interest, at the Company's election, at either (i) a defined base rate plus 1.25% per annum or (ii) LIBOR plus 2.25% per annum, subject to reduction based on the achievement of certain leverage ratio levels commencing on the first anniversary of the closing of the 1997 Credit Facility. At December 28, 1997, the interest rate ranged from 7.97 to 8.13 percent. The Company is obligated to pay commitment fees of 0.5% per annum (subject to reduction based on the achievement of certain leverage ratio levels, commencing on the first anniversary of the closing of the 1997 Credit Facility) on the unused portions of the Acquisition Facility and the Revolving Facility from time to time, as well as a customary annual agent's fee. Fees relating to the issuance of letters of credit under the Revolving Facility will include a fee equal to the then applicable margin over LIBOR plus a fronting fee of 0.25% per annum (payable F-18 to the issuing institution) based on the face amount of letters of credit, plus standard issuance and administrative charges. The 1997 Term Loan is payable in quarterly installments ranging from $1.0 to $7.5 million beginning September 1997 and matures in June 2002. In addition to the scheduled amortization, the Company is required to make prepayments on the 1997 Credit Facility under certain conditions, including without limitation, upon certain asset sales or issuance of debt or equity securities. The Company is also required to make annual prepayments on the 1997 Credit Facility in an amount equal to a percentage of excess cash flow (as defined) beginning with fiscal year 1998. During the fiscal year ended December 28, 1997, there were no prepayments required to be made by the Company under the agreement. The Company may borrow under the Acquisition Facility from time to time through the second anniversary of the closing. Amounts outstanding under the Acquisition Facility on the second anniversary of the closing will be converted to a term loan due in full on the fifth anniversary of the closing. In addition, the Company will be required to make scheduled annual amortization payments on the term portion of the Acquisition Facility. At December 28, 1997, there were no outstanding borrowings under the Acquisition Facility. Under the terms of the Revolving Facility, the Company may borrow and obtain letters of credit up to an aggregate of $25.0 million. At December 28, 1997, there were no short-term borrowings outstanding and $13.1 million of outstanding letters of credit leaving unused revolving credit available for short-term borrowings and letters of credit of $11.9 million. The 1997 Credit Facility is secured by a first priority security interest in substantially all of the Company's assets (subject to certain exceptions). Any future material subsidiaries of the Company will be required to guarantee the 1997 Credit Facility and the Company will be required to pledge the stock of such subsidiaries to secure the facility. The 1997 Credit Facility contains certain financial covenants, including, but not limited to, covenants related to minimum fixed charge coverage, minimum cash interest coverage and maximum leverage. In addition, the 1997 Credit Facility contains other affirmative and negative covenants relating to, among other things, limitations on capital expenditures, other indebtedness, liens, investments, guarantees, restricted junior payments (dividends, redemptions and payments on subordinated debt), mergers and acquisitions, sales of assets, leases and transactions with affiliates. The 1997 Credit Facility contains customary events of default, including certain changes of control of the Company. At December 28, 1997, the Company was in compliance with all covenants. 10.25% Senior Subordinated Notes In August 1997, the Notes issued pursuant to the Rule 144A Offering were exchanged for $175.0 million of publicly registered 10.25% Senior Subordinated Notes (the "Senior Notes"). The Senior Notes contain substantially the same provisions as the Notes. The Senior Notes bear interest at 10.25 percent per annum and interest will be due and payable on May 15 and November 15 of each year, commencing on November 15, 1997. The Senior Notes mature on May 15, 2007 and will not be redeemable prior to May 15, 2002. On or after such date, the Senior Notes will be F-19 subject to redemption, at the option of the Company, in whole or in part, at any time before maturity. The Senior Notes are redeemable at prices set forth in the agreement, plus accrued and unpaid interest to the date of redemption. The Senior Notes are unsecured and rank subordinate in right of payment to all existing and future Senior Indebtedness, as defined, of the Company including all indebtedness under the 1997 Credit Facility and the Company's capital lease obligations. The Indenture restricts, among other things, the ability of the Company and its subsidiaries a) to incur additional indebtedness and subsidiary preferred stock, b) to sell assets and to use the proceeds from asset sales, c) to engage in certain transactions with affiliates and d) to pay dividends, make certain investments and make other restricted payments, as defined. At December 28, 1997, the Company was in compliance with all covenants. Debt Issuance Costs In connection with the 1997 Credit Facility and the Notes, the Company incurred approximately $10.7 million in debt issuance costs which were capitalized. These costs are being amortized into interest expense over a period of 5 to 10 years. Amortization is calculated using the straight-line method. The unamortized balance is included in other assets in the accompanying balance sheets. 9. LEASES The Company maintains leases covering restaurant land and building properties, computer software, hardware and other equipment which expire on various dates through 2016 and generally require additional payments for property taxes, insurance and maintenance. Certain leases provide for rentals based upon a percentage of sales by Company-operated restaurants in addition to the minimum annual rental payments. Future minimum payments under capital and operating leases, as of December 28, 1997 are as follows (in thousands):
Capital Operating Leases Leases ------- --------- 1998............................................. $ 7,628 $10,360 1999............................................. 6,330 8,728 2000............................................. 4,178 7,483 2001............................................. 1,985 6,762 2002............................................. 495 5,896 Thereafter....................................... 3,560 16,652 ------- ------- Future minimum lease payments............... 24,176 $55,881 ======= Less: amounts representing interest......... 5,437 ------- Total obligations under capital leases...... 18,739 Less: current portion....................... 6,001 ------- Long-term obligations under capital leases.. $12,738 =======
F-20 On August 29, 1997, the Company repaid certain capital lease obligations totaling $16.7 million. The Company used a portion of the proceeds from the refinancing transaction that took place during the second quarter of 1997 to repay these capital lease obligations (See Note 8). Rent expense for operating leases for the fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997, amounted to $10.8 million, $9.9 million and $11.0 million, respectively, including percentage rents of $0.6 million, $0.7 million and $0.7 million, respectively. As of December 28, 1997, the Company leases restaurant properties with an aggregate book value of $17.1 million to certain franchisees and others. Some of these properties are owned by the Company and others are leased from third parties. Rental income from these leases was approximately $7.0 million, $6.4 million and $7.5 million for the fiscal years ended in 1995, 1996 and 1997, respectively, and was primarily based upon a percentage of restaurant sales. The lease terms under these agreements expire on various dates through 2027. 10. INCOME TAXES The components of income tax expense (benefit) included in the statements of operations are as follows (dollars in thousands):
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ Current income tax expense consists of: Federal..................................... $ 210 $ 363 $ 1,557 State/foreign............................... 1,691 1,747 3,105 ------- ------- -------- Total.................................... 1,901 2,110 4,662 ------- ------- -------- Deferred income tax expense (benefit) consists of: Federal..................................... (4,322) 1,857 4,338 State....................................... (548) (1,477) (475) ------- ------- -------- Total.................................... (4,870) 380 3,863 ------- ------- -------- Income tax expense (benefit)............. $(2,969) $ 2,490 $ 8,525 ======= ======= ========
The Company does not currently own or participate in the ownership of any material non-U.S. operations and does not file income tax returns with any foreign jurisdictions. However, applicable foreign withholding taxes are generally deducted from royalties and certain other revenues collected from international franchisees. Foreign taxes withheld are eligible for credit against the Company's U.S. income tax liabilities. F-21 A reconciliation of the Federal statutory income tax rate to the Company's effective tax rate is as follows:
For For For Year Ended Year Ended Year Ended December 31, December 29, December 28, 1995 1996 1997 ------------ ------------ ------------ Statutory Federal income tax expense (benefit) rate................... (34.0%) 34.0% 35.0% Non-deductible expenses............... 1.9 3.7 2.4 State/foreign income tax expense...... 5.8 4.6 4.2 Other................................. 1.1 - 2.0 ------------ ------------ ------------ Effective income tax expense (benefit) rate.............. (25.2%) 42.3% 43.6% ============ ============ ============
Significant components of the Company's net deferred tax asset and net deferred tax liability were as follows (dollars in thousands):
December 29, December 28, 1996 1997 ------------ ------------ Current deferred tax asset (liability): Accrued vacation............................... $ 684 $ 582 Other accruals................................. - 80 -------- -------- Total current deferred tax asset.......... 684 662 -------- -------- Noncurrent deferred tax asset (liability): Franchise value and trademarks................. $(32,683) $(30,639) Property, plant and equipment.................. 1,845 3,171 Net operating loss and tax credit carryforwards............................. 16,288 7,485 Deferred compensation.......................... 1,078 1,909 Insurance accruals............................. 7,873 6,944 Litigation/environmental accruals.............. 3,509 2,774 Reorganization costs........................... 4,427 4,427 Allowance for doubtful accounts and uncollectible notes....................... 1,255 1,515 Deferred franchise fee revenue................. 1,779 2,679 Other items, net............................... (64) 1,201 -------- -------- Net noncurrent deferred tax asset......... 5,307 1,466 -------- -------- Net deferred tax asset.................... $ 5,991 $ 2,128 ======== ========
F-22 Based on management's assessment, it is more likely than not that the net deferred tax assets will be realized through future reversals of existing temporary differences and future taxable income. As of December 28, 1997, the Company has recognized net operating losses ("NOLs") and tax credit carryforwards in the amounts of $7.7 million and $3.8 million, respectively, against its net deferred tax liabilities. The Company's NOLs of $7.7 million expire in 2005, and the $3.8 million of tax credit carryforwards expire from 2001 through 2012. The Internal Revenue Service has not reviewed the Company's federal income tax returns for years past 1990. On November 5, 1992, the Company acquired its current business from a debtor in a bankruptcy reorganization. This reorganization constituted an "ownership change" under Section 382 of the Internal Revenue Code of 1986, as amended. As a result, utilization of the pre-November 5, 1992 NOLs and tax credit carryforwards is subject to an annual limit of approximately $4.0 million of NOLs or $1.4 million of credits (but not both). The Company believes that the Section 382 limitations arising from the November 5, 1992 ownership change or any subsequent ownership changes should not prevent the ultimate utilization of any existing NOLs and tax credit carryforwards arising both before and after November 5, 1992. 11. STOCK OPTION PLANS The 1992 Stock Option Plan The 1992 Stock Option Plan is a nonqualified stock option plan authorizing the issuance of options to purchase approximately 1.8 million shares of the Company's common stock. The options currently granted and outstanding allow certain officers of the Company to purchase approximately 1.8 million shares of common stock at $0.08 per share and are exercisable at various dates beginning January 1, 1994. If not exercised, the options expire 15 years after the date of issuance. The options issued in 1992 under the 1992 Stock Option Plan were issued with option exercise prices below market value of the Company's common stock. In prior years, compensation expense of approximately $2.4 million related to certain options was being amortized over their respective vesting periods of 25.0 percent per year. During 1995, the Company accelerated the vesting of options granted to certain officers. In connection with this accelerated vesting, the Company recorded approximately $0.6 million of compensation expense in 1995 (See Note 16). For the fiscal year ended December 29, 1996, the Company recognized an immaterial amount of compensation expense related to certain of these options. For the year ended December 28, 1997, the Company did not recognize any compensation expense related to these options. As of December 28, 1997, 1,527,854 options were exercisable. Pursuant to certain anti-dilution provisions, in April 1996, the 1992 Stock Option Plan was amended whereby the option price was reduced from $0.10 per share to $0.08 per share. In connection with the price reduction per share, approximately 0.4 million additional options were issued to the officers currently holding options under this plan. The Company did not recognize compensation expense with respect to the reduction of the option price and the issuance of the 0.4 million options. F-23 The 1996 Performance-Based Stock Option Plan In April 1996, the Company executed the Nonqualified Performance Stock Option Plan ("1996 Performance-Based Stock Option Plan"). This plan currently authorizes the issuance of approximately 2.7 million options to purchase one share each of AFC's common stock at prices ranging from $3.317 to $4.95 per share. At December 28, 1997, the weighted average exercise price was $3.41 per share. The options currently granted and outstanding allow certain employees of the Company to purchase approximately 2.7 million shares of common stock. Vesting, as defined in the stock option agreement, is based upon the Company achieving annual levels of earnings before interest, taxes, depreciation and amortization, as defined in the stock option agreement, over fiscal year periods beginning with fiscal year 1996 and ending with fiscal year 2000. If not exercised, the options expire ten years from the date of issuance. At December 28, 1997, the weighted average contractual life of these options was 8.5 years. Under this plan, compensation expense will be determined and recorded when and if the employees vest in their respective options. During the fiscal year ended December 29, 1996 and December 28, 1997, the Company recorded approximately $0.8 million and $2.2 million, respectively, in compensation expense related to the options which vested in 1996 and 1997 under this plan. As of December 28, 1997, 1,051,358 options were exercisable. The 1996 Stock Option Plan Also in April 1996, the Company executed the Nonqualified Stock Option Plan ("1996 Stock Option Plan"). This plan authorizes the issuance of approximately 1.8 million options. The Company granted approximately 0.3 million options in 1996 at $3.317 per share whereby the compensation expense associated with this grant was immaterial. In 1997, the Company granted approximately 0.3 million options at $4.95 per share, which was the market value of the Company's common stock at the date of grant. At December 28, 19978, the weighted average price per share was $4.11. The options currently granted and outstanding allow certain employees of the Company to purchase approximately 0.6 million shares of common stock, which vest at 25% per year beginning April 1997. If not exercised, the options expire seven years from the date of issuance. At December 28, 1997, the weighted average contractual life of these options was 6.1 years. As of December 28, 1997, 84,100 options were exercisable. F-24 A Summary of Plan Activity A summary of the status of the Company's three stock option plans at December 29, 1996 and December 28, 1997 and changes during the years is presented in the table and narrative below:
1996 1997 ----------------- ----------------- Shares Wtd.Avg. Shares Wtd.Avg. (000's) Ex.Price (000's) Ex.Price ------- -------- ------- -------- Outstanding at beginning of year................. 1,397 $ .10 4,643 $ 2.06 Granted options................................. 3,413 2.93 496 4.95 Exercised options............................... (5) .08 (75) .08 Forfeited options............................... (162) 3.32 (51) 2.61 ------ ------ Outstanding at end of year...................... 4,643 2.06 5,013 2.36 ------ ------ Exercisable at end of year...................... 2,063 .84 2,663 1.48 Weighted average fair value of options granted (See Note 1)................................ $ 1.65 $ 1.69
Approximately 3.0 million and 0.5 million options granted in 1996 and 1997, respectively, were at prices that equaled the market price of the common stock at the grant date. 12. OTHER EMPLOYEE BENEFIT PLANS Pre-Tax Savings and Investment Plan The Company maintains a qualified employee benefit plan under Section 401(k) of the Code for the benefit of employees meeting certain eligibility requirements. Under the plan, employees may contribute up to 16.0 percent of their eligible compensation to the plan on a pre-tax basis and the Company may make both voluntary and matching contributions to the plan. The Company expensed approximately $0.2 million during 1995, 1996 and 1997 for its contributions to the plan. Executive Retirement and Benefit Plans During 1994, the Company adopted a nonqualified retirement, disability and death benefit plan for certain employees. Retirement benefits under this plan are unfunded and cover certain executive officers. Annual benefits are equal to 30 percent of the executive's average base compensation for the five years preceding retirement. The benefits are payable in 120 equal monthly installments following the executive officers' retirement date. Death benefits under this plan cover certain executive officers and are up to five times the officer's base compensation during the time of employment. The Company has the discretion to increase the employee's death benefits. Death benefits are funded by split dollar life insurance arrangements. The accumulated benefit obligation related to this plan was approximately $0.7 million, $1.0 million F-25 and $1.2 million as of December 31, 1995, December 29, 1996 and December 28, 1997, respectively. Expense for the retirement plan for the years ended December 31, 1995, December 29, 1996, and December 28, 1997, was approximately $0.3 million, $0.3 million and $0.2 million, respectively. The Company's assumptions used in determining the plan cost and liabilities include a discount rate of seven and one-half percent per annum in 1995, 1996 and 1997 and a five percent rate of salary progression in 1995, 1996 and 1997. The Company also provides post-retirement medical benefits (including dental coverage) for certain retirees and their spouses. This benefit begins on the date of retirement and ends after 120 months or upon the death of both parties. The accumulated post-retirement benefit obligation for the plan as of December 29, 1996, and December 28, 1997, was approximately $0.3 million and $0.2 million, respectively, and the net periodic expense for the medical coverage continuation plan for 1995, 1996 and 1997 was approximately $44,000 and $71,000, and $204,500, respectively. 13. RELATED PARTY TRANSACTIONS In 1995 and 1996 the Company received legal services from a law firm associated with a member of the Company's Board of Directors. During the fiscal years ended December 31, 1995 and December 29, 1996, the total amount paid to this law firm was $0.9 million and $0.5 million, respectively. In April 1996, the Company loaned certain officers of the Company an aggregate of $4.5 million to pay personal withholding tax liabilities incurred as a result of the $10.0 million executive compensation award (See Note 16). All the individual notes have similar terms. The notes bear interest at 6.25% per annum with principal and interest payable at the end of the term of the note which is approximately seven and one half years from the date of issuance. Each note is secured by the common stock awarded to the officers. At the date of issuance, a discount was recorded to present the notes at fair market value. Accordingly, compensation expense was recognized in an amount of $0.9 million for the fiscal year ended December 29, 1996. The note receivable balance, net of the unamortized discount, and interest receivable balance as of December 29, 1996 and December 28, 1997 are included as a reduction to shareholders' equity in the accompanying balance sheets and statements of shareholders' equity (deficit) since the common stock awarded to the officers secures payment of the individual notes. 14. COMMITMENTS AND CONTINGENCIES Employment Agreements The three most senior executives and the Company have entered into employment agreements containing customary employment terms which provide for an annual base salary, subject to annual adjustment by the Board of Directors, an annual incentive bonus, stock options, F-26 fringe benefits, participation in Company-sponsored benefit plans and such other compensation as may be approved by the Board of Directors. The terms of the agreements terminate in 2000, unless earlier terminated or otherwise renewed, pursuant to the terms thereof. Pursuant to the terms of the agreements, if employment is terminated without cause or if written notice not to renew employment is given by the Company, the executive would be entitled to, among other things, one to two-and-one-half times their base annual salary and the bonus payable to the individual for the fiscal year in which such termination occurs. Under the agreements, upon (i) a change of control of the Company, (ii) a significant reduction in the executive's responsibilities, title or duties or (iii) the relocation of the Company's principal office more than 45 miles from its current location, the executive may terminate his employment and would be entitled to receive, among other things, the same severance pay he would have received had his employment been terminated by the Company without cause. Chicken Supply Contracts The Company's and its franchisees' principal raw material is fresh chicken. The Company maintains purchase agreements with its fresh chicken suppliers that provide for a "ceiling", or highest price, and a "floor", or lowest price, that the Company will pay for chicken over the contract term and the ceilings are generally set at prices above the current market price. Such supply contracts are generally for one to two years. The Company recognizes chicken cost of sales at the amounts paid under the contracts. For the periods presented, the Company has not experienced any material losses as a result of these contracts. Litigation The Company has been named as a defendant in various actions arising from its normal business activities in which damages in various amounts are claimed. The Company has established reserves in the accompanying balance sheets to provide for the defense and settlement of current litigation and management believes that the ultimate resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company. In July 1997, CP Partnership ("CP") filed a complaint against the Company alleging patent infringement regarding the design of the proprietary gas fryer manufactured by the Company's manufacturing division. While the ultimate liability in this matter is difficult to assess, it is management's belief that the final outcome will not have a material adverse effect on the Company's financial condition or results of operations. Environmental Matters Approximately 200 of the Company's owned and leased properties are known or suspected to have been used by prior owners or operators as retail gas stations, and a few of these properties may have been used for other environmentally sensitive purposes. Many of these properties previously contained underground storage tanks ("USTs") and some of these properties may currently contain abandoned USTs. As a result of the use of oils and solvents typically associated with automobile repair facilities and gas stations, it is possible that F-27 petroleum products and other contaminants may have been released at these properties into the soil or groundwater. Under applicable Federal and state environmental laws, the Company, as the current owner or operator of these sites, may be jointly and severally liable for the costs of investigation and remediation of any such contamination. As a result, after an analysis of its property portfolio, including testing of soil and groundwater at a representative sample of its facilities, the Company believes that it has accrued adequate reserves for environmental remediation liabilities. While the Company is currently not subject to any administrative or court order requiring remediation at any of its properties, the Company is considering active remediation at a limited number of facilities containing USTs. Information Technology Outsourcing The Company entered into an agreement with IBM Global Services, a division of IBM ("IGS") commencing on August 1, 1994, for a ten-year term, to outsource the Company's information technology, programming and computer operations. This agreement allows the Company to update its corporate and restaurant systems with state-of-the-art computer software and hardware. IGS will guarantee levels of performance, maintain the operating systems and hardware, perform applications development and maintenance, and provide other administrative, management and support functions. Initially, IGS purchased the hardware and software under the outsourcing contract and leased the hardware and software to the Company which the Company recorded as capital leases. In August 1997, the Company purchased from IGS certain hardware and software for approximately $16.7 million which were formerly accounted for as capital leases. Future minimum payments under this agreement, exclusive of payments included in Note 9 as capital lease payments for systems installed as of December 28, 1997, are as follows at that date (in thousands):
YEAR AMOUNT ---- ------ 1998.................................. $ 8,489 1999.................................. 6,925 2000.................................. 5,089 2001.................................. 4,170 2002.................................. 5,055 Thereafter............................ 9,585 ------- $39,313 =======
It is estimated that the remaining payments due under the contract of approximately $39.3 million will be reflected as restaurant operating or general and administrative costs and expenses. Operating expenses of approximately $9.0 million, $7.5 million and $8.1 million related to the outsourcing contract have been included in the statements of operations for the years ended December 31, 1995, December 29, 1996 and December 28, 1997, respectively. F-28 Year 2000 Compliance The outsourcing agreement between the Company and IGS referred to above was executed to, among other things, enhance and upgrade the Company's corporate and restaurant computer systems. The Company believed this was necessary because its existing systems 1) did not provide adequate information to manage the business, 2) did not provide optimal control systems and 3) were not as efficient as systems using newer technology. During the process of upgrading its systems, which is scheduled for completion in 1998, the Company established procedures to ensure that its new systems were year 2000 compliant. Additionally in 1997, the Company formalized a plan to (i) analyze all of its financial and operating computer systems to ensure they are year 2000 compliant, (ii) test all of its computer systems and interfaces and (iii) take any corrective action necessary to eliminate problems at the beginning of the year 2000. This plan includes analysis of existing systems, new systems to be implemented in 1998 and 1999, systems used by its vendors and customers that are needed for the proper functioning of the Company's systems, and all other known Company processes that use computers to function. While the analyses phase of the plan has not been completed as of December 28, 1997, the Company believes that with the completion of its system upgrades, made in connection with the IGS contract, a significant portion of the potential year 2000 issues will be resolved. Although the analysis is not complete, the Company believes that the cost, if any, to make other systems year 2000 compliant will not be material to the Company's results of operations. Formula Agreement The Company has a formula licensing agreement, as amended, (the "Formula Agreement"), with Alvin C. Copeland, the former owner of the Popeyes and Churchs restaurant systems, and Diversified Foods and Seasonings, Inc. ("Diversified"), which calls for the worldwide exclusive licensing to the Popeyes system of the spicy fried chicken formula and certain other ingredient used in Popeyes products. The Formula Agreement provides for monthly royalty payments of $237,500 until April 1999, and, thereafter, monthly royalty payments of $254,166 until March 2029. Total royalty payments were $2.9 million in the fiscal years ended December 31, 1995, December 29, 1996 and December 28, 1997. Supply Agreements The Company has a supply agreement with Diversified under which the Company is required to purchase certain propriety products made exclusively by Diversified. This contract expires in 2029 subject to further renewal. Supplies are generally provided to franchised and Company-operated restaurants in the Popeyes and Churchs systems pursuant to supply agreements negotiated by Popeyes Operators Purchasing Cooperative Association, Inc. ("POPCA") and Churchs Operators Purchasing Association, Inc. ("COPA"), respectively, each a not-for-profit corporation that was created for F-29 the purpose of consolidating the collective purchasing power of the franchised and Company-operated restaurants and negotiating favorable terms therefor. The purchasing cooperatives are not obligated to purchase, and do not bind their members to commitments to purchase, any supplies. Membership in each cooperative is open to all franchisees. Since 1995, the Company's franchise agreements related to Popeyes and Churchs have required that each franchisee joins its respective purchasing cooperative as a member. All Company-operated Popeyes and Churchs restaurants are members of POPCA or COPA, as the case may be. Substantially all of the Company's domestic Popeyes and Churchs franchisees participate in POPCA or COPA. COPA also purchases certain ingredients and supplies for Chesapeake franchised and Company-operated restaurants in order to further leverage the collective buying power of AFC. Advertising Funds In accordance with the Popeyes and Churchs franchise agreements, advertising funds have been established (the "Advertising Funds") whereby the Company contributes a percentage of sales (generally 5%) to the Advertising Funds in order to pay for the costs of funding advertising and promotional activities. In accordance with the franchise agreement, the net assets and transactions of the Advertising Funds are not commingled with the working capital of the Company. The net assets and transactions of the Advertising Funds are, therefore, not included in the accompanying financial statements. The Company's contributions to the Advertising Funds are recorded in restaurant operating expenses in the accompanying financial statements. License Agreement The Company currently has a number of domestic and international agreements with The Hearst Corporation, King Features Syndicate Division ("King Features") under which the Company has the exclusive license to use the image and likeness of the cartoon character "Popeye" (and certain companion characters such as "Olive Oyl") in connection with the operations of franchised and Company- operated Popeyes restaurants worldwide. Under the current agreements, the Company is obligated to pay King Features a royalty of 0.1% of the first $1.0 billion of Popeyes systemwide sales and 0.05% for the next $2.0 billion of such sales. The King Features agreements automatically renew annually. Other Commitments The Company has guaranteed certain loans and lease obligations approximating $2.2 million and $1.9 million at December 29, 1996 and December 28, 1997, respectively. 15. SHAREHOLDERS' EQUITY TRANSACTIONS During 1993, the Company and its shareholders held discussions concerning the number of common shares issued to a minority shareholder and the effects on the shareholders' ownership interests resulting from the adoption of the 1992 Stock Option Plan discussed in Note 11. As a result of these discussions, certain stock options were granted to purchase 250,000 common shares at $0.01 per share. These options become exercisable at the same time the stock F-30 options issued to the Company's officers become exercisable. In 1996, these options were exercised by the minority shareholder. 16. EXECUTIVE COMPENSATION AWARD During 1995, the Board of Directors granted a special award of $10.0 million to the CEO of the Company and his designees contingent upon the happening of certain events related to a recapitalization of the Company. The award became payable at the time of the Recapitalization. This award was paid in 1996 in approximately 3.0 million shares of the Company's common stock valued at $3.317 per share, the market value of the Company's common stock at the date of issuance. As a result of the Recapitalization, certain senior executive officers became fully vested in certain stock options pursuant to the terms of the 1992 Stock Option Plan resulting in a recognition of $647,000 of compensation expense in 1995. 17. ACQUISITIONS AND DIVESTITURES AFDC Transaction On March 24, 1997, the Company closed the AFDC Transaction whereby the Company sold the rights to operate 100 previously Company-operated restaurants in eight domestic markets to AFDC. The Company also sold the land, building and equipment for 51 of these restaurants, and it sold the building and equipment and leased the land for 49 of the restaurants to AFDC. The Company received approximately $19.9 million in cash, along with a warrant to acquire, for nominal consideration, a 5.0% equity interest in AFDC. As a result of this transaction, the Company recorded $2.5 million in franchise fees and approximately $5.3 million of gain associated with the sale of the property in the second quarter of 1997. Included in the $19.9 million payment was $1.0 million representing the development fees on an additional 100 restaurants which will be developed by AFDC over the next ten years. These development fees were deferred and will be taken into income as the restaurants open. Chesapeake Bagel Bakery Acquisition On May 5, 1997, the Company acquired from the American Bagel Company all of the intangible assets related to the franchise business of Chesapeake Bagel Bakery, a bagel bakery restaurant chain. As a result of this acquisition, the Company became the franchisor of 158 franchised Chesapeake restaurants located primarily in Washington D.C., Maryland and Virginia. The net purchase price paid by the Company for Chesapeake was approximately $11.8 million, plus a potential earn out of up to $3.5 million. The net purchase price was funded with internal funds. The acquisition was accounted for as a purchase with the majority of the purchase price allocated to franchise value which isare being amortized straight-line over a thirty-five year life. The financial impact of Chesapeake is not expected to be material to the Company in the near-term. F-31 18. SUBSEQUENT EVENTS Pinetree Foods, Inc. Acquisition On February 10, 1998, the Company acquired all of the assets of 81 restaurant properties operated by Pinetree Foods, Inc. ("Pinetree") for a purchase price of approximately $24.0 million. Of the 81 restaurants, 66 will be converted to Popeyes Company-operated restaurants with the remaining restaurants to be closed concurrently with the purchase. The restaurants are primarily located in North and South Carolina and Georgia. The Company funded the purchase price with internal funds and the Acquisition Facility (See Note 8). Seattle Coffee Company Acquisition On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for a purchase price of approximately $70 million plus the assumption of approximately $5 million of debt. The Company paid approximately $41 million in cash funded by its Acquisition Facility (See Note 8) and approximately $29 million in AFC common stock. The transaction includes the acquisition of a roasting and packaging facility, 58 Company-operated cafes and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands, a wholesale business including 13 offices and more than 5,000 accounts and a Chicago distribution center which is scheduled to open in mid 1998. Included in the purchase price is a contingent out payment of up to $3.8 million, based upon SCC operations achieving a level of earnings, as defined in the agreement, over a 52-week period from October 1, 1997 to September 30, 1998. F-32 EX-10.75 2 FORM OF CHESAPEAKE BAGEL DEVELOPMENT AGREEMENT EXHIBIT 10.75 CHESAPEAKE BAGEL BAKERY DEVELOPMENT AGREEMENT (Exclusive) Between AFC ENTERPRISES, INC. and _______________________________ No.:_______ Dev. Agr. No. Options:________ Date:_______________
AFC Enterprises, Inc. CHESAPEAKE BAGEL BAKERY DEVELOPMENT AGREEMENT (Exclusive) TABLE OF CONTENTS I. GRANT....................................... 2 II. DEVELOPMENT FEE............................. 3 III. DEVELOPMENT SCHEDULE........................ 3 IV. FRANCHISED UNIT OPENINGS.................... 4 V. DEFAULT AND TERMINATION..................... 6 VI. TRANSFERABILITY OF INTEREST................. 7 VII. CONFIDENTIAL INFORMATION.................... 11 VIII. COVENANTS................................... 12 IX. NOTICES..................................... 13 X. NON-WAIVER.................................. 14 XI. INDEPENDENT CONTRACTOR AND INDEMNIFICATION.. 14 XII. APPROVALS................................... 15 XIII. ACKNOWLEDGMENT.............................. 15 XIV. SEVERABILITY AND CONSTRUCTION............... 16 XV. ENTIRE AGREEMENT AND APPLICABLE LAW......... 16 EXHIBIT A - DEVELOPMENT SCHEDULE......................... EXHIBIT B - TERRITORY.................................... EXHIBIT C - FRANCHISE AGREEMENT..........................
AFC Enterprises, Inc. CHESAPEAKE BAGEL BAKERY DEVELOPMENT AGREEMENT (Exclusive) THIS AGREEMENT (the "Agreement"), made this ______ day of __________________________, 19___, by and between AFC Enterprises, Inc. (f/k/a America's Favorite Chicken Company), a Minnesota corporation, with its principal place of business at Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328- 5352, U.S.A. ("Franchisor") and ("Developer"). WITNESSETH: WHEREAS, Franchisor owns a unique system for opening and operating restaurants ("Chesapeake Bagel Bakery Restaurant(s)") specializing in the preparation, merchandising, advertising and sale of bagels, breads and other bakery items, sandwiches, salads and other quick-service menu items developed and owned by Franchisor (the "Chesapeake Bagel Bakery System" or the "CBB System"); WHEREAS, the distinguishing characteristics of the Chesapeake Bagel Bakery System include, without limitation, the name "Chesapeake Bagel Bakery"; the distinguishing characteristics of which include, without limitation, uniform and distinctive building designs, interior and exterior layouts, trade dress, equipment layout standards and specifications, development and maintenance of sources of supply, operating procedures for sanitation and maintenance, food and beverage storage procedures, service procedures, and formulas and specifications for baking bagels, breads and other bakery products, standards and specifications for equipment, equipment layouts, products, operating procedures and management programs, all of which may be changed, improved and further developed by Franchisor from time to time; WHEREAS, Franchisor identifies the Chesapeake Bagel Bakery System by means of certain trade names, service marks, trademarks, logos, emblems, and indicia of origin, including, but not limited to, the mark "Chesapeake Bagel Bakery" and such other trade names, service marks, and trademarks as are now, or may hereafter, be designated by Franchisor for use in connection with the System ("Proprietary Marks"); WHEREAS, Franchisor continues to develop, use, and control the use of such Proprietary Marks in order to identify for the public the source of 1 services and products marketed thereunder in the Chesapeake Bagel Bakery System and to represent the Chesapeake Bagel Bakery System's high standards of quality, appearance, and service; WHEREAS, Developer wishes to be assisted, trained and licensed by Franchisor as a Chesapeake Bagel Bakery developer and franchisee and licensed to use, in connection therewith, the Chesapeake Bagel Bakery System; WHEREAS, Developer understands the importance of the Chesapeake Bagel Bakery System and Chesapeake Bagel Bakery high and uniform standards of quality, cleanliness, appearance, and service, and the necessity of opening and operating Developer's Chesapeake Bagel Bakery Restaurants in conformity with the Chesapeake Bagel Bakery System; and WHEREAS, Developer wishes to obtain the right to develop Chesapeake Bagel Bakery Restaurants ("Franchised Units") in the area described in this Agreement and to use the Chesapeake Bagel Bakery System in connection with those Franchised Units; NOW, THEREFORE, the parties hereto agree as follows: I. GRANT 1.01. Franchisor hereby grants the Developer, subject to the terms and conditions of this Development Agreement and as long as Developer shall not be in default of this Agreement or any other development, franchise or other agreement between Developer and Franchisor, development rights to obtain franchises to establish and operate Franchised Units, and to use the Chesapeake Bagel Bakery System solely in connection therewith, at specific locations to be designated in separate franchise agreements ("Franchise Agreements"), executed as provided in Section 3.01. hereof, and pursuant to the schedule set forth in Exhibit A to this Agreement ("Development Schedule"). Each Franchised Unit developed pursuant hereto shall be located in the area described in Exhibit B hereto "(Development Area"). 1.02. Subject to the terms and conditions herein, Franchisor shall neither establish nor license anyone other than Developer to establish a Franchised Unit in the Development Area until sixty (60) days after the commencement of operations of the final Franchised Unit under this Agreement, without Developer's prior written consent. 1.03. Each Franchised Unit for which a development right is granted hereunder shall be established and operated pursuant to a Franchise Agreement to be entered into between Developer and Franchisor in accordance with Section 3.01. hereof. 2 1.04. This Agreement is not a franchise agreement, and does not grant the Developer any right to use Franchisor's Proprietary Marks or the Chesapeake Bagel Bakery System, but merely sets forth the terms and conditions under which Developer will be entitled to obtain a franchise agreement. 1.05. Developer shall have no right under this Agreement to license others under the Proprietary Marks or to use the Chesapeake Bagel Bakery System. II. DEVELOPMENT FEE In consideration of the development rights granted herein, Developer has paid to the Franchisor upon execution of this Agreement a non-refundable development fee of Dollars ($ ) which development fee has been fully earned by Franchisor for administrative and other expenses incurred by Franchisor and for the development opportunities lost or deferred as a result of the rights granted Developer herein. III. DEVELOPMENT SCHEDULE 3.01. Developer shall exercise each development right granted herein only by executing a Franchise Agreement for each Franchised Unit for a site accepted by the Franchisor in the Development Area as hereinafter provided. Developer's right to execute such a Franchise Agreement shall be contingent upon Developer's continuous performance of all of the terms and conditions of this Agreement and any other development, franchise or other agreements between Developer and Franchisor. The Franchise Agreement for each Franchised Unit developed pursuant to this Agreement shall be in the form of the Franchise Agreement attached hereto as Exhibit C. 3.02. Recognizing that time is of the essence in this Agreement, Developer agrees to exercise the development rights granted hereunder in the manner specified in Section IV hereof and to satisfy the Development Schedule. Failure by Developer to adhere to the Development Schedule shall constitute a default under this Agreement, as provided in Section 5.03. hereof. 3.03. In addition to the development fee required by Section II hereof, Developer shall pay (i) an initial franchise fee for each Restaurant developed hereunder in the amount of Fifteen Thousand Dollars ($15,000) upon execution of a Franchise Agreement for each such Franchised Unit, all of which amount shall be non-refundable and fully earned by Franchisor upon execution of the Franchise Agreement for a Franchised Unit. 3 IV. FRANCHISED UNIT OPENINGS 4.01. Developer shall submit a proposed site for each Franchised Unit for acceptance by Franchisor. Franchisor shall, provided there exists no default by Developer under this Agreement or any other development, franchise or other agreement between Developer and Franchisor, evaluate each site proposed and shall promptly, but not more than thirty (30) days after receipt of Developer's proposal, send to Developer written notice of acceptance or non-acceptance of the site. Site acceptance does not assure that a Franchise Agreement will be executed. Execution of the Franchise Agreement is contingent upon Developer purchasing or leasing the proposed site and securing acceptance of the final plans and specifications as provided below. 4.02. Within ninety (90) days after notice of Franchisor's site acceptance, Developer shall: A. Submit, in writing to Franchisor, satisfactory proof to Franchisor that Developer: (i) owns the accepted site; (ii) has leased the accepted site for a term which, with renewal options, is not less than the initial term of the Franchise Agreement; or (iii) has entered into a written agreement to purchase or to lease the accepted site on terms provided herein, subject only to obtaining necessary governmental permits. If Developer leases the accepted site, the lease must provide: (a) that, in the event Developer defaults under or otherwise ceases operating the Franchised Unit at the accepted site during the term of the lease, Franchisor shall have the right, at its option, to assume Developer's position under the lease; (b) that, in the event Developer defaults under the lease, notice of the default shall immediately be forwarded to Franchisor; and (c) that Franchisor shall have the right, upon default under the lease or other cessation of operation at the accepted site, to make the modifications and alterations to the Franchised Unit set forth in Section 16.01.D. of the Franchise Agreement. The proof required by this Section includes, but is not limited to, submission of executed copies of all leases and deeds, as well as all governmental approvals if effectiveness of the leases or deeds is conditioned thereon. B. Submit to Franchisor, and obtain Franchisor's written approval of, the final and complete plans and specifications for the construction (or renovation) and decoration of the Franchised Unit, which must be in conformity with Franchisor's standards 4 and specifications for Franchised Units, as set out in the current Confidential Operating Standards Manual (as defined in the Franchise Agreement) or otherwise in writing (hereinafter, the "Construction Plans"). The final Construction Plans shall include, but are not limited to, floor plans, equipment layouts, decor, and interior and exterior elevations. C. Execute the Franchise Agreement and pay all fees required thereunder. If Developer is a partnership, each general partner shall, and if Developer is a corporation, each stockholder holding a beneficial interest of five percent (5%) or more of the securities with voting rights of Developer or any corporation directly or indirectly controlling Developer shall, guarantee the performance of the Franchise Agreement by executing the Franchisor's Franchise Agreement Guarantee form. Franchisor shall not approve the final construction plans until the Franchise Agreement is executed and all fees are paid by Franchisee. 4.03. Developer shall procure the insurance coverage provided for in Section XI of the Franchise Agreement, prior to commencement of construction of a Franchised Unit, and shall maintain such insurance coverage throughout the term of the Franchise Agreement. 4.04. No more than thirty (30) days after the Franchisor approves Developer's Construction Plans, Developer shall commence construction or renovation of the Franchised Unit. If commencement of construction or renovation is delayed by a cause beyond the reasonable control of Developer, the date upon which commencement of construction or renovation is to begin may be extended by obtaining written approval of Franchisor. 4.05. Upon commencement of construction or renovation of the Franchised Unit, Developer shall notify Franchisor on such form as Franchisor may prescribe. 4.06. Developer shall have completed construction or renovation and commenced operation of the Franchised Unit within one-hundred eighty (180) days from execution of the Franchise Agreement as provided in Section 4.02.C. hereof. Franchisor may, in its sole discretion, extend this period to address unforeseen construction delays, not within the control of Developer. Nothing herein shall be deemed to relieve Developer of the obligation of complying with the Development Schedule. 4.07. At least ten (10) days prior to the proposed commencement of operation of each Franchised Unit, Developer shall notify Franchisor of such proposed opening. If the Franchised Unit is Developer's first Franchised Unit opened hereunder, Franchisor shall provide a representative to be present at the opening. The Franchised Unit shall not be opened unless such representative is present. Should commencement of operation of the Franchised Unit be delayed by the failure of Franchisor to provide such a representative, the date upon which commencement of operation of the Franchised Unit is required pursuant to Exhibit A of this Agreement, shall be extended until such time as such assistance is provided by Franchisor. 5 V. DEFAULT AND TERMINATION 5.01. The rights granted to Developer in this Agreement have been granted based upon Developer's representations and assurances, among others, that the conditions set forth in Sections III and IV of this Development Agreement will be met by Developer in a timely manner. 5.02. Developer shall be deemed to be in default under this Agreement, and all rights granted herein shall automatically terminate without notice to Developer, if Developer shall become insolvent or make a general assignment for the benefit of creditors; if a petition in bankruptcy is filed by Developer or such a petition is filed against Developer and not opposed by Developer; or if Developer is adjudicated bankrupt or insolvent; or if a receiver or other custodian (permanent or temporary) of Developer's assets or property, or any part thereof, is appointed by any court of competent jurisdiction; or if proceedings for a composition with creditors under the applicable law of any jurisdiction should be instituted by or against Developer; or if a final judgment remains unsatisfied or of record for thirty (30) days or longer (unless a supersedeas bond is filed); or if Developer is dissolved; or if execution is levied against Developer's property or business; or if suit to foreclose any lien or mortgage against the premises or equipment of any Franchised Unit developed hereunder is instituted against the Developer and not dismissed within thirty (30) days; or if the real or personal property of any Franchised Unit developed hereunder shall be sold after levy thereupon by any sheriff, marshall, or constable. 5.03. If Developer fails to comply with the Development Schedule or any other terms of this Agreement, or fails to obtain Franchisor's approval of a site or construction plans and specifications prior to commencement of construction, or fails to comply with any terms or conditions of any franchise agreement covering a Franchised Unit established hereunder, or any other agreement between Developer or any affiliate of Developer and Franchisor or any affiliate of Franchisor, such action shall constitute a default under this Development Agreement. Upon such default, Franchisor, in its discretion, may, effective immediately upon the mailing of written notice by Franchisor to Developer, do any one or more of the following: A. Terminate this Agreement and all rights granted hereunder without affording the Developer any opportunity to cure the default; B. Reduce the number of Franchised Units which Developer may establish pursuant to Section 1.01 of this Agreement; 6 C. Terminate the territorial exclusivity granted Developer in Section 1.01 hereof or reduce the area of territorial exclusivity granted Developer hereunder; D. Withhold evaluation or approval of site proposal packages and refuse to permit the opening of any Franchised Unit then under construction or otherwise not ready to commence operations; or E. Accelerate the Development Schedule set forth in Exhibit A hereto. In addition to the foregoing, Franchisor shall be entitled to pursue any other remedies available hereunder or at law or in equity. 5.04. Upon termination of this Agreement, Developer shall have no right to establish or operate any Franchised Unit for which a Franchise Agreement has not been executed by Franchisor and delivered to Developer at the time of termination; and Franchisor shall be entitled to establish, and to license others to establish, Franchised Units in the Development Area, except as may be provided under any other agreement which is then in effect between Franchisor and Developer. 5.05. A default in the Development Schedule under this Development Agreement shall not constitute a default under any existing Franchise Agreement between the parties hereto. VI. TRANSFERABILITY OF INTEREST 6.01. Transfer by Franchisor. This Agreement shall inure to the benefit of the successors and assigns of Franchisor. Franchisor shall have the right to transfer or assign its interest in this Agreement to any person, persons, partnership, association, or corporation. If Franchisor's assignee assumes all the obligations of Franchisor hereunder and sends written notice of the assignment so attesting, Developer agrees promptly to execute a general release of Franchisor, and any affiliates of Franchisor, from claims or liabilities of Franchisor under this Agreement. 6.02. Transfer by Developer. Developer understands and acknowledges that the rights and duties set forth in this Agreement are personal to Developer, and that Franchisor has granted this Agreement in reliance on Developer's business skill and financial capacity. Accordingly, neither (i) Developer, nor (ii) any immediate or remote successor to Developer, nor (iii) any individual, partnership, corporation or other legal entity which directly or indirectly owns any interest in the Developer or in this Development Agreement, shall sell, assign, transfer, convey, donate, pledge, mortgage, or otherwise encumber any direct or indirect interest in this Agreement or in Developer without the prior written consent of Franchisor. Any purported assignment or transfer, by operation of law or otherwise, not having the written consent of Franchisor, shall be null and void, and shall constitute a material breach of 7 this Agreement, for which Franchisor may then terminate without opportunity to cure pursuant to Section 5.03. of this Agreement. Notwithstanding anything in this Agreement to the contrary, Developer understands and acknowledges that individual development rights to obtain franchises to establish and operate Franchised Units may not be transferred except in connection with a transfer of this Development Agreement, together with all remaining development options due to be developed under this Agreement, in accordance with the conditions set forth herein. 6.03. Conditions for Consent. Franchisor shall not unreasonably withhold its consent to any transfer referred to in this Section hereof for the remainder of the term hereof, when requested; provided, however, that prior to the time of transfer: A. Developer shall not be in default of the Development Schedule; B. The transfer must be in conjunction with a simultaneous transfer to the same transferee of all Franchised Units operated by Developer under Chesapeake Bagel Bakery System within the same DMA('s) as the remaining development options; C. All of Developer's accrued monetary obligations to Franchisor and its subsidiaries and affiliates shall have been satisfied; D. Developer shall have agreed to remain obligated under the covenants contained in Sections VII and VIII hereof as if this Agreement had been terminated on the date of the transfer; E. The transferee must be of good moral character and reputation, in the reasonable judgment of the Franchisor; F. The transferee shall have demonstrated to the Franchisor's satisfaction, by meeting with the Franchisor or otherwise at Franchisor's option, that the transferee's qualifications meet the Franchisor's then current criteria for new developers; G. The parties must execute a written assignment, in a form satisfactory to Franchisor, pursuant to which the transferee shall assume all of the obligations of the individual or entity which is the transferor under this Agreement and pursuant to which Developer shall generally release any and all claims it might have against Franchisor as of the date of the assignment; H. The transferee must, at Franchisor's option, execute the then-current form of Development Agreement and such other then-current ancillary agreements as Franchisor may reasonably require. The then- current form of Development Agreement may have significantly different provisions, provided, however, that Exhibits A and B hereto shall be Exhibits A and B to such development agreement; 8 I. If the transferee is a partnership, the partnership agreement shall provide that further assignments or transfers of any interest in the partnership are subject to all restrictions imposed upon assignments and transfers in this Agreement; J. Developer shall, at Franchisor's option and request, execute a written guarantee of the transferee's obligations under the Agreement, which such guarantee shall not exceed a period of three (3) years from the date of transfer; and K. The Developer or the transferee shall have paid to Franchisor a transfer fee of Five Thousand Dollars ($5,000), to cover Franchisor's administrative expenses in connection with the transfer, but no development fees shall be charged by Franchisor for a transfer. If the transferee is a corporation formed by Developer for the convenience of ownership and in which the Developer is the sole shareholder, no transfer fee shall be required. 6.04. Grant of Security Interest. Developer shall grant no security interest in this Agreement unless the secured party agrees that, in the event of any default by Developer under any documents related to the security interest, (i) Franchisor shall be provided with notice of default and be given a reasonable time within which to cure said default, (ii) Franchisor shall have the right and option to be substituted as obligor to the secured party and to cure any default of Developer or to purchase the rights of the secured party upon payment of all sums then due to such secured party, except such amounts which may have become due as a result of any acceleration of the payment dates based upon the Developer's default, and (iii) such other requirements as Franchisor, in its sole discretion, deems reasonable and necessary to protect the integrity of the Proprietary Marks and the Chesapeake Bagel Bakery System. 6.05. Death or Mental Incapacity. Upon the death or mental incapacity of any person with an interest in this Agreement or in Developer, the executor, administrator, or personal representative of such person shall transfer his interest to a third party approved by Franchisor within twelve (12) months after such death or mental incapacity. Such transfer, including, without limitation, transfer by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Section VI, the personal representative of the deceased Developer shall have a reasonable time, but no more than eighteen (18) months after the death of the Developer, to dispose of the deceased's interest in this Agreement and the business conducted pursuant hereto, which disposition shall be subject to all the terms and conditions for assignments and transfers contained in this Agreement. If the interest is not disposed of within twelve (12) or eighteen (18) months, whichever is applicable, Franchisor may terminate this Agreement pursuant to Section 5.03. hereof. 9 6.06. Right of First Refusal. Any party holding any interest in this Agreement or in Developer, and who desires to accept any bona fide offer from a third party to purchase such interest, shall notify Franchisor in writing of such offer within ten (10) days of receipt of such offer, and shall provide such information and documentation relating to the offer as Franchisor may require. Franchisor shall have the right and option, exercisable within thirty (30) days after receipt of such written notification, to send written notice to the seller that Franchisor intends to purchase the seller's interest on the same terms and conditions offered by the third party. In the event that Franchisor elects to purchase the seller's interest, closing on such purchase must occur within sixty (60) days from the date of notice to the seller of the election to purchase by Franchisor. Any material change in the terms of any offer prior to closing shall constitute a new offer subject to the same rights of first refusal by Franchisor as in the case of an initial offer. Failure of Franchisor to exercise the option afforded by this Section 6.06. shall not constitute a waiver of any other provisions of this Agreement, including all of the requirements of this Section VI, with respect to a proposed transfer. In the event the consideration, terms, and/or conditions offered by a third party are such that Franchisor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then Franchisor may purchase the interest in this Agreement, Developer, or Developer's business proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree within a reasonable time as to the reasonable equivalent in cash of the consideration, terms, and/or conditions offered by the third party, an independent appraiser shall be designated by Franchisor, and his determination shall be binding upon the parties. 6.07. Offerings by Developer. Securities or partnership interests in Developer may be offered to the public, by private offering or otherwise, only with the prior written consent of Franchisor, which consent shall not be unreasonably withheld. All materials required for such offering by federal or state law shall be submitted to Franchisor for review prior to their being filed with any governmental agency; and any materials to be used in any exempt offering shall be submitted to Franchisor for review prior to their use. No offering of such securities shall imply (by use of the Proprietary Marks or otherwise) that Franchisor is participating in the underwriting, issuance, or offering of securities by Developer or Franchisor; and Franchisor's review of any offering shall be limited solely to the subject of the relationship between Developer and Franchisor. Developer and the other participants in the offering must fully indemnify Franchisor in connection with the offering. For each proposed offering, Developer shall pay to Franchisor a non-refundable fee of Five Thousand Dollars ($5,000), or such greater amount as is necessary to reimburse Franchisor for its reasonable costs and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. Developer shall give Franchisor written notice at least thirty (30) days prior to the date of commencement any offering or other transaction covered by this Section 6.07. 10 VII. CONFIDENTIAL INFORMATION 7.01. Developer shall not, during the term of this Agreement or thereafter, communicate, divulge, or use for the benefit of any other person, persons, partnership, association, or corporation, any confidential information, knowledge, or know-how concerning the construction and methods of operation of any Franchised Unit which may be communicated to Developer, or of which Developer may be apprised, by virtue of Developer's operation under the terms of this Agreement. Developer shall divulge such confidential information only to such employees of Developer as must have access to it in order to exercise the development rights granted hereunder and to establish and operate the Franchised Units pursuant to the Franchise Agreement and as Developer may be required by law, provided, Developer shall give Franchisor prior written notice of any such required disclosure immediately upon receipt of notice by Developer in order for Franchisor to have the opportunity to seek a protective order or take such other actions as it deems appropriate under the circumstances. 7.02. Any and all information, knowledge, and know-how, including, without limitation, drawings, materials, equipment, recipes, prepared mixtures or blends of spices or other food products, and other data, which Franchisor designates as confidential, and any information, knowledge, or know-how which may be derived by analysis thereof, shall be deemed confidential for purposes of this Development Agreement, except information which Developer can demonstrate came to Developer's attention prior to disclosure thereof by Franchisor or which, at the time of disclosure thereof by Franchisor to Developer, had become a part of the public domain, through publication or communication by others or which, after disclosure to Developer by Franchisor, becomes a part of the public domain, through publication or communication by others. 7.03. Developer shall require all of Developer's employees, as a condition of their employment, to execute an employment agreement, as provided in writing by Franchisor, prohibiting them during the term of their employment, or thereafter, from communicating, divulging, or using for the benefit of any person, persons, partnership, association, or corporation any confidential information, knowledge, or know-how concerning the methods of operation of the franchised business which may be acquired during the term of their employment with Developer. A duplicate original of each such agreement shall be provided to Franchisor upon execution. 11 VIII. COVENANTS 8.01. Developer specifically acknowledges that, pursuant to this Agreement, Developer will receive valuable specialized training and confidential information, including, without limitation, information regarding the operational, sales, promotional, and marketing methods and techniques of Franchisor and the System. Developer covenants that, during the term of this Agreement, except as otherwise approved in writing by Franchisor, Developer (who, unless otherwise specified, shall include for purposes of this Section VIII, collectively and individually, all officers, directors and holders of a beneficial interest of five percent (5%) or more of the securities with voting rights of Developer, and of any corporation directly or indirectly controlling Developer, if Developer is a corporation, and the general partners and any limited partners, including any corporation and the officers, directors and holders of beneficial interests of five percent (5%) or more of the securities with voting rights, of a corporation which controls, directly or indirectly, any general or limited partner, if Developer is a partnership) shall not, either directly or indirectly, for Developer or through or on behalf of, or in conjunction with, any person, persons, partnership, or corporation: A. Divert or attempt to divert any business or customer of the Franchised Units to be developed hereunder to any competitor by direct or indirect inducements or otherwise, or to do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Franchisor's Proprietary Marks and the System; B. Employ or seek to employ any person who is at the time employed by Franchisor or by any other Chesapeake Bagel Bakery franchisees or otherwise, or directly or indirectly induce such person to leave his or her employment; or C. Own, maintain, operate, engage in, or have any interest in any fast food (either takeout, on premises consumption, or a combination thereof) restaurant that specializes in the sale of bakery products, including bagels, breads and other food products substantially similar to those sold within the Chesapeake Bagel Bakery System (a "Bagel Bakery Restaurant"); provided, however, that the term "Bagel Bakery Restaurant" shall not apply to any business operated by Franchisee under a franchise agreement with Franchisor or an affiliate of Franchisor. 8.02. Developer covenants that, except as otherwise approved in writing by the Franchisor, Developer shall not, either directly or indirectly, for itself or through or on behalf of, or in conjunction with, any person, persons, partnership or corporation, during the term hereof or for two (2) years following expiration or termination of this Agreement, regardless of the cause for termination, own, maintain, engage in, or have an interest in any Bagel Bakery Restaurant which is located within a radius of ten (10) miles of the 12 location of any restaurant under the Chesapeake Bagel Bakery System which is in existence as of the date of expiration or termination of this Agreement. 8.03. At Franchisor's request, Developer shall require and obtain execution of covenants similar to those set forth in this Section VIII (including covenants applicable upon the termination of a person's relationship with Developer) from all officers, directors, and holders of a direct or indirect beneficial ownership interest of five percent (5%) or more in Developer. Every covenant required by this Section 8.03. shall be in a form satisfactory to Franchisor, including, without limitation, specific identification of Franchisor as a third party beneficiary of such covenants with the independent right to enforce them. Failure by Developer to obtain execution of a covenant required by this Section 8.03. shall constitute a material breach of this Agreement. IX. NOTICES Any and all notices required or permitted under this Agreement shall be in writing and shall be delivered by any means which will provide evidence of the date received to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to Franchisor: Franchise Department AFC Enterprises, Inc. Atlanta, Georgia 30328-5352 cc: Legal Department Notices to Developer: ________________________ Attention:______________ All written notices and reports permitted or required to be delivered by the provisions of this Agreement shall be addressed to the party to be notified at its most current principal business address of which the notifying party has been notified and shall be deemed so delivered (i) at the time delivered by hand; (ii) one (1) business day after sending by telegraph, facsimile or comparable electronic system; or (iii) if sent by registered or certified mail or by other means which affords the sender evidence of delivery, on the date and time of receipt or attempted delivery if delivery has been refused or rendered impossible by the party being notified. 13 X. NON-WAIVER No failure of Franchisor to exercise any power reserved to it in this Agreement, or to insist upon compliance by Developer with any obligation or condition in this Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Franchisor's right to demand exact compliance with the terms of this Agreement. Waiver by Franchisor of any particular default shall not affect or impair Franchisor's right with respect to any subsequent default of the same or of a different nature, nor shall any delay, forbearance, or omission of Franchisor to exercise any power or rights arising out of any breach or default by Developer of any of the terms, provisions, or covenants of this Agreement, affect or impair Franchisor's rights, nor shall such constitute a waiver by Franchisor of any rights hereunder or right to declare any subsequent breach or default. Subsequent acceptance by Franchisor of any payments due to it shall not be deemed to be a waiver by Franchisor of any preceding breach by Developer of any terms, covenants, or conditions of this Agreement. XI. INDEPENDENT CONTRACTOR AND INDEMNIFICATION 11.01. It is understood and agreed by the parties hereto that this Agreement does not create a fiduciary relationship between them, that Developer is an independent contractor, and that nothing in this Agreement is intended to constitute either party an agent, legal representative, subsidiary, joint venturer, partner, employee, or servant of the other for any purpose whatsoever. 11.02. Developer shall hold itself out to the public to be an independent contractor operating pursuant to this Agreement. Developer agrees to take such actions as shall be necessary to that end. 11.03. Developer understands and agrees that nothing in this Agreement authorizes the Developer to make any contract, agreement, warranty, or representation on Franchisor's behalf, or to incur any debt or any other obligation in Franchisor's name, and that Franchisor shall in no event assume liability for, or be deemed liable hereunder as a result of, any such action or by reason of any act or omission of Developer, or any claim or judgement arising therefrom. Developer shall indemnify and hold Franchisor and Franchisor's officers, directors, shareholders, and employees, harmless against any and all such claims arising directly or indirectly from, as a result of, or in connection with Developer's activities, as well as the cost, including attorney's fees, of defending against such claims. 11.04. Developer shall indemnify and hold Franchisor harmless for all costs, expenses, or losses incurred by Franchisor in enforcing the provisions hereof or in upholding the propriety of any action or determination by Franchisor pursuant to this Agreement, or arising in any manner from Developer's 14 breach of or failure to perform any covenant or obligation hereunder, including, without limitation, reasonable attorney's fees incurred by Franchisor in connection with any litigation relating to any aspect of this Agreement, unless Developer shall be found, after due legal proceedings, to have complied with all of the terms, provisions, conditions and covenants hereof. XII. APPROVALS 12.01. Whenever this Agreement requires the prior approval of Franchisor, Developer shall make a timely written request to Franchisor therefor, and, except as may otherwise be expressly provided herein, any approval or consent granted shall be in writing. 12.02. Franchisor makes no warranties or guaranties upon which Developer may rely, and assumes no liability or obligation to Developer or any third party to which Franchisor would not otherwise be subject, by providing any waiver, approval, advice, consent, or services to Developer in connection with this Agreement, or by reason of any neglect, delay, or denial of any request therefor. XIII. ACKNOWLEDGMENT 13.01. Developer acknowledges that the success of the business venture contemplated by this Agreement involves substantial business risks and will be largely dependent upon the ability of Developer as an independent businessman. Franchisor expressly disclaims the making of, and Developer acknowledges not having received, any warranty or guaranty, expressed or implied, as to the potential volume, profits, or success of the business venture contemplated by this Agreement. 13.02. Developer acknowledges that Developer has received, read, and understands this Agreement, the exhibits hereto, and agreements relating hereto, if any; and the Franchisor has accorded Developer ample time and opportunity to consult with advisors of Developer's own choosing about the potential benefits and risks of entering into this Agreement. 13.03. Developer acknowledges that Developer has received a complete copy of this Agreement, the exhibits hereto, and agreements relating hereto, if any, at least five (5) business days prior to the date upon which this Agreement was executed. Developer further acknowledges that Developer has received the Uniform Franchise Offering Circular required by the Trade Regulation Rule of the Federal Trade Commission entitled "Disclosure Requirements and Prohibitions concerning Franchising and Business Opportunity Ventures" at least ten (10) business days prior to the date on which this Agreement was executed. 15 XIV. SEVERABILITY AND CONSTRUCTION 14.01. Except as expressly provided to the contrary herein, each portion, section, part, term, and/or provision of this Agreement shall be considered severable; and if, for any reason, any section, part, term, and/or provision herein is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, such shall not impair the operation, or have any other effect upon, such other portions, sections, parts, terms, and/or provisions of this Agreement as may remain otherwise intelligible, and the latter shall continue to be given full force and effect to bind the parties; and said invalid portions, sections, parts, terms, and/or provisions shall be deemed not to be part of this Agreement. 14.02. Except as has been expressly provided to the contrary herein, nothing in this Agreement is intended, nor shall be deemed, to confer upon any person or legal entity other than Developer, Franchisor, Franchisor's officers, directors, and employees, and Developer's and Franchisor's respective successors and assigns as may be contemplated (and, as to Developer, permitted) by Section VI hereof, any rights or remedies under or by reason of this Agreement. 14.03. Developer expressly agrees to be bound by any covenant or promise imposing the maximum duty permitted by law which is subsumed within the terms of any provision hereof, as though it were separately articulated in and made a part of this Agreement, that may result from striking from any of the provisions hereof any portion or portions which a court will hold to be unreasonable and unenforceable in a final decision to which Franchisor is a party, or from reducing the scope of any promise or covenant to the extent required to comply with such court order. 14.04. All captions in this Agreement are intended solely for the convenience of the parties, and none shall be deemed to affect the meaning or construction of the provisions hereof. 14.05. All provisions of this Agreement which, by their terms or intent, are designed to survive the expiration or termination of this Agreement, shall so survive the expiration and/or termination of this Agreement. 14.06. This Agreement may be executed in multiple originals and each copy so executed deemed an original. XV. ENTIRE AGREEMENT AND APPLICABLE LAW 15.01. This Agreement, the documents referred to herein, and the exhibits hereto, constitute the entire, full, and complete agreement between Franchisor and Developer concerning the subject matter hereof and supersede any and all prior agreements. Except for those permitted to be made unilaterally by 16 Franchisor hereunder, no amendment, change, or variance from this Agreement shall be binding on either party unless mutually agreed to by the parties and executed by their authorized officers or agents in writing. 15.02. Applicable Law. This Agreement takes effect upon its acceptance and execution by Franchisor and shall be interpreted and construed under the laws of the State of Georgia which laws shall prevail in the event of any conflict of law (without regard to, and without giving effect to, the application of Georgia choice of law or conflict of law rules); provided, however, that if the covenants in Article VIII of this Agreement would not be enforceable under the laws of Georgia, then such covenants shall be interpreted and construed under the laws of the State in which the Developer operates the Franchised Units developed hereunder, or in the State where Developer is domiciled if Developer, at such time, is not operating any Franchised Units. Nothing in this Section XV is intended by the parties to subject this Agreement to any franchise or similar law, rule, or regulation of the State of Georgia to which this Agreement would not otherwise be subject. 15.03. The parties agree that any action brought by Developer against Franchisor in any court, whether federal or state, shall be brought within such state and in the judicial district in which Franchisor has its principal place of business. Any action brought by Franchisor against Developer in any court, whether federal or state, may be brought within the state and in the judicial district in which Franchisor has its principal place of business. Developer hereby waives all questions of personal jurisdiction or venue for the purpose of carrying out this provision. 15.04. No right or remedy herein conferred upon or reserved to Franchisor is exclusive of any other right or remedy herein, or by law or equity provided or permitted; but each shall be cumulative of any other right or remedy provided in this Agreement. 15.05. Nothing herein contained shall bar Franchisor's right to obtain injunctive relief against threatened conduct that will cause it loss or damages, under the usual equity rules, including the applicable rules for obtaining restraining orders and preliminary injunctions. 17 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have duly executed, sealed, and delivered this Agreement in multiple originals as of the day and year first above-written. AFC ENTERPRISES, INC. DEVELOPER: By: By: -------------------------- ------------------------------ Title: Title: ----------------------- --------------------------- 18 EXHIBIT A DEVELOPMENT SCHEDULE CUMULATIVE NUMBER OF NUMBER OF FRANCHISED FRANCHISED RESTAURANTS RESTAURANTS TO BE OPEN AND IN TO BE OPENED AND OPERATION DATE OPENED IN OPERATION --------- ----------- ------------ TO BE INITIALED BY BOTH PARTIES: FRANCHISOR: ________ DEVELOPER: _______ EXHIBIT B Description of Development Area ------------------------------- (The following are specifically excluded from the Development Area: military bases, public transportation facilities, toll road plazas, universities, recreational theme parks and the interior-structural confines of shopping malls). TO BE INITIALED BY BOTH PARTIES EXHIBIT C FRANCHISE AGREEMENT ------------------- EX-10.76 3 FORM OF CHESAPEAKE BAGEL FRANCHISE AGREEMENT EXHIBIT 10.76 CHESAPEAKE BAGEL BAKERY FRANCHISE AGREEMENT BETWEEN AFC ENTERPRISES, INC. AND ___________________________________ Unit No.: ______ Dev. Agr. No.: ______ Dated: _____________ AFC ENTERPRISES, INC.
CHESAPEAKE BAGEL BAKERY FRANCHISE AGREEMENT TABLE OF CONTENTS I. APPOINTMENT..........................................2 II. TERM............................................... 3 III. FEES............................................... 5 IV. ACCOUNTING AND RECORDS............................. 7 V. PROPRIETARY MARKS.................................. 9 VI. OBLIGATIONS OF CORPORATE OR PARTNERSHIP FRANCHISEE. 12 VII. CONFIDENTIAL OPERATING STANDARDS MANUAL............ 13 VIII. TRAINING........................................... 13 IX. DUTIES OF THE FRANCHISOR........................... 14 X. DUTIES OF THE FRANCHISEE........................... 15 XI. INSURANCE.......................................... 21 XII. CONFIDENTIAL INFORMATION........................... 24 XIII. COVENANTS.......................................... 24 XIV. TRANSFERABILITY OF INTEREST........................ 27 XV. TERMINATION........................................ 30 XVI. EFFECT OF TERMINATION OR EXPIRATION................ 33 XVII. TAXES, PERMITS, AND INDEBTEDNESS................... 36 XVIII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION......... 36 XIX. APPROVALS AND WAIVERS.............................. 37 XX. NOTICES............................................ 38 XXI. SEVERABILITY AND CONSTRUCTION...................... 38 XXII. ENTIRE AGREEMENT: SURVIVAL........................ 39 XXIII. ACKNOWLEDGMENTS.................................... 40 XXIV. APPLICABLE LAW: VENUE............................. 41 XXV. CORPORATE FRANCHISEE............................... 42
i AFC ENTERPRISES, INC. CHESAPEAKE BAGEL BAKERY FRANCHISE AGREEMENT THIS AGREEMENT (the "Agreement") is made this _______ day of _________, 19___, by and between AFC ENTERPRISES, INC. (f/k/a America's Favorite Chicken Company), a Minnesota corporation, having its principal place of business at Six Concourse Parkway, Suite 1700, Atlanta, Georgia, 30328-5352, U.S.A. ("Franchisor" or "Chesapeake Bagel Bakery") and ________________________________ ____________________________________, [jointly and severally where more than one], ("Franchisee"). WITNESSETH: WHEREAS, Franchisor has developed and owns a unique system for opening and operating specializing in bagels, breads, sandwiches, salads and other bakery products and other menu items developed and owned by Franchisor (the "Chesapeake Bagel Bakery System" or "CBB System"); WHEREAS, the distinguishing characteristics of Franchisor's Chesapeake Bagel Bakery System include, without limitation, the name "Chesapeake Bagel Bakery"; specially designed buildings, distinctive interior and exterior layouts, decor, color schemes, and furnishings; confidential food formulae and recipes used in the preparation of food products and, particularly, formulas and specifications for baking bagels, breads and other bakery products; specialized menus; standards and specifications for equipment, equipment layouts, products, operating procedures, and management programs, all of which may be changed, improved, and further developed by Franchisor from time to time; WHEREAS, Franchisor identifies the Chesapeake Bagel Bakery System by means of certain trade names, service marks, trademarks, logos, emblems, and other indicia of origin, including, but not limited to, the mark "Chesapeake Bagel Bakery" and such other trade names, service marks, trademarks and trade dress as are now, or may hereafter, be designated by Franchisor for use in connection with the Chesapeake Bagel Bakery System (collectively referred to as the "Proprietary Marks"); WHEREAS, Franchisor continues to develop, use, and control the use of such Proprietary Marks in order to identify for the public the source of services and products marketed thereunder in the Chesapeake Bagel Bakery System and to represent the System's high standards of quality, appearance, and service; WHEREAS, Franchisee wishes to be assisted, trained, and licensed by Franchisor as a Chesapeake Bagel Bakery franchisee and licensed to use, in connection therewith, the Chesapeake Bagel Bakery System; WHEREAS, Franchisee understands the importance of the Chesapeake Bagel Bakery System and Chesapeake Bagel Bakery high and uniform standards of quality, cleanliness, appearance, and service, and the necessity of opening and operating Chesapeake Bagel Bakery Restaurants in conformity with the Chesapeake Bagel Bakery System; NOW, THEREFORE, the parties hereto agree as follows: I. APPOINTMENT 1.01. Franchisor grants to Franchisee a franchise to open and operate a Chesapeake Bagel Bakery restaurant (the "Unit", "Franchised Unit", "Franchised Business" or "Restaurant") at one location only, such location to be described as: Store Number: --------------------------------- Address: --------------------------------- --------------------------------- --------------------------------- --------------------------------- upon the terms and conditions herein contained and subject to the terms and conditions contained in the development agreement between Franchisor and Franchisee, dated , (the "Development Agreement"), which is incorporated herein by reference; and a license to use in connection therewith Franchisor's Proprietary Marks and the Chesapeake Bagel Bakery System. 1.02. Protected Territory. 1. Subject to the terms and conditions of this Agreement and provided Franchisee is not otherwise in default of this Agreement and/or any other Agreement between Franchisor (or any parent, subsidiary or affiliate of Franchisor) and Franchisee (or any parent, subsidiary or affiliate of Franchisee), Franchisor shall not establish, nor franchise another to establish a restaurant under the Chesapeake Bagel Bakery System, for the term of this Agreement, within the area described in 2 Exhibit "C" of this Agreement (the "Protected Area"), without Franchisee's prior written consent. Notwithstanding the foregoing, Franchisor may, from time to time during the term hereof, reduce or modify the Protected Area to encompass a geographic area immediately surrounding the Franchised Unit which shall include a population (residential and/or daytime business or commercial) of no less than 50,000 people, which modification shall become effective upon Franchisee's receipt of written notice from Franchisor to Franchisee. 2. The provisions of Section 1.02 (A) hereof shall not apply with respect to the following types of locations within the Protected Area, at which Franchisor retains the right, in its sole discretion, to franchise and/or operate Chesapeake Bagel Bakery restaurants, and to distribute by any means Chesapeake Bagel Bakery products: 1. Existing Franchised Units and/or Franchised Units for which Franchise Agreements were previously executed 2. Transportation facilities (including airports, train stations, bus stations, etc.) 3. Toll roads and major thoroughfares 4. Educational facilities (including schools, colleges and universities) 5. Institutional feeding facilities (including, but not limited to, airports, hospitals, hotels, and corporate or school cafeterias 6. Government institutions and facilities 7. Enclosed shopping malls 8. Military bases 9. Casinos 10. Amusement and/or theme parks 1.03. Except as otherwise set forth herein, (a) the franchise granted to Franchisee under this Agreement is non-exclusive, and grants to Franchisee the rights to establish and operate the Franchised Unit at only the specific location set forth hereinabove, (b) no exclusive, protected or other territorial rights in the contiguous area or market of such Franchised Unit or otherwise is hereby granted or to be inferred and (c) Franchisor and/or its affiliates have the right to operate and grant as many other franchises for the operation of Chesapeake Bagel Bakery restaurants, anywhere in the world, as they shall, in their sole discretion, elect. 3 II. TERM 2.01. Except as otherwise provided in this Agreement, the initial term of this Franchise Agreement (the "Term") shall expire on the twentieth (20th) anniversary of the date of commencement of operation of the Franchised Unit. For all purposes under this Agreement, the date of commencement of operation of the Franchised Unit shall be the date verified in writing by Franchisor and delivered to Franchisee in a form substantially similar to the "Notice" attached hereto as Exhibit "A". Franchisee agrees and shall be obligated to operate the Franchised Unit and perform hereunder for the full Term of this Agreement. 2.02. Franchisee may, at its option, renew this franchise for one (1) additional period of ten (10) years, provided that, at the time of renewal: A. Franchisee gives Franchisor written notice of such election to renew not less than six (6) months nor more than twelve (12) months prior to the end of the initial term; B. Franchisee executes Franchisor's then-current standard form of franchise agreement, which may include, without limitation, a higher royalty fee and a higher advertising contribution, if any, than that contained in this Agreement; and the term of which shall be the renewal term as specified in Section 2.02. hereof, but shall contain no further renewal rights; C. Franchisee executes a general release in a form prescribed by Franchisor of any and all claims against Franchisor and its subsidiaries, and affiliates, and their respective officers, directors, agents, and employees; D. Franchisee is not in default of any provision of this Agreement, or any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor, or any subsidiary or affiliate of Franchisor, and Franchisee has fully and faithfully performed all of Franchisee's obligations throughout the term of this Agreement; E. Franchisee has paid or otherwise satisfied all monetary obligations owed by Franchisee to Franchisor and its subsidiaries and affiliates and any indebtedness of Franchisee which is guaranteed by Franchisor, and Franchisee has timely paid or otherwise satisfied these obligations throughout the term of this Agreement; F. Franchisee agrees, at its sole cost and expense, to reimage, renovate, refurbish and modernize the Franchised Unit, within the time frame required by Franchisor, including the building design, parking lot, landscaping, equipment, signs, interior and exterior decor items, fixtures, furnishings, 4 trade dress, color scheme, presentation of trademarks and service marks, supplies and other products and materials to meet Franchisor's then-current standards, specifications and design criteria for Chesapeake Bagel Bakery restaurants, as contained in the then-current franchise agreement, Confidential Operating Standards Manual (as defined herein), or otherwise in writing, including, without limitation, such structural changes, remodeling and redecoration and such modifications to existing improvement as may be necessary to do so. G. Franchisee shall pay to Franchisor a renewal fee equal to fifty percent (50%) of Franchisor's standard initial franchise fee in effect at the date of renewal. III. FEES 3.01. In consideration of the franchise granted to Franchisee herein, Franchisee shall pay to the Franchisor the following: A. A franchise fee of ________________________ Dollars ($XXX) payable upon execution of this Agreement by Franchisee. Such franchise fee shall be fully earned by Franchisor upon execution of this Agreement by Franchisee and is in addition to any development fees paid to Franchisor by Franchisee. B. A recurring, non-refundable royalty fee of four percent(4%) of Gross Sales (as defined herein) during the term of this Agreement, payable weekly (or on such other basis as may be set forth in the Confidential Operating Standards Manual (as defined herein) or otherwise agreed to in writing by Franchisor) on the Gross Sales of the preceding week. The royalty fee shall increase to five percent (5%) of Gross Sales effective January 1, 1999. 3.02. In addition to the payments provided for in Section 3.01. hereof, Franchisee, recognizing the value of advertising and the importance of the standardization of advertising and promotion to the goodwill and public image of the System, agrees to pay to the Chesapeake Bagel Bakery national creative and production fund (the "NCP Fund) a recurring, non-refundable contribution ("NCP Fund Contribution") in an amount to be determined by Franchisor, in its sole discretion, not to exceed two percent (2%) of the Gross Sales for the preceding week, payable weekly (or on such other basis as may be set forth in the Confidential Operating Standards Manual or otherwise agreed to in writing by Franchisor). The NCP Fund Contribution shall be expended by the NCP Fund for national, regional, and/or local advertising and promotional materials and market research for the Chesapeake Bagel Bakery System, under the following conditions and limitations: 5 A. The NCP Fund, all contributions thereto, and any earnings thereon, shall be used exclusively to pay any and all costs of maintaining, administering, directing, producing and preparing market research, advertising, marketing materials and/or promotional activities for the Chesapeake Bagel Bakery System. Franchisee shall pay the NCP Fund Contribution by separate check made payable to the NCP Fund. All sums paid by the Franchisee to the NCP Fund shall be maintained in an account separate from other funds of Franchisor and shall not be used to defray any of Franchisor's expenses except as provided herein, and as Franchisor may incur in activities reasonably related to the administration or direction of the NCP Fund and advertising and marketing programs for franchisees and the Chesapeake Bagel Bakery System. The NCP Fund and its earnings shall not otherwise inure to the benefit of Franchisor. Franchisor shall maintain a separate bookkeeping account for the NCP Fund. B. The selection of media and locale for media placement shall be at the sole discretion of the Franchisor. C. All reasonable costs incurred by Franchisor or charged to Franchisor by third parties for market research and the production and dissemination of advertising, marketing and promotional materials may be charged to the NCP Fund. D. Franchisor, upon request, shall provide Franchisee with an annual accounting of receipts and disbursements of the NCP Fund. E. It is anticipated that all contributions to and earnings of the NCP Fund will be expended for market research, costs of creating and producing advertising materials, marketing and/or promotional purposes during the taxable year in which contributions and earnings are received. If, however, excess amounts remain in the NCP Fund at the end of a taxable year, all expenditures in the following taxable year(s) shall be made first out of accumulated earnings from previous years, next out of earnings in the current year, and finally from contributions. F. The NCP Fund is not, and shall not be, an asset of Franchisor. Although the NCP Fund is intended to be of perpetual duration, Franchisor maintains the right to terminate the NCP Fund; provided, however, that the NCP Fund shall not be terminated until all monies in the NCP Fund have been expended for the purposes stated herein. 6 G. Franchisee understands that such advertising and marketing is intended to maximize the public's awareness of the Franchised Units and the System, and that Franchisor accordingly undertakes no obligation to insure that any individual Franchisee benefits directly or on a pro rata basis from the placement, if any, of such advertising or marketing in its local market. Franchisee further acknowledges that its failure to derive any such benefit, whether directly or indirectly, shall not be cause for Franchisee's nonpayment or reduction of the required contributions to the NCP Fund. 3.03. If any monetary obligations owed by Franchisee to Franchisor and its subsidiaries and affiliates are more than seven (7) days overdue, Franchisee shall, in addition to such obligations, pay to Franchisor a sum equal to one and one-half percent (1 1/2%) of the overdue balance per month, or the highest rate permitted by law, whichever is less, from the date said payment is due. 3.04. For the purposes of this Agreement, the term "Gross Sales" shall mean all revenues generated by Franchisee's business conducted upon, from or with respect to the Franchised Unit, whether such sales are evidenced by cash, check, credit, charge, account, barter or exchange. Gross Sales shall include, without limitation, monies or credit received from the sale of food and merchandise, from tangible property of every kind and nature, promotional or otherwise, and for services performed from or at the Franchised Unit, including without limitation such off-premises services as catering and delivery. Gross Sales shall not include the sale of food or merchandise for which refunds have been made in good faith to customers, the sale of equipment used in the operation of the Franchised Unit, nor shall it include sales, meals, use or excise tax imposed by a governmental authority directly on sales and collected from customers; provided that the amount for such tax is added to the selling price or absorbed therein, and is actually paid by Franchisee to such governmental authority. 3.05. In addition to the payments provided for in Sections 3.01 and 3.02 hereof, Franchisee agrees to pay to the Local Media Fund (the "Local Media Fund") a recurring non-refundable contribution (the "Local Media Fund Contribution") in an amount to be determined by Franchisor, in its sole discretion, not to exceed three percent (3%) of the gross Sales of the Franchised Unit, payable weekly on the Gross Sales for the preceding week. Franchisee's Local Media Fund Contribution shall be reduced by an amount equal to Franchisee's actual contribution, for the corresponding period, to a local advertising cooperative established pursuant to Section 10.05 of this Agreement. The Local Media Fund contribution shall be expended by the Local Media Fund for advertising and promotions in the DMA in which the Franchised Unit is located. Franchisor will consider requests from Franchisee for reimbursement from the Local Media Fund, for costs incurred by Franchisee related to local advertising conducted by Franchisee in the DMA in which the Franchised Unit is located, provided (i) such advertising has been approved, in advance, by Franchisor and is consistent with the most recent marketing plan of the Local Media Fund, (ii) 7 the costs expended by Franchisee on local advertising are verified by invoice and/or such other documentation as Franchisor shall require and (iii) the amount reimbursed shall not exceed the amount of Franchisee's contribution to the Local Media Fund. IV. ACCOUNTING AND RECORDS 4.01. Accurate Books and Records. During the Term of this Agreement, Franchisee shall maintain and preserve, for at least three (3) years from the dates of their preparation, full, complete and accurate books, records and accounts in accordance with generally accepted accounting principles and in the form and the manner prescribed by Franchisor from time-to-time in the Confidential Operating Standards Manual or otherwise in writing. These records shall include, without limitation, cash register sales tape (including non- resettable readings), meals, sales and other tax returns, duplicate deposit slips and other evidence of Gross Sales and all other business transactions. 4.02. Royalty Reports. Franchisee shall submit to Franchisor, no later than the date each weekly royalty payment is due during the Term of this Agreement, a report on forms prescribed by Franchisor, accurately reflecting all Gross Sales during the preceding week and such other forms, reports, records, financial statements or information as Franchisor may reasonably require in the Confidential Operating Standards Manual, or otherwise in writing. 4.03. Quarterly Statement. Franchisee shall, at its expense, submit to Franchisor quarterly, within thirty (30) days following the end of each quarter during the Term hereof, an unaudited financial statement with such detail as Franchisor may reasonably require (hereinafter, "Quarterly Statement") together with a certificate executed by Franchisee stating that such financial statement is true and accurate. Upon Franchisor's request, Franchisee shall submit to Franchisor, with each Quarterly Statement, copies of any state or local sales tax returns ("Sales Tax Returns") filed by Franchisee for the period included in the Quarterly Statement. In the event Franchisee prepares financial statements on the basis of thirteen (13), four (4) week periods ("Periods"), the Quarterly Statements shall be submitted within thirty (30) days following the end of the third (3rd), sixth (6th), ninth (9th) and thirteenth (13th) Periods. 4.04. Annual Financial Statements. Franchisee shall, at its expense, submit to Franchisor within ninety (90) days following the end of each calendar or fiscal year during the Term of this Agreement, an unaudited financial statement for the preceding calendar or fiscal year, together with a certificate executed by Franchisee certifying that such financial statement is true and accurate (hereinafter, "Annual Financial Statements") and such other information in such form as Franchisor may reasonably require. Upon written request from Franchisor, the foregoing Annual Financial Statement shall include both a profit and loss statement and a balance sheet, and shall be prepared in accordance with generally accepted accounting principles. In the event Franchisee defaults under this Agreement, Franchisor may require, upon written notice to Franchisee, that all Annual Financial Statements submitted thereafter include a "Review Report" prepared by an independent Certified Public Accountant. 8 4.05. Other Reports. Franchisee shall also submit to Franchisor, for review or auditing, such other forms, financial statements, reports, records, information and data as Franchisor may reasonably designate, in the form and at the times and places reasonably required by Franchisor, upon request and as specified from time-to-time in the Confidential Operating Standards Manual or otherwise in writing. If Franchisee has combined or consolidated financial information relating to the Franchised Unit with that of any other business or businesses, including a business licensed by Franchisor, Franchisee shall simultaneously submit to Franchisor, for review or auditing, the forms, reports, records and financial statements (including, but not limited to the Quarterly Statements and Annual Financial Statements) which contain the detailed financial information relating to the Franchised Unit, separate and apart from the financial information of such other businesses. Franchisee hereby authorizes all of its suppliers and distributors to release to Franchisor, upon Franchisor's request, any and all of its books, records, accounts or other information relating to goods, products and supplies sold to Franchisee and/or the Franchised Unit. 4.06. Equipment. Franchisee shall record all sales on cash registers or other point-of-sale equipment approved, in writing, by Franchisor (hereinafter "POS Equipment"). 4.07. Franchisor's Right of Audit. Franchisor or its designated agents or auditors shall have the right at all reasonable times to audit, review and examine by any means, including electronically through the use of telecommunications devices or otherwise, at its expense, the books, records, accounts, and tax returns of Franchisee. If any such audit, review or examination reveals that Gross Sales have been understated in any report to Franchisor, Franchisee shall immediately pay to Franchisor the royalty fee and NCP Fund Contribution due with respect to the amount understated upon demand, in addition to interest from the date such amount was due until paid, at the rate of one and one-half percent (1.5%) per month. If any such understatement exceeds two percent (2%) of Gross Sales as set forth in the report, Franchisee shall, in addition, upon demand, reimburse Franchisor for any and all costs and expenses connected with such audit, review or examination (including, without limitation, reasonable accounting and attorneys' fees). The foregoing remedies shall be in addition to any other rights and remedies Franchisor may have. V. PROPRIETARY MARKS 5.01. It is understood and agreed that the franchise granted herein to use Franchisor's Proprietary Marks applies only to use in connection with the operation of the Franchised Unit franchised in this Agreement at the location designated in Section I hereof, and includes only such Proprietary Marks as are now designated or which may hereafter be designated, in the Confidential Operating Standards Manual or otherwise in writing as a part of the System (which might or might not be all of the Proprietary Marks pertaining to the System owned by the Franchisor), and does not include any other mark, name, or 9 indicia of origin of Franchisor now existing or which may hereafter be adopted or acquired by Franchisor. 5.02. With respect to Franchisee's use of the Proprietary Marks pursuant to this Agreement, Franchisee acknowledges and agrees that: A. Franchisee shall not use the Proprietary Marks as part of Franchisee's corporate or other business name; B. Franchisee shall not hold out or otherwise use the Proprietary Marks to perform any activity or incur any obligation or indebtedness in such manner as might, in any way, make Franchisor liable therefor, without Franchisor's prior written consent; C. Franchisee shall execute any documents and provide such other assistance deemed necessary by Franchisor or its counsel to obtain protection for the Proprietary Marks or to maintain the continued validity of such Proprietary Marks; and D. Franchisor reserves the right to substitute different Proprietary Marks for use in identifying the System and the franchised businesses operating thereunder, and Franchisee agrees to immediately substitute Proprietary Marks upon receipt of written notice from Franchisor. 5.03. Franchisee expressly acknowledges Franchisor's exclusive right to use the mark Chesapeake Bagel Bakery for restaurant services, bakery products including bagels and other related food products; the building configuration; and the other Proprietary Marks of the System. Franchisee agrees not to represent in any manner that it has any ownership in the Proprietary Marks or the right to use the Proprietary Marks except as provided in this Agreement. Franchisee further agrees that its use of the Proprietary Marks shall not create in its favor any right, title, or interest in or to the Proprietary Marks, and that all of such use shall inure to the benefit of Franchisor. 5.04. Franchisee acknowledges that the use of the Proprietary Marks outside the scope of this license, without Franchisor's prior written consent, is an infringement of Franchisor's exclusive right to use the Proprietary Marks, and during the term of this Agreement and after the expiration or termination hereof, Franchisee covenants not to, directly or indirectly, commit an act of infringement or contest or aid in contesting the validity or ownership of Franchisor's Proprietary Marks, or take any other action in derogation thereof. 5.05. Franchisee shall promptly notify Franchisor of any suspected infringement of, or challenge to, the validity of the ownership of, or Franchisor's right to use, the Proprietary Marks licensed hereunder. Franchisee 10 acknowledges that Franchisor has the right to control any administrative proceeding or litigation involving the Proprietary Marks. In the event Franchisor undertakes the defense or prosecution of any litigation relating to the Proprietary Marks, Franchisee agrees to execute any and all documents and to do such acts and things as may, in the opinion of counsel for Franchisor, be necessary to carry out such defense or prosecution. Except to the extent that such litigation is the result of Franchisee's use of the Proprietary Marks in a manner inconsistent with the terms of this Agreement, Franchisor agrees to reimburse Franchisee for its out of pocket costs in doing such acts and things, except that Franchisee shall bear the salary costs of its employees. 5.06. Franchisee understands and agrees that its license with respect to the Proprietary Marks is non-exclusive to the extent that Franchisor has and retains the right under this Agreement: A. To grant other licenses for the Proprietary Marks, in addition to those licenses already granted to existing franchisees; B. To develop and establish other franchise systems for the same, similar, or different products or services utilizing proprietary marks not now or hereafter designated as part of the System licensed by this Agreement, and to grant licenses thereto, without providing Franchisee any right therein; and C. To develop and establish other systems for the sale, at wholesale or retail, of similar or different products utilizing the same or similar Proprietary Marks, without providing Franchisee any right therein. 5.07. Franchisee acknowledges and expressly agrees that any and all goodwill associated with the System and identified by the Proprietary Marks used in connection therewith shall inure directly and exclusively to the benefit of Franchisor and is the property of Franchisor, and that upon the expiration or termination of this Agreement or any other agreement, no monetary amount shall be assigned as attributable to any goodwill associated with any of Franchisee's activities in the operation of the Franchised Unit granted herein, or Franchisee's use of the Proprietary Marks. 5.08. Franchisee understands and acknowledges that each and every detail of the Chesapeake Bagel Bakery System is important to Franchisee, Franchisor, and other franchisees in order to develop and maintain high and uniform standards of quality and services, and hence to protect the reputation and goodwill of Chesapeake Bagel Bakery restaurants. Accordingly, Franchisee covenants: A. To operate and advertise the Franchised Unit, at Franchisee's own expense, under the name "Chesapeake Bagel Bakery," without prefix or suffix; B. To adopt and use the Proprietary Marks licensed hereunder solely in the manner prescribed by Franchisor; 11 C. To observe such reasonable requirements with respect to trademark registration notices as Franchisor may from time to time direct in the Confidential Operating Standards Manual or otherwise in writing. 5.09. In order to preserve the validity and integrity of the Proprietary Marks licensed herein and to assure that Franchisee is properly employing the same in the operation of the Franchised Unit, Franchisor or its agents shall at all reasonable times have the right to inspect Franchisee's operations, premises, and Franchised Unit and make periodic evaluations of the services provided and the products sold and used therein. Franchisee shall cooperate with Franchisor's representatives in such inspections and render such assistance to the representatives as may reasonably be requested. VI. OBLIGATIONS OF CORPORATE OR PARTNERSHIP FRANCHISEE 6.01. If Franchisee, or any successor to or assignee of Franchisee, is a corporation, or limited liability company: A. Franchisee shall furnish to Franchisor, upon execution or any subsequent transfer of this Agreement, a copy of the Franchisee's Articles of Incorporation, Certificate of Incorporation, Bylaws and a list of shareholders showing the percentage interest of each, and shall thereafter promptly furnish Franchisor with a copy of any and all amendments or modifications thereto; B. Franchisee shall promptly furnish Franchisor, on a regular basis, with certified copies of such corporate records material to the Franchised Business as Franchisor may require from time to time in the Confidential Operating Standards Manual or otherwise in writing; and C. Franchisee shall maintain stop-transfer instructions against the transfer, on its records, of any securities with voting rights, subject to the restrictions of this Agreement, and each stock certificate of the corporate Franchisee representing each share of stock, shall have conspicuously endorsed upon it the following legend: "The transfer of this stock is subject to the terms and conditions of a CHESAPEAKE BAGEL BAKERY Franchise Agreement with AFC ENTERPRISES, INC. dated ___________. Reference is made to the provisions of said Franchise Agreement and to the Articles and By-Laws of this corporation." 12 6.02. If the Franchisee, or any successor to or assignee of Franchisee, is a partnership, limited partnership or limited liability partnership, Franchisee shall furnish to Franchisor, upon execution or any subsequent transfer of this Agreement, a copy of Franchisee's Articles of Partnership, if any, and Partnership Agreement, and shall thereafter promptly furnish Franchisor with a copy of any and all amendments or modifications thereto. VII. CONFIDENTIAL OPERATING STANDARDS MANUAL. 7.01. In order to protect the reputation and goodwill of Franchisor and the Chesapeake Bagel Bakery System and to maintain uniform standards of operation under Franchisor's Proprietary Marks, Franchisee shall conduct the Franchised Business in accordance with Franchisor's Confidential Operating Standards Manual (hereinafter, together with any other manuals created or approved for use in the operation of the Franchised Business granted herein, and all amendments and updates thereto, the "Manual"). 7.02. Franchisee shall at all times treat the Manual, and the information contained therein, as confidential, and shall use all reasonable efforts to keep such information secret and confidential. Franchisee shall not, at any time, without Franchisor's prior written consent, copy, duplicate, record, or otherwise make the Manual available to any unauthorized person or entity. 7.03. The Manual shall at all times remain the sole property of Franchisor. 7.04. In order for Franchisee to benefit from new knowledge information, methods and technology adopted and used by Franchisor in the operation of the System, Franchisor may from time-to-time revise the Manual and Franchisee agrees to adhere to and abide by all such revisions. 7.05. Franchisee agrees at all times to keep its copy of the Manual current and up-to-date, and in the event of any dispute as to the contents of Franchisee's Manual, the terms of the master copy of the Manual maintained by Franchisor at Franchisor's home office, shall be controlling. 7.06. The Manual is intended to further the purposes of this Agreement, and is specifically incorporated, by reference, into this Agreement. Except as otherwise set forth in this Agreement, in the event of a conflict between the terms of this Agreement and the terms of the Manual, the terms of this Agreement shall control. VIII. TRAINING 13 8.01. Franchisee, a partner of Franchisee if Franchisee is a partnership, or a principal shareholder of Franchisee if Franchisee is a corporation, must complete, to Franchisor's satisfaction, the Chesapeake Bagel Bakery New Franchisee Orientation Program ("NFOP") prior to opening the first franchised Chesapeake Bagel Bakery unit operated by Franchisee. NFOP shall consist of one (1) forty (40) hour week of workshops and seminars conducted at a training facility designated by Franchisor. 8.02. In addition to completing the NFOP, Franchisee (or a partner or principal shareholder of Franchisee), and two (2) to four (4) designated management employees of Franchisee, must attend and complete, to Franchisor's satisfaction, the Chesapeake Bagel Bakery basic management training program ("BMT"), prior to opening the Franchised Unit. The exact number of Franchisee's management employees required to attend and complete BMT shall be determined by Franchisor in its sole discretion, but in no event shall the number be less than two (2). BMT shall consist of up to five (5) weeks of in-store restaurant operations training at a facility designated by Franchisor (a "Certified Training Facility") and certain self-directed study programs. A management employee of Franchisee that successfully completes BMT, shall be certified by Franchisor as an "BMT Certified Manager". 8.03. Franchisee shall maintain the number of BMT Certified Managers designated by the Franchisor in the employ of the Franchised Unit throughout the term of this Agreement, which in no event shall be less than three (3). In the event that Franchisee or any BMT Certified Manager ceases active employment at the Franchised Unit, Franchisee must enroll a qualified replacement in the BMT program within thirty (30) days of cessation of such individual's employment. The replacement employee shall attend and complete the next regularly scheduled BMT program to Franchisor's satisfaction. 8.04. The cost of conducting the NFOP and BMT programs (instruction and required materials) shall be borne by Franchisor. All other expenses during NFOP and BMT, including meals and lodging, wages and travel, shall be borne by Franchisee. 8.05. Franchisor may make available to Franchisee or Franchisee's employees, from time to time, such additional training programs as Franchisor, in its sole discretion, may choose to conduct. Attendance at said training programs may be mandatory. The cost of conducting such additional training programs (instruction and required materials) shall be borne by Franchisor. All other expenses during the training period, including meals and lodging, wages and travel, shall be borne by the Franchisee. IX. DUTIES OF THE FRANCHISOR 14 9.01. Franchisor will make available to Franchisee such continuing advisory assistance in the operation of the Franchised Business, in person or by electronic or written bulletins made available from time to time, as Franchisor may deem appropriate. 9.02. Franchisor, in its sole discretion, may provide opening assistance to Franchisee at the Franchised Unit. 9.03. Franchisor will make available to Franchisee standard plans and specifications to be utilized only in the construction of the Franchised Unit. No modification to or deviations from the standard plans and specifications may be made without the written consent of Franchisor. Franchisee shall obtain, at its expense, further qualified architectural and engineering services to prepare surveys, site and foundation plans, and to adapt the standard plans and specifications to applicable local or state laws, regulations or ordinances. Franchisee shall bear the cost of preparing plans containing deviations or modifications from the standard plans. 9.04. Franchisor will loan one (1) copy of the Manual to Franchisee for the duration of this Agreement, which the Manual contains the standards, specifications, procedures and techniques of the Chesapeake Bagel Bakery System. 9.05. Franchisor will continue its efforts to maintain high and uniform standards of quality, cleanliness, appearance and service at all Chesapeake Bagel Bakery restaurants, to protect and enhance the reputation of the Chesapeake Bagel Bakery System and the demand for the products and services of the System. Franchisor will establish uniform criteria for approving suppliers; make every reasonable effort to disseminate its standards and specifications to prospective suppliers of the Franchisee upon the written request of the Franchisee, provided that Franchisor may elect not to make available to prospective suppliers the standards and specifications for such food formulae or equipment designs deemed by Franchisor in its sole discretion to be confidential; and may conduct periodic inspections of the premises and evaluations of the products used and sold at the Franchised Unit and in all other Chesapeake Bagel Bakery restaurants. 9.06. Franchisor will provide training to Franchisee as set forth in Article VIII hereof. X. DUTIES OF THE FRANCHISEE Franchisee understands and acknowledges that every detail of the System is important to Franchisor, Franchisee and other franchisees in order to develop and maintain high and uniform operating standards, to increase the demand for Chesapeake Bagel Bakery products and services, and to protect the reputation and goodwill of Franchisor. Accordingly, Franchisee agrees that: 15 10.01. Franchisee shall maintain, at all times during the term of this Agreement, at Franchisee's expense, the premises of the Franchised Unit and all fixtures, furnishings, signs, systems and equipment (hereinafter "improvements") thereon or therein, in conformity with Franchisor's high standards and public image and to make such additions, alterations, repairs, and replacements thereto (but no others, without Franchisor's prior written consent) as may be required by Franchisor, including but not limited to the following: A. To keep the Franchised Unit in the highest degree of sanitation and repair, including, without limitation, such periodic repainting, repairs or replacement of impaired equipment, and replacement of obsolete signs, as Franchisor may reasonably direct; B. To meet and maintain the highest governmental standards and ratings applicable to the operation of the Franchised Business; C. At its sole cost and expense, to complete a full reimaging, renovation, refurbishment and modernization of the Franchised Unit, within the time frame required by Franchisor, but no more often than once every seven (7) years, including the building design, parking lot, landscaping, equipment, signs, interior and exterior decor items, fixtures, furnishings, trade dress, color scheme, presentation of trademarks and service marks, supplies and other products and materials, to meet Franchisor's then-current standards, specifications and design criteria for Chesapeake Bagel Bakery restaurants, including without limitation, such structural changes, remodeling and redecoration and such modifications to existing improvements as may be necessary to do so (hereinafter, a "Franchised Unit Renovation"). Franchisee shall not be required to perform a Franchised Unit Renovation if there are less than five (5) years remaining on the term of this Agreement. Nothing herein shall be deemed to limit Franchisee's other obligations, during the term of this Agreement, to operate the Franchised Unit in accordance with Franchisor's standards and specifications for the Chesapeake Bagel Bakery System, including, but not limited to, the obligations set forth in this Section X. 10.02. Franchisee shall operate the Franchised Unit in conformity with such uniform methods, standards, and specifications as Franchisor may from time to time prescribe in the Manual or otherwise in writing, to insure that the highest degree of quality, service and cleanliness is uniformly maintained and to refrain from any deviation therefrom and from otherwise operating in any manner which reflects adversely on Franchisor's name and goodwill or on the Proprietary Marks, and in connection therewith: 16 A. To maintain in sufficient supply, and use at all times, only such ingredients, products, materials, supplies, and paper goods as conform to Franchisor's standards and specifications, and to refrain from deviating therefrom by using non-conforming items, without Franchisor's prior written consent; B. To sell or offer for sale only such products and menu items that have been expressly approved for sale in writing by Franchisor, meet Franchisor's uniform standards of quality and quantity and as have been prepared in accordance with Franchisor's methods and techniques for product preparation; to sell or offer for sale the minimum menu items specified in the Manual or otherwise in writing; to refrain from any deviation from Franchisor's standards and specifications for serving or selling the menu items, without Franchisor's prior written consent; upon thirty (30) days written notice from Franchisor, to sell or offer for sale only such beverages produced by Franchisor's Designated Beverage Supplier (as defined in Section 10.03 below); and to discontinue selling or offering for sale such items as Franchisor may, in its discretion, disapprove in writing at any time; C. To use the premises of the Franchised Unit solely for the purpose of conducting the business franchised hereunder, and to conduct no other business or activity thereon, whether for profit or otherwise, without Franchisor's prior written consent; D. To keep the Franchised Unit open and in normal operation during such business hours as Franchisor may prescribe in the Manual or otherwise in writing; E. To permit Franchisor or its agents, at any time during ordinary business hours, to remove from the Franchised Unit samples of any ingredients, products, materials, supplies, and paper goods used in the operation of the Franchised Unit, without payment therefor, in amounts reasonably necessary for testing by Franchisor or an independent laboratory, to determine whether such samples meet Franchisor's then-current standards and specifications. In addition to any other remedies it may have under this Agreement, Franchisor may require Franchisee to bear the cost of such testing if any such ingredient, products, materials, supplier or paper goods have been obtained from a supplier not approved by Franchisor, or if the sample fails to conform to Franchisor's specifications; F. To purchase, install and construct, at Franchisee's expense, all improvements furnishings, signs and equipment specified in the approved standard plans and specifications, and such other furnishings, signs or equipment as Franchisor may reasonably direct from time to time in the Manual or otherwise in writing; and to refrain from installing or permitting to be installed on or about the premises of the Franchised Unit, without Franchisor's written consent, any improvements, furnishings, signs or equipment not first approved in writing as meeting Franchisor's standards and specifications; 17 G. To comply with all applicable federal, state and local laws, regulations and ordinances pertaining to the operation of the Franchised Business; and H. Franchisee shall grant Franchisor and its agents the right to enter upon the premises of the Franchised Unit at any time during ordinary business hours for the purpose of conducting inspections; cooperate with Franchisor's representatives in such inspections by rendering such assistance as they may reasonably request; and, upon notice from Franchisor or its agents, and without limiting Franchisor's other rights under this Agreement, take such steps as may be necessary immediately to correct the deficiencies detected during any such inspection, including, without limitation, immediately desisting from the further use of any equipment, promotional materials, products, or supplies that do not conform with Franchisor's then-current specifications, standards, or requirements. 10.03. Franchisee shall (i) purchase all ingredients, products, materials, supplies, and other items required in the operation of the Franchised Business which are or incorporate trade-secrets of Franchisor, as designated by Franchisor ("Trade-Secret Products") only from Franchisor or suppliers designated by Franchisor; and (ii) upon thirty (30) days prior written notice that Franchisor has designated an exclusive beverage supplier for any or all beverage products sold within the Chesapeake Bagel Bakery System ("Designated Beverage Products"), Franchisee shall purchase all such Designated Beverage Products only from Franchisor's designated beverage supplier ("Designated Beverage Supplier"). 10.04. Franchisee shall purchase all ingredients, products, materials, supplies, paper goods, and other items required for the operation of the Franchised Business, except Trade-Secret Products and Designated Beverage Products, solely from suppliers who demonstrate, to the continuing reasonable satisfaction of Franchisor, the ability to meet Franchisor's reasonable standards and specifications for such items; who possess adequate quality controls and capacity to supply Franchisee's needs promptly and reliably; and who have been approved in writing by Franchisor and such approval has not thereafter been revoked. If Franchisee desires to purchase any such items from an unapproved supplier, Franchisee shall submit to Franchisor a written request for approval, or shall request the supplier itself to seek approval. Franchisor shall have the right to require, as a condition of its approval, that its representatives be permitted to inspect the supplier's facilities, and that samples from the supplier be delivered, at Franchisor's option, either to 18 Franchisor or to an independent laboratory designated by Franchisor for testing prior to granting approval. A charge not to exceed Franchisor's reasonable cost of inspection and the actual cost of testing shall be paid by the supplier or Franchisee. Franchisor reserves the right, at its option, to reinspect the facilities and products of any such approved supplier from time to time and to revoke its approval upon failure of such supplier to continue to meet any of the foregoing criteria. 10.05. Franchisor shall have the right, in its sole discretion, to establish a local advertising cooperative ("Cooperative") in any dominant market area ("DMA"). In addition, a Cooperative for the DMA in which the Franchised Unit is located may be established upon the favorable vote of the owners of all Chesapeake Bagel Bakery restaurants (including non-franchised restaurants) within the same DMA. Each owner will be entitled to cast one (1) vote for each restaurant owned and operated by that owner within such DMA. If 80% of all votes entitled to be cast vote in favor of establishing a Cooperative, then such Cooperative shall be formed. A. Once a Cooperative is established in the DMA in which the Franchised Unit is located, Franchisee shall become a member of such Cooperative upon commencement of operation of the Franchised Unit if the Cooperative is in existence at that time, or no later than thirty (30) days after the date on which the Cooperative commences operation. In no event shall Franchisee be required to be a member of more than one Cooperative with respect to the Franchised Unit. B. If a Cooperative has been established, Franchisee shall contribute an amount, to be determined by the Cooperative, which shall not be less than two percent (2%) of its weekly Gross Sales. C. Each Cooperative shall be organized and governed in a form and manner, and shall commence operations on a date, approved in advance by Franchisor in writing. (1) Each Cooperative shall be organized for the exclusive purpose of administering regional advertising programs and developing, subject to Franchisor's approval, standardized promotional materials for use by its members in local advertising. (2) No advertising or promotional plans or materials may be used by a Cooperative or furnished to its members without the prior approval of the Franchisor, pursuant to the procedures and terms set forth in Section 10.07 hereof. (3) Franchisee shall pay its required contribution to the Cooperative weekly on Gross Sales for the preceding week, together with such 19 statements or reports as may be required by Franchisor, or by the Cooperative with the Franchisor's prior written approval. D. Franchisor, in its sole discretion, may grant an exemption to any franchisee for any length of time from the requirement of membership in a Cooperative, and/or from the obligation to contribute thereto (including a reduction, deferral or waiver of such contribution), upon written request of such franchisee stating reasons supporting such exemption. Franchisor's decision concerning such request for exemption shall be final. If an exemption is granted to a franchisee, such franchisee shall be required to expend on local advertising, on a monthly basis, the same amount as would otherwise be assessed by the Cooperative, as set forth in Section 10.05.B hereof. 10.06. All local advertising by Franchisee shall be in such media, and of such type and format as Franchisor may approve; shall be conducted in a dignified manner; and shall conform to such standards and requirements as Franchisor may specify. Franchisee shall not use any advertising or promotional plans or materials unless and until Franchisee has received written approval from Franchisor, pursuant to the procedures and terms set forth in Section 10.07 hereof. 10.07. All advertising and promotional plans proposed to be used by Franchisee or the Cooperative, where applicable, except such plans and materials that have been previously approved by Franchisor shall be submitted to Franchisor for Franchisor's written approval (except with respect to prices to be charged) prior to any use thereof. Franchisor shall use its best efforts to complete its review of Franchisee's proposed advertising and promotional plans within fifteen (15) days after Franchisor receives such plans. If written approval is not received by Franchisee or the Cooperative from Franchisor within fifteen (15) days after receipt by Franchisor of such plans, Franchisor shall be deemed to have disapproved such plans. 10.08. Franchisee shall, at Franchisor's request, require all of its supervisory employees, as a condition of their employment, to execute an agreement prohibiting them, during the term of their employment or thereafter, from communicating, divulging, or using for the benefit of any person, persons, partnership, association, corporation or other entity any confidential information, trade secrets, knowledge, or know-how concerning the Chesapeake Bagel Bakery System or methods of operation of the Franchised Unit which may be acquired as a result of their employment with Franchisee or other franchisees. A duplicate original of each such agreement shall be provided by Franchisee to Franchisor immediately upon execution. 10.09. If Franchisee operates more than four (4) Franchised Units, Franchisee shall have a supervisor, which may be Franchisee, to supervise and coordinate the operation of the Franchised Units (hereinafter, a "Supervisor"). In addition to the foregoing, Franchisee shall employ an additional Supervisor upon the opening of Franchisee's sixth (6th) Franchised Unit and upon the opening of each successive fifth (5th) Franchised Unit thereafter. Each 20 Supervisor shall attend and successfully complete the BMT program set forth in Section 8.02 hereof prior to assuming any supervisory responsibilities and shall meet such other standards as Franchisor may reasonably impose. No Supervisor may have supervisory responsibilities for more than eight (8) Franchised Units. 10.10. If at any time the Franchised Unit is proposed to be operated by an entity or individual other than the Franchisee, Franchisor reserves the right to review and approve the operating entity or individual and to require and approve an operating agreement prior to such party's assumption of operations. Franchisor may, in its sole discretion, reject either the operating entity, the individual operator or the operating agreement. If approved by Franchisor, the operating entity and/or individual shall agree in writing to comply with all of Franchisee's obligations under the Franchise Agreement as though such party were the franchisee designated therein, on such form as may be designated by Franchisor. The operation of the Franchised Unit by any party other than Franchisee, without Franchisor's prior written consent, shall be deemed a material default of this Agreement for which Franchisee may terminate this Agreement pursuant to the provisions of Section 15.02 hereof. 10.11. Franchisee shall become a member of any purchasing cooperative established by Franchisor for the Chesapeake Bagel Bakery System and shall remain a member in good standing thereof throughout the term of this Agreement and shall pay all reasonable membership fees assessed by such purchasing association. Franchisee shall, prior to opening the Franchised Unit, become a member of the Churchs Operators Purchasing Association (hereinafter "COPA"), or any successor thereto, shall remain a member in good standing of COPA throughout the term of this Agreement (or until a separate Purchasing Cooperative is established by Franchisor for the Chesapeake Bagel Bakery System), and shall pay all reasonable membership fees assessed by COPA. 10.12 Franchisee shall, within thirty (30) days from receipt of written notice from Franchisor, purchase and install computer hardware and software equipment at the Franchised Unit and/or at Franchisee's principal business office, which computer hardware shall include telecommunications devices, and which software may be a single program or set of programs, all of which must be obtained in accordance with the Franchisor's standards and specifications (the "Required Computer Equipment"). The Required Computer Equipment shall permit 24 hour per day electronic communications between Franchisor and Franchisee including access to the internet and Franchisor's intranet,"AFC On-Line" or any successor thereto. Franchisee shall only be required to purchase and install the Required Computer Equipment at one, central location, which shall satisfy the conditions of this section 10.02 (or its equivalent) for all Franchised Units operated by Franchisee. 10.13. Franchisee shall comply with all other requirements set forth in this Agreement. 21 XI. INSURANCE 11.01. Insurance Program. Franchisee shall procure, prior to commence ment of construction of the Franchised Unit, and shall maintain in full force and effect during the Term of this Agreement at Franchisee's expense, an insurance policy or policies protecting Franchisee and Franchisor, and their officers, directors, agents and employees, against any loss, liability, or expense whatsoever from personal injury, death or property damage or casualty, including, fire, lightning, theft, vandalism, malicious mischief, and other perils normally included in an extended coverage endorsement arising from, occurring upon or in connection with the construction, operation or occupancy of the Franchised Unit, as Franchisor may reasonably require for its own and Franchisee's protection. 11.02. Insurance Requirements. Such policy or policies shall be written by an insurance company satisfactory to Franchisor, and shall include, at a minimum the following coverage: A. Workers' Compensation Insurance, with statutory limits as ------------------------------- required by the laws and regulations applicable to the employees of Franchisee who are engaged in the performance of their duties relating to the Franchised Unit, including any pre-opening training programs, as well as such other insurance as may be required by statute or regulation of the state in which the Franchised Unit is located. B. Employer's Liability Insurance, for employee bodily ------------------------------ injuries and deaths, with a limit of $500,000 each accident. C. Comprehensive or Commercial General Liability Insurance, ------------------------------------------------------- covering claims for bodily injury, death and property damage, including Premises and Operations, Independent Contractors, Products and Completed Operations, Personal Injury, Contractual, and Broadform Property Damage liability coverages, with limits as follows: Occurrence/Aggregate Limit of $1,000,000 for bodily injury, death and property damage each occurrence and $2,000,000 for general aggregate or Split liability limits of: $1,000,000 for bodily injury per person $1,000,000 for bodily injury per occurrence $ 500,000 for property damage D. Comprehensive Automobile Liability Insurance, if applicable, -------------------------------------------- covering owned, non-owned and hired vehicles, with limits as follows: 22 Combined Single Limit of $500,000 for bodily injury, death and property damage per occurrence or Split liability limits of: $500,000 for bodily injury per person $500,000 for bodily injury per occurrence $250,000 for property damage E. All Risk Property Insurance, on a replacement cost basis, --------------------------- with limits as appropriate, covering the real property of Franchisee and any real property which the Franchisee may be obligated to insure by contract. Such real property may including building, machinery, equipment, furniture, fixtures and inventory. 11.03. All such policies of insurance shall provide that the same shall not be canceled, modified or changed without first giving thirty (30) days prior written notice thereof to Franchisor. No such cancellation, modification or change shall affect Franchisee's obligation to maintain the insurance coverages required by this Agreement. Except for Workers' Compensation Insurance, Franchisor shall be named as an Additional Insured on all such required policies. All liability insurance policies shall be written on an "occurrence" policy form. Franchisee shall be responsible for payment of any and all deductibles from insured claims under its policies of insurance. The coverage afforded under any insurance policy obtained by Franchisee pursuant to this Agreement shall be primary coverage regardless of whether or not Franchisor has similar coverage. Franchisee shall not satisfy the requirements of this Article XI unless and until certificates of such insurance, including renewals thereof, have been delivered to and approved by Franchisor. Franchisee shall not self-insure any of the insurance coverages required by this Agreement, or non- subscribe to any State's applicable workmen's compensation laws without the prior written consent of Franchisor. The minimum limits of coverage required by this Agreement may be satisfied by a combination of primary and excess or umbrella insurance policies. Franchisor shall have the right, at any time during the term of this Agreement to increase the minimum limits of insurance coverage or otherwise modify the insurance requirements of this Agreement upon written notice in the Manual or as otherwise prescribed by Franchisor in writing. If Franchisee shall fail to comply with any of the insurance requirements herein, upon written notice to Franchisee by Franchisor, Franchisor may, without any obligation to do so, procure such insurance and Franchisee shall pay Franchisor, upon demand, the cost thereof plus interest at the maximum rate permitted by law, and a reasonable administrative fee designated by Franchisor. 11.04. No Limitation on Coverage. Franchisee's obligation to obtain and maintain the foregoing policy or policies of insurance in the amounts 23 specified shall not be limited in any way by reason of any insurance which may be maintained by Franchisor, nor shall Franchisee's performance of that obligation relieve it of liability under the indemnity provisions set forth in Section XVIII of this Agreement. 11.05. Issuance of Insurance. Franchisee must obtain the insurance required by this Agreement no later than fifteen (15) days before the date on which any construction is commenced. The Franchised Unit shall not be opened for business prior to Franchisor's receipt of satisfactory evidence that all insurance required by this Agreement is in effect. Upon obtaining such insurance, and on each policy renewal date thereafter, Franchisee shall promptly submit evidence of satisfactory insurance and proof of payment therefor to Franchisor, together with, upon request, copies of all policies and policy amendments. The evidence of insurance shall include a statement by the insurer that the policy or policies will not be canceled or materially altered without at least thirty (30) days prior written notice to Franchisor. XII. CONFIDENTIAL INFORMATION 12.01. Franchisee shall not, during the term of this Agreement or thereafter, communicate, divulge, or use for the benefit of any other person, persons, partnership, association, corporation or other entity, any confidential information, knowledge or know-how concerning the construction and methods of operation of the Franchised Business which may be communicated to Franchisee, or of which Franchisee may be apprised, by virtue of Franchisee's operation under the terms of this Agreement. Franchisee shall divulge such confidential information only to such employees of Franchisee as must have access to it in order to exercise the franchise rights granted hereunder and to establish and operate the Franchised Unit pursuant hereto and as Franchisee may be required by law, provided Franchisee shall give Franchisor prior written notice of any such required disclosure immediately upon receipt of notice by Franchisee in order for Franchisor to have the opportunity to seek a protective order or take such other actions as it deems appropriate under the circumstances. 12.02. Any and all information, knowledge, and know-how, including, without limitation, drawings, materials, equipment, recipes, prepared mixtures or blends of spices or other food products, and other data, which Franchisor designates as confidential, and any information, knowledge, or know-how which may be derived by analysis thereof, shall be deemed confidential for purposes of this Agreement, except information which Franchisee can demonstrate came to Franchisee's attention prior to disclosure thereof by Franchisor; or which, at the time of disclosure thereof by Franchisor to Franchisee, had become a part of the public domain, through publication or communication by others; or which, after disclosure to Franchisee by Franchisor, becomes a part of the public domain, through publication or communication by others. XIII. COVENANTS 13.01. Franchisee covenants that, during the term of the Agreement, except as otherwise approved in writing by Franchisor, Franchisee or, 24 alternatively, one designated management employee if that employee assumes primary responsibility for the operation of the Franchised Unit, shall devote full time, energy and best efforts to the management and operation of the Franchised Business. 13.02. Franchisee acknowledges that, pursuant to this Agreement, Franchisee will receive valuable specialized training and confidential information, including without limitation, information regarding the operational, sales, promotional, and marketing methods, procedures and techniques of Franchisor and the System. Franchisee covenants that, during the term of this Agreement, Franchisee (who, unless otherwise specified, shall include, for purposes of this Section XIII, collectively and individually, all officers, directors and holders of a beneficial interest of five percent (5%) or more of the securities with voting rights of Franchisee and of any corporation, directly or indirectly controlling Franchisee, if Franchisee is a corporation, and the general partner and any limited partners, including any corporation, and the officers, directors and holders of a beneficial interest of five percent (5%) or more of securities with voting rights of a corporation which controls, directly or indirectly, any general or limited partner, if Franchisee is a partnership) shall not, either directly or indirectly, for itself or on behalf of, or in conjunction with, any person, persons, partnership, association or corporation or other entity: A. Divert or attempt to divert any business or customer of the business franchised hereunder to any competitor by direct or indirect inducements or otherwise, or to do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with Franchisor's Proprietary Marks and the System; B. Employ or seek to employ any person who is, at that time, employed by Franchisor or by any other Chesapeake Bagel Bakery franchisee, or otherwise, directly or indirectly, induce such person to leave his or her employment therewith; or C. Own, maintain, operate, engage in, or have any interest in any fast food (either takeout, on premises consumption, or a combination thereof) restaurant that specializes in the sale of bakery products, including bagels, breads and other food products substantially similar to those sold within the Chesapeake Bagel Bakery System (a "Bagel Bakery Restaurant"); provided, however, that the term "Bagel Bakery Restaurant" shall not apply to any business operated by Franchisee under a franchise agreement with Franchisor or an affiliate of Franchisor. 25 13.03. Franchisee covenants that Franchisee shall not, regardless of the cause for termination, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person, persons, partnership, association, corporation or other entity: A. For a period of two (2) years following the termination or expiration of this Agreement, own, maintain, engage in, or have any interest in any Bagel Bakery Restaurant which is located within a radius of ten (10) miles of the location specified in Section I hereof, or the location of any other Chesapeake Bagel Bakery restaurant under the System, whether owned by Franchisor or any other Chesapeake Bagel Bakery franchisee, which is in existence as of the date of expiration or termination of this Agreement; or B. For a period of one (1) year following the termination or expiration of this Agreement, employ or seek to employ any person who is, at the time, employed by Franchisor or by any other Chesapeake Bagel Bakery franchisee, or otherwise, directly or indirectly, induce such person to leave his or her employment therewith. 13.04. At Franchisor's request, Franchisee shall require and obtain execution of covenants similar to those set forth in this Section XIII (including covenants applicable upon the termination of a person's relationship with Franchisee) in a form satisfactory to Franchisor, including, without limitation, specific identification of Franchisor as a third party beneficiary of such covenants with the independent right to enforce them, from any or all of the following persons: A. All managers and assistant managers of the Franchised Unit, and any other personnel employed by Franchisee who have received or will receive training from Franchisor; B. All officers, directors, and holders of a direct or indirect beneficial ownership interest of five percent (5%) or more in Franchisee. The failure of Franchisee to obtain execution of a covenant required by this Section 13.04 shall constitute a material breach of this Agreement. A duplicate original of each such covenant shall be provided by Franchisee to Franchisor immediately upon execution. 13.05. The parties agree that each of the foregoing covenants shall be construed as independent of any other covenant or provision of this Agreement. If all or any portion of a covenant in this Section XIII, is held unreasonable or unenforceable by a court or agency having jurisdiction in a final decision, Franchisee expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant was separately stated in and made a part of this Section XIII. 26 A. Right to Reduce Covenants. Franchisee understands and acknowledges ------------------------- that Franchisor shall have the right, in its sole discretion, to reduce the scope of any covenant set forth in Sections 13.02. and 13.03. of this Agreement, or any portion thereof, without Franchisee's consent, effective immediately upon receipt by Franchisee of written notice thereof, and Franchisee agrees that it shall comply with any covenant as so modified, which shall be fully enforceable notwithstanding the provisions of Section XXII hereof. B. Injunctive Relief. The parties acknowledge that it will be ----------------- difficult to ascertain with any degree of certainty the amount of damages resulting from a breach by Franchisee of any of the covenants contained in this Section XIII. It is further agreed and acknowledged that any violation by Franchisee of any of said covenants will cause irreparable harm to Franchisor. Accordingly, Franchisee agrees that upon proof of the existence of a violation of any of said covenants, Franchisor will be entitled to injunctive relief against Franchisee in any court of competent jurisdiction having authority to grant such relief, together with all costs and reasonable attorney's fees incurred by Franchisor in bringing such action. XIV. TRANSFERABILITY OF INTEREST 14.01. Transfer by Franchisor. This Agreement shall inure to the benefit of the successors and assigns of Franchisor. Franchisor shall have the right to transfer or assign its interest in this Agreement to any person, persons, partnership, association, corporation, or other entity. If Franchisor's assignee assumes all the obligations of Franchisor hereunder and sends Franchisee written notice of the assignment so attesting, Franchisee agrees promptly to execute a general release of Franchisor, and any affiliates of Franchisor, from claims or liabilities of Franchisor under this Agreement. 14.02. Transfer by Franchisee. Franchisee understands and acknowledges that the rights and duties set forth in this Agreement are personal to Franchisee, and that Franchisor has granted this Agreement in reliance on Franchisee's business skill and financial capacity. Accordingly, neither (i) Franchisee, nor (ii) any immediate or remote successor to Franchisee, nor (iii) any individual, partnership, corporation or other legal entity which directly or indirectly owns any interest in the Franchisee or in this Franchise Agreement, shall sell, assign, transfer, convey, donate, pledge, mortgage, or otherwise encumber any direct or indirect interest in this Agreement or in any legal entity which owns the Franchised Business without the prior written consent of Franchisor. Acceptance by Franchisor of any royalty fee, advertising fee or any other amount accruing hereunder from any third party, including, but not limited to any proposed transferee, shall not constitute Franchisor's approval of such party as a transferee or the transfer of this Franchise Agreement to such party. 27 Any purported assignment or transfer, by operation of law or otherwise, not having the written consent of Franchisor, shall be null and void, and shall constitute a material breach of this Agreement, for which Franchisor may then terminate without opportunity to cure pursuant to Section 15.02.E. of this Agreement. 14.03. Conditions for Consent. Franchisor shall not unreasonably with hold its consent to any transfer referred to in Section 14.02., when requested; provided, however, that prior to the time of transfer; A. All of Franchisee's accrued monetary obligations to Franchisor and its subsidiaries and affiliates shall have been satisfied; B. Franchisee shall have agreed to remain obligated under the covenants contained in Section XIII hereof as if this Agreement had been terminated on the date of the transfer; C. The transferee must be of good moral character and reputation, in the reasonable judgment of the Franchisor; D. The Franchisor shall have determined, to its satisfaction, that the transferee's qualifications meet the Franchisor's then current criteria for new franchisees; E. Franchisee and transferee shall execute a written assignment, in a form satisfactory to Franchisor, pursuant to which the transferee shall assume all of the obligations of Franchisee under this Agreement and Franchisee shall unconditionally release any and all claims Franchisee might have against Franchisor as of the date of the assignment; F. The transferee shall execute the then-current form of Franchise Agreement and such other then-current ancillary agreements as Franchisor may reasonably require. The then-current form of Franchise Agreement may have significantly different provisions including, without limitation, a higher royalty fee and advertising contribution than that contained in this Agreement. The then-current form of Franchise Agreement will expire on the expiration date of this Agreement and will contain the same renewal rights, if any, as are available to Franchisee herein; G. The transferee shall agree at its sole cost and expense, to (i) complete a Franchised Unit Renovation, within the time frame required by Franchisor, unless a Franchised Unit Renovation was completed within seven (7) years prior to the date of the transfer and (ii) perform such other scope of work as may be determined by Franchisor. 28 H. The transferee and such other individuals as may be designated by Franchisor in the Manual or otherwise in writing, must have successfully completed the training course then in effect for new franchisees. If the Franchised Unit is the transferee's first Chesapeake Bagel Bakery restaurant, the transferee shall pay to Franchisor the then-standard Training Fee; I. If the transferee is a partnership, the partnership agreement shall provide that further assignments or transfers of any interest in the partnership are subject to all restrictions imposed upon assignments and transfers in this Agreement; J. Franchisee shall, at Franchisor's option and request, execute a written guarantee of the transferee's obligations under the Agreement, which guarantee shall not exceed a period of three (3) years from the date of transfer. K. The Franchisee shall pay to Franchisor a transfer fee of Five Thousand Dollars ($5,000), to cover Franchisor's administrative expenses in connection with the transfer; however no additional franchise fee shall be charged by Franchisor for a transfer. If the transferee is (i) a corporation formed by Franchisee for the convenience of ownership and in which the Franchisee is the sole shareholder, or (ii) an existing Franchisee under this Agreement, no transfer fee shall be required. 14.04. Grant of Security Interest. Franchisee shall grant no security interest in this Agreement, the Franchised Business, or in any of its assets unless the secured party agrees that, in the event of any default by Franchisee under any documents related to the security interest (i) Franchisor shall be provided with notice of default and given a reasonable time within which to cure said default, (ii) Franchisor shall have the right and option to be substituted as obligor to the secured party and to cure any default of Franchisee or to purchase the rights of the secured party upon payment of all sums then due to such secured party, except such amounts which may have become due as a result of any acceleration of the payment dates based upon the Franchisee's default, and (iii) the secured party shall agree to such other requirements as Franchisor, in its sole discretion, deems reasonable and necessary to protect the integrity of the Proprietary Marks and the Chesapeake Bagel Bakery System. 14.05. Transfer on Death or Mental Incapacity. Upon the death or mental incapacity of any person with an interest in this Agreement, the Franchised Business or Franchisee, the executor, administrator, or personal representative of such person shall transfer his interest to a third party approved by Franchisor within 12 months after such death or mental incapacity. Such transfer, including, without limitation, transfer by devise or inheritance, shall be subject to the same conditions as any inter vivos transfer. However, in 29 the case of transfer by devise or inheritance, if the heirs or beneficiaries of any such person are unable to meet the conditions in this Section XIV, the personal representative of the deceased Franchisee shall have a reasonable time, but in no event more than eighteen (18) months from Franchisee's death, to dispose of the deceased's interest in this Agreement and the business conducted pursuant hereto, which disposition shall be subject to all the terms and conditions for assignments and transfers contained in this Agreement. If the interest is not disposed of within twelve (12) or eighteen (18) months, whichever is applicable, Franchisor may terminate this Agreement. 14.06. Right of First Refusal. Any party holding an interest in this Agreement, the Franchised Business or in Franchisee, and who desires to accept a bona fide offer from a third party to purchase such interest, shall notify Franchisor in writing of such offer within ten (10) days of receipt of such offer, and shall provide such information and documentation relating to the offer as Franchisor may require. Franchisor shall have the right and option, exercisable within thirty (30) days after receipt of such written notification, to send written notice to the seller that Franchisor intends to purchase the seller's interest on the same terms and conditions offered by the third party. In the event that Franchisor elects to purchase the seller's interest, closing on such purchase must occur within sixty (60) days from the date of notice to the seller of the election to purchase by Franchisor. Any material change in the terms of any offer prior to closing shall constitute a new offer subject to the same rights of first refusal by Franchisor as in the case of an initial offer. Failure of Franchisor to exercise the option afforded by this Section 14.06. shall not constitute a waiver of any other provisions of this Agreement, including all of the requirements of this Section XIV, with respect to a proposed transfer. In the event the consideration, terms, and/or conditions offered by a third party are such that Franchisor may not reasonably be required to furnish the same consideration, terms, and/or conditions, then Franchisor may purchase the interest in this Agreement, Franchisee, or the Franchised Business proposed to be sold for the reasonable equivalent in cash. If the parties cannot agree within a reasonable time as to the reasonable equivalent in cash of the consideration, terms, and/or conditions offered by the third party, an independent appraiser shall be designated by Franchisor, and his determination shall be binding upon the parties. 14.07. Offerings by Franchisee. Securities or partnership interests in Franchisee may be offered to the public, by private offering or otherwise, only with the prior written consent of Franchisor, which consent shall not be unreasonably withheld. All materials required for such offering by federal or state law shall be submitted to Franchisor for review prior to their being filed with any governmental agency; and any materials to be used in any exempt offering shall be submitted to Franchisor for review prior to their use. No offering of such securities shall imply (by use of the Proprietary Marks or otherwise) that Franchisor is participating in the underwriting, issuance, or offering of securities by Franchisee; and Franchisor's review of any offering shall be limited solely to the subject of the relationship between Franchisee and Franchisor. Franchisee and the other participants in the offering shall fully indemnify Franchisor in connection with the offering. For each proposed offering, Franchisee shall pay to Franchisor a non-refundable fee of Five Thousand Dollars ($5,000), or such greater amount as is necessary to reimburse 30 Franchisor for its reasonable costs and expenses associated with reviewing the proposed offering, including, without limitation, legal and accounting fees. Franchisee shall give Franchisor written notice at least sixty (60) days prior to the date of commencement any offering or other transaction covered by this Section 14.07. XV. TERMINATION 15.01. Franchisee shall be deemed to be in default under this Agreement, and all rights granted herein shall automatically terminate without notice to Franchisee, if Franchisee shall become insolvent or make a general assignment for the benefit of creditors; if a petition in bankruptcy is filed by Franchisee or such a petition is filed against Franchisee and not opposed by Franchisee; or if Franchisee is adjudicated bankrupt or insolvent; or if a receiver or other custodian (permanent or temporary) of Franchisee's assets or property, or any part thereof, is appointed by any court of competent jurisdiction; or if proceedings for a composition with creditors under the applicable law of any jurisdiction should be instituted by or against Franchisee; or if a final judgment remains unsatisfied or of record for thirty (30) days or longer (unless a supersedeas bond is filed); or if Franchisee is dissolved; or if execution is levied against Franchisee's property or business; or if suit to foreclose any lien or mortgage against the premises or equipment of any Franchised Unit developed hereunder is instituted against the Franchisee and not dismissed within thirty (30) days; or if the real or personal property of any Restaurant developed hereunder shall be sold after levy thereon by any sheriff, marshal, or constable. 15.02. Franchisee shall be deemed to be in default and Franchisor may, at its option, terminate this Agreement and all rights granted hereunder without affording Franchisee any opportunity to cure the default upon the occurrence of any of the following events: A. If Franchisee fails to complete construction of the Franchised Unit and opens for business within one hundred eighty (180) days of execution of this Agreement. Franchisor may, in its sole discretion, extend this period to address unforeseen construction delays, not within the control of Franchisee. B. If Franchisee at any time ceases to operate the Franchised Unit or otherwise abandons the Franchised Unit, or loses the right to possession of the premises of the Franchised Unit, or otherwise forfeits the right to do or transact business in the jurisdiction where the Franchised Unit is located; provided, however, that if, through no fault of Franchisee, the premises are damaged or destroyed by an event not within the control of Franchisee such that repairs or reconstruction cannot be completed within one hundred eighty (180) days thereafter, then Franchisee shall have thirty (30) days after such event in which to apply for Franchisor's approval to relocate and/or reconstruct the premises, which approval shall not be unreasonably withheld, but may be conditioned upon the payment of an agreed minimum royalty to Franchisor during the period in which the Franchised Unit is not in operation; 31 C. If Franchisee is convicted of or pleads guilty to a felony, a crime involving moral turpitude, or any other crime or offense that Franchisor believes is reasonably likely to have an adverse effect on the System, the Proprietary Marks, the goodwill associated therewith, or Franchisor's interest therein; D. If a threat or danger to public health or safety results from the construction, maintenance, or operation of the Franchised Unit; E. If Franchisee, or any partner or shareholder of Franchisee purports to transfer any rights or obligations under this Agreement or any interest in Franchisee to any third party without Franchisor's prior written consent, contrary to the terms of Section XIV hereof; F. If Franchisee fails to comply with the in-term covenants in Section 13.02. hereof or fails to obtain execution of the covenants required under Sections 10.08. or 13.04. hereof; G. If, contrary to the terms of Section VII hereof, Franchisee discloses or divulges the contents of the Manual or any other confidential information provided to Franchisee by Franchisor; H. If an approved transfer is not effected as required by Section 14.05 hereof, following Franchisee's death or mental incapacity; I. If Franchisee knowingly maintains false books or records, or submits any false reports to Franchisor; J. If Franchisee or any individual, group, association, limited or general partnership, corporation or other business entity which directly or indirectly controls, is controlled by, or is under common control with Franchisee; or which directly or indirectly owns, controls, or holds power to vote ten percent (10%) or more of the outstanding voting securities of Franchisee; or which has in common with Franchisee one or more partners, officers, directors, trustees, branch managers, or other persons occupying similar status or performing similar functions ("Affiliate") commits any act of default under any other Franchise Agreement, Development Agreement (except for failure to meet the development schedule thereunder), asset purchase agreement, promissory note or any other agreement entered into by Franchisee or an Affiliate of Franchisee, and Franchisor, or any parent, subsidiary, affiliate, predecessor or successor to Franchisor; 32 K. If Franchisee, after or during a default pursuant to Section 15.03. hereof, commits the same default again, whether or not such default is cured after notice; or L. If Franchisee defaults more than once in any twelve (12) month period under Section 15.03. hereof for failure to substantially comply with any of the requirements imposed by this Agreement, whether or not cured after notice. M. If Franchisee refuses to permit Franchisor or its agents to enter upon the premises of the Franchised Unit to conduct any periodic inspection as set forth in Sections 5.09. and 10.02.H hereof. N. If Franchisee uses any of Franchisor's Proprietary Marks in any unauthorized manner or is otherwise in default of the provisions of Section V hereof. 15.03. Except as provided in Sections 15.01 and 15.02 of this Agreement, upon any default by Franchisee which is susceptible of being cured, Franchisor may terminate this Agreement only by giving written Notice of Termination stating the nature of such default to Franchisee at least ten (10) days prior to the effective date of termination if the default is for failure to pay royalties, NCP Fund Contributions (including Cooperative contributions, if any are due and/or any other financial obligations owed to Franchisor by Franchisee), and thirty (30) days, prior to the effective date of termination for any other default, provided, however, that Franchisee may avoid termination by curing such default to Franchisor's satisfaction within the ten (10) day or thirty (30) day period, as applicable. If any such default is not cured within the specified time, this Agreement shall terminate without further notice to Franchisee effective immediately upon the expiration of the ten (10) day or thirty (30) day period, as applicable, or such longer period as applicable law may require. Notwithstanding anything to the contrary set forth in this Agreement, Franchisee hereby acknowledges that any agreement between Franchisee and Franchisor relating to past due amounts accruing hereunder, (an "Arrearage Agreement"), including, but not limited to any promissory note, payment plan or amendment to this agreement shall be deemed to be a material part of this agreement and shall be incorporated herein by reference. A default under any Arrearage Agreement shall be deemed a material default of this Franchise Agreement, regardless of the reason Franchisee fails to pay the amount which is the subject of such Arrearage Agreement. 15.04. Franchisee shall indemnify and hold Franchisor harmless for all costs, expenses and any losses incurred by Franchisor in enforcing the provisions hereof, or in upholding the propriety of any action or determination by Franchisor pursuant to this Agreement, or in defending any claims made by Franchisee against Franchisor, or arising in any manner from Franchisee's breach of or failure to perform any covenant or obligation hereunder, including, without limitation, reasonable litigation expenses and attorney's fees incurred by Franchisor in connection with any threatened or pending litigation relating 33 to any part of this Agreement, unless Franchisee shall be found, after due legal proceedings, to have complied with all of the terms, provisions, conditions and covenants hereof. XVI. EFFECT OF TERMINATION OR EXPIRATION 16.01. Upon termination or expiration of this Agreement, all rights granted herein shall forthwith terminate, and: A. Franchisee shall immediately cease to operate the Franchised Unit as a Chesapeake Bagel Bakery restaurant, and shall not thereafter, directly or indirectly, represent to the public that the restaurant is a Chesapeake Bagel Bakery restaurant; B. Franchisee shall immediately and permanently cease to use, by advertising or in any manner whatsoever, any menus, recipes, confidential food for formulae, equipment, methods, procedures, and the techniques associated with the System, Franchisor's Proprietary Marks, and Franchisor's other trade names, trademarks and service marks associated with the Chesapeake Bagel Bakery System. In particular, and without limitation, Franchisee shall cease to use all signs, furniture, fixtures, equipment, advertising materials, stationery, forms, packaging, containers and any other articles which display the Proprietary Marks; C. Franchisee agrees, in the event Franchisee continues to operate or subsequently begins to operate restaurants or other businesses, not to use any reproduction, counterfeit, copy, or colorable imitation of the Proprietary Marks in conjunction with such other business which is likely to cause confusion or mistake or to deceive, and further agrees not to utilize any trade dress, designation of origin, description, or representation which falsely suggests or represents an association or connection with Franchisor; D. Franchisee agrees, upon termination or expiration of this Agreement or upon cessation of the Franchised Business at the location specified in Section I hereof for any reason, whether or not Franchisee continues to operate any business at such location, and whether or not Franchisee owns or leases the location, to make such modifications or alterations to the Franchised Unit premises immediately upon termination or expiration of this Agreement or cessation of operation of the Franchised Business as may be necessary to prevent the operation of any businesses thereon by Franchisee or others in derogation of this Section XVI, and shall make such specified 34 additional changes thereto as Franchisor may reasonably request for that purpose. The modifications and alterations required by this Section XVI shall include, but are not limited to, removal of all trade dress, proprietary marks and other indicia of the Chesapeake Bagel Bakery System; E. Franchisee shall immediately pay all sums owing to Franchisor and its subsidiaries and affiliates. In the event of termination for any default by Franchisee, such sums shall include all damages, costs and expenses, including reasonable attorneys' fees, incurred by Franchisor as a result of the default; and F. Franchisee shall immediately turn over to Franchisor the Manual, all other manuals, records, files, instructions, correspondence and any and all other materials relating to the operation of the Franchised Business in Franchisee's possession and all copies thereof (all of which are acknowledged to be Franchisor's property) and shall retain no copy or record of any of the foregoing, with the exception of Franchisee's copy of this Agreement, any correspondence between the parties, and any other documents which Franchisee reasonably needs for compliance with any provision of law. 16.02. Franchisor shall have the right (but not the duty) to be exercised by notice of intent to do so within thirty (30) days after termination or expiration of this Agreement, to purchase any and all improvements, equipment, advertising and promotional materials, ingredients, products, materials, supplies, paper goods and any items bearing Franchisor's Proprietary Marks at current fair market value. If the parties cannot agree on a fair market value within a reasonable time, an independent appraiser shall be designated by Franchisor, and his determination of fair market value shall be binding. If Franchisor elects to exercise any option to purchase herein provided, it shall have the right to set-off all amounts due from Franchisee under this Agreement and the cost of the appraisal, if any, against any payment therefor. 16.03. In the event the premises are leased to Franchisee, Franchisee shall, upon termination of this Agreement and upon request by Franchisor, immediately assign, set over and transfer unto Franchisor, at Franchisor's sole option and discretion, said lease and the premises, including improvements. Any such lease entered into by Franchisee shall contain a clause specifying the landlord's consent to assign such lease to Franchisor or its assignee in the event this Agreement is terminated. 16.04. Franchisee shall pay to Franchisor all damages, costs, and expenses, including reasonable attorneys' fees, incurred by Franchisor in seeking recovery of damages caused by any action of Franchisee in violation of, or in obtaining injunctive relief for the enforcement of, any portion of this Section XVI. Further, Franchisee acknowledges and agrees that any failure to comply with the provisions of this Section XVI, shall result in irreparable injury to Franchisor. 35 16.05. All provisions of this Agreement which, by their terms or intent, are designed to survive the expiration or termination of this Agreement, shall so survive the expiration and/or termination of this Agreement. 16.06. Franchisee shall comply with the covenants contained in Section XIII of this Agreement. 16.07. Franchisee shall execute such documents as Franchisor may reasonably require to effectuate termination of the franchise and Franchisee's rights to use the trademarks and systems of Franchisor. XVII. TAXES, PERMITS, AND INDEBTEDNESS 17.01. Franchisee shall promptly pay when due all taxes, accounts and other indebtedness of every kind incurred by Franchisee in the conduct of the Franchised Business under this Agreement. 17.02. Franchisee, in the conduct of the Franchised Business, shall comply with all applicable laws and regulations, and shall timely obtain any and all permits, certificates, or licenses necessary for the full and proper conduct of the businesses operated under this Agreement, including, without limitation, licenses to do business, trade name registrations, sales tax permits and fire clearances. XVIII. INDEPENDENT CONTRACTOR AND INDEMNIFICATION 18.01. This Agreement does not constitute Franchisee an agent, legal representative, joint venturer, partner, employee or servant of Franchisor for any purpose whatsoever. It is understood and agreed that Franchisee shall be an independent contractor and is in no way authorized to make any contract, agreement, warranty, or representation on behalf of Franchisor. The parties further agree that this Agreement does not create any fiduciary relationship between them. 18.02. During the term of this Agreement and any extensions hereof, Franchisee agrees to take such action as Franchisor deems reasonably necessary 36 for Franchisee to inform and hold itself out to the public as an independent contractor operating the Franchised Business pursuant to a franchise from Franchisor, including, without limitation, exhibiting a notice of that fact at the Franchised Business in form and substance satisfactory to Franchisor. 18.03 Franchisee agrees to defend, indemnify and hold harmless Franchisor, its parent, subsidiaries and affiliates, and their respective officers, directors, employees, agents, successors and assigns from all claims, demands, losses, damages, liabilities, cost and expenses (including attorney's fees and expense of litigation) resulting from, or alleged to have resulted from, or in connection with Franchisee's operation of the Franchised Business, including, but not limited to, any claim or actions based on or arising out of any injuries, including death to persons or damages to or destruction of property, sustained or alleged to have been sustained in connection with or to have arisen out of or incidental to the Franchised Business and/or the performance of this contract by Franchisee, its agents, employees, and/or its subcontractors, their agents and employees, or anyone for whose acts they may be liable, regardless of whether or not such claim, demand, damage, loss, liability, cost or expense is caused in whole or in part by the negligence of Franchisor, Franchisor's representative, or the employees, agents, invitees, or licensees thereof. 18.04 Franchisor shall advise Franchisee in the event Franchisor receives notice that a claim has been or may be filed with respect to a matter covered by this Agreement, and Franchisee shall immediately assume the defense thereof at Franchisee's sole cost and expense. In any event, Franchisor will have the right, through counsel of its choice, to control any matter to the extent it could directly or indirectly affect Franchisor and/or its parent, subsidiaries or affiliates or their officers, directors, employees, agents, successors or assigns. If Franchisee fails to assume such defense, Franchisor may defend, settle, and litigate such action in the manner it deems appropriate and Franchisee shall, immediately upon demand, pay to Franchisor all costs (including attorney's fees and cost of litigation) incurred by Franchisor in affecting such defense, in addition to any sum which Franchisor may pay by reason of any settlement or judgment against Franchisor. 18.05 Franchisor's right to indemnity hereunder shall exist notwithstanding that joint or several liability may be imposed upon Franchisor by statute, ordinance, regulation or judicial decision. 18.06 Franchisee agrees to pay Franchisor all expenses including attorney's fees and court costs, incurred by Franchisor, its parent, subsidiaries, affiliates, and their successors and assigns to remedy any defaults of or enforce any rights under this Agreement, effect termination of this Agreement or collect any amounts due under this Agreement. XIX. APPROVALS AND WAIVERS 19.01. Whenever this Agreement requires the prior approval of Franchisor, Franchisee shall make a timely written request to Franchisor therefor, and such approval or consent shall be in writing. 37 19.02. Franchisor makes no warranties or guarantees upon which Franchisee may rely, and assumes no liability or obligation to Franchisee or any third party to which Franchisor would not otherwise be subject, by providing any waiver, approval, advice, consent, or suggestions to Franchisee in connection with this Agreement, or by reason of any neglect, delay, or denial of any request therefor. 19.03. No failure of Franchisor to exercise any power reserved to it in this Agreement, or to insist upon compliance by Franchisee with any obligation or condition in this Agreement, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of Franchisor's right to demand exact compliance with the terms of this Agreement. Waiver by Franchisor of any particular default shall not affect or impair Franchisor's right in respect to any subsequent default of the same or of a different nature, nor shall any delay, forbearance, or omission of Franchisor to exercise any power or rights arising out of any breach or default by Franchisee of any of the terms, provisions, or covenants of this Agreement, affect or impair Franchisor's rights, nor shall such constitute a waiver by Franchisor of any rights, hereunder or right to declare any subsequent breach or default. Subsequent acceptance by Franchisor of any payments due to it shall not be deemed to be a waiver by Franchisor of any preceding breach by Franchisee of any terms, covenants, or conditions of this Agreement. XX. NOTICES Any and all notices required or permitted under this Agreement shall be in writing and shall be personally delivered, sent by registered mail, or by other means which will provide evidence of the date received to the respective parties at the following addresses unless and until a different address has been designated by written notice to the other party: Notices to Franchisor: Franchise Department AFC ENTERPRISES, INC. Six Concourse Pkwy., Suite 1700 Atlanta, Georgia 30328-5352 cc: Legal Department Notices to Franchisee: ____________________________ ____________________________ ____________________________ [ATTN:] ____________________ All written notices and reports permitted or required to be delivered by the provisions of this Agreement shall be addressed to the party to be 38 notified at its most current principal business address of which the notifying party has been notified and shall be deemed so delivered (i) at the time delivered by hand; (ii) one (1) business day after sending by telegraph, facsimile or comparable electronic system; or (iii) if sent by registered or certified mail or by other means which affords the sender evidence of delivery, on the date and time of receipt or attempted delivery if delivery has been refused or rendered impossible by the party being notified. XXI. SEVERABILITY AND CONSTRUCTION 21.01. Except as expressly provided to the contrary herein, each section, paragraph, part, term, and/or provision of this Agreement shall be considered severable; and if, for any reason, any section, part, term, and/or provision herein is determined to be invalid and contrary to, or in conflict with, any existing or future law or regulation by a court or agency having valid jurisdiction, such shall not impair the operation, or have any other effect upon, such other portions, sections, parts, terms, and/or provisions of this Agreement as may remain otherwise intelligible, and the latter shall continue to be given full force and effect to bind the parties hereto; and said invalid portions, sections, parts, terms, and/or provisions shall be deemed not to be part of this Agreement. 21.02. Except as has been expressly provided to the contrary herein, nothing in this Agreement is intended, nor shall be deemed, to confer upon any person or legal entity other than Franchisee, Franchisor, Franchisor's officer, directors, and employees, and Franchisee's permitted and Franchisor's respective successors and assigns, any rights or remedies under or by reason of this Agreement. 21.03. All captions in the Agreement are intended solely for the convenience of the parties, and none shall be deemed to affect the meaning or construction of any provision hereof. 21.04. All references herein to the masculine, neuter or singular shall be construed to include the masculine, feminine, neuter or plural, where applicable, and all acknowledgments, promises, covenants, agreements and obligations herein made or undertaken by Franchisee shall be deemed jointly and severally undertaken by all the parties hereto on behalf of Franchisee. 21.05. This Agreement may be executed in counterparts, and each copy so executed shall be deemed an original. XXII. ENTIRE AGREEMENT: SURVIVAL 22.01. This Agreement, the documents referred to herein, the Development Agreement, if any, and the exhibits hereto, constitute the entire, full and complete agreement between Franchisor and Franchisee concerning the subject matter hereof and supersede any and all prior agreements. Except for those permitted to be made unilaterally by Franchisor hereunder, no amendment, change, modification or variance of this Agreement shall be binding on either party unless in writing and executed by Franchisor and Franchisee. Representations by either party, whether oral, in writing, electronic or otherwise, that are not set forth in this Agreement shall not be binding upon the party alleged to have made such representations and shall be of no force or effect. 39 I have read this Section 22.01 and agree that I have not been induced by and am not relying upon any representation not contained in this Agreement. _________________________________, Franchisee 22.02. Notwithstanding anything herein to the contrary, upon the termination of this Agreement for any reason whatsoever (including the execution of a subsequent Franchise Agreement pursuant to the provisions of Sections 2.02.B and 14.03.F), or upon the expiration of the Term hereof, any provisions of this Agreement which, by their nature, extend beyond the expiration or termination of this Agreement, shall survive termination or expiration and be fully binding and enforceable as though such termination or expiration had not occurred. XXIII. ACKNOWLEDGMENTS 23.01. Franchisee acknowledges that Franchisee has conducted an independent investigation of the Chesapeake Bagel Bakery franchise and recognized that the business venture contemplated by this Agreement involves business risks and Franchisee's success will be largely dependent upon the ability of the Franchisee as an independent business entity. FRANCHISOR EXPRESSLY DISCLAIMS THE MAKING OF, AND FRANCHISEE ______ACKNOWLEDGES THAT FRANCHISEE HAS NOT RECEIVED, ANY WARRANTY OR GUARANTY, EXPRESSED OR IMPLIED, AS TO THE POTENTIAL VOLUME, PROFITS OR SUCCESS OF THE BUSINESS VENTURE CONTEMPLATED BY THIS AGREEMENT. Franchisee must initial __________ 23.02. FRANCHISEE ACKNOWLEDGES THAT FRANCHISEE HAS RECEIVED A COMPLETED COPY OF THIS AGREEMENT, THE EXHIBITS HERETO, IF ANY, AND THE AGREEMENTS RELATING THERETO, IF ANY, AT LEAST FIVE (5) BUSINESS DAYS PRIOR TO THE DATE ON WHICH THIS AGREEMENT WAS EXECUTED. FRANCHISEE 40 FURTHER ACKNOWLEDGES THAT FRANCHISEE HAS RECEIVED THE DISCLOSURE DOCUMENT REQUIRED BY THE TRADE REGULATION RULE OF THE FEDERAL TRADE COMMISSION ENTITLED "DISCLOSURE REQUIREMENTS AND PROHIBITIONS CONCERNING FRANCHISING AND BUSINESS OPPORTUNITY VENTURES" AT LEAST TEN (10) BUSINESS DAYS PRIOR TO THE DATE ON WHICH THIS AGREEMENT WAS EXECUTED. Franchisee must initial _________ 23.03. FRANCHISEE ACKNOWLEDGES THAT FRANCHISEE HAS READ AND UNDERSTOOD THIS AGREEMENT, THE EXHIBITS HERETO, IF ANY, AND AGREEMENTS RELATING THERETO, IF ANY, AND THAT FRANCHISOR HAS ACCORDED FRANCHISEE AMPLE TIME AND OPPORTUNITY AND HAS ENCOURAGED FRANCHISEE TO CONSULT WITH ADVISORS OF FRANCHISEE'S OWN CHOOSING ABOUT THE POTENTIAL BENEFITS AND RISKS OF ENTERING INTO THIS AGREEMENT. Franchisee must initial _________ 23.04. FRANCHISEE RECOGNIZES AND UNDERSTANDS THAT IT MAY INCUR OTHER EXPENSES AND/OR OBLIGATIONS AS PART OF THE INITIAL INVESTMENT IN THE FRANCHISED BUSINESS WHICH THE TERMS OF THIS AGREEMENT MAY NOT _____ ADDRESS, AND WHICH INCLUDE WITHOUT LIMITATION: OPENING ADVERTISING, EQUIPMENT, FIXTURES, OTHER FIXED ASSETS, CONSTRUCTION, LEASEHOLD IMPROVEMENTS AND DECORATING COSTS AS WELL AS WORKING CAPITAL NECESSARY TO COMMENCE OPERATIONS. Franchisee must initial _________ XXIV. APPLICABLE LAW: VENUE 24.01. Applicable Law. This Agreement takes effect upon its acceptance and execution by Franchisor and shall be interpreted and construed under the laws of the State of Georgia which laws shall prevail in the event of any conflict of law (without regard to, and without giving effect to, the application of Georgia choice of law or conflict of law rules) except to the extent governed by the U. S. Trademark Act of 1946, 15 U.S.C. (S) 1051, et seq. (the " Lanham Act") as amended; provided, however, that if the covenants in Article XIII of this Agreement would not be enforceable under the laws of Georgia, and the Franchised Unit is located outside of Georgia, then such covenants shall be interpreted and construed under the laws of the state in which the Franchised Unit is located. Nothing in this Section XXV is intended by the parties to subject this Agreement to any franchise or similar law, rule, or regulation of the State of Georgia to which this Agreement would not otherwise be subject. 24.02. The parties agree that any action brought by Franchisee against Franchisor in any court, whether federal or state, shall be brought within such state and in the judicial district in which Franchisor has its principal place of business. Any action brought by Franchisor against Franchisee in any court, whether federal or state, may be brought within the state and in the judicial 41 district in which Franchisor has its principal place of business. Franchisee hereby consents to personal jurisdiction and venue in the state and judicial district in which Franchisor has its principal place of business. 24.03. No right or remedy herein conferred upon or reserved to Franchisor is exclusive of any other right or remedy herein, or by law or equity provided or permitted; but each shall be cumulative of any other right or remedy provided in this Agreement 24.04. Nothing herein contained shall bar Franchisor's right to obtain injunctive relief against threatened conduct that will cause it loss or damages, under the usual equity rules, including the applicable rules for obtaining restraining orders and preliminary injunctions. 24.05. Any and all claims and actions arising out of or relating to this Agreement (including, but not limited to, the offer and sale of this franchise), the relationship of Franchisee and Franchisor, or Franchisee's operation of the Franchised Unit, brought by Franchisee shall be commenced within eighteen (18) months from the occurrence of the facts giving rise to such claim or action, or such claim or action shall be barred. 24.06. Franchisor and Franchisee hereby waive to the fullest extent permitted by law any right to or claim of any consequential, punitive, or exemplary damages against the other, and agree that in the event of a dispute between them each shall be limited to the recovery of any actual damages sustained by it. XXV. CORPORATE FRANCHISEE In the event the Franchisee named herein is a corporation at the time of execution of this Agreement, it is warranted, covenanted and represented to Franchisor that: 25.01. All of the issued and outstanding stock of Franchisee is owned, legally and beneficially, by the person or persons listed on Exhibit "B" attached hereto. 25.02. The above-named person or persons has (have) individually, and jointly and severally, executed this Agreement, and such person, or one of such persons, is and shall be the chief executive officer of the Franchisee corporation, holding such corporate office or offices as may be necessary to maintain and exercise the actual power and authority actively to direct the affairs of the Franchisee. 25.03. Franchisee is validly incorporated and duly existing under the laws of the State of , is duly qualified to conduct business therein, and has its principal place of business at . Franchisee shall promptly notify Franchisor in writing of any change thereto during the term of this Agreement. 42 {SIGNATURE PAGE TO FRANCHISE AGREEMENT FOLLOWS} 43 IN WITNESS WHEREOF, the parties hereto, intending to be legally bound hereby, have duly executed, sealed, and delivered this Agreement in triplicate on the day and year first above-written. WITNESS: FRANCHISOR: AFC ENTERPRISES, INC. __________________________ By: __________________________________ __________________________ WITNESS: FRANCHISEE: __________________________ By: __________________________________ __________________________ {SIGNATURE PAGE TO FRANCHISE AGREEMENT} 44 EXHIBIT "A" CHESAPEAKE BAGEL BAKERY FRANCHISE AGREEMENT NOTICE OF COMMENCEMENT DATE Name of Franchisee: _______________________________________________________ Franchise Agreement Dated: ________________________________________________ Franchise Premises Address: _______________________________________________ ___________________________________________________________________________ ___________________________________________________________________________ Store Number: _____________________________________________________________ NOTICE is hereby given to the abovementioned Franchisee pursuant to Section 2.01 of the Franchise Agreement that the Term of the abovementioned Franchise Agreement commenced on ________________, 19___, and that the Term shall expire on ________________, _____, unless the Franchise Agreement is terminated earlier, pursuant to its terms and conditions. AFC ENTERPRISES, INC. By: ___________________________________ Title: ________________________________ Date of Notice: _______________________ 45 EXHIBIT "B" SHAREHOLDERS OF FRANCHISEE (For Corporate Franchisees) Name of Number of % Ownership Shareholders Shares of Franchisee Title ------------ ------ ------------- ----- 46 EXHIBIT "C" ----------- PROTECTED AREA -------------- 47 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-28-1997 DEC-30-1996 32,964 0 17,406 4,624 4,447 48,930 295,562 87,755 380,002 66,747 243,882 0 0 344 48,115 380,002 403,285 483,348 131,374 443,178 0 1,214 20,645 19,525 8,525 11,000 0 0 0 11,000 0 0
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