-----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, O4C66mRbKUqUgnBHQMIneNISiuZjuUcPnCJSJ0/jxtfcvFjKPn8AgdukJQ3Pd8pn 6RU3YZFKfcCMpYJT1EKLow== 0000931763-99-000901.txt : 19990331 0000931763-99-000901.hdr.sgml : 19990331 ACCESSION NUMBER: 0000931763-99-000901 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981227 FILED AS OF DATE: 19990329 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: 99576870 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 27, 1998 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 29, 1999, there were 39,233,441 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................................................. 1 Item 2. Properties............................................... 20 Item 3. Legal Proceedings........................................ 23 Item 4. Submission of Matters to a Vote of Security Holders...... 24 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters.................................. 24 Item 6. Selected Consolidated Financial Data..................... 25 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 28 Item 8. Consolidated Financial Statements and Supplementary Data. 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 45 PART III Item 10. Directors and Executive Officers of the Registrant....... 46 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 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 this section. GENERAL AFC Enterprises, Inc., a Minnesota corporation and its wholly-owned subsidiaries (collectively "AFC" or the "Company"), are principally engaged in the operation, development and franchising of quick-service restaurants, bakeries and cafes ("QSRs") under the primary trade names of Popeyes Chicken and Biscuits ("Popeyes"), Churchs Chicken ("Churchs"), Cinnabon Bakeries ("Cinnabon"), Seattle's Best Coffee and Torrefazione Italia ("Seattle Coffee") and Chesapeake Bakery Cafes ("Chesapeake"). Total restaurants, bakeries and cafes by brand as of December 27, 1998 were as follows:
Domestic International ------------------------ ------------------------ Company- Company- Operated Franchised Operated Franchised Total -------- ---------- -------- ---------- ------ Popeyes......... 171 899 - 222 1,292 Churchs......... 491 615 - 293 1,399 Cinnabon........ 212 140 - 17 369 Seattle Coffee.. 57 11 2 1 71 Chesapeake...... 4 103 - - 107 ------- ---------- -------- ---------- ----- Total...... 935 1,768 2 533 3,238 ======= ========== ======== ========== -----
The Company is also engaged in the business of selling premium brand coffees through wholesale and retail distribution channels. In addition, the Company has a small manufacturing plant that produces gas fryers and other custom-fabricated restaurant equipment for sale to Company-operated and franchised chicken restaurants and to other restaurant operators. 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. 1 BRAND PROFILES The Company franchises and operates restaurants, bakeries and cafes 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 1,292 restaurants worldwide as of December 27, 1998, Popeyes was the second largest quick-service chicken restaurant chain in 1998, in terms of sales. System-wide sales for fiscal year 1998 totaled $954.3 million. Popeyes specialty menu item is fresh, hand-battered, bone-in fried chicken sold in two flavors--New Orleans Spicy(TM) and Louisiana Mild(TM). Popeyes chicken is complemented with a wide assortment of 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 unique items that complement its core menu, including its Louisiana Legends (TM) menu of jambalaya, crawfish etoufee' and chicken and seafood gumbo. Popeyes spicy fried chicken and other Cajun menu offerings have also proven to be popular in Far East countries. Popeyes restaurants are generally found in urban areas in traditional stand-alone locations, as well as in non-traditional formats such as airports and other travel centers and supermarkets. CHURCHS CHICKEN. Churchs Chicken, founded in San Antonio, Texas in 1952, is one of the United States' oldest QSR chains and as of December 27, 1998 had 1,399 restaurants worldwide, making Churchs the second largest quick-service chicken restaurant chain, in terms of number of outlets. Total system-wide sales for fiscal year 1998 totaled $755.1 million. 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 their reputation as 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). CINNABON. On October 15, 1998, the Company acquired Cinnabon International, Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico. The Company acquired CII for $64.0 million in cash. Founded in Seattle, Washington in 1985, Cinnabon International, Inc. is the leading cinnamon roll bakery retailer in North America. Located in high traffic shopping malls, airports, train stations, travel plazas and supermarkets, Cinnabon bakeries serve fresh cinnamon rolls made with Indonesian cinnamon and topped with a sweet, rich cream cheese-based frosting. Cinnabon has built a reputation for offering fresh, aromatic, oven-hot cinnamon rolls at affordable prices. Continually evolving and improving since 2 the original Cinnabon opened in Seattle in 1985, today's product offerings are built upon the foundation recipe begun by "CinnaMom" Jerilyn Brusseau. After nine arduous months of testing and re-testing more than 200 recipes, Jerilyn invented the original Classic Roll. The Classic Roll laid the foundation for Cinnabon's high standards and commitment to quality and freshness. Some of the Company's successful new product offerings include the Pecanbon and the Berrybon. In addition to the cinnamon roll related products, the Company offers a variety of proprietary beverages including the Mochalatta Chill and Vareva Orange Juice. SEATTLE COFFEE. On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for an adjusted purchase price of approximately $68.8 million plus the assumption of approximately $4.8 million of debt. Seattle Coffee Company was created as a result of combining Seattle's Best Coffee, Inc. and Torrefazione Italia, Inc. in May 1994. Seattle's Best Coffee is one of the oldest companies in the specialty coffee business in the United States. Currently, SCC has more than 5,000 wholesale accounts, 59 Company- operated cafes and twelve franchised cafes. Founded by Jim Stewart in 1969 in Coupeville on Whidbey Island, Washington, the coffee roasting operation was moved to a store in Seattle in 1971. In 1983, the first Stewart Brothers Coffee retail store was opened in Bellevue Square, a regional mall and management adopted a strategy of using retail stores to promote the brand name and drive wholesale sales. This strategy has remained basically unchanged to the present. SCC's brand name was changed from Stewart Brothers Coffee to Seattle's Best Coffee ("SBC") in the 1980s, after being honored by Seattle's leading chefs as "Seattle's best coffee." SBC markets several "coffee house blends" under names such as Seattle's Best Blend, Post Alley, Saturday's, Grand Central and Henry's. Each blend has a unique flavor profile, allowing SBC to meet a full range of taste preferences. Torrefazione Italia ("TI") was founded in 1986 by Umberto Bizzarri and Dawn Zervas. Like SBC, TI has opened retail locations to support and build brand awareness for its primary business of wholesaling premium brand coffees. TI presents a classic Italian coffee experience. TI coffees are positioned at the highest end of the quality and price range and are marketed with an Italian image. With names such as Venezia, Milano, Perugia and Napoli, these coffees are the creations of the Bizzarri family. The Italian heritage is enhanced by serving TI coffees in hand-painted ceramics imported from Deruta, Italy. The TI cafes project the brand's European flavor and are designed to accommodate those who are on-the-go as well as those who wish to relax and sip their coffee while listening to classic music. 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 operates four Company-operated bagel bakeries and franchises 103 bagel bakeries. System-wide sales for the year totaled $61.5 million in 1998. Chesapeake bagel bakeries offer a variety of freshly made items, including a wide assortment of bagels and other baked goods, 3 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 bagel and sandwich segment of the QSR industry. WHOLESALE OPERATIONS SEATTLE COFFEE. Seattle Coffee roasts and blends specialty coffees in its 28,000 square foot automated roasting facility on Vashon Island, near Seattle. Management believes that the roasting and packaging facility may be one of the most technically advanced in the U.S., for its capacity. Seattle Coffee selects its coffee beans from the best quality Arabica beans from the finest growing regions of the world, which have been prepared by growers and producers who take great care with their coffees. Seattle Coffee is one of a few specialty coffee roasters in the U.S. that travels to the producing countries to purchase green coffee beans. Management believes this buying strategy will be increasingly important to ensure supply of the highest quality green beans, as the demand for specialty coffee expands in the U.S. and around the world. Seattle Coffee's wholesale sales are made primarily to other food service retailers, supermarkets and to its own coffee cafes. Food service wholesale sales are targeted to such food service providers as hotel chains, fine restaurants, specialty coffee retailers, espresso carts, delis, and theaters, among others. Seattle Coffee has opened 14 regional offices to support the expansion of its wholesale food service sales. Seattle Coffee has been successful in initiating strategic alliances with multi-market retailers such as Books-A-Million, Eddie Bauer, Mrs. Fields Cookies and Albertson's Supermarkets. In addition, Alaska Airlines recently announced that it will serve Seattle's Best Coffee on all of its flights beginning in April, 1999. Seattle's Best Coffee whole bean bulk and pre-packaged coffee is distributed to supermarkets throughout the Pacific Northwest and other parts of the country. The brand has achieved a high degree of penetration in the Pacific Northwest with settings in most major supermarkets, including QFC, Safeway, Albertson's and others. SCC initiated the entry of Torrefazione Italia into supermarkets in late 1995 and the brand is now carried in selected high-end chains and independents in Western Washington and Oregon. The prospects for growth in the supermarket channel appear to be significant. Management believes that the increasing presence of its brands in retail cafes and key food service accounts around the country will, in turn, stimulate opportunities for long-term growth of bean sales through supermarkets. Seattle Coffee operates 14 regional wholesale offices throughout the U.S. and one in Canada. 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 4 and franchised Popeyes and Churchs restaurants domestically and internationally, as well as other QSR customers. Ultrafryer's main product is the Ultrafryer(TM) gasfryer. RESTAURANT LOCATIONS As of December 27, 1998, the Company's 3,238 systemwide restaurants were located in 47 states, the District of Columbia and 24 foreign countries. POPEYES. Popeyes restaurants are located in 39 states, the District of Columbia and 18 foreign countries. The 171 Company-operated Popeyes restaurants are located in the states of Texas, Louisiana, Georgia, North Carolina and South Carolina. Over 70% of the 899 domestic franchised Popeyes restaurants are located in the states of Texas, Louisiana, Florida, California, Illinois, Maryland, Mississippi and Georgia. Over 65% of the 222 international franchised Popeyes restaurants are located in Korea. CHURCHS. Churchs restaurants are located in 29 states and nine foreign countries. The 491 Company-operated Churchs restaurants are concentrated primarily in the states of Texas, Louisiana, Georgia, Oklahoma, Alabama, Florida, Mississippi and Arizona. Almost 65% of the 615 domestic franchised Churchs restaurants are located in Texas, California, Louisiana, Georgia, Florida, Michigan, New York and Illinois. Over 95% of the 293 international franchised Churchs restaurants are in Canada, Puerto Rico, Indonesia, Taiwan and the Philippines. CINNABON. Cinnabon bakery cafes are located in 40 states and three foreign countries. The 212 Company-operated Cinnabon bakeries are heavily concentrated in the states of California, Washington, Florida, Illinois, Ohio, Texas, Massachusetts, Michigan and Pennsylvania. The 140 domestic franchised Cinnabon bakeries are heavily concentrated in the states of Minnesota, Massachusetts, Illinois, Arizona, California, Nevada, New Jersey and New York. The 17 international franchised Cinnabon restaurants are open in Canada, Mexico and Saudi Arabia. SEATTLE COFFEE. Seattle Coffee cafes are located in eight states and two foreign countries. The 57 Seattle Coffee domestic Company-operated cafes are located primarily in the states of Washington, Oregon, California and Illinois. There are two Seattle Coffee Company-operated cafes in Canada. The 11 franchised Seattle Coffee cafes are located primarily in Washington and Oregon. There is one international franchised Seattle Coffee cafe in Saudi Arabia. CHESAPEAKE. Chesapeake bagel bakeries are located in 23 states and the District of Columbia. The four Company-operated Chesapeake bagel bakeries are in the states of Georgia and Maryland. The 103 franchised Chesapeake bagel bakeries are concentrated primarily in Virginia, Maryland, Pennsylvania, Florida and the District of Columbia. 5 STRATEGY GLOBAL STRATEGY. The Company has adopted a global strategy to increase revenues and profits by (i) the franchise development of its existing Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake brands and (ii) the multiple- channel distribution of specialty coffee products, penetrating both at-home and away-from-home consumption. 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, (iii) provide new and existing franchisees with investment opportunities in high value/high growth branded concepts and (iv) expand wholesale and retail channels of distribution for its specialty coffees. 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, strong franchisee relationships and expanding channels of distribution will result in continued growth. INCREASE DOMESTIC FRANCHISED RESTAURANTS, BAKERIES AND CAFES. The Company believes that significant opportunities exist to increase the number of domestic franchised restaurants, bakeries and cafes 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, bakeries and cafes 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, bakeries and cafes has increased from approximately 990 at the beginning of 1993, to 1,768 at December 27, 1998. Domestic franchised restaurant openings during fiscal year 1998 are as follows: Fiscal Year 1998 ----------- Popeyes............. 83 Churchs............. 51 Cinnabon............ 3 Seattle Coffee...... 1 Chesapeake.......... 10 ----------- Total........... 148 =========== INCREASE INTERNATIONAL FRANCHISED RESTAURANTS, BAKERIES AND CAFES. 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 restaurants, bakeries and cafes in a substantial number of countries around the world. The Company's international operations have increased from 172 franchised restaurants in 14 foreign 6 countries at the beginning of 1993, to 533 franchised restaurants, bakeries and cafes in 24 foreign countries at December 27, 1998. Additionally, commitments to develop international franchised restaurants have risen from 161 at the beginning of 1993, to 815 at December 27, 1998. International franchised restaurant openings during fiscal year 1998 are as follows: Fiscal Year 1998 ----------- Popeyes.............. 46 Churchs.............. 25 Cinnabon............. 2 Seattle Coffee....... 1 ----------- Total............. 74 =========== INCREASE SPECIALTY COFFEE WHOLESALE BUSINESS. The Company's goal is to develop Seattle's Best Coffee and Torrefazione Italia into nationally recognized brand names in the premium segment of the specialty coffee industry. Quality restaurants, hotels, offices, specialty retailers, clubs, universities and other places where people consume food and beverages are now potential outlets for specialty coffee. Supermarkets will remain the dominant source of coffee for home consumption and specialty coffee's share of this market is expanding rapidly. Management anticipates significant growth in specialty coffee distribution through retail, wholesale food service and grocery over the next few years. 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, (iii) expanding the channels of distribution for its specialty coffees and (iv) 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, Chesapeake, Cinnabon and Seattle Coffee food products. In addition to the traditional stand-alone models, the Company has franchised and opened Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes within community shopping plazas, convenience stores, mall food courts, airports and other transportation centers and grocery stores. . 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 7 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 into several such arrangements including franchising Churchs restaurants in 91 Cara Operations Limited Harvey's hamburger restaurants in Canada and in 76 White Castle hamburger restaurants throughout the Midwest, Southeast and Northeast. . NEW DISTRIBUTION CHANNELS. Management intends to aggressively pursue new and expanded distribution channels for its premium coffee products. Marketing efforts will be aimed at developing key accounts with such food service providers as espresso carts, quality restaurants, hotels, independent coffee cafes, delis, theaters, colleges, corporate offices and general merchandise retailers. Marketing efforts will also be aimed at developing strategic alliances with larger hotel chains, quality restaurant chains and specialty retailers doing business in multiple regions or on a national basis. Management believes that significant opportunities exist to expand its distribution channels into regional and national supermarkets. . NEW BRANDED CONCEPTS. Management has identified and acquired additional high value/high growth brands which it believes will 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 Bagel. In March 1998, the Company acquired Seattle Coffee Company and its two specialty coffee brands Seattle's Best Coffee and Torrefazione Italia. Further, in October 1998, the Company acquired Cinnabon International. Management currently plans to focus on integrating and growing these concepts but intends to continue to seek out additional high value/high growth brands to acquire, operate and franchise in the future. 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) effectively manage inventory and (iii) analyze product mix and various promotional programs using point-of-sale information. In 1998, management launched AFC Online, an intranet for franchisees that provides 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 8 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(TM) global strategy, which will be implemented by (i) promoting distinctly positioned brands, currently Popeyes, Churchs, Cinnabon, Seattle's Best Coffee, Torrefazione Italia 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. SITE SELECTION The Company has an extensive domestic site selection process for the establishment of new Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake restaurant, bakery and cafe locations, commencing with an overall market plan for each intended area of development compiled by the Company and the relevant area developer, if any. The Company emphasizes free-standing pad sites and end- cap locations with ample parking and easy dinner-time access from high traffic roads for its Popeyes and Churchs brands. Cinnabon, Seattle Coffee and Chesapeake brands emphasize mall food courts, in-line shopping centers, transportation facilities and office buildings. 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, bakeries and cafes through franchising additional restaurants, bakeries and cafes to new and existing franchisees. The Company enjoys strong relationships with its franchisees as a result of its ongoing efforts to (i) develop Popeyes, Churchs, Cinnabon 9 and Seattle Coffee 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, bakeries and cafes 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, bakeries and cafes to be opened and in operation at six-month 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. INTERNATIONAL DEVELOPMENT AGREEMENTS. The Company enters into development agreements with qualifying parties to develop Popeyes, Churchs, Cinnabon or Seattle Coffee franchised restaurants, bakeries and cafes 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 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 Cinnabon franchise agreements require franchisees to pay a 5% royalty on net restaurant sales and a 1.5% national advertising 10 fund contribution. Franchise agreements for Seattle Coffee franchisees require a 3% royalty on net restaurant sales and a 2% national advertising fund contribution. The Chesapeake franchise agreements require franchisees to pay a 4% royalty on net restaurant sales and a 1% to 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. 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, Cinnabon, Seattle Coffee 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 up to $30,000 at the time the development agreement is entered into, along with a development fee up 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. As of December 27, 1998, the Company has eleven turnkey sites in various stages of development. MARKETING AND COMMUNITY ACTIVITY Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake products are marketed to their respective customer bases using a predominantly 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, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes support the promotional activity. 11 Each of the brands offers 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, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes contribute to a national advertising fund to pay for the development of marketing materials. Franchised and Company-operated Popeyes, Churchs and Chesapeake restaurants and bakeries also contribute to local advertising funds to support programs in their local markets. For the fiscal year ended December 27, 1998, the Company contributed approximately $21.7 million to these various 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 sponsored and helped 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. The Company also sponsors Adopt-A-School programs. COMPETITION The restaurant industry, and particularly the quick service restaurant ("QSR") segment, is intensely competitive with respect to price, quality, name recognition, service and location. Other QSR competitors include chicken, hamburger, pizza, Mexican, sandwich and Chinese food QSRs, other purveyors of carry-out food and convenience dining establishments, including national restaurant chains. Numerous well-established QSR competitors possess substantially greater financial, marketing, personnel and other resources than AFC. In addition, the QSR industry is characterized by the frequent introduction of new products, accompanied by substantial promotional campaigns. AFC must respond to various factors affecting the restaurant industry, including changes in consumer preferences, tastes and eating habits, demographic trends and traffic patterns, increases in food and labor costs, competitive pricing and national, regional and local economic conditions. In recent years, a number of companies in the QSR industry have introduced products, including non-fried chicken products, which were developed to capitalize on a growing consumer preference for food products which are, or are perceived to be, healthful, nutritious, low in calories and low in fat content. It can be expected that AFC will be subject to increasing competition from companies whose products or marketing strategies address these consumer preferences. There can be no assurance that consumers will continue to regard AFC's products favorably, as compared to such competitive products, or that AFC will be able to continue to compete successfully in the QSR marketplace. In addition, AFC's chief competitors in the chicken segment of the QSR industry, KFC Corporation ("KFC"), and in the specialty coffee business, Starbucks, are larger, better capitalized and have greater access to financing at favorable rates, all of which may affect AFC's competitive abilities. 12 Chesapeake bagel bakeries and Cinnabon bakeries compete with other QSR's, bagel bakeries and traditional bakeries in the bagel and cinnamon roll business. While national chains such as Einstein/Noah Bagels, Big City Bagels and others compete directly with the Company for the sale of bagels and other bakery products, there are few direct competitors in cinnamon rolls. Cinnabon is one of the leaders in the cinnamon roll segment of the QSR business and is the only national cinnamon roll retailer in North America. SCC's whole bean coffees compete directly with specialty coffees sold at retail through supermarkets, specialty retailers, and a growing number of specialty coffee stores. SCC's coffee beverages compete directly with all restaurant and beverage outlets that serve coffee and a growing number of espresso kiosks, carts, and coffee cafes. Both SCC's whole bean coffees and its coffee beverages compete indirectly with all other coffees on the market, including specialty retail companies such as Starbucks, and conventional coffee from several large companies such as Kraft General Foods, Procter & Gamble, and Nestle. 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. SUPPLY CONTRACTS. Notwithstanding the above, Popeyes and Churchs 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 27, 1998, the Popeyes system purchased approximately $40.7 million of proprietary products made by Diversified. The Popeyes and Churchs systems purchase fresh chicken from 14 suppliers from 33 plant locations. With respect to SCC's wholesale operations, SCC's principal raw material is green coffee beans. The Company typically enters into supply contracts to purchase a pre-determined quantity of green coffee beans at a fixed price per pound. These contracts usually cover periods up to a year as negotiated with the individual supplier. At December 27, 1998, the Company had commitments to purchase approximately 5.3 million pounds of green coffee beans at a total cost of approximately $7.7 million. The contract terms cover a period from January 1999 to September 1999. SCC purchases 50% of its green coffee beans from two suppliers and purchases the remaining 50% from 13 15 other suppliers. To the extent the two major suppliers cannot meet SCC's coffee orders, SCC has the option of ordering its coffee from the other fifteen suppliers. PURCHASING COOPERATIVES. 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. COPA also purchases certain ingredients and supplies for Cinnabon and Chesapeake franchised and Company-operated restaurants, bakeries and cafes in order to further leverage the collective buying power of AFC. Currently, the Company purchases cinnamon for Cinnabon products from one supplier. 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 chicken restaurant 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 chicken restaurant franchisees participate in POPCA or COPA. SCC CAFES. SCC's Company-operated and franchised cafes purchase all their coffee from SCC's wholesale distribution centers. The cafes purchase non-coffee food and supply items from Unisource Worldwide, Inc., a large food service supply distributor. 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", "Popeyes Chicken and Biscuits", "Churchs", "Cinnabon World Famous Cinnamon Roll", "Seattle's Best Coffee", "Torrefazione Italia", "Chesapeake Bagel Bakery", "Ultrafryer" and each brand's logo utilized by the Company and its franchisees in virtually all Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes domestically. The Company also has trademark registrations pending for a number of additional marks, including "Gotta Love It", "Day of Dreams", "Love That Chicken From Popeyes", "New Age of Opportunity" and "Franchisor of Choice". 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 150 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 perpetual formula licensing agreement, as amended (the "Formula Agreement"), with Alvin C. Copeland, the former 14 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 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 such 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. 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. While the analysis phase of the plan has not been completed as of December 27, 1998, 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. See "Item 7. Management's Discussion and Analysis - Year 2000". EXPANSION; DEPENDENCE ON FRANCHISEES AND DEVELOPERS The Company's global strategy will depend heavily on growing its franchise operations. At December 27, 1998, the Company franchised 1,768 Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes domestically and 533 Popeyes, Churchs, Cinnabon and Seattle Coffee restaurants, bakeries and cafes internationally. The Company's success is dependent upon its franchisees and the manner in which they develop and operate Popeyes, Churchs, Cinnabon, Seattle Coffee and Chesapeake restaurants, bakeries and cafes. 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, bakeries and cafes will depend on various other factors, including the availability of suitable sites, the negotiation of acceptable 15 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 27, 1998, the Company franchised 533 restaurants, bakeries and cafes to franchisees in 24 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 currently operates two Seattle Coffee cafes and a wholesale distribution center that are located in Canada. The Company operates no other restaurants outside of the U.S. 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, bakeries and cafes, 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 1998 maintain any hedges against foreign currency fluctuations, although management entered into a foreign currency hedging agreement in February 1999 with respect to the Korean Won. 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 1998, 1997 and 1996, royalties and other revenues from foreign franchisees represented 1.9%, 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, bakeries and cafes. Multi-unit food service chains such as Popeyes, Churchs, Cinnabon, Seattle Coffee 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. 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 Federally-mandated increases 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. 16 FLUCTUATIONS IN COST OF CHICKEN The Company's and its franchisees' principal raw material is fresh chicken. For fiscal years ended December 27, 1998 and December 28, 1997, approximately 50% and 60%, respectively 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, the price for other alternative domestic meats 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. The market price for chicken changes on a weekly basis. While the Company's purchase agreements with its fresh chicken suppliers in 1998 and prior generally provided for a "ceiling", or highest price, and a "floor", or lowest price, that the Company would pay for chicken over the contract term, the ceilings were generally set at prices well above the current market price, exposing the Company to a risk of price increases. Additionally, such supply contracts were generally for one to two years, thereby exposing the Company to regular cost increases if the price of fresh chicken continued to rise. In order (i) to ensure favorable pricing for the Company's chicken purchases in the future, (ii) to reduce volatility in chicken prices and (iii) to maintain an adequate supply of fresh chicken, the Company has or will enter into two types of chicken purchasing arrangements with its suppliers. The first of these contracts is a grain-based "cost-plus" pricing arrangement that provides chicken prices based upon the cost of feed grains, such as corn and soybean meal, plus certain agreed upon non-feed and processing costs. The other contract is similar to the grain based "cost-plus" arrangement but contains price provisions which limit how far up or down prices may move in any year. Both contracts have terms ranging from three to five years with provisions for certain annual price adjustments as defined in the contracts. AVAILABILITY AND COST OF GREEN COFFEE BEANS The supply and prices of green coffee beans are volatile. Although most coffee beans trade in the commodity market (the "C market"), coffee beans of the quality sought by Seattle Coffee tends to trade on a negotiated basis at a premium above the C market coffee pricing, depending upon the supply and demand at the time of purchase. Availability and price can be affected by many factors in producing countries, including weather and political and economic conditions. 17 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 and bakeries during the summer months while operating results have been somewhat lower during the winter season. Cinnabon and Seattle Coffee have traditionally experienced the strongest operating results during the Christmas holiday shopping season between Thanksgiving and Christmas. 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. 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, bakeries and cafes are subject to state and local building code and zoning requirements. In connection with the remodeling and alteration of the Company's restaurants, bakeries and cafes, the Company may be required to expend funds to meet certain Federal, state and local regulations, including regulations requiring that remodeled or altered restaurants, bakeries and cafes 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, bakeries and cafes 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 18 applicable state laws regulating franchising in those states in which it has offered franchises. The Company is also subject to various Federal, state and local 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. The Company is currently not subject to any administrative or court order requiring remediation at any of its properties. EMPLOYEES AND PERSONNEL As of December 27, 1998, the Company employed approximately 2,805 full-time salaried employees and approximately 15,274 full-time and part-time hourly employees. Of the Company's full-time salaried employees, 130 are involved in overseeing restaurant operations, 2,086 are involved in the management of individual restaurants, bakeries and cafes 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. 19 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 27, 1998:
Land Land and and/or Building Building Owned Leased Total -------- -------- ------- Texas......................... 21 40 61 Louisiana..................... 3 36 39 Georgia....................... 2 44 46 North Carolina................ - 17 17 South Carolina................ - 8 8 -------- -------- ------- Total Popeyes............... 26 145 171 ======== ======== =======
20 The following table sets forth the locations by state of the Churchs Company-operated restaurants as of December 27, 1998:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Texas.......................... 151 96 247 Georgia........................ 34 17 51 Louisiana...................... 20 18 38 Alabama........................ 25 10 35 Arizona........................ 15 9 24 Florida........................ 22 2 24 Oklahoma....................... 17 2 19 Mississippi.................... 11 4 15 Tennessee...................... 13 1 14 New Mexico..................... 5 2 7 Missouri....................... 6 - 6 Arkansas....................... 4 1 5 Nevada......................... 2 2 4 Kansas......................... 2 - 2 -------- -------- ----- Total Churchs................ 327 164 491 ======== ======== =====
The following table sets forth the locations by state of the SCC Company- operated restaurants as of December 27, 1998:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Washington.................... - 27 27 California.................... - 10 10 Illinois...................... - 9 9 Oregon........................ - 5 5 Massachusetts................. - 3 3 Georgia....................... - 1 1 Texas......................... - 1 1 Virginia...................... - 1 1 -------- -------- ----- Total SCC.................. - 57 57 ======== ======== =====
21 The following table sets forth the locations by state of the Cinnabon Company-operated restaurants as of December 28, 1997:
Land Land and and/or Building Building Owned Leased Total -------- -------- ------- California..................... - 46 46 Washington..................... - 24 24 Florida........................ - 15 15 Illinois....................... - 15 15 Ohio........................... - 12 12 Texas.......................... - 10 10 Massachusetts.................. - 9 9 Michigan....................... - 8 8 Pennsylvania................... - 8 8 Indiana........................ - 7 7 Wisconsin...................... - 7 7 New Jersey..................... - 6 6 Hawaii......................... - 4 4 Maryland....................... - 4 4 Nevada......................... - 4 4 Kentucky....................... - 3 3 North Carolina................. - 3 3 Oregon......................... - 3 3 Virginia....................... - 3 3 Georgia........................ - 2 2 Iowa........................... - 2 2 Missouri....................... - 2 2 New York....................... - 2 2 Tennessee...................... - 2 2 Alabama........................ - 1 1 Colorado....................... - 1 1 Connecticut.................... - 1 1 Delaware....................... - 1 1 Kansas......................... - 1 1 Montana........................ - 1 1 Nebraska....................... - 1 1 New Hampshire.................. - 1 1 New Mexico..................... - 1 1 South Carolina................. - 1 1 South Dakota................... - 1 1 ------- ------- ------- Total Cinnabon............ - 212 212 ======= ======= =======
22 The following table sets forth the locations by state of the Chesapeake Company-operated restaurants as of December 27, 1998:
Land Land and and/or Building Building Owned Leased Total -------- -------- ----- Georgia...................... - 3 3 Maryland..................... - 1 1 -------- -------- ----- Total Chesapeake........ - 4 4 ======== ======== =====
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 relocated to another facility in Atlanta, Georgia on July 1, 1998. The Company's Churchs division will be relocating to another facility in Atlanta, Georgia in April 1999. The Company believes that its existing headquarters provides sufficient space to support its current needs. The Company's wholly-owned subsidiaries, SCC and Cinnabon both lease office space in Seattle, Washington. SCC has four distribution facilities that service SCC's coffee wholesale operations. Two of the distribution centers are located in the Seattle, Washington area. The other two facilities are located in Portland, Oregon and Chicago, Illinois. 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). ITEM 3. LEGAL PROCEEDINGS 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. This case was segregated into a patent infringement claim and a contract claim. In August 1998, the Court dismissed CP's patent infringement claim. CP has appealed this judgment. In November 1998, the Company settled the contract claim for an immaterial amount. It is management's belief that the final outcome of the patent infringement claim will not have an 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. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the common stock of the Company. As of March 29, 1999, the number of record holders of the Company's common stock was 100. 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 upon, among other things, 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." On October 15, 1998, the Company sold 2,795,703 shares of its common stock to "qualified investors" who are existing shareholders and option holders at a price of $7.75 per share. The Company received approximately $20.3 million in cash and $1.3 million in notes receivable from certain shareholders and option holders. All of these unregistered securities were issued by AFC pursuant to the limited offering exception under Rule 506 of Regulation D. Cash proceeds from the sale of stock was used to fund a portion of the purchase price to acquire Cinnabon International, Inc. and to pay $1.0 million in stock issuance costs in connection with the stock offering. The $1.0 million in stock issuance costs was paid to Freeman Spogli and Co., Inc. ("FS"), an affiliate of the Company's majority shareholder. A second affiliate of FS purchased the majority of shares under this offering. 24 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 25, 1994, December 31, 1995, December 29, 1996, December 28, 1997 and December 27, 1998 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 27, December 28, December 29, December 31, December 25, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ REVENUES: Restaurant sales....................... $ 488,574 $ 403,285 $ 430,280 $426,707 $401,855 Franchise revenues..................... 66,606 64,055 51,336 47,916 41,581 Wholesale revenues..................... 36,411 - - - - Manufacturing revenues................. 7,561 7,647 8,222 9,969 12,026 Other revenues......................... 9,939 8,766 8,005 8,320 8,252 ----------- ------------ ------------ ------------ ------------ Total revenues........................ 609,091 483,753 497,843 492,912 463,714 COSTS AND EXPENSES: Restaurant cost of sales............... 155,627 131,374 142,199 139,286 133,893 Restaurant operating expenses.......... 246,448 197,324 211,275 214,703 206,212 Wholesale cost of sales................ 18,466 - - - - Wholesale operating expenses........... 8,313 - - - - Manufacturing cost of sales............ 5,802 6,381 7,201 9,180 11,414 General and administrative............. 89,457 79,541 76,071 78,095 72,540 Executive compensation award (2)....... - - - 10,647 - Depreciation and amortization.......... 46,078 33,803 30,904 28,665 25,438 Impairment of Chesapeake intangible.... 6,800 - - - - Charges for restaurant closings........ 9,183 479 1,304 688 650 Provision for software write-offs...... 5,000 - - - - Gain on sale of fixed assets from AFDC transaction...................... - (5,319) - - - ----------- ------------ ------------ ------------ ------------ Total costs and expenses.............. 591,174 443,583 468,954 481,264 450,147 ------------ ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS.................... 17,917 40,170 28,889 11,648 13,567 OTHER EXPENSES:........................... Interest, net.......................... 30,786 20,645 15,875 23,444 19,172 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........... (12,869) 19,525 13,014 (11,796) (5,605) Income tax expense (benefit)........... (4,223) 8,525 5,163 (2,969) (553) ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...................... (8,646) 11,000 7,851 (8,827) (5,052) Extraordinary loss, net of taxes (3)... - - (4,456) - - ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS)......................... (8,646) 11,000 3,395 (8,827) (5,052) 8% Preferred Stock dividends.............. - - 1,316 4,555 4,467 10% Preferred Stock dividends payable in kind.......................... - 2,240 3,956 - - Accelerated accretion of 8% Preferred Stock discount upon retirement........... - - 8,719 - - Accretion of 8% Preferred Stock discount.. - - 813 2,571 2,250 ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK.......................... $ (8,646) $ 8,760 $(11,409) $ (15,953) $(11,769) ============ ============ ============ ============ ============
25
Year Ended (1) -------------------------------------------------------------------------- December 27, December 28, December 25, December 31, December 29, 1998 1997 1996 1995 1994 ------------- ------------ ------------ ------------ ------------ OTHER FINANCIAL DATA: EBITDA, as defined (4)..... $ 87,037 $ 74,017 $ 64,866 $ 55,342 $ 43,435 EBITDA margin (5).......... 14.3% 15.3% 13.0% 11.2% 9.4% CASH FLOWS PROVIDED BY (USED IN): Operating activities.... 45,537 52,515 47,801 28,031 22,673 Investing activities.... (188,287) (35,782) (29,388) (20,114) (11,493) Financing activities.... 126,852 (2,985) (12,806) (10,721) (17,530) Cash capital expenditures (6) Maintenance capital expenditures $ 6,059 $ 7,756 $ 6,010 $ 5,483 $ 5,050 Re-images and renovation 4,079 13,356 15,342 15,502 10,267 New restaurant development 13,749 4,588 3,215 2,272 1,999 Other 13,965 16,436 9,384 1,739 3,496 ------------- ------------ ------------ ------------ ------------ Total cash capital expenditures $ 37,852 $ 42,136 $ 33,951 $ 24,996 $ 20,812 RATIO OF EARNINGS TO FIXED CHARGES (7)............... - 1.64% 1.29% - - BALANCE SHEET DATA: Total assets............ $ 556,465 $ 380,002 $ 339,668 $ 328,645 $ 327,494 Total debt and capital lease obligations............. 360,711 243,882 151,793 204,025 193,646 Mandatorily redeemable preferred stock................... - - 59,956 46,468 43,897 Total shareholders equity (deficit)....... 87,917 48,459 37,902 (21,665) (6,707) RESTAURANT DATA (UNAUDITED) (8): Systemwide restaurant sales (in (thousands): Popeyes................. $ 954,305 $ 853,078 $ 762,108 $ 710,840 $ 649,880 Churchs................. 755,074 723,988 675,996 647,746 590,261 Cinnabon................ 41,738 - - - - Seattle Coffee.......... 24,887 - - - - Chesapeake Bagel........ 61,474 50,878 - - - ------------- ------------ ------------ ------------ ------------ Total................... $ 1,837,478 $1,627,944 $1,438,104 $ 358,586 $1,240,141 ============= ============ ============ ============ ============ Systemwide restaurant units: Popeyes................. 1,292 1,131 1,021 964 907 Churchs................. 1,399 1,356 1,257 1,219 1,165 Cinnabon................ 369 - - - - Seattle Coffee............. 71 - - - - Chesapeake Bagel........ 107 155 - - - ------------- ------------ ------------ ------------ ------------ Total................... 3,238 2,642 2,278 2,183 2,072 ============= ============ ============ ============ ============ Systemwide percentage change in comparable restaurant sales (9): Popeyes domestic........ 5.2% 3.6% 0.5% 1.2% 2.0% Churchs domestic........ 4.6% 4.0% 4.6% 4.6% 5.1% Popeyes international... (13.3)% 1.3% 4.3% 11.6% (2.2)% Churchs international... (1.5)% 2.6% (2.1)% 0.9% 3.4% Total commitments outstanding, end of period (10) 1,757 1,715 1,319 1,083 1,047
(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 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 26 senior executive officers became fully vested in certain stock options pursuant to the terms of the 1992 Stock Option Plan resulting in recognition of $647,000 of compensation expense in 1995. (3) The extraordinary loss recorded in fiscal 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 above) 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. (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 25, 1994, December 31, 1995 and December 27, 1998 of approximately $5,869,000, $12,284,000 and $13,139,000, 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) Prior year sales figures for Cinnabon, Seattle Coffee, and Chesapeake are not comparable since these acquisitions occurred during 1997 and 1998. (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. 27 ITEM 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 CINNABON ACQUISITION On October 15, 1998, the Company acquired Cinnabon International, Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail cinnamon roll bakeries are Company-operated and are located within the United States. In connection with the acquisition, CII became a wholly-owned subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII (the "Acquisition"). The Company acquired CII for $64.0 million in cash. The Company obtained $44.7 million of the cash consideration from its 1997 Credit Facility, which was amended to add a $50.0 million Tranche B term loan (see below). The remaining $19.3 million cash consideration was funded with the proceeds from the sale of approximately 2.8 million shares of AFC common stock to certain "qualified" investors who are existing AFC shareholders and option holders. The shares were sold at a price of $7.75 per share and net proceeds from the sale totaled approximately $19.3 million. RESULTS OF OPERATIONS The following table presents selected revenues and expenses as a percentage of total revenues for the Company's Consolidated Statements of Operations for the fiscal years ended December 27, 1998, December 28, 1997 and December 29, 1996. 28 PERCENTAGE RESULTS OF OPERATIONS
Year Ended (1) ---------------------------------------------- December 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ REVENUES: Restaurant sales....................... 80.3 % 83.4 % 86.4 % Franchise revenues..................... 10.9 13.2 10.3 Wholesale revenues..................... 6.0 - - Manufacturing revenues................. 1.2 1.6 1.7 Other revenues......................... 1.6 1.8 1.6 -------- -------- ------- Total revenues........................ 100.0 % 100.0 % 100.0 % -------- -------- ------- COSTS AND EXPENSES: Restaurant cost of sales (1)........... 31.9 % 32.6 % 33.0 % Restaurant operating expenses (1)...... 50.4 48.9 49.1 Wholesale cost of sales (2)............ 50.7 - - Wholesale operating expenses (2)....... 22.8 - - Manufacturing cost of sales (3)........ 76.7 83.4 87.6 General and administrative............. 14.7 16.4 15.3 Depreciation and amortization.......... 7.6 7.0 6.2 Impairment of Chesapeake intangible.... 1.1 - - Charges for restaurant closings........ 1.5 0.1 0.3 Provision for software write-offs...... 0.8 - - Gain on sale of fixed assets from AFDC transaction...................... - (1.1) - Total costs and expenses.............. 97.1 91.7 94.2 Income from operations.................. 2.9 8.3 5.8 Interest expense, net................... 5.1 4.3 3.2 Net income (loss) before extraordinary loss and taxes......................... (2.1) 4.0 2.6 Income tax expense (benefit)............ (0.7) 1.8 1.0 Net income (loss) before extraordinary items.................... (1.4)% 2.2 % 1.6 %
(1) Expressed as a percentage of restaurant sales by Company-operated restaurants. (2) Expressed as a percentage of wholesale revenues. (3) Expressed as a percentage of manufacturing revenues. 29 SELECTED CONSOLIDATED 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 27, 1998, December 28, 1997 and December 29, 1996:
Year Ended ------------------------------------------------------------------------------------------ December 27, December 28, % Change December 29, % Change 1998 1997 1997 - 1998 1996 1996 - 1997 -------------- ------------- ------------ ----------- -------------- (dollars in millions) EBITDA, as defined (1)................ $ 87.0 $ 74.0 17.6 % $ 64.9 14.1 % EBITDA margin......................... 14.3 % 15.3 % (6.7) 13.0 % 17.5 Capital Expenditures (2).............. 41.5 62.9 (34.0) 46.3 36.0 Restaurant data (unaudited): Systemwide restaurant sales (3): Popeyes................... $ 954.3 $ 853.0 11.9% $ 762.1 11.9 % Churchs................... 755.1 724.0 4.3 676.0 7.1 Cinnabon.................. 41.7 - N/A - N/A Seattle Coffee............ 24.9 - N/A - N/A Chesapeake................ 61.5 50.9 20.8 - N/A -------- ---------- --------- Total $1,837.5 $ 1,627.9 12.9% $ 1,438.1 13.2 % ======== ========== ========= Systemwide restaurant openings: Popeyes................... 198 137 44.5% 110 24.6 % Churchs................... 87 132 (34.1) 117 12.8 Cinnabon.................. 6 - N/A - N/A Seattle Coffee............ 17 - N/A - N/A Chesapeake................ 11 27 (59.3) - N/A -------- ---------- --------- Total 319 296 8.1% 227 30.4 % ======== ========== ========= Systemwide restaurants open, end of period: Popeyes................... 1,292 1,131 14.2 1,021 10.8 % Churchs................... 1,399 1,356 3.2 1,257 7.9 Cinnabon.................. 369 - N/A - N/A Seattle Coffee............ 71 - N/A - N/A Chesapeake................ 107 155 (31.0) - N/A -------- ---------- --------- Total 3,238 2,642 22.6% 2,278 16.0 % ======== ========== ========= Systemwide percentage change in comparable restaurant sales (3): Popeyes domestic.......... 5.2 % 3.6% 0.5% Churchs domestic.......... 4.6 4.0 4.6 Popeyes international..... (13.3) 1.3 4.3 Churchs international..... (1.5) 2.6 (2.1)
(1) EBITDA is defined as income from operations plus depreciation and amortization; adjusted for items related to gains/losses on asset dispositions and write-downs and compensation expense related to stock option activity (deferred compensation). (2) Excludes fixed assets added in connection with the Seattle Coffee, Cinnabon and Pinetree acquisitions and capital expenditures made to convert the Pinetree restaurants to Popeyes Company-operated restaurants. (3) Prior year sales figures for Cinnabon, Seattle Coffee and Chesapeake and are not comparable since these acquisitions occurred during 1997 and 1998. 30 YEARS ENDED DECEMBER 27, 1998 AND DECEMBER 28, 1997 Certain items relating to prior periods have been reclassified to conform with current presentation. REVENUES Total revenues increased 25.9%, or $125.3 million, during the fiscal year ended December 27, 1998, as compared to the fiscal year ended December 28, 1997. RESTAURANT SALES. Restaurant sales were up 21.1% or $85.3 million over the prior year, primarily due to sales generated by Company-operated restaurants acquired during 1998. Chicken Sales at Company-operated chicken restaurants increased 10.2% or $41.1 million from the prior year. The increase was primarily attributable to sales generated by Company-operated restaurants acquired during the first quarter of 1998. On February 10, 1998, the Company acquired all of the restaurant properties operated by Pinetree Foods, Inc. ("Pinetree") and during the first and second quarters of 1998 converted these properties into 66 Popeyes Company- operated restaurants. Sales generated by these restaurants during 1998 were $32.9 million. The remaining sales increase was due to an increase in comparable sales for Company-operated chicken restaurants of 4.5% for the year. Bakery Cafes Sales at Company-operated bakery cafes were up $23.8 million from the prior year. Sales increased primarily due to the acquisition of the Cinnabon bakery cafes in October 1998. Sales for the Cinnabon bakeries during 1998 were $22.8 million. Seattle Coffee On March 18, 1998, the Company acquired all of Seattle Coffee Company's (SCC's) common stock, resulting in the acquisition of 59 Company-operated cafes. Sales generated by the SCC cafes during 1998 were $20.4 million. FRANCHISE REVENUES. Franchise revenues increased $2.6 million or 4.0% from the prior year. Chicken Domestic franchise royalty revenue for chicken restaurants increased $6.1 million or 14.4% from the prior year. The increase in franchise royalty revenue was primarily 31 attributable to a 130 or 9.8% increase in the average number of chicken franchised restaurants open during 1998 as compared to 1997. The remaining increase was attributable to an increase in comparable sales for domestic franchised restaurants of 5.0% for the year. Domestic franchise fee income decreased $4.2 million or 58.3% for the year ended December 27, 1998, compared to the year ended December 28, 1997. Franchise fee income in the amount of $2.5 million was recorded in connection with the sale of 100 Company-operated Churchs restaurants to the Atlanta Franchise Development Corporation ("AFDC") during the second quarter of 1997 and $1.2 million was recorded in connection with the sale of 47 Company-operated Churchs restaurants to the Royal Capital group during the first quarter of 1997. AFDC and the Royal Capital group both entered into franchise agreements with the Company to each develop 100 additional franchised restaurants. Franchise fee income was also lower, as domestic franchise restaurant openings during 1998 were 134, versus 170 in 1997. Bakery Cafes Franchise royalty revenue for bakery cafes during 1998 increased $1.4 million or 82.2% from the prior year, primarily due to the acquisition of the Cinnabon bakeries in October 1998. Royalty revenues for Cinnabon bakeries were $1.0 million in 1998. Royalty revenues for Chesapeake bakeries were up $0.4 million over 1997 as a result of the bakeries being owned for the entire fiscal year of 1998. Seattle Coffee Franchise royalty revenue for Seattle Coffee franchised cafes totaled $0.2 million during 1998. There were a total of 11 Seattle Coffee domestic franchised cafes as of December 27, 1998. International International franchise revenues were down $0.6 million or 4.6% from the prior year. International franchise royalty revenue decreased $1.4 million or 13.6%, while franchise fees increased $0.8 million or 34.2%. Royalty revenues were down, despite an increase in the number of international franchised restaurants, primarily due to the depressed economies in Southeast Asia. Overall, international comparable sales were down 7.0% from the prior year. Unfavorable currency fluctuations caused further decreases in royalty revenues for 1998 as compared to 1997. International franchise fee income was up over the prior year, primarily due to amounts recorded in connection with the development of international Cinnabon bakeries and Seattle Coffee cafes in the Middle East. WHOLESALE REVENUES. The Company's wholesale revenues consist of sales of premium brand coffee from its roasting and distribution company to food service 32 retailers, supermarkets and its own coffee cafes. Wholesale revenues for the year ended December 27, 1998 were $36.4 million. MANUFACTURING REVENUES. Manufacturing revenues consist of sales of proprietary fryers and other custom-fabricated restaurant equipment to distributors and franchisees. Manufacturing revenues decreased $0.1 million from fiscal year 1997 to fiscal year 1998. OPERATING COSTS AND EXPENSES RESTAURANT COST OF SALES. Restaurant cost of sales for 1998 increased 18.5% or $24.3 million from the prior year. The increase was primarily attributable to the increase in restaurant sales. Expressed as a percentage of restaurant sales, cost of sales were 31.9% for the year ended December 27, 1998 and 32.6% for the year ended December 28, 1997. The decrease in this percentage is primarily due to selective menu price increases taken during 1998. RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the fiscal year ended December 27, 1998 increased $49.1 million or 24.9% from the corresponding period in 1997. The increase in restaurant operating expenses was primarily due to the increase in the number of Company-operated restaurants. Restaurant operating expenses as a percentage of restaurant sales were 50.4% for fiscal year 1998, compared to 48.9% for fiscal year 1997. The increase in this percentage was primarily attributable to high restaurant operating costs incurred by the converted Pinetree restaurants. High labor and training costs at the Pinetree restaurants caused personnel costs to increase by 0.8% as a percentage of sales. High rent costs at the Pinetree restaurants caused other restaurant operating costs to increase by 0.7% as a percentage of sales. Management believes that the closure of the underperforming Pinetree restaurants will help to lower these costs during 1999 and has implemented plans to reduce restaurant operating costs at the remaining Pinetree restaurants still in operation. WHOLESALE COST OF SALES. Wholesale cost of sales represent the cost of coffee beans and the direct overhead used to roast and blend specialty coffee blends. Wholesale cost of sales were $18.5 million, which as a percentage of wholesale revenues was 50.7%. WHOLESALE OPERATING EXPENSE. Wholesale operating expenses represent the overhead incurred in connection with the distribution of specialty coffee blends. Wholesale operating expenses were $8.3 million, which as a percentage of wholesale revenues was 22.8%. 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 and indirect manufacturing overhead applied during the manufacturing process. Manufacturing cost of sales as a percentage of manufacturing revenues decreased from 83.4% during fiscal year 1997 to 76.7% during fiscal year 1998. The decrease in this percentage was primarily due to a sales mix 33 consisting of more standard-configurated versus custom-configurated fryers and certain price increases taken during fiscal year 1998 . GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased $9.9 million or 12.5% during 1998 compared to the prior year. The increase was primarily attributable to general and administrative expenses incurred by the Seattle Coffee and Cinnabon operations, which totaled $8.8 million combined. As a percentage of total revenues, general and administrative expenses decreased from 16.4% for fiscal year 1997 to 14.7% for fiscal year 1998. The decrease in this percentage was primarily attributable to a decrease in corporate bonuses in the amount of $4.6 million from 1997 to 1998. Due to the Company not meeting bonus plan incentive benchmarks, incentive bonuses for corporate employees were not earned during the year for payment in 1999. Also contributing to the decrease in this percentage was the acquisition of SCC's operations. SCC's general and administrative expenses as a percentage of SCC revenues was 11.4% for the fiscal year ended December 27, 1998, causing the overall percentage for the Company to decrease from the prior year. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $12.3 million or 36.4% from the prior year. Depreciation and amortization as a percentage of total revenues increased from 7.0% to 7.6%. Depreciation and amortization attributable to Seattle Coffee and Cinnabon tangible and intangible assets totaled $6.2 million for 1998. Depreciation and amortization attributable to Pinetree restaurants during 1998 totaled $4.9 million. Overall, net property and equipment of $268.1 million as of December 27, 1998 was up 29.0% over net property and equipment of $207.8 million at December 28, 1997. Net intangible assets as of December 27, 1998 were $208.1 million, versus net intangible assets of $100.3 million as of December 28, 1997. IMPAIRMENT OF CHESAPEAKE INTANGIBLE. During 1998 management wrote down the Chesapeake franchise value and trademarks by $6.8 million. The write-down was made subsequent to a FAS 121 review of Chesapeake operations, which indicated a partial impairment loss related to the intangible asset. The decrease in the value of the intangible asset resulted primarily from the closing of 58 franchised Chesapeake bagel bakeries during 1998 and the weakness of the bagel bakery industry in general. CHARGES FOR RESTAURANT CLOSINGS. Charges for restaurant closings include write-downs of restaurant assets to net realizable value, provisions related to future rent obligations for the closed properties and write-offs of any intangible assets identified with the restaurant properties. Charges for restaurant closings were $9.2 million during 1998, compared to $0.5 million during 1997. The increase was primarily attributable to charges taken for the closing of 14 Pinetree restaurants during fiscal year 1998. Charges taken for these closings during 1998 totaled $8.5 million. PROVISION FOR SOFTWARE WRITE-OFFS. Management recorded a provision for software write-offs in the amount of $5.0 million during fiscal year 1998. The provision was made after a third party technology expert evaluation of the Company's "back office" automation 34 systems currently under development. The technology expert evaluating these systems concluded that certain elements of the software being developed were not stable in the AFC information technology environment. Management is in the process of performing its own review of these systems, but believes that it is probable that certain of the "back office" software development costs will be deemed to have little or no value. Therefore, management made a provision of $5.0 million to establish a reserve as of December 27, 1998 for the potential write offs of these assets. (See Note 1 - "Summary of Significant Accounting Policies" of the Company's Consolidated Financial Statements.) GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION. During the second quarter of 1997, the Company recorded a $5.3 million pre-tax gain associated with the sale of 100 Company-operated restaurants to AFDC. INCOME FROM OPERATIONS. Income from operations decreased $22.3 million or 55.4% from the prior year, primarily due to unusual charges taken during 1998 and a one-time gain recorded during 1997. During 1998, the Company recorded write-downs and charges with respect to the closure of 14 Pinetree restaurants totaling $8.5 million, an impairment charge with respect to the Chesapeake franchise value and trademarks intangible in the amount of $6.8 million and a $5.0 million provision for software write-offs. Also, income from operations for 1997 included a $5.3 million pre-tax gain associated with the sale of 100 Company-operated restaurants to AFDC. Income from operations for chicken restaurants decreased $20.8 million or 27.3%, primarily due to the Pinetree write-downs in 1998 and the pre-tax gain recorded for the AFDC sale in 1997. In addition, the Company realigned its management structure during 1998 to more directly support its various restaurant concepts, resulting in a shift in overhead costs from corporate to the chicken brands. The remaining decrease in income from operations for the chicken restaurants was due to start up costs related to establishing the Popeyes brand in new markets through its conversion of Pinetree restaurants in 1998. Income from operations for bakery cafes decreased $6.5 million from the prior year, primarily due to the impairment charge taken against the Chesapeake franchise value and trademarks. NET INTEREST EXPENSE. Interest expense, net of capitalized interest, for the year ended December 27, 1998 was $30.8 million, compared to $20.6 million for the year ended December 28, 1997. The $10.2 million increase in interest expense was due to higher levels of average debt outstanding and higher effective interest rates during 1998 as compared with the prior year. The increase in average debt outstanding was primarily attributable to the refinancing transaction completed during the second quarter of 1997, borrowings made under the Company's acquisition and revolving loan facilities during 1998 and borrowings made under the new Tranche B term loan (see "--Liquidity and Capital Resources"). The refinancing transaction also led to higher effective interest rates during fiscal 1998 compared to fiscal 1997. 35 INCOME TAXES. The Company's effective tax rate for fiscal year ended December 27, 1998 was (32.8)%, compared to 43.6% for fiscal year ended December 28, 1997. A reconciliation of the Federal statutory rate to the Company's effective tax rate began with a federal tax benefit rate of (35.0)% for fiscal year 1998 and a federal tax expense rate of 35.0% for fiscal year 1997. The tax benefit rate for 1998 was reduced for non-deductible amortization expense related to acquired goodwill. 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 2.8%, or $14.1 million, during the fiscal year ended December 28, 1997, as compared to the fiscal year ended December 29, 1996. RESTAURANT SALES. Restaurant sales decreased $27.0 million or 6.3% from fiscal year 1996 to fiscal year 1997. Chicken Chicken restaurant sales decreased 6.3% or $27.1 million from the prior year. The decrease in chicken restaurant sales was primarily attributable to the sale of 100 Churchs restaurants to AFDC in March 1997. Sales generated by these restaurants during the last three quarters of 1996 totaled $43.4 million. The overall sales decrease was partially offset by an increase in comparable sales for the remaining Company-operated chicken restaurants of 5.1% for the year. Bakery cafes Only one Company-operated bakery cafe was in operation as of the end of 1997. Sales generated by this Chesapeake bagel bakery during 1997 were $100 thousand. FRANCHISE REVENUES. Franchise revenues increased $12.7 million or 24.8% from the prior year. Franchise royalty revenue increased $9.8 million or 22.2% and franchise fees increased $2.9 million or 40.4%. Chicken Franchise royalty revenues from chicken restaurants increased $6.6 million or 18.4% from the prior year. The increase in franchise royalty revenue was primarily attributable to royalty revenues recorded for 100 restaurants franchised in connection with the AFDC transaction and a comparable sales increase for domestic franchised chicken restaurants of 3.2%. Franchise fee income for chicken restaurants increased $3.9 million 36 or 121.1% from 1996 to 1997, primarily due to franchise fees of $2.5 million recorded in connection with the sale of 100 restaurants to AFDC and $1.2 million recorded in connection with the sale of 47 restaurants to the Royal Capital group. Bakery Cafes Franchise revenues produced by the Chesapeake brand during 1997 totaled $2.3 million, including $1.7 million in franchise royalty income and $0.6 million in franchise fee income. International Revenues from franchising for international franchised restaurants were down $0.1 million from 1996 to 1997. Royalty income was up $1.5 million or 18.3% from the prior year, although franchise fee income was down $1.6 million or 41.6%. Royalty income was up as the average number of international franchised restaurants open during 1997 was up 20.1% from 362 in 1996 to 435 in 1997. Exchange rate losses on royalties earned in Southeast Asia partially offset the increase in international royalty income. Franchise fee income was down $1.6 million from the prior year, primarily due to a decrease in the amount of default revenues recorded for terminated international development agreements and a decrease in international commitments sold from 464 in 1996 to 225 in 1997. MANUFACTURING REVENUES. Revenues from manufacturing decreased 7.0%, or $0.6 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 Ultrafryer 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 $14.0 million or 6.6% from the corresponding 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 48.9% for 1997, compared to 49.1% for 1996. A decrease in utility costs resulting from the installation of more energy efficient gas fryers in 37 Company-operated restaurants offset an increase in personnel expenses resulting from the increase in the minimum wage levels effective October 1, 1996 and September 1, 1997. MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 11.4% or $0.8 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 $3.5 million or 4.6% during 1997 compared to the prior year. As a percentage of total revenues, general and administrative expenses increased from 15.3% for fiscal year 1996 to 16.4% for fiscal year 1997. The increase in general and administrative expenses was due to a number of factors including, but not limited to, asset write-downs of software costs, overhead costs associated with the Chesapeake Bagel 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. 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. 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. GAIN ON SALE OF ASSETS FROM AFDC TRANSACTION. During the second quarter of 1997, the Company recorded a $5.3 million pre-tax gain associated with the sale of 100 Company-operated restaurants to AFDC. INCOME FROM OPERATIONS. Income from operations increased $11.3 million or 39.0% from fiscal year 1997 to fiscal year 1998. The increase was primarily due to an increase in franchising revenues for chicken restaurants in the amount of $10.5 million. The gain on the sale of the 100 AFDC restaurants in the amount of $5.3 million recognized during fiscal year 1997 was nearly offset by the decrease in income from operations generated by these restaurants during fiscal year 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 attributable to the refinancing transaction completed during the second quarter of 1997 38 (see " -Liquidity and Capital Resources"). 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 43.6%, 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. Based on the level of pre-tax income, the tax rate for fiscal year 1997 assumed a federal statutory rate of 35%, versus 34% assumed for fiscal year 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. LIQUIDITY AND CAPITAL RESOURCES 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. Net cash provided by operating activities for the years ended December 27, 1998, December 28, 1997 and December 29, 1996 was $45.5 million, $52.5 million and $47.8 million, respectively. Available cash and cash equivalents, net of bank overdrafts, as of December 27, 1998 was $10.8 million, compared to $23.3 million at December 28, 1997 and $8.4 million at December 29, 1996. The Company's working capital deficit as of December 27, 1998, December 28, 1997 and December 29, 1996 was approximately $34.1 million, $13.6 million and $29.5 million, respectively. The decrease in available cash and cash equivalents, net of bank overdrafts from December 28, 1997 to December 27, 1998 was primarily due to the acquisitions of the Pinetree restaurants and Seattle Coffee Company. 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 restaurant units located primarily in North Carolina, South Carolina and Georgia. The assets were acquired in cash for a total purchase price of approximately $24.3 million. The Company borrowed $16.0 million under its $100.0 million acquisition facility in order to complete the transaction. The Company converted 66 of these restaurants into Company-operated Popeyes restaurants. The Company spent approximately $16.0 million to convert these restaurants. Funds to convert these restaurants were provided primarily by the Company's acquisition facility and short-term borrowings under its revolving line of credit. As of December 27, 1998, the Company had borrowed $9.0 39 million under its acquisition facility and $7.0 million under its revolving line of credit to convert these restaurants. On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for an adjusted purchase price of approximately $68.8 million plus the assumption of approximately $4.8 million of debt. In order to complete the transaction, the Company obtained $37.6 million in cash from its acquisition facility and issued $25.5 million in AFC common stock, options and warrants. In addition, the Company established a payable of approximately $3.8 million pursuant to a holdback payment provision in the acquisition agreement. Included in the adjusted purchase price was a contingent payment of $1.9 million, based upon SCC operations achieving a level of earnings, as defined in the agreement, over a 52-week period from September 29, 1997 to September 27, 1998. On October 15, 1998, the Company acquired Cinnabon International, Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail cinnamon roll bakeries are Company-operated and are located within the United States. In connection with the acquisition, which was accounted for as a purchase, CII became a wholly-owned subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII (the "Acquisition"). The Company acquired CII for $64.0 million in cash. The Company obtained $44.7 million of the cash consideration from its 1997 Credit Facility, which was amended to add a $50.0 million Tranche B term loan (see below). The remaining $19.3 million cash consideration was funded with the proceeds from the sale of approximately 2.8 million shares of AFC common stock to certain "qualified" investors who are existing AFC shareholders and option holders. The shares were sold at a price of $7.75 per share and cash proceeds from the sale totaled approximately $19.3 million. The Company also received notes receivable from the investors totaling approximately $1.3 million. In connection with the acquisition of CII, the Company amended its existing 1997 Credit Facility (See Note 8-"Long-term Debt" of the Company's Consolidated Financial Statements) to add a $50.0 million Tranche B term loan. The terms of the amended 1997 Credit Facility remained substantially unchanged with respect to security interests, covenants and events of default. At the election of the Company, the Tranche B term loan will bear interest at (i) a defined base rate plus 1.75% per annum or (ii) LIBOR plus 2.75% per annum, subject to reduction based on the achievement of certain leverage ratio levels. Principal repayments under the term loan are due in quarterly instalments of $0.1 million commencing December 31, 1998 and increasing to $3.8 million beginning September 30, 2002. The Tranche B term loan matures on June 30, 2004. As of December 27, 1998, total amounts outstanding under the Company's 1997 Credit Facility included: Tranche A term loan - $44.3 million; Tranche B term loan - $50.0 million; Acquisition Facility- $68.0 million; and Revolving Facility - $7.0 million. 40 During the fiscal year ended December 27, 1998 the Company invested in various capital projects totaling $41.5 million. During this period the Company invested $13.7 million in new restaurant locations, $4.1 million in its re- imaging and renovation program and $5.1 million in new management information systems. In addition, during 1998 the Company invested $18.6 million in other capital assets to update, replace and extend the lives of restaurant equipment and facilities and complete other projects. Approximately $3.7 million of the above capital projects were financed through capital lease obligations or note payable obligations. The remaining capital projects were financed primarily through cash flows provided from normal operating activities and internal funds. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt and changes in commodity prices. In addition, a portion of the Company's receivables are denominated in foreign currency, which exposes it to exchange rate movements. Historically, the Company has not utilized hedging contracts to manage its exposure to foreign currency rate fluctuations since the market risk associated with international receivables was not determined to be significant. Management anticipates that such hedging contracts may be used to some extent in 1999 and beyond to reduce the Company's exposure to future foreign currency rate fluctuations. The Company's net exposure to interest rate risk consists of its Senior Subordinated Notes and borrowings under its 1997 Credit Facility. The Senior Subordinated Notes bear interest at a fixed rate of 10.25%. The aggregate balance outstanding under the Senior Subordinated Notes as of December 27, 1998 was $175.0 million. Should interest rates increase or decrease, the estimated fair value of these notes would decrease or increase, respectively. As of December 27, 1998, the fair value of the Senior Subordinated Notes exceeded the carrying amount by approximately $7.0 million. The Company's 1997 Credit Facility has borrowings made pursuant to it that bear interest rates that are benchmarked to US and European short-term interest rates. The balances outstanding under the 1997 Credit Facility as of December 27, 1998 totaled $169.3 million. The impact on the Company's annual results of operations of a hypothetical one-point interest rate change on the outstanding balances under the 1997 Credit Facility would be approximately $1.7 million. This assumes no change in the volume or composition of the debt at December 27, 1998. 41 The Company and its franchisees purchase certain commodities such as chicken, potatoes, flour, cooking oil and coffee beans. These commodities are generally purchased based upon market prices established with vendors. These purchase arrangements may contain contractual features that limit the price paid by establishing certain price floors or caps. Historically, the Company has not used financial instruments to hedge commodity prices. In the future, the Company intends to enter into commodity hedging initiatives to control the ultimate cost paid for these products and limit the impact of changes in commodity prices. IMPAIRMENTS OF LONG-LIVED ASSETS Effective December 13, 1995, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"). Under FAS 121, the Company reviews its long-lived assets (such as property and equipment) and certain identifiable intangible assets for impairment whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. If the sum of the undiscounted estimated future cash flows of an asset is less than the carrying value of the asset, an impairment loss equal to the difference between the carrying value and the fair value of the asset is recognized. Fair value is estimated to be the present value of expected future cash flows, as determined by management, after considering such factors as inflation, interest rates and other economic data. During 1998 management reviewed the estimated future cash flows expected from its Chesapeake bakery cafe group and determined an impairment loss equal to $6.8 million. The bagel bakery industry segment has been weak the last two years and, as a result, 58 franchised Chesapeake bagel bakeries closed during 1998. Management believes that expected future cash flows from the remaining bagel bakery restaurants support the carrying values for long-lived tangible and intangible assets of the Chesapeake brand as of December 27, 1998. YEAR 2000 The Company relies to a large extent on computer technology to carry out its day-to-day operations. The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's information technology ("IT") systems and non-IT systems that are reliant on computer technology. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This problem could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions or engage in normal business activities. 42 The Company has adopted a Year 2000 plan that includes five phases. These phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain. Although the pace of the work varies among IT and non-IT systems and the phases are often conducted in parallel, the inventory and assess phases have been substantially completed as of December 27, 1998 and the remediation phase is in progress. Under the Company's current plan, remediation and testing of IT systems is scheduled to be completed by the end of its third quarter of 1999. The Company anticipates the timely completion of this compliance assessment, which should mitigate the Year 2000 issue. To date, the Company has incurred approximately $0.1 million in Year 2000 costs. These costs are primarily related to fees paid to outside consultants who helped develop a strategy to assess the Company's Year 2000 issues. The Company estimates that the total costs of addressing the Year 2000 issue will approximate $0.9 million, including the amount that has already been expended. These costs will be funded through operating cash flows. Based upon its compliance assessment, the Company does not expect the Year 2000 problem, including the cost of making the Company's IT and non-IT systems Year 2000 compliant, to have a material adverse impact on the Company's financial position or results of operations in future periods. The cost and time estimates for the Company's Year 2000 project are based on its best estimates. There can be no assurance that these estimates will be achieved or that planned results will be achieved. The inability of the Company to resolve all potential Year 2000 problems in a timely manner could have a material adverse impact on the Company. During August 1994, an outsourcing agreement between the Company and IBM Global Services ("IGS") was executed to, among other things, enhance and upgrade the Company's corporate and restaurant hardware and software computer systems. During the process of upgrading its systems, which is scheduled for completion by the end of third quarter of 1999, the Company established procedures to ensure that its new IT systems were Year 2000 compliant. The Company believes that a significant portion of the potential Year 2000 issues will be resolved with the completion of its IT system upgrades made in connection with the IGS contract. Under the Company's Franchise Awareness Program and Vendor/Supplier Letter Program, the Company has and will initiate communications with its significant suppliers and vendors and its franchisee community in an effort to determine the extent to which the Company's business is vulnerable to the failure by these third parties to remediate their Year 2000 problems. While the Company has not been informed of any material risks associated with the Year 2000 problem with respect to these entities, there can be no assurance that the IT and non-IT systems of these third parties will be Year 2000 compliant on a timely basis. The inability of these third parties to remediate their Year 2000 problems could have a material adverse impact on the Company's financial position and results of operations. 43 The Company has not yet ascertained what the impact would be on the Company's financial position and results of operations in the event of failure of the Company's or third parties' IT and non-IT systems due to the Year 2000 issue. The Company began developing a contingency plan in the fourth quarter of 1998 and will continue to develop such plan during the first quarter of 1999 designed to allow continued operations in the event that such failures should occur. 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. 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. Cinnabon and Seattle Coffee have traditionally experienced the strongest operating results during the Christmas holiday shopping season between Thanksgiving and Christmas. 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. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This standard requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement with the same prominence as other financial statements. FAS 130 is effective for fiscal years beginning after December 15, 1997. Presently, the Company does not have any items which are considered to be components of comprehensive income and therefore, FAS 130 does not impact the Company's financial statements at this time. In February 1998, Statement of Financial Accounting Standards No. 132, "Employer's Disclosure about Pensions and Other Post-Retirement Benefits" ("FAS 132") was issued. FAS 132 revises employer's disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. This statement is effective for fiscal years beginning after December 15, 1997 and 44 impacts the presentation of financial statement disclosures. The Company adopted FAS 132 in fiscal year 1998. In June 1998, Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. The statement is effective for all quarters of fiscal years beginning after June 15, 1999. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities in the financial statements at fair value. Management does not believe the implementation of this recent accounting pronouncement, if applicable, will have a material effect on its consolidated financial statements. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires that costs of start-up activities and organization costs be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company will adopt SOP 98-5 in fiscal year 1999. It is management's belief that SOP 98-5 will not have a materially adverse effect on the Company's financial position or results of operations. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company has included the consolidated 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 consolidated financial statements. 45 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 51 Chairman, Chief Executive Officer and Director Dick R. Holbrook 46 President, Chief Operating Officer and Director Samuel N. Frankel 61 Executive Vice President, Secretary, General Counsel and Director Gerald J. Wilkins 41 Chief Financial Officer Jon Luther 55 President of Popeyes Chicken & Biscuits Hala Moddelmog 43 President of Churchs Chicken William M. Van Epps 51 President of International Gregg A. Kaplan 42 President of Bakery Cafe Group James W. Clarke 52 President of Seattle Coffee Company Mark J. Doran 35 Director Paul Farrar 64 Director Matt L. Figel 39 Director Peter Starrett 51 Director Kelvin J. Pennington 40 Director John M. Roth 40 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. 46 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 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. In 1999, Mr. Belatti received the Entrepreneur of the Year Award by the International Franchise Association. Mr. Belatti also serves as Chairman of the AFC Foundation, Inc., as well as a member of the Boards of Directors for The Hank Aaron Chasing the Dream Foundation, Inc., The Schenck School, APEX Museum, The Tandy Corporation 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. Mr. Holbrook is a member of the Board of Directors of the AFC Foundation, Inc. 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 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. Mr. Luther is a member of the Board of Directors of the AFC Foundation, Inc. 47 HALA 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 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. Ms. Moddelmog is a member of the Board of Directors of the AFC Foundation, Inc. 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 Bakery Cafe Group: Mr. Kaplan assumed the position as President of the Bakery Cafe Group 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. From January 1989 to December 1990, Mr. Kaplan served as Vice President of Marketing with Rally's Inc. From 1983 to 1988, Mr. Kaplan was the Director of Marketing at Wendy's International. Mr. Kaplan is a member of the Board of Directors of the International Franchise Association. JAMES W. CLARKE, President of Seattle Coffee Company: Mr. Clarke assumed the position of President of Seattle Coffee Company in October 1998. He served as Seattle Coffee Company's Chief Operating Officer from April 1997 to September 1998. Between August 1995 and May 1997, Mr. Clarke was the Senior Vice President of Marketing at Seattle Coffee Company. Mr. Clarke is also a member of the Boards of Directors of the Salvation Army of King County and the Pacific Northwest Aquarium. MARK J. DORAN, Director: Mr. Doran joined FS&Co. in 1988 and became a general partner in March 1998. 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. 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. 48 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. PETER STARRETT, Director: Mr. Starrett founded Peter Starrett Associates, a retail advisory firm, in August 1998. From 1990 to 1998, Mr. Starrett was the President of Warner Bros. Studio Stores Worldwide. Previously, he held senior executive positions at both Federated Department Stores and May Department Stores. Mr. Starrett also serves on the boards of directors of Brylane, Inc., Guitar Center, Inc. and Petco Animal Supplies, Inc. 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 Liberty Service Corporation, MainStreet Healthcare Corporation and HTD Corporation. 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 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 Advance Holding Corporation. 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 Executive Committee and a director of EnviroSource, Inc. and also serves on the Boards of Directors of Advance Holding Corporation, Century Maintenance Supply and Hudson Respiratory Care, 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. 49 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 27, 1998, December 28, 1997 and December 29, 1996.
Annual Compensation All Other - ---------------------------------- --------------------------------------------------------- Name and Principal Position Year Salary Bonus/(1)/ Compensation/(2)/ - ---------------------------------- ----------- ----------------- ------------------- ------------------------ FRANK J. BELATTI 1998 $495,385 - $ 19,560/(3)/ Chief Executive Officer 1997 468,462 660,000 55,860 1996 430,000 515,045 32,943 DICK R. HOLBROOK 1998 $345,385 - $ 17,935/(3)/ President and 1997 323,077 270,000 21,635 Chief Operating Officer 1996 300,000 220,000 13,643 SAMUEL N. FRANKEL 1998 $311,538 - $ 50,995 Executive Vice President, 1997 294,231 250,000 50,995 Secretary and 1996 275,000 200,000 32,745 General Counsel WILLIAM M. VAN EPPS 1998 $266,154 - $ 5,833/(3)/ President of 1997 236,615 90,000 5,617/(3)/ International 1996 196,720 100,000 5,758/(3)/ HALA MODDELMOG 1998 $266,154 - $ 2,935/(3)/ President of Churchs Chicken 1997 230,001 120,000 2,935/(3)/ 1996 178,079 80,000 2,860/(3)/
______________ (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) 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 $4,633, $4,417 and $4,633 in life insurance premiums in 1998, 1997 and 1996, 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 1998, 1997 and 1996 for the split dollar life insurance policy for the benefit of Ms. Moddelmog. (3) Includes matching contributions by AFC into the AFC Deferred Compensation Plan on behalf of Messrs. Belatti and Holbrook of $1,200. 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, $1,200 and $1,125 for 1998, 1997 and 1996, respectively, and (ii) Ms. Moddelmog of $1,200, $1,200 and $1,125 for 1998, 1997 and 1996, respectively. 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 $500,000, subject to annual adjustment by the Board of Directors, 50 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, 2001, 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 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 $350,000, 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, 2001, 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 $315,000, 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, 2001, 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 51 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 ("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 27, 1998, options with respect to 1,635,757 shares of Common Stock were outstanding under the 1992 Option Plan, of which options with respect to 1,560,563 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 1,507,489 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. 52 Belatti, Holbrook and Frankel, respectively, at an exercise price of $4.95 per share. In 1998, AFC granted options with respect to 23,328, 20,000 and 20,000 shares of Common Stock to Messrs. Belatti, Holbrook and Frankel, respectively, at an exercise price of $7.50 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 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. Effective on December 15, 1998, the Company's Board of Directors approved the cancellation of 510,842, 263,428 and 158,428 unvested options as of December 27, 1998 held by Messrs. Belatti, Holbrook and Frankel, respectively. These options had exercise prices that ranged from $3.32 per share to $7.50 per share. In connection with the cancellation, the Board of Directors also approved the grant of 510,842, 263,428 and 158,428 options for Messrs. Belatti, Holbrook and Frankel, respectively at an exercise price of $7.75 per share, which was the fair value of the Company's Common Stock at the date of grant. Additionally, Messrs. Belatti, Holbrook and Frankel became fully vested in these options upon the date of grant. As of December 27, 1998, options with respect to 1,507,489 shares of Common Stock were outstanding and exercisable under the Executive Performance Option Plan. 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 1,205,806 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. In 1997, AFC granted options with respect to 8,547 and 2,377 shares of Common Stock to Mr. Van Epps and Mrs. Moddelmog, respectively, 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 53 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 27, 1998, options to purchase 1,187,476 shares of Common Stock were outstanding under the General Performance Option Plan, of which options to purchase 690,699 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 an exercise price of $3.317 per share. In 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. On January 1, 1998, options to purchase 16,672 and 5,000 shares were granted to Messrs. Belatti and Holbrook at an exercise price of $7.50 per share. On October 1, 1998, options to purchase 8,000 and 20,000 shares were granted to Mr. Van Epps and Ms. Moddelmog at an exercise price of $7.50 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 27, 1998, options with respect to 1,036,143 shares of Common Stock were outstanding under the 1996 Option Plan, of which options to purchase 241,968 shares of Common Stock were exercisable. 54 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 ------------------------------------------------------------- Value at Assumed Annual Number of % of Total Rates of Stock Price Securities Options Appreciation for Option Underlying Granted to Exercise Term(2) Options Employees in or Expiration -------------------------- Name Granted (#) Fiscal Year Base Price Date 5% 10% ---- -------------- ------------- ------------- ----------- ---------- ---------- Frank J. Belatti 510,842 54.77% $ 7.750 12/15/08 $2,489,810 $6,309,667 16,672 4.09 7.500 1/1/05 50,904 118,628 Dick R. Holbrook 263,428 28.24 7.750 12/15/08 1,283,931 3,253,732 5,000 1.23 7.500 1/1/05 15,266 35,577 Samuel N. Frankel 158,428 16.99 7.750 12/15/08 772,168 1,956,824 William M. Van Epps 8,000 1.96 7.500 10/1/05 24,426 56,923 Hala Moddelmog 20,000 4.91 7.500 10/1/05 61,065 142,308
_____________ (1) Option grants to the Named Executive Officers set forth in the table were granted under the Executive Performance Option Plan, with respect to Messrs. Belatti, Holbrook and Frankel and the 1996 Option Plan, with respect to Messrs. Belatti, Holbrook and Van Epps and Ms. Moddelmog. (2) These columns indicate the hypothetical gains of "option spreads" of the outstanding options granted, based on assumed annual compound stock appreciation rates of 5% and 10% over the options' terms. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Commission and do not represent AFC's estimate or projection of the future prices or market value of Common Stock. 55 The following table sets forth information concerning the number and value of securities underlying unexercised options held by each of the Named Executive Officers as of December 27, 1998. AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Securities Unexercised Value of Unexercised Underlying Options at In-the-Money Options at Dec 27, 1998 (#) Dec. 27, 1998 ($)(1)(2) --------------------------------- ---------------------------- Not Not Exercisable Exercisable Exercisable Exercisable --------------- ------------- ----------- ----------- Frank J. Belatti 1,752,637 85,965 8,291,434 271,673 Dick R. Holbrook 719,672 38,722 2,831,569 153,329 Samuel N. Frankel 319,893 41,213 2,128,359 158,263 William M. Van Epps 109,797 68,662 604,883 266,478 Hala Moddelmog 93,860 86,599 502,336 344,025
_____________ (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 $7.75 per share as of December 27, 1998. (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 $7.75 per share as described in Note 1. 1998 SCC PLAN In connection with the SCC acquisition in March 1998, the Company executed the Substitute Nonqualified Stock Option Plan ("1998 SCC Plan"). This plan was established to enable the Company to issue AFC options to former SCC option holders in order to purchase 100% of SCC's common stock pursuant to the purchase agreement. The 1998 SCC Plan authorizes the issuance of approximately 0.5 million options at exercise prices that range from $3.91 to $6.75 per share. The Company issued approximately 0.4 million options at the closing date of the acquisition. The issuance of the remaining 0.1 million is subject to a reduction of a holdback provision in the agreement. At December 27, 1998, the weighted-average price per share was $4.74. The options vest when issued by the Company and expire at various dates through October 31, 2007. At December 27, 1998, the weighted-average contractual life of these options was 6.6 years. As of December 27, 1998, 457,398 options were exercisable. 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 27, 1998, 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% 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 $1.5 million on December 27, 1998. 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION 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. 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 29, 1999, 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 39,233,441 shares outstanding as of March 29, 1999. OWNERSHIP OF AFC COMMON STOCK
Shares of Percentage of Name(1) Common Stock Common Stock ------- --------------- ------------- Freeman Spogli & Co. Incorporated(2)(3)...................... 21,212,421 54.1% Canadian Imperial Bank of Commerce(4)........................ 6,312,724 16.1% PENMAN Private Equity and Mezzanine Fund, L.P.(5)............ 2,361,954 6.0% ML IBK Positions, Inc.(6).................................... 2,050,000 5.2% Frank J. Belatti(7)(8)....................................... 3,234,140 7.9% Dick R. Holbrook(7)(9)....................................... 1,401,326 3.5% Samuel N. Frankel(7)(10)..................................... 1,211,275 3.0% William M. Van Epps(7)(11)................................... 132,807 * Hala Moddelmog(7)(12)........................................ 128,765 * Mark J. Doran(3)............................................. -- -- Paul Farrar(13).............................................. -- -- Matt L. Figel(14)............................................ -- -- Peter Starrett(3)............................................ 44,000 * Kelvin J. Pennington(5)...................................... -- -- John M. Roth(3).............................................. -- -- Ronald P. Spogli(3).......................................... -- -- William M. Wardlaw(3)........................................ -- -- Directors and officers as a group (34 persons) (15).......... 30,578,339 71.0% ---------------
______________ * 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") , 733,583 shares owned by FS Equity Partners International, L.P. ("FSEP International")and 2,219,355 shares owned by FS Equity Partners IV, L.P. ("FSEP IV"). 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 Starrett, each of whom is a member of the Board, are affiliated with FS&Co. The business address of 58 each of FS&Co. and its general partners, FSHI and its sole directors, officers and shareholders, FS Capital and FSEP III and Mr. Starrett is 11100 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 Mr. Doran 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 1,775,138 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 29, 1999. (9) Includes 728,422 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 29, 1999. (10) Includes 499,622 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 29, 1999. (11) Includes 98,107 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 29, 1999. (12) Includes 94,065 shares of Common Stock issuable with respect to options exercisable within 60 days as of March 29, 1999. (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 21,212,421 shares of Common Stock held by affiliates of FS&Co., 2,361,954 shares of Common Stock held by an affiliate of PENMAN Equity and 3,812,067 shares of Common Stock issuable with respect to options granted to certain executive officers that are exercisable within 60 days as of March 29, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In October 1998, the Company issued 2,795,703 shares of AFC Common Stock to certain existing "qualified" shareholders and option holders at a purchase price of $7.75 per share. The buyers of stock included an affiliate, Freeman Spogli and Co., Inc. ("FS"), which through other affiliates, is AFC's majority shareholder, and PENMAN Private Equity and Mezzanine Fund, L.P. Freeman Spogli purchased 2,219,355 shares of Common Stock for a purchase price of $17.2 million. PENMAN Private Equity and Mezzanine Fund, L.P. purchased 251,613 shares of Common Stock for a purchase price of approximately $2.0 million. Messrs. Belatti, Holbrook and Frankel purchased 129,033, 12,904 and 51,613 shares of Common Stock, respectively, for a purchase price of $1.0 million, $0.1 million and $0.4 million, respectively. Messrs. Belatti, Holbrook and Frankel borrowed $0.8 million, $0.1 million and $0.3 million, respectively, from AFC to cover a portion of the purchase price of the shares of Common Stock referred to above. Each officer delivered a promissory note to AFC with respect to the amount borrowed. The notes bear interest at 7.0% per annum 59 with principal and interest payable at the end of the term of the note, which is December 31, 2005. The notes are secured by the number of shares of common stock purchased by the employee with the note proceeds. At December 27, 1998, the outstanding principal balances plus accrued interest due from Messrs. Belatti, Holbrook and Frankel was approximately $0.8 million, $0.1 million and $0.3 million, respectively. As part of the stock offering in October 1998, the Company paid FS $1.0 million, which represented stock issuance costs. In 1996, Messrs. Belatti, Holbrook, Frankel, Van Epps and Ms. Moddelmog borrowed approximately $2.0 million, $1.0 million, $1.0 million, $0.1 million and $0.1 million, respectively, from AFC to cover certain income tax liabilities arising as a result of the issuance of shares of Common Stock in connection with a 1996 recapitalization. In 1997, AFC additionally loaned each of Messrs. Belatti, Holbrook and Frankel approximately $0.1 million 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 officer also entered into a pledge agreement with AFC whereby each note is secured by the pledge of shares of Common Stock issued to them. At December 27, 1998, the outstanding principal balances plus accrued interest due from Messrs. Belatti, Holbrook, Frankel, Van Epps and Ms. Moddelmog was approximately $2.4 million, $1.2 million, $1.2 million, $0.1 million and $0.1 million, respectively. 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 Public Accountants............................. F-1 Consolidated Balance Sheets as of December 27, 1998 and December 28, 1997........................................................... F-2 Consolidated Statements of Operations for the Years ended December 27, 1998, December 28, 1997 and December 29, 1996.................. F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years ended December 27, 1998, December 28, 1997 and December 29, 1996........................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996.................. 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 (a) Articles of Incorporation of AFC Enterprises, Inc. ("AFC"), as amended to date. 3.2 (a) Amended and Restated Bylaws of AFC (formerly known as America's Favorite Chicken Company), as amended to date. 4.1 (a) 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 (a) 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. 61 4.3 (h) Amended and Restated Credit Agreement, dated as of October 15, 1998, among AFC Enterprises, Inc. and Goldman Sachs Credit Partners L.P., as Syndication Agent and Lead Arranger and the financial institutions listed therein (collectively "Lenders") and Canadian Imperial Bank of Commerce, as Administrative Agent. 4.4 (a) Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.5 (a) Pledge Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.6 (a) Trademark Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.7 (a) Patent and Copyright Security Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.8 (a) Collateral Account Agreement, dated as of May 21, 1997, by and between AFC and CIBC, as Administrative Agent. 4.9 (a) 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 (a) 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 (a) 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 (a) 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 (a) Asset Purchase Agreement dated March 24, 1997 by and between AFC and Atlanta Franchise Development Company, LLC. 10.5 (a) 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 (a) Form of Popeye's Development Agreement 10.7 (a) Form of Church's Development Agreement 10.8 (a) Form of Popeye's Franchise Agreement 10.9 (a) Form of Church's Franchise Agreement 62 10.10 (a) 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 (a) 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 (a) 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 (a) Supply Agreement dated March 21, 1989 between New Orleans Spice Company, Inc. and Biscuit Investments, Inc. 10.14 (a) Recipe Royalty Agreement dated March 21, 1989 by and among Alvin C. Copeland, New Orleans Spice Company, Inc. and Biscuit Investments, Inc. 10.15 (a) Licensing Agreement dated March 11, 1976 between King Features Syndicate Division of The Hearst Corporation and A. Copeland Enterprises, Inc. 10.16 (a) 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 (a) Popeye License Agreement dated January 1, 1981 between King Features Syndicate Division of The Hearst Corporation and Popeyes Famous Fried Chicken, Inc. 10.18 (a) 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 (a) 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 (a) 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 (a) Employment Agreement dated November 5, 1992 between AFC and Frank J. Belatti. 10.22 (a) Amendment No. 1 to Employment Agreement dated November 5, 1995 between AFC and Frank J. Belatti. 10.23 (a) Employment Agreement dated as of November 5, 1992 between AFC and Dick 63 R. Holbrook. 10.24 (a) Amendment No. 1 to Employment Agreement dated November 5, 1995 between AFC and Dick R. Holbrook. 10.25 (a) Employment Agreement dated December 5, 1995 between AFC and Samuel N. Frankel. 10.26 (a) 1992 Stock Option Plan of AFC (formerly America's Favorite Chicken Company) effective as of November 5, 1992. 10.27 (a) First Amendment to 1992 Stock Option Plan dated July 19, 1993. 10.28 (a) Second Amendment to 1992 Stock Option Plan dated December 17, 1993. 10.29 (a) Third Amendment to 1992 Stock Option Plan dated April 11, 1996. 10.30 (a) 1996 Nonqualified Performance Stock Option Plan (Executive) of AFC effective as of April 11, 1996. 10.31 (a) 1996 Nonqualified Performance Stock Option Plan (General) of AFC effective as of April 11, 1996. 10.32 (a) 1996 Nonqualified Stock Option Plan of AFC effective as of April 11, 1996. 10.33 (a) Form of Nonqualified Stock Option Agreement (General) between AFC and stock option participants. 10.34 (a) Form of Nonqualified Stock Option Agreement (Executive) between AFC and certain key executives. 10.35 (a) 1996 Employee Stock Bonus Plan (Executive) of AFC effective as of April 11, 1996. 10.36 (a) 1996 Employee Stock Bonus Plan (General) of AFC effective as of April 11, 1996. 10.37 (a) Form of Stock Bonus Agreement (Executive) between AFC and certain executive officers. 10.38 (a) Form of Stock Bonus Agreement (General) between AFC and certain key officers and employees. 10.39 (a) Form of Secured Promissory Note issued to certain members of management. 10.40 (a) Form of Stock Pledge Agreement between AFC and certain members of management. 64 10.41 (a) AFC 1994 Supplemental Benefit Plan for Executive Officers dated May 9, 1994. 10.42 (a) AFC 1994 Supplemental Benefit Plan for Senior and Executive Staff Officers dated April 19, 1994. 10.43 (a) AFC 1994 Supplemental Benefit Plan for Senior Officers/General Managers dated May 9, 1994. 10.44 (a) AFC 1994 Supplemental Benefit Plan for Designated Officers dated May 9, 1994. 10.45 (a) Settlement Agreement between Alvin C. Copeland, Diversified Foods and Seasonings, Inc., Flavorite Laboratories, Inc. and AFC dated May 29, 1997. 10.46 (a) Sublease dated March 1, 1997 by and between AFC and Foresight Software, Inc. 10.47 (a) Lease dated December 31, 1992 by and between Concourse VI Associates and AFC. 10.48 (a) First Amendment to Lease Agreement dated January 1993 by and between AFC and Concourse VI Associates. 10.49 (a) Second Amendment to Lease Agreement dated June 24, 1993 by and between AFC and Concourse VI Associates. 10.50 (a) Third Amendment to Lease Agreement dated June 17, 1994 by and between AFC and Concourse VI Associates. 10.51 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and William M. Wardlaw. 10.52 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Ronald P. Spogli. 10.53 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and John M. Roth. 10.54 (a) Indemnification Agreement dated May 1, 1996 by and between AFC and Kelvin J. Pennington. 10.55 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Dick R. Holbrook. 10.56 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Todd W. Halloran. 10.57 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Samuel N. Frankel. 65 10.58 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Matt L. Figel. 10.59 (a) Indemnification Agreement dated July 2, 1996 by and between AFC and Paul H. Farrar. 10.60 (a) Indemnification Agreement dated July 2, 1997 by and between AFC and Mark J. Doran. 10.61 (a) Indemnification Agreement dated April 11, 1996 by and between AFC and Frank J. Belatti. 10.62 (b) Credit Agreement dated August 12, 1997, between AFC and Banco Popular ("Banco Popular") De Puerto Rico for Turnkey Development program financing. 10.63 (b) Exhibit A (the Budget) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.64 (b) Exhibit B (Form of Notes) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.65 (b) Exhibit C (Form of Leasehold Mortgage) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.66 (b) Exhibit D (Form of Owned Property Mortgage) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.67 (b) Exhibit E (Form of Assignment of Contracts) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.68 (b) Exhibit F (Form of Environmental Indemnity Agreement) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.69 (b) Exhibit G (Form of Borrowing Certificate) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.70 (b) Exhibit H (Terms and Conditions of Standard Franchise Loans) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.71 (b) Exhibit I (Terms and Conditions of Popular Plus Loans) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.72 (b) Exhibit J (Description of Borrower's "Plus Program") of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 66 10.73 (b) Exhibit K-1 (Franchise Loan Commitment) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.74 (b) Exhibit K-2 (Forms of Franchise Loan Documents) of Credit Agreement dated August 12, 1997 between AFC and Banco Popular. 10.75 (c) Form of Chesapeake Bagel Development Agreement 10.76 (c) Form of Chesapeake Bagel Franchise Agreement 10.77 (d) Agreement and Plan of Merger among AFC Enterprises, Inc. and Seattle Coffee Company, all of the Principal Shareholders of Seattle Coffee Company (collectively "SCC") and AFC Acquisition Corp (the "Merger Agreement"). 10.78 (d) Exhibit A of Merger Agreement with SCC - Disclosure Statement 10.79 (d) Exhibit B of Merger Agreement with SCC - Stockholders Agreement 10.80 (d) First Amendment to Merger Agreement with SCC 10.81 (e) Agreement and Plan of Merger by and among Cinnabon International, Inc., AFC Enterprises, Inc. and AFC Franchise Acquisition Corp., effective August 13, 1998 10.82 (f) First Amendment to the Agreement and Plan of Merger by and among Cinnabon International, Inc., AFC Enterprises, Inc. and AFC Franchise Acquisition Corp. dated August 13, 1998 ("Cinnabon Merger Agreement") 10.83 (f) Second Amendment to the Cinnabon Merger Agreement 10.84 (f) Stockholder Agreement by and among AFC Franchise Acquisition Corp. and other parties signatories dated as of August 13, 1998 10.85 (h) AFC Deferred Compensation Plan dated March 1, 1998. 10.86 (h) First Amendment to the AFC Deferred Compensation Plan dated March 1, 1998 21.1 (h) Subsidiaries of AFC. 23.2 (g) Consent of Ernst and Young LLP. 27.1 (h) Financial Data Schedule 67 ___________________ (a) 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. (b) 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. (c) Filed as an exhibit to the Company's Form 10-K for the year ended December 28, 1998 on March 15, 1998 and incorporated by reference herein. (d) Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 22, 1998 on May 6, 1998 and incorporated by reference herein. (e) Filed as an exhibit to the Company's Current Report on Form 8-K dated August 13, 1998 and incorporated by reference herein. (f) Filed as an exhibit to the Company's Current Report on Form 8-K dated October 15, 1998 and incorporated by reference herein. (g) Filed as an exhibit to the Company's Current Report on Form 8-K/A dated October 15, 1998 and incorporated by reference herein. (h) Included in this filing. (D) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K dated October 29, 1998 under Item 2, Acquisition or Disposition of Assets and Item 7, Financial Statements and Exhibits, to report the Company's execution of a definitive agreement to acquire all of the common stock of Cinnabon International, Inc. The Company filed a Current Report on Form 8-K/A dated December 23, 1998 under Item 7, Financial Statements and Exhibits, to include Cinnabon International, Inc.'s (i) audited financial statements as of March 30, 1997 and March 29, 1998, (ii) unaudited financial statements for the six months ended September 27, 1998 and pro forma financial information. 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 29, 1999 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 29, 1999 ------------------------ Frank J. Belatti Chief Executive Officer (Principal Executive Officer) /s/ Gerald J. Wilkins Chief Financial Officer March 29, 1999 ------------------------ Gerald J. Wilkins (Principal Financial and Accounting Officer) /s/ Dick R. Holbrook President, Chief Operating March 29, 1999 ------------------------ Dick R. Holbrook Officer and Director /s/ Samuel N. Frankel Executive Vice President, March 29, 1999 ------------------------ Samuel N. Frankel Secretary, General Counsel and Director /s/ John M. Roth Director March 29, 1999 ------------------------ John M. Roth /s/ Mark J. Doran Director March 29, 1999 ------------------------ Mark J. Doran /s/ Paul Farrar Director March 29, 1999 ------------------------ Paul Farrar
69 /s/ Matt L. Figel Director March 29, 1999 ------------------------- Matt L. Figel /s/ Peter Starrett Director March 29, 1999 ------------------------- Peter Starrett /s/ Kelvin J. Pennington Director March 29, 1999 ------------------------- Kelvin J. Pennington /s/ Ronald P. Spogli Director March 29, 1999 ------------------------- Ronald P. Spogli /s/ William M. Wardlaw Director March 29, 1999 ------------------------- 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 subsidiaries (collectively referred to hereafter as "the Company") as of December 27, 1998, and December 28, 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 27, 1998, December 28, 1997, and December 29, 1996. 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 the Company as of December 27, 1998, and December 28, 1997, and the results of its operations and its cash flows for the years ended December 27, 1998, December 28, 1997, and December 29, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia March 12, 1999 F-1 AFC ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS As of December 27, 1998 and December 28, 1997 ( In thousands, except share amounts) - -------------------------------------------------------------------------------- 1998 1997 -------- -------- ASSETS: CURRENT ASSETS: Cash and cash equivalents.............................. $ 17,066 $ 32,964 Accounts and current notes receivable, net of reserve.. 16,728 8,305 Income taxes refundable................................ 3,327 2,477 Inventories............................................ 13,182 4,447 Deferred income taxes.................................. 4,577 3,366 Prepaid expenses and other............................. 2,344 1,539 -------- -------- Total current assets................................ 57,224 53,098 LONG-TERM ASSETS: Notes receivable, net.................................. 4,066 4,477 Deferred income taxes.................................. 4,416 - Property and equipment, net............................ 263,141 207,807 Other assets........................................... 19,498 17,049 Trademarks, net........................................ 82,913 95,504 Goodwill, net.......................................... 122,334 3,347 Other intangible assets, net........................... 2,873 1,422 -------- -------- Total long-term assets.............................. 499,241 329,606 -------- -------- Total assets................................... $556,465 $382,704 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable....................................... $ 40,579 $ 22,123 Bank overdrafts........................................ 6,248 9,707 Current portion of long-term debt...................... 8,356 4,993 Current portion of capital lease obligations........... 6,050 6,001 Short-term borrowings.................................. 7,000 - Accrued interest....................................... 2,863 2,765 Accrued insurance expenses............................. 4,437 5,123 Accrued employee compensation.......................... 4,700 7,114 Accrued employee benefit expenses...................... 4,332 5,767 Other accrued expenses................................. 6,715 3,154 -------- -------- Total current liabilities........................... 91,280 66,747 LONG-TERM LIABILITIES: Long-term debt, net of current portion................. 262,744 220,150 Capital lease obligations, net of current portion...... 8,561 12,738 Acquisition facility................................... 68,000 - Deferred income taxes.................................. - 2,702 Other liabilities...................................... 37,963 31,908 -------- -------- Total long-term liabilities......................... 377,268 267,498 -------- -------- Total liabilities.............................. 468,548 334,245 -------- -------- (Continued) See accompanying notes to consolidated financial statements. F-2 AFC ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 27, 1998 and December 28, 1997 ( In thousands, except share amounts) - --------------------------------------------------------------------------------
1998 1997 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock ($.01 par value; 50,000,000 shares authorized; 39,232,329 and 34,448,604 shares issued and outstanding at period end, respectively).............................. 392 344 Capital in excess of par value............................... 151,632 101,840 Notes receivable - officers, including accrued interest...... (6,138) (4,402) Accumulated deficit.......................................... (57,969) (49,323) -------- -------- Total shareholders' equity................................ 87,917 48,459 -------- -------- Total liabilities and shareholders' equity........... $556,465 $382,704 ======== ========
See accompanying notes to consolidated financial statements. F-3 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996 (In thousands) - --------------------------------------------------------------------------------
For For For Year Ended Year Ended Year Ended December 27, December 28, December 29, 1998 1997 1996 ------------- ------------- ------------ (52 Weeks) (52 Weeks) (52 Weeks) REVENUES: Restaurant sales............................................. $ 488,574 $ 403,285 $ 430,280 Franchise revenues........................................... 66,606 64,055 51,336 Wholesale revenues........................................... 36,411 - - Manufacturing revenues....................................... 7,561 7,647 8,222 Other revenues............................................... 9,939 8,766 8,005 ------------ ------------ ------------ Total revenues.............................................. 609,091 483,753 497,843 COSTS AND EXPENSES: Restaurant cost of sales..................................... 155,627 131,374 142,199 Restaurant operating expenses................................ 246,448 197,324 211,275 Wholesale cost of sales...................................... 18,466 - - Wholesale operating expenses................................. 8,313 - - Manufacturing cost of sales.................................. 5,802 6,381 7,201 General and administrative................................... 89,457 79,541 76,071 Depreciation and amortization................................ 46,078 33,803 30,904 Impairment of Chesapeake intangible.......................... 6,800 - - Charges for restaurant closings.............................. 9,183 479 1,304 Provision for software write-offs............................ 5,000 - - Gain on sale of fixed assets from AFDC transaction........... - (5,319) - ------------ ------------ ------------ Total costs and expenses.................................... 591,174 443,583 468,954 ------------ ------------ ------------ INCOME FROM OPERATIONS........................................ 17,917 40,170 28,889 OTHER EXPENSES: Interest, net................................................ 30,786 20,645 15,875 ------------ ------------ ------------ NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS........................................... (12,869) 19,525 13,014 Income tax expense (benefit)................................. (4,223) 8,525 5,163 ------------ ------------ ------------ NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS................... (8,646) 11,000 7,851 Extraordinary loss on early retirement of debt, (net of income taxes of $2,673).................................. - - (4,456) ------------ ------------ ------------ NET INCOME (LOSS)............................................. (8,646) 11,000 3,395 8% Preferred Stock dividends.................................. - - 1,316 10% Preferred Stock dividends payable in kind................. - 2,240 3,956 Accelerated accretion of 8% Preferred Stock Discount upon retirement..................................... - - 8,719 Accretion of 8% Preferred Stock discount...................... - - 813 ------------ ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK................ $ (8,646) $ 8,760 $ (11,409) ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996 (In thousands) - --------------------------------------------------------------------------------
For For For Year Ended Year Ended Year Ended December 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ Common stock: Balance at beginning of period.................. $ 344 $ 344 $ 100 Issuance of common stock........................ 48 - 244 -------- -------- -------- Balance at end of period........................ $ 392 $ 344 $ 344 -------- -------- -------- Capital in excess of par value: Balance at beginning of period.................. $101,840 $ 99,482 $ 24,909 Issuance of common stock, options and warrants.. 48,720 6 73,709 Adjust stock issuance cost accrual to actual.... - 135 - Deferred compensation........................... 1,072 2,217 864 -------- -------- -------- Balance at end of period........................ $151,632 $101,840 $ 99,482 -------- -------- -------- Notes receivable - officers: Balance at beginning of period.................. $ (4,402) $ (3,841) $ - Notes receivable additions, net of discount..... (1,345) (202) (3,593) Note receivable payments........................ 12 19 - Interest receivable............................. (307) (284) (194) Amortization of discount........................ (96) (94) (54) -------- -------- -------- Balance at end of period........................ $ (6,138) $ (4,402) $ (3,841) -------- -------- -------- Accumulated deficit: Balance at beginning of period.................. $(49,323) $(58,083) $(46,674) Net income (loss)............................... (8,646) 11,000 3,395 Accretion of 8% Preferred Stock discount........ - - (813) Accelerated accretion of 8% Preferred Stock discount upon retirement....................... - - (8,719) 10% and 8% Preferred Stock dividends............ - (2,240) (5,272) -------- -------- -------- Balance at end of period........................ $(57,969) $(49,323) $(58,083) -------- -------- -------- Total shareholders' equity....................... $ 87,917 $ 48,459 $ 37,902 ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996 (In thousands) - --------------------------------------------------------------------------------
For For For Year Ended Year Ended Year Ended December 27, December 28, December 29, 1998 1997 1996 ------------- ------------- ------------- (52 Weeks) (52 Weeks) (52 Weeks) CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Net income (loss).......................................... $ (8,646) $ 11,000 $ 3,395 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 46,078 33,803 30,904 Provision for credit losses............................... 1,063 1,214 816 (Gain) loss on disposition and retirement of long-lived assets...................................... 987 (2,652) 1,715 Charges for restaurant closings........................... 9,183 479 1,304 Impairment of Chesapeake intangible....................... 6,800 - - Provision for software write-offs......................... 5,000 - - Amortization of notes payable discount.................... - - 7,729 Amortization of debt issuance costs....................... 1,477 886 - Notes receivable - officers discount...................... - - 876 Amortization of notes receivable - officers discount............................................... (96) (94) (54) Deferred compensation..................................... 1,072 2,217 864 Deferred tax expense (benefit)............................ (7,628) 3,863 380 Change in operating assets and liabilities: (Increase) decrease in accounts receivable................ (6,325) (905) (4,137) (Increase) decrease in inventories........................ (3,565) (487) 2,154 (Increase) decrease in prepaid expenses/other............. (1,546) 4,076 1,694 (Increase) decrease in other assets....................... (6,681) 21 (856) Increase (decrease) in accounts payable................... 14,747 4,157 1,101 Increase (decrease) in accrued expenses................... (3,298) (3,097) 2,469 Increase (decrease) in other liabilities.................. (3,085) (1,966) (2,553) --------- -------- -------- Total adjustments...................................... 54,183 41,515 44,406 --------- -------- -------- Net cash provided by operating activities.................. $ 45,537 $ 52,515 $ 47,801 --------- -------- -------- CASH FLOWS USED IN INVESTING ACTIVITIES: Proceeds from disposition of property held for sale........ $ 479 $ 19,681 $ 3,158 Investment in property and equipment....................... (38,135) (42,136) (33,951) Investment in Chesapeake intangible asset.................. - (14,116) - Investment in Pinetree intangible and fixed assets.................................................... (41,449) - - Investment in SCC intangible and fixed assets.................................................... (43,970) - - Investment in CII intangible and fixed assets.............. (67,484) - - Notes receivable additions................................. (359) (2,657) (136) Payments received on notes................................. 2,631 3,446 1,541 --------- -------- -------- Net cash used in investing activities...................... $(188,287) $(35,782) $(29,388) --------- -------- --------
(Continued) See accompanying footnotes to consolidated financial statements. F-6 AFC ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996 (In thousands) - --------------------------------------------------------------------------------
For For For Year Ended Year Ended Year Ended December 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ (52 Weeks) (52 Weeks) (52 Weeks) CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Principal payments of long-term debt................. $ (5,321) $(128,365) $(69,054) Proceeds from long-term debt......................... 50,000 50,000 - Proceeds from subordinated notes..................... - 175,000 - Net borrowings under Acquisition line of credit...... 68,000 - - Net borrowings under Revolving line of credit........ 7,000 - - Increase (decrease) in bank overdrafts, net.......... (3,459) (1,105) 2,729 Principal payments for capital lease obligations..... (7,421) (25,182) (3,904) Redemption of 10% preferred stock.................... - (59,957) - Notes receivable additions to officers............... - (202) (4,469) Notes receivable officers-payments................... 12 19 - Notes receivable officers-accrued interest........... (307) (284) (194) Issuance of common stock............................. 20,350 6 70,205 Stock issuance costs................................. (1,016) - (6,115) Debt issuance costs.................................. (986) (10,675) - Preferred stock dividends paid....................... - (2,240) (2,004) -------- --------- -------- Net cash provided by (used in) financing activities.. 126,852 (2,985) (12,806) -------- --------- -------- Net increase (decrease) in cash and cash equivalents.. (15,898) 13,748 5,607 Cash and cash equivalents at beginning of the period....................................... 32,964 19,216 13,609 -------- --------- -------- Cash and cash equivalents at end of the period........ $ 17,066 $ 32,964 $ 19,216 ======== ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash interest paid (net of capitalized amounts)....... $ 29,388 $ 19,579 $ 13,763 Cash paid for income taxes............................ 4,064 6,747 2,060
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital lease and note payable additions.............. $ 3,899 $ 20,485 $ 12,404 Issuance of Common Stock.............................. 28,090 - - Notes receivable to officers (See Note 14)............ 1,345 - - Retirement of 8% Preferred Stock (See Note 1)......... - - (56,000) Issuance of 10% Preferred Stock (See Note 1).......... - - 56,000 Issuance of common stock to executives in connection with 1996 Executive Compensation Award............... - - 10,000
See accompanying notes to consolidated financial statements. F-7 AFC ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 27, 1998, December 28, 1997 and December 29, 1996 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 subsidiaries, AFC Properties, Inc., a Georgia corporation, Seattle Coffee Company ("SCC"), a Washington corporation, and Cinnabon International, Inc. ("CII"), a Delaware corporation. All significant intercompany balances and transactions are eliminated in consolidation. The consolidated entity is referred to herein as "AFC" or "the Company". SCC is the parent company of two wholly-owned subsidiaries, Seattle's Best Coffee, Inc. and Torrefazione Italia, Inc., both of which are Washington corporations. CII is the parent company of one subsidiary, Cinnabon Inc., a Delaware corporation. Nature of Operations AFC is primarily a multi-concept quick-service restaurant company. 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"). In 1998, the Company added SCC, which operates and franchises cafes under the "Seattle's Best" and "Torrefazione Italia" brands (collectively "Seattle Coffee") and operates a wholesale coffee business. Also in 1998, the Company acquired CII, an operator and franchisor of retail cinnamon roll bakeries under the Cinnabon trade name ("Cinnabon"). The Company also operates a manufacturing plant that produces proprietary gas fryers and other custom-fabricated restaurant equipment for sale to distributors and franchisees. The following table outlines the number of restaurants operated by the Company and franchised by brand at the end of the indicated periods:
December 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ Popeyes: Domestic-Company-operated....... 171 119 120 Domestic-Franchised............. 899 830 774 International-Franchised........ 222 182 127 ----- ----- ----- Total......................... 1,292 1,131 1,021 ===== ===== ===== Churchs: Domestic-Company-operated....... 491 480 622 Domestic-Franchised............. 615 590 367 International-Franchised........ 293 286 268 ----- ----- ----- Total......................... 1,399 1,356 1,257 ===== ===== =====
F-8
December 27, December 28, December 29, 1998 1997 1996 ----- ----- ----- CII: Domestic-Company-operated....... 212 - - Domestic-Franchised............. 140 - - International-Franchised........ 17 - - ----- ----- ----- Total......................... 369 - - ===== ===== ===== SCC: Domestic-Company-operated....... 57 - - Domestic-Franchised............. 11 - - International-Company-operated 2 - - International-Franchised........ 1 - - ----- ----- ----- Total......................... 71 - - ===== ===== ===== Chesapeake: Domestic-Company-operated....... 4 1 - Domestic-Franchised............. 103 154 - International-Franchised........ - - - ----- ----- ----- Total......................... 107 155 - ===== ===== =====
A substantial portion of the domestic Company-operated restaurants are located in the South and Southwest areas of the United States. With the exception of two Company-operated SCC cafes in Canada, 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 March 18, 1998, the Company acquired all of SCC's common stock. As a result of this transaction, the Company acquired 59 Company-operated cafes and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands and a wholesale distribution business, including 13 offices and more than 5,000 accounts (See Note 17). On October 15, 1998, the Company acquired all of CII's's common stock. At acquisition, CII operated and franchised 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico. At the date of the acquisition, 211 of the bakeries were Company-operated and located within the United States (See Note 17). Basis of Presentation The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-9 The Company has a 52/53-week fiscal year ending on the last Sunday in December. The 1998, 1997 and 1996 fiscal years all consisted of 52 weeks. Certain items in the prior period consolidated financial statements, and notes thereto, have been reclassified to conform with the current presentation. In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company will adopt SOP 98-5 in fiscal year 1999. It is management's belief that SOP 98-5 will not have a material effect on the Company's financial position or results of operations. In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. This standard requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement with the same prominence as other financial statements. FAS 130 is effective for fiscal years beginning after December 15, 1997. Presently, the Company does not have any items which are considered to be components of comprehensive income, and therefore, FAS 130 does not impact the Company's financial statements at this time. In February 1998, Statement of Financial Accounting Standards No. 132, "Employer's Disclosure about Pensions and Other Post-Retirement Benefits" ("FAS 132") was issued. FAS 132 revises employer's disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. This statement is effective for fiscal years beginning after December 15, 1997 and impacts the presentation of financial statement disclosures. The Company adopted FAS 132 in fiscal year 1998. In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), was issued. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for financial statements for periods beginning after June 15, 1999. It is management's belief that FAS 133 will not have a material effect on the Company's financial position or results of operations when adopted. 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 consolidated statements of cash flows. At December 28, 1997 and December 29, 1996, cash equivalents included $23.2 million and $10.9 million, respectively, of F-10 domestic commercial paper. At December 27, 1998, there were no short-term marketable securities included in cash and cash equivalents. 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 not yet cleared the bank and are presented as a current liability in the accompanying consolidated financial statements. Accounts Receivable Accounts receivable consists primarily of amounts due from franchisees related to royalties, rents and miscellaneous equipment sales and food service accounts related to wholesale coffee 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 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ Balance, beginning of period.. $4,040 $1,457 $ 2,078 Provisions.................... 1,185 2,423 816 Recoveries.................... 12 340 1,193 Write-offs.................... (669) (180) (2,630) ------ ------ ------- Balance, end of period........ $4,568 $4,040 $ 1,457 ====== ====== =======
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 $0.9 million and $0.8 million as of December 27, 1998 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 $0.1 million and $1.2 million in 1998 and 1997, respectively, relate to several fully reserved notes that were subsequently determined to be collectible. F-11 A summary of changes in the allowance for uncollectible notes is as follows (in thousands): December 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ Balance, beginning of period.. $ 584 $ 1,871 $ 3,371 Provisions.................... (122) (1,209) - Recoveries.................... 22 232 20 Write-offs.................... (54) (310) (1,520) ----- ------- ------- Balance, end of period........ $ 430 $ 584 $ 1,871 ===== ======= ======= Inventories Inventories, consisting primarily of food and beverage 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. The Company calculates an interest rate factor based on the Company's long-term debt and applies this factor to its construction work in progress balance each accounting period to arrive at capitalized interest expense. Capitalized overhead costs include personnel expenses related to employees directly involved in the Company's development projects such as new restaurant projects, remodeling/re-imaging initiatives and other projects of this nature. 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 F-12 Intangible Assets Intangible assets consist primarily of franchise value and trademarks and 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........................ 20-40 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. The Company periodically reviews the realizability of its long-lived assets as set forth in Statement of Financial Accounting Standards No. 121 ("FAS 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) 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 are compared to estimates of the recoverability of the asset values. In 1998, the Company recorded a $6.8 million write-down of its Chesapeake intangible asset under FAS 121 accounting. The write-down was based on an analysis of future cash flows expected to be generated from Chesapeake's operations. The Company did not incur FAS 121 write-downs in 1997 or 1996. In 1998, the Company closed fourteen Popeyes Company-operated restaurants that were acquired in 1998 in connection with the acquisition of Pinetree Foods, Inc. (See Note 17). The total charges resulting from the closures were approximately $8.5 million and included the write-off of the related restaurant assets, related goodwill allocated to these restaurants and a provision for the remaining minimum lease payments due under the respective restaurant operating leases. The $8.5 million charge is included in "charges for restaurant closings" in the accompanying consolidated statements of operations. During the past four years, the Company has been in the process of replacing its restaurant accounting and control systems. This project includes the installation of new point-of-sale hardware and software systems, the installation of work stations in each Company-operated restaurant and the implementation of a "back office" automation system. The Company anticipates that upon the implementation of all these systems it will have customized restaurant F-13 systems that will provide better food cost controls, better labor controls and labor scheduling, better marketing information, more timely restaurant operating results and more efficient accounting processes. The Company estimated that the total cost of these systems would be approximately $36.5 million. While a large portion of the total project has been completed, certain elements of the restaurant accounting and control systems have not been implemented because of delays caused by technological problems related to the "back office" automation system. The Company recently engaged a third party technology expert to evaluate these technological problems. The technology expert concluded that certain elements of the software being developed were not stable in the AFC information technology environment. The technology expert recommended that the Company investigate alternatives, including purchasing other commercially available "back-office" software. Management is in the process of performing its own review of these systems, but believes that it is probable that certain of the "back office" software development costs will be deemed to have little or no value. Therefore, management reduced the carrying value of its software development costs by $5.0 million at December 27, 1998. 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" ("FAS 123"). This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. FAS 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, FAS 123 requires supplemental disclosure to show the effects of using FAS 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 FAS 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 27, December 28, December 29, 1998 1997 1996 ------------ ------------ ------------ Net income (loss): As reported....... $ (8,646) $11,000 $3,395 Pro forma......... (10,247) 11,528 3,310
Because the fair value 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 each option is estimated on the date of grant using the "minimum value" method with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: risk-free interest rate of approximately 5.0%; expected lives of approximately 12 years, 10 F-14 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 12). Segment Disclosures In 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers (See Note 16). 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 to pay a royalty ranging from 3% to 5% of sales to the Company and an advertising fund contribution ranging from 1% to 4% of 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.). Prior to December 27, 1998, these agreements generally included a territorial fee related to establishing a franchise in a new country. International development agreement payments and related territorial fees are normally 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. F-15 Wholesale Revenues Wholesale revenues are generated from the Company's coffee wholesaling operations, which it acquired in 1998 through its acquisition of SCC. Revenues consist of coffee sales to food service retailers, supermarkets and to its own coffee cafes. Manufacturing Revenues The Company's manufacturing revenues 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 other parties. 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. In October 1998, the Company converted its insurance coverages for general and auto liability insurance and workers' compensation insurance, excluding workers' compensation in the State of Texas, to a "guaranteed cost" insurance arrangement. Prior to October 1998, the Company was liable for claims on a per-incident basis ranging between $0.2 million to $0.5 million, at which time the Company's stop loss insurance coverage would cover the excess amount of each claim. Under the "guaranteed cost" insurance coverage, the Company pays an annual premium and is covered up to the first $1.0 million per claim. The Company has umbrella coverage in cases where a claim may exceed $1.0 million. In the State of Washington, the Company participates in the state-sponsored workers' compensation insurance program, which requires the Company to pay annual premiums into an insurance pool administered by the state. The Company has established reserves with respect to the programs described above 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 consolidated 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. F-16 International Operations As of December 27, 1998, the Company franchised 533 restaurants to franchisees in 24 foreign countries and plans to expand its foreign franchising program significantly in the future. The Company currently operates two SCC cafes and a sales office that are located in Canada. The Company does not own any other property, operate any other restaurants or have equity ownership in any other 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 1998 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 1998, 1997 and 1996, royalties and other revenues from foreign franchisees represented 1.9%, 2.4% and 2.4%, respectively, of the Company's total revenues. Equity Investment On April 11, 1996, 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. 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 at the date of the transaction. With the proceeds from the sale of common stock, the Company retired approximately $64.0 million of its term debt and paid transaction fees in the amount of approximately $6.0 million. The remaining term 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. In connection with the refinancing of the Company's term debt, the Company wrote-off approximately $7.0 million in unamortized debt issuance costs related to the retired debt. 2. 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 credit and interest rate risks involved. In addition, management maintains reserves for doubtful note receivable accounts (See Note 1). F-17 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 27, 1998 and December 28, 1997 are as follows (in thousands):
1998 1997 ------------------ ------------------- Carrying Fair Carrying Fair Value Value Value Value -------- -------- -------- -------- 10.25% Senior Subordinated Notes $175,000 $182,000 $175,000 $184,625
3. INVENTORIES The major components of inventory are as follows (in thousands):
December 27, December 28, 1998 1997 ----------- ----------- Food and beverage items, preparation and packaging materials........................................... $ 10,269 $ 2,390 Restaurant equipment................................................. 2,913 2,057 ----------- ----------- $ 13,182 $ 4,447 =========== ===========
F-18 4. PROPERTY AND EQUIPMENT The major components of property and equipment are as follows (in thousands):
December 27, December 28, 1998 1997 ------------ ------------ Owned properties: Land............................. $ 43,289 $ 40,491 Buildings........................ 71,827 65,423 Equipment........................ 146,507 113,715 Leasehold improvements........... 80,045 42,260 Construction work in process..... 8,008 5,336 Properties held for sale......... 3,683 2,960 Capital leases: Buildings........................ 3,811 3,863 Equipment........................ 21,818 21,514 ------------ ------------ 378,988 295,562 Less: accumulated depreciation and amortization...................... 115,847 87,755 ------------ ------------ $263,141 $207,807 ============ ============
Depreciation and amortization expense related to property and equipment, including property and equipment held under capital leases, was approximately $35.2 million, $27.2 million and $25.0 million for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. Properties held for sale consists of land, buildings and equipment currently not in use by the Company. These assets include both restaurant and corporate assets. 5. OTHER ASSETS Other assets consist of the following (in thousands):
December 27, December 28, 1998 1997 ------------ ------------ Deposits....................... $ 2,297 $ 1,860 Information technology costs... 4,888 3,007 Debt issuance costs, net....... 9,298 9,789 Real estate development costs.. 1,602 1,447 Other.......................... 1,413 946 ------------ ------------ $19,498 $17,049 ============ ============
F-19 6. INTANGIBLE ASSETS Intangible assets consist of the following (in thousands):
December 27, December 28, 1998 1997 ------------ ------------ Franchise value and trademarks.... $117,278 $124,116 Goodwill.......................... 126,043 4,765 Other............................. 7,088 2,771 ------------ ------------ 250,409 131,652 Less: accumulated amortization.. 42,289 31,379 ------------ ------------ $208,120 $100,273 ============ ============
Amortization expense for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, was approximately $10.9 million, $6.6 million and $5.9 million, respectively. 7. OTHER LIABILITIES A summary of other liabilities is as follows (in thousands):
December 27, December 28, 1998 1997 ------------ ------------ Insurance reserves............ $ 8,598 $11,015 Deferred franchise revenues... 6,472 5,863 Litigation and environmental.. 6,314 7,393 Other......................... 16,579 7,637 ------------ ------------ $37,963 $31,908 ============ ============
The majority of liabilities comprising "other liabilities" are not subject to a fixed cash payment schedule but are primarily payable upon the occurrence of specific events, which are not estimable as of December 27, 1998. 8. LONG-TERM DEBT 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 "Term Loan A"), 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 long-term debt balances under the Company's existing credit facility, 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-20 In October 1998, the Company amended and restated the 1997 Credit Facility to include a $50.0 million term loan (the "Term Loan B") which was primarily used to fund the acquisition of CII (See Note 17). A summary of the Company's long-term debt is as follows (in thousands):
December 27, December 28, 1998 1997 ------------ ------------ Term Loans: Term Loan A.................... $ 44,250 $ 49,000 Term Loan B.................... 50,000 - 10.25% Senior Subordinated Notes.. 175,000 175,000 Other notes....................... 1,850 1,143 -------- -------- 271,100 225,143 Less: current maturities..... 8,356 4,993 -------- -------- $262,744 $220,150 ======== ========
The following is a schedule of the aggregate maturities of long-term debt as of December 27, 1998, for each of the succeeding five years and thereafter (in thousands):
YEAR AMOUNT ---- -------- 1999......................... $ 8,356 2000......................... 13,223 2001......................... 8,476 2002......................... 21,665 2003......................... 15,000 Thereafter................... 204,380 -------- $271,100 ========
The Company's Term Loans A and B and certain letter of credit facilities described below were provided by various financial institutions, some of which hold a minority interest in the Company. 1997 CREDIT FACILITY (AS AMENDED AND RESTATED AS OF OCTOBER 15, 1998) The Term Loan A, the Term Loan B, the Acquisition Facility and the Revolving Facility (collectively "the 1997 Credit Facility") bear interest, at the Company's election, at either (i) a defined base rate plus 1.25% per annum (1.75% for Term Loan B) or (ii) LIBOR plus 2.25% per annum (2.75% for Term Loan B), subject to reduction based on the achievement of certain leverage ratio levels. At December 27, 1998, the interest rates ranged from 7.4% to 8.0%. 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) 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 F-21 equal to the then applicable margin over LIBOR plus a fronting fee of 0.25% per annum (payable to the issuing institution) based on the face amount of letters of credit, plus standard issuance and administrative charges. In addition to the scheduled amortization, the Company is required to make prepayments 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 in an amount equal to a percentage of excess cash flow (as defined in the 1997 Credit Facility) beginning with fiscal year 1998. During the fiscal year ended December 27, 1998, there were no prepayments required of the Company under the agreement. Term Loans Term Loan A principal is payable in quarterly installments ranging from $1.0 to $7.5 million beginning September 1997 and maturing in June 2002. Interest is paid in one, two, three or six month periods as defined in the 1997 Credit Facility. Term Loan B principal is payable in quarterly installments as follows: $0.1 million from December 31, 1998 to June 30, 2002; $3.8 million from September 30, 2002 to March 31, 2004; and a balloon payment of $21.9 million at maturity on June 30, 2004. Interest is paid in one, two, three or six month periods as defined in the 1997 Credit Facility. Acquisition Facility The Company may borrow under the Acquisition Facility at anytime during the period from the closing date of May 21, 1997 through the third anniversary of the closing date. Amounts outstanding under the Acquisition Facility on the third anniversary of the closing will be converted to a term loan. The Company will be required to make scheduled annual amortization payments on the term loan portion of the Acquisition Facility. At December 27, 1998, there was an outstanding balance of $68.0 million, which if converted to a term loan would result in the following principal payment amortization by fiscal year: $6.8 million in 2000; $13.6 million in 2001; and $47.6 million in 2002. Revolving 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 27, 1998, there was $7.0 million in outstanding borrowings and $6.8 million of outstanding letters of credit leaving unused revolving credit available for short-term borrowings and letters of credit of $11.2 million. Other Terms 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. F-22 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, transactions with affiliates and investments in the Company's deferred compensation plan. The amendment made to the 1997 Credit Facility in October 15, 1998 included the addition of a Year 2000 covenant that requires that the Company be Year 2000 compliant. The 1997 Credit Facility contains customary events of default, including certain changes of control of the Company. At December 27, 1998, 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% 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 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 Senior Notes restrict, among other things, the ability of the Company and its wholly-owned 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, d) to pay dividends, make certain investments and make other restricted payments, as defined, and e) to maintain a certain interest coverage financial ratio. At December 27, 1998, 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 and the unamortized balance is included in other assets in the accompanying consolidated balance sheets. During 1998 and 1997, the Company amortized as interest expense approximately $1.4 million and $0.8 million, respectively. As a result of amending and restating the 1997 Credit Facility in October 1998, the Company incurred approximately $0.9 million in debt issuance costs, which were capitalized. These costs are being amortized into interest expense over a period of six years. Amortization is F-23 calculated using the straight-line method, and the unamortized balance is included in other assets in the accompanying consolidated 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 non-cancelable operating leases, as of December 27, 1998 are as follows (in thousands):
Capital Operating Leases Leases ------- --------- 1999............................................. $ 7,112 $ 30,632 2000............................................. 5,018 28,584 2001............................................. 2,331 27,117 2002............................................. 520 25,291 2003............................................. 304 21,316 Thereafter....................................... 3,319 66,419 ------- -------- Future minimum lease payments............... 18,604 $199,359 ======== Less: amounts representing interest......... 3,993 ------- Total obligations under capital leases...... 14,611 Less: current portion....................... 6,050 ------- Long-term obligations under capital leases.. $ 8,561 =======
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 27, 1998, December 28, 1997 and December 29, 1996, amounted to $20.5 million, $11.0 million and $9.9 million, respectively, including percentage rents of $1.3 million, $0.7 million and $0.7 million, respectively. As of December 27, 1998, the Company leases Company-owned restaurant properties with an aggregate book value of $15.8 million to certain franchisees and others. The Company also leases from third parties and sub-leases these properties to franchisees and others. Rental income from these leases was approximately $7.9 million, $7.5 million and $6.4 million for the fiscal years ended in 1998, 1997 and 1996, respectively, and was primarily based upon a percentage of restaurant sales. The lease terms under these agreements expire on various dates through 2027. Future minimum rentals receivable under these non- cancelable lease and sub-lease arrangements as of December 27, 1998 are as follows (in thousands): F-24 Rental Income ------- 1999......................... $ 7,304 2000......................... 7,077 2001......................... 6,837 2002......................... 6,104 2003......................... 5,375 Thereafter................... 38,553 ------- Future minimum rentals.. $71,250 ======= 10. INCOME TAXES The components of income tax expense (benefit) included in the statements of operations are as follows (in thousands):
For For For Year Ended Year Ended Year Ended December 27, December 28, December 29, 1998 1997 1996 ------------- ------------- ------------ Current income tax expense consists of: Federal................................ $ 1,094 $ 1,557 $ 363 Foreign................................ 1,543 1,804 1,705 State.................................. 768 1,301 42 ------- ------ ------ Total............................. 3,405 4,662 2,110 ------- ------ ------ Deferred income tax expense (benefit) consists of: Federal................................ (6,801) 4,338 152 State.................................. (827) (475) 228 ------- ------ ------ Total............................. (7,628) 3,863 380 ------- ------ ------ Income tax expense (benefit).... $(4,223) $8,525 $2,490 ======= ====== ======
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-25 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 27, December 28, December 29, 1998 1997 1996 -------------- ------------- ------------- Statutory Federal income tax expense (benefit) rate................... (35.0%) 35.0% 34.0% Non-deductible items including goodwill amortization............ 5.3 2.0 1.6 State taxes, net of federal benefit... (2.1) 4.2 4.6 Other items, net...................... (1.0) 2.4 2.1 ------ ---- ---- Effective income tax expense (benefit) rate................ (32.8%) 43.6% 42.3% ====== ==== ====
Significant components of the Company's net deferred tax asset and net deferred tax liability were as follows (in thousands):
December 27, December 28, 1998 1997 ------------- ------------- Current deferred tax asset (liability): Payroll accruals.......................... $ 919 $ 683 Allowance for doubtful accounts........... 1,903 1,734 Other accruals............................ 1,755 949 -------- -------- Total current deferred tax asset....... 4,577 3,366 -------- -------- Noncurrent deferred tax asset (liability): Franchise value and trademarks............ $(23,939) $(31,662) Property, plant and equipment............. 4,476 4,167 Net operating loss carryforwards.......... 7,633 3,352 General business and AMT credit carryforwards.......................... 4,836 3,424 Foreign tax credit carryforwards.......... 3,732 4,924 Deferred compensation..................... 3,165 2,665 Insurance accruals........................ 5,684 6,944 Litigation/environmental accruals......... 2,739 2,774 Deferred franchise fee revenue............ 2,427 2,679 Other items, net.......................... (177) (1,969) -------- -------- 10,576 (2,702) Valuation allowance....................... (6,160) - -------- -------- Total noncurrent deferred tax asset (liability)........................ 4,416 (2,702) -------- -------- Net deferred tax asset................. $ 8,993 $ 664 ======== ========
F-26 Certain prior period balances above have been reclassified to conform to the current presentation to adjust estimates to actual per the 1997 tax return. As of December 27, 1998, the Company had U.S. Net Operating Losses ("NOLs") and tax credit carryforwards in the amounts of $17.5 million and $8.6 million, respectively. Certain acquired NOLs and tax credit carryforwards are subject to limitations under Section 382 and 383 of the Internal Revenue Code of 1986, as amended. Management has determined that it is more likely than not that the deferred tax assets attributable to these acquired NOLS and tax credit carryforwards will not be realized and as such has established a valuation allowance of $6.2 million for the fiscal year ended December 27, 1998. Based on management's assessment, it is more likely than not that the remaining net deferred tax assets will be realized through future reversals of existing temporary differences and future taxable income. 11. COMMON STOCK In October 1998, the Company issued 2,795,703 shares of AFC common stock to existing shareholders and option holders at $7.75 per share. The Company received approximately $20.3 million in cash and approximately $1.3 million in notes receivable from certain officers of the Company. The cash proceeds from the stock offering were used to fund a portion of the purchase price to acquire CII (See Note 17). 12. 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% per year. For the years ended December 27, 1998 and December 28, 1997, the Company did not recognize any compensation expense related to these options. In 1996, the Company recognized an immaterial amount of compensation expense related to certain of these options. As of December 27, 1998, 1,560,563 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-27 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 $7.50 per share. At December 27, 1998, the weighted-average exercise price was $4.94 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 27, 1998, the weighted-average contractual life of these options was 8.5 years. Under this plan, compensation expense is determined and recorded when employees vest in their respective options. During the fiscal year ended December 27, 1998, December 28, 1997 and December 29, 1996, the Company recorded approximately $1.1 million, $2.2 million and $0.8 million, respectively, in compensation expense related to the options, which vested in 1998, 1997 and 1996 under this plan. As of December 27, 1998, 2,198,188 options were exercisable. In 1998, the Board of Directors approved the cancellation of 932,698 unvested options under this plan held by the Company's top three executives. The cancelled options had exercise prices that ranged from $3.32 per share to $7.50 per share. In connection with the cancellation, the Board granted to these three individuals 932,698 options with an exercise price of $7.75 per share, which was the fair value of the Company's common stock at the date of grant. In addition, the executives became fully vested in these options upon the grant date. The Company did not recognize compensation expense regarding the subsequent grant of the 932,698 options since they were issued at an exercise price that equaled the fair value of the Company's common stock at the date of grant. The 1996 Stock Option Plan 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. In 1998, the Company granted 0.4 million options at $7.50 per share which approximated the market value of the Company's common stock at the date of grant. At December 27, 1998, the weighted-average price per share was $5.42. The options currently granted and outstanding allow certain employees of the Company to purchase approximately 1.0 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 27, 1998, the weighted-average contractual life of these options was 5.6 years and 241,968 options were exercisable. F-28 The 1998 SCC Plan In connection with the SCC acquisition in March 1998, the Company executed the Substitute Nonqualified Stock Option Plan ("1998 SCC Plan"). This plan was established to enable the Company to issue AFC options to former SCC option holders in order to purchase 100% of SCC's common stock pursuant to the purchase agreement. The 1998 SCC Plan authorizes the issuance of approximately 0.5 million options at exercise prices that range from $3.91 to $6.75 per share. The Company issued approximately 0.4 million options at the closing date of the acquisition. The issuance of the remaining 0.1 million is subject to a reduction of options based on a holdback provision in the acquisition agreement. Regarding the remaining options to be issued, a determination on the number of options will be made on or about March 31, 1999, a year from the closing date of the transaction. At December 27, 1998, the weighted-average exercise price per share was $4.74. The options vest when issued by the Company and expire at various dates through October 31, 2007. At December 27, 1998, the weighted-average contractual life of these options was 6.6 years. As of December 27, 1998, 457,398 options were exercisable. These options were issued in connection with the acquisition of SCC and the related value placed upon these options was added to the goodwill resulting from this acquisition (See Note 17). Warrants Also in connection with the SCC acquisition, the Company authorized the issuance of 177,958 warrants to the former SCC shareholders to purchase AFC Common Stock at prices that range from $3.91 to $6.00 per share. At closing, 154,468 warrants were issued to the former SCC shareholders. On or about March 31, 1999, the remaining 23,490 warrants will be issued subject to possible reductions in the number of warrants based on a holdback provision in the acquisition agreement. Most of the warrants expire on May 4, 1999, with 23,353 warrants expiring on September 30, 2001. At December 27, 1998, 160,340 warrants were exercisable. These warrants were issued in connection with the acquisition of SCC and the related value placed upon these warrants was added to the goodwill resulting from this acquisition (See Note 17). F-29 A Summary of Plan Activity A summary of the status of the Company's four stock option plans and warrants at December 27, 1998 and December 28, 1997 and changes during the years is presented in the table and narrative below:
1998 1997 ----------------- ----------------- Shares Wtd.Avg. Shares Wtd.Avg. (000's) Ex.Price (000's) Ex.Price ------- -------- ------- -------- Outstanding at beginning of year............ 5,013 $2.36 4,643 $2.06 Granted options and warrants................ 2,021 6.73 496 4.95 Exercised options and warrants.............. (10) 2.62 (75) .08 Cancelled options and warrants.............. (1,039) 3.37 (51) 2.61 ------ ------ Outstanding at end of year.................. 5,985 3.66 5,013 2.36 ------ ------ Exercisable at end of year.................. 4,618 3.34 2,663 1.48 Weighted average fair value of options and warrants granted (See Note 1)........... $2.36 $1.69
Approximately 0.4 million, 0.5 million and 3.0 million options granted in 1998, 1997 and 1996, respectively, were at prices that equaled the market price of the common stock at the grant date. 13. OTHER EMPLOYEE BENEFIT PLANS Pre-Tax Savings and Investment Plan The Company maintains a qualified employee benefit plan under Section 401(k) of the Internal Revenue Code for the benefit of employees meeting certain eligibility requirements. Under the plan, employees may contribute up to 16.0% of their eligible compensation to the plan on a pre-tax basis up to statutory limitations and the Company may make both voluntary and matching contributions to the plan. The Company expensed approximately $0.2 during 1998, 1997 and 1996 for its contributions to the plan. SCC maintains an employee benefit plan under Section 401(k) of the Internal Revenue Code for the benefit of employees meeting certain eligibility requirements. The Company is in the process of integrating the SCC plan into the Company's plan, which is anticipated to be completed in the fall of 1999. Deferred Compensation Plan Effective March 1, 1998, the Company established the AFC Deferred Compensation Plan. The plan is an unfunded, nonqualified deferred compensation plan that benefits certain designated employees who are within a select group of key management or highly compensated employees. Under this plan, an employee may defer up to 20% of base salary and 100% of any F-30 bonus award in increments of 5% on a pre-tax basis. The Company may make both voluntary and matching contributions to the plan. The minimum annual deferral is 5%. The funds are invested in variable life insurance policies that have an aggregate cash surrender value of approximately $0.4 million at December 27, 1998. All plan assets are held in a trust that is subject to the Company's creditors. The Company's 1997 Credit Facility (See Note 8) limits the Company's investment in the plan to $5.0 million. The Company expensed approximately $26,000 in 1998 for its contributions to the plan. Executive Retirement and Benefit Plans During 1994, the Company adopted a nonqualified, unfunded retirement, disability and death benefit plan for certain executive officers. Annual benefits are equal to 30% of the executive officer'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 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 $1.5 million, $1.2 million and $1.0 million as of December 27, 1998, December 28, 1997 and December 29, 1996, respectively. Expense for the retirement plan for the years ended December 27, 1998, December 28, 1997, and December 29, 1996, was approximately $0.4 million, $0.2 million and $0.3 million, respectively. The Company's assumptions used in determining the plan cost and liabilities include a discount rate of 7.5% per annum in 1998, 1997 and 1996 and a 5% rate of salary progression in 1998, 1997 and 1996. 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 27, 1998 and December 28, 1997, was approximately $0.4 million and $0.2 million, respectively, and the net periodic expense for the medical coverage continuation plan for 1998, 1997 and 1996 was approximately $42,000, $204,500, and $71,000, respectively. 14. RELATED PARTY TRANSACTIONS In 1996, the Company received legal services from a law firm associated with a member of the Company's Board of Directors. During the fiscal year ended December 29, 1996, the total amount paid to this law firm was $0.5 million. 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 a $10.0 million executive compensation award earned in 1995. All the individual notes have similar terms. The F-31 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 27, 1998 and December 28, 1997 are included as a reduction to shareholders' equity in the accompanying consolidated balance sheets and consolidated statements of shareholders' equity since the common stock awarded to the officers secures payment of the individual notes. In October 1998, the Company loaned certain officers of the Company an aggregate of $1.3 million to pay for shares of common stock offered by AFC in connection with the acquisition of CII. All the individual notes have similar terms. The notes bear interest at 7.0% per annum with principal and interest payable at the end of the term of the note, which is December 31, 2005. The notes are secured by the number of shares of common stock purchased by the employee with the note proceeds. The note receivable balance and interest receivable balance as of December 27, 1998 is included as a reduction to shareholders' equity in the accompanying consolidated balance sheets and consolidated statements of shareholders' equity. In connection with the Company's common stock offering described in Note 11, the Company paid stock issuance costs of approximately $1.0 million to Freeman Spogli and Co., Inc., which through other affiliates is the Company's majority common shareholder. 15. 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 of $500,000, $350,000 and $315,000, respectively, subject to annual adjustment by the Board of Directors, an annual incentive bonus, stock options, 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 2001, 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 terminated executive would be entitled to, among other things, one to two-and-one-half times his 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. F-32 Supply Contracts With respect to Popeyes and Churchs, the Company's and its franchisees' principal raw material is fresh chicken. The Company maintained purchase agreements with its fresh chicken suppliers that provided for a "ceiling", or highest price, and a "floor", or lowest price, that the Company paid for chicken over the contract term and the ceilings were generally set at prices above the current market price. Such supply contracts were generally for one to two years. The Company recognized 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. In order (i) to ensure favorable pricing for the Company's chicken purchases in the future, (ii) to reduce volatility in chicken prices and (iii) to maintain an adequate supply of fresh chicken, the Company has entered and will enter into two types of chicken purchasing arrangements with its suppliers. The first of these contracts is a grain-based "cost-plus" pricing arrangement that provides chicken prices based upon the cost of feed grains, such as corn and soybean meal, plus certain agreed upon non-feed and processing costs. The other contract is similar to the grain based "cost-plus" arrangement but contains price provisions which limit how far up or down prices may move in any year. Both contracts have terms ranging from three to five years with provisions for certain annual price adjustments as defined in the contracts. SCC's principal raw material is green coffee beans. The Company typically enters into supply contracts to purchase a pre-determined quantity of green coffee beans at a fixed price per pound. These contracts usually cover periods up to a year as negotiated with the individual supplier. At December 27, 1998, the Company had commitments to purchase approximately 5.3 million pounds of green coffee beans at a total cost of approximately $7.7 million. The contract terms cover a period from January 1999 to September 1999. 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 consolidated 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. This case was segregated into a patent infringement claim and a contract claim. In August 1998, the Court dismissed CP's patent infringement claim. CP has appealed this judgment. In November 1998, the Company settled the contract claim for an immaterial amount. It is management's belief that the final outcome of the patent infringement claim will not have an adverse effect on the Company's consolidated financial position or results of operations. F-33 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 that it has accrued adequate reserves for environmental remediation liabilities. The Company is currently not subject to any administrative or court order requiring remediation at any of its properties. 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 repaid certain of these capital lease obligations totaling $16.7 million. Future minimum payments under this agreement, exclusive of payments included in Note 9 as capital lease payments for systems installed as of December 27, 1998, are as follows at that date (in thousands): YEAR AMOUNT ---- ------ 1999........ $ 6,925 2000........ 5,089 2001........ 4,170 2002........ 5,055 2003........ 5,968 Thereafter.. 3,617 ------- $30,824 ======= F-34 It is estimated that the remaining payments due under the contract of approximately $30.8 million will be reflected as restaurant operating or general and administrative costs and expenses. Operating expenses of approximately $10.5 million, $8.1 million and $7.5 million related to the outsourcing contract have been included in the statements of operations for the years ended December 27, 1998, December 28, 1997 and December 29, 1996, respectively. Year 2000 Compliance (Unaudited) The Company relies to a large extent on computer technology to carry out its day-to-day operations. The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information by the Company's information technology ("IT") systems and non-IT systems that are reliant on computer technology. The Year 2000 problem is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any of the Company's programs that have time- sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This problem could result in a system failure or miscalculations causing disruptions of operations, including, but not limited to, a temporary inability to process transactions or engage in normal business activities. The Company is in the process of completing a Year 2000 compliance assessment of both its IT systems and non-IT systems, including those recently acquired. All IT-related systems are in the process of being assessed using a standard Year 2000 approach that includes five phases. These phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain. Although the pace of the work varies among IT and non-IT systems and the phases are often conducted in parallel, the inventory and assess phases have been substantially completed as of December 27, 1998 and the remediation phase is in progress. Under its current plan, remediation and testing of IT systems is scheduled to be completed by the end of the Company's third quarter of 1999. The Company anticipates the timely completion of this compliance assessment, which should mitigate the Year 2000 issue. Based upon this compliance assessment, the Company does not expect the Year 2000 problem, including the cost of making the Company's IT and non-IT systems Year 2000 compliant, to have a material adverse impact on the Company's financial position or results of operations in future periods. However, the inability of the Company to resolve all potential Year 2000 problems in a timely manner could have a material adverse impact on the Company. Under the Company's Franchise Awareness Program and Vendor/Supplier Letter Program, the Company has and will be initiating communications with its significant suppliers and vendors and its franchisee community in an effort to determine the extent to which the Company's business is vulnerable to the failure by these third parties to remediate their Year 2000 problems. While the Company has not been informed of any material risks associated with the Year 2000 problem on these entities, there can be no assurance that the IT and non-IT systems of these third parties will be Year 2000 compliant on a timely basis. The inability of these third parties to remediate their Year 2000 problems could have a material adverse impact on the Company's financial position and results of operations. F-35 To date, the Company has incurred approximately $0.1 million in Year 2000 costs. These costs are primarily related to fees paid to outside consultants who helped develop a strategy to assess the Company's Year 2000 issues. The Company estimates that the total costs of addressing the Year 2000 issue will approximate $0.9 million, including the amount that has already been expended. These costs will be funded through operating cash flows. The Company has not yet ascertained what the impact would be on the Company's financial position and results of operations in the event of failure of the Company's or third parties' IT and non-IT systems due to the Year 2000 issue. The Company began developing a contingency plan in the fourth quarter of 1998 and will continue to develop such plan during the first quarter of 1999 designed to allow continued operations in the event that such failures should occur. 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 ingredients 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 27, 1998, December 28, 1997 and December 29, 1996. Supply Agreements The Company has a supply agreement with Diversified under which the Company is required to purchase certain proprietary 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 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 Chuchs have required that each franchisee joins its respective purchasing cooperative. All Company-operated Popeyes and Churchs restaurants are members of POPCA or COPA, respectively. 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 and Cinnabon franchised and Company-operated restaurants in order to further leverage the collective buying power of AFC. F-36 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 consolidated financial statements. The Company's contributions to the Advertising Funds are recorded in restaurant operating expenses in the accompanying consolidated 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 $1.6 million and $1.9 million at December 27, 1998 and December 28, 1997, respectively. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates exclusively in the food service industry. Substantially all revenues result from the sale of menu products at restaurants operated by the Company, franchise royalty and fee income earned from franchised restaurant operations and wholesale revenues from the sale of coffee products. The Company's reportable segments are based on specific products and services within the food service industry. The Company combined Popeyes' and Churchs' domestic operations to form its chicken segment. The Company also aggregated the operations of Chesapeake and Cinnabon to form its bakery cafe segment. The Company's coffee segment consists of SCC's domestic operations, which includes wholesale operations. The international segment is comprised of the Company's international franchised operations, which mainly consists of Popeyes and Churchs international franchised restaurants. The "other" segment includes the Company's manufacturing division, Ultrafryer. The "corporate" component of operating income includes revenues from 1) interest income from notes receivable and rental revenue from leasing and sub-leasing agreements with franchisees and third parties, less 2) corporate general and administrative expenses, depreciation, amortization and interest expense. F-37 Operating income (loss) represents each segment's earnings before income taxes, depreciation, amortization, non-cash items related to gains/losses on asset dispositions and write-downs and compensation expense related to stock option activity.
REVENUES: 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken........................ $495,770 $452,799 $469,553 Coffee......................... 58,113 - - Bakery cafe.................... 27,290 2,442 - International.................. 11,712 12,273 12,388 Other.......................... 9,866 8,557 12,065 Inter-segment revenues......... (2,261) (857) (3,815) Corporate...................... 8,601 8,539 7,652 -------- -------- -------- Total Revenues............... $609,091 $483,753 $497,843 ======== ======== ========
Inter-segment revenues represent Ultrafryer sales to Company-operated restaurants. These revenues are eliminated in consolidation.
OPERATING INCOME (LOSS): 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken........................ $ 90,441 $ 90,457 $ 84,308 Coffee......................... 7,774 - - Bakery cafe.................... 3,133 258 - International.................. 6,912 7,684 8,011 Other.......................... 1,220 901 546 Corporate...................... (22,443) (25,283) (27,999) -------- -------- -------- Total Operating Income (Loss)................... $ 87,037 $ 74,017 $ 64,866 ======== ======== ======== DEPRECIATION AND AMORTIZATION: 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken........................ $ 24,935 $ 17,308 $ 18,446 Coffee......................... 4,502 - - Bakery cafe.................... 2,237 271 - International.................. 87 39 51 Other.......................... 316 288 388 Corporate...................... 14,001 15,897 12,019 -------- -------- -------- Total Depreciation and Amortization............. $ 46,078 $ 33,803 $ 30,904 ======== ======== ========
F-38
SIGNIFICANT NON-CASH ITEMS: 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken......................... $ 9,956 $2,094 $2,858 Coffee.......................... - - - Bakery cafe..................... 7,125 - - International................... - - - Other........................... - 31 11 Corporate....................... 5,000 1,021 309 ------- ------ ------ Total Significant Non-cash Items............ $22,081 $3,146 $3,178 ======= ====== ======
Significant non-cash items include (i) charges for restaurant closings which are primarily write-offs of tangible and intangible assets and (ii) losses on the disposition of long-lived assets which includes both operating and non- operating assets.
ASSETS: 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken.......................... $281,005 $246,138 $244,602 Coffee........................... 82,164 - - Bakery cafe...................... 83,350 14,530 - International.................... 15,236 15,625 14,122 Other............................ 5,730 5,425 4,721 Corporate........................ 88,980 100,986 76,223 -------- -------- -------- Total Assets................... $556,465 $382,704 $339,668 ======== ======== ======== CAPITAL EXPENDITURES: 1998 1997 1996 ---------- --------- --------- (in thousands) Chicken.......................... $ 26,453 $ 29,472 $ 29,639 Coffee........................... 4,602 - - Bakery cafe...................... 2,360 309 - International.................... 148 - - Other............................ 140 - 57 Corporate........................ 7,822 33,138 16,576 -------- -------- -------- Total Capital Expenditures..... $ 41,525 $ 62,919 $ 46,272 ======== ======== ========
Not included in the 1998 capital expenditures is approximately $21.1 million in funds spent in 1998 to convert the acquired Pinetree restaurants to Company-operated Popeyes restaurants (See Note 17). F-39 17. ACQUISITIONS 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 $24.3 million. In addition, the Company recorded liabilities of approximately $4.0 million in connection with the acquisition. Of the 81 restaurants, 66 were converted to Popeyes Company-operated restaurants, with the remaining restaurants 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 its Acquisition Facility. The Pinetree acquisition was accounted for as a purchase in accordance with Accounting Principles Board Opinion Number 16, "Accounting for Business Combinations" ("APB 16"). The unamortized goodwill recorded in connection with this acquisition was $23.1 million at December 27, 1998. The Company will amortize this goodwill amount on a straight-line basis over a forty- year period. Seattle Coffee Company Acquisition On March 18, 1998, the Company acquired all of Seattle Coffee Company's ("SCC") common stock for an adjusted purchase price of approximately $68.8 million plus the assumption of approximately $4.8 million of debt. The Company paid approximately $37.6 million in cash funded by its Acquisition Facility and approximately $25.5 million in AFC common stock, resulting in the issuance of 1,837,834 common shares, 440,645 options to purchase common shares and 154,468 warrants to purchase common shares. In addition, the Company established a payable of approximately $3.8 million and placed 139,914 shares of AFC's common stock into an escrow account pursuant to a holdback payment provision in the acquisition agreement. As a result of the transaction, SCC became a wholly-owned subsidiary of the Company. The transaction included the acquisition of a roasting and packaging facility, 59 Company-operated cafes and 10 franchised cafes under the Seattle's Best and Torrefazione Italia brands, a wholesale business including 13 sales offices with more than 5,000 wholesale accounts and two major distribution centers. The acquisition agreement provides for a contingent earn out payable to former SCC shareholders. Actual payment to former SCC shareholders is contingent upon SCC operations achieving a level of earnings, as defined in the acquisition agreement, over a 52-week period from September 29, 1997 to September 27, 1998 (the "Contingency Period"). Based on SCC's operating results during the Contingency Period that ended on September 27, 1998, the Company expects to pay $1.9 million in cash, stock and stock options to former SCC shareholders as a contingent payment pursuant to the provision in the agreement mentioned above. The contingent payable of $1.9 million is included in the adjusted purchase price of $68.8 million. The Company accounted for this acquisition as a purchase in accordance with APB 16. The allocation of the purchase price resulted in the Company recording goodwill. At December 27, 1998, the unamortized goodwill balance was approximately $53.0 million, which is amortized on a straight-line basis over a forty-year period. The Company is in the process of analyzing the fair value and allocation of its intangible asset acquired from SCC, which may F-40 result in a purchase price adjustment to the current amounts initially recorded on the acquisition date. The Company anticipates completing this process by mid 1999. The following unaudited pro forma results of operations for the fifty-two weeks ended December 27, 1998, December 28, 1997 and December 29, 1996, assumes the acquisition of SCC occurred as of the beginning of the respective periods (in thousands).
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended 12/27/98 12/28/97 12/29/96 --------- --------- --------- Total revenues............ $ 617,638 $ 534,549 $ 536,179 ========= ========= ========= Net income (loss) before Extraordinary loss....... $ (9,178) $ 10,213 $ 4,987 ========= ========= ========= Net income (loss)......... $ (9,178) $ 10,213 $ 531 ========= ========= =========
The 52 weeks ended December 27, 1998 include SCC's operations for the two- month period ended February 28, 1998 since the Company acquired SCC in March 1998. The 52 weeks ended December 28, 1997 include SCC's operations for the twelve-month period ended September 28, 1997. The 52 weeks ended December 28, 1996 include SCC's operations for the twelve-month period ended September 30, 1996. These pro forma results have been prepared for comparative purposes only and include certain adjustments that result in (i) an increase in amortization expense related to the recording of SCC goodwill, (ii) an increase in interest expense related to the Acquisition Facility (See Note 8) used to partially fund the acquisition, (iii) a decrease in interest expense related to SCC debt that was paid off at the time of the acquisition and (iv) a decrease in amortization expense related to the write-off of SCC's intangible assets at the time of the acquisition. These results do not purport to be indicative of the results of operations which actually would have resulted had the acquisition been in effect at the beginning of the respective periods or of future results of operations of the consolidated entities. Cinnabon International, Inc. On October 15, 1998, the Company acquired Cinnabon International, Inc. ("CII"), the operator and franchisor of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico. Two hundred and eleven of the retail cinnamon roll bakeries are Company-operated and are located within the United States. In connection with the acquisition, which was accounted for as a purchase, CII became a wholly-owned subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII (the "Acquisition"). The Company acquired CII for $64.0 million in cash. The Company obtained $44.7 million of the cash consideration from its 1997 Credit Facility as amended and restated (See Note 8). The remaining $19.3 million cash consideration was funded with the proceeds from the sale F-41 of approximately 2.8 million shares of AFC common stock to certain "qualified" investors who are existing AFC shareholders and option holders (See Note 11). The Company accounted for this acquisition as a purchase in accordance with APB 16. The allocation of the purchase price resulted in the Company recording goodwill in the amount of approximately $43.7 million, which will be amortized on a straight-line basis over a forty-year period. The Company is in the process of analyzing the fair values of the tangible and intangible assets acquired from CII, which may result in a purchase price adjustment to the current amounts initially recorded on the acquisition date. The Company anticipates completing this process by mid 1999. The Company is also in the process of developing an exit plan involving CII's corporate headquarters in Seattle, Washington. The exit plan will include severance, relocation and integration costs. At December 27, 1998, the Company has not recorded a liability to recognize this anticipated liability since the plan has not been finalized. The Company expects to finalize the plan within a year from the acquisition date and record the related liability at that time. The liability will be accounted for as a purchase price adjustment, which will increase goodwill recorded as a result of the CII acquisition. The following unaudited pro forma results of operations for the fifty-two weeks ended December 27, 1998, December 28, 1997 and December 29, 1996, assumes the acquisition of CII occurred as of the beginning of the respective periods (in thousands).
52 Weeks 52 Weeks 52 Weeks Ended Ended Ended 12/27/98 12/28/97 12/29/96 --------- --------- --------- Total revenues............ $ 663,030 $ 562,612 $ 574,483 ========= ========= ========= Net income (loss) before Extraordinary items...... $ (18,962) $ 1,041 $ 2,439 ========= ========= ========= Net income (loss)......... $ (18,962) $ 1,041 $ (346) ========= ========= =========
The 52 weeks ended December 27, 1998 include CII's operations for the nine- month period ended September 27, 1998 since the Company acquired SCC in October 1998. The 52 weeks ended December 28, 1997 include SCC's operations for the twelve-month period ended March 29, 1998. The 52 weeks ended December 28, 1996 include SCC's operations for the twelve-month period ended March 30, 1997. These pro forma results have been prepared for comparative purposes only and include certain adjustments that result in (i) an increase in amortization expense related to the recording of CII goodwill, (ii) an increase in interest expense related to the Term Loan B debt (See Note 8) used to partially fund the acquisition, (iii) a decrease in interest expense related to CII debt that was paid off at the time of the acquisition and (iv) a decrease in amortization expense related to the write-off of CII's intangible assets at the time of the acquisition. These results do not purport F-42 to be indicative of the results of operations which actually would have resulted had the acquisition been in effect at the beginning of the respective periods or of future results of operations of the consolidated entities. F-43 EX-4.3 2 AMENDED AND RESTATED CREDIT AGREEMENT EXHIBIT 4.3 ================================================================================ AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF OCTOBER __, 1998 AMONG AFC ENTERPRISES, INC. AND GOLDMAN SACHS CREDIT PARTNERS L.P., AS SYNDICATION AGENT AND LEAD ARRANGER AND THE LENDERS LISTED HEREIN, AS LENDERS, AND CANADIAN IMPERIAL BANK OF COMMERCE, (acting through its New York Agency) AS ADMINISTRATIVE AGENT ================================================================================ AFC ENTERPRISES, INC. AMENDED AND RESTATED CREDIT AGREEMENT TABLE OF CONTENTS -----------------
PAGE ---- SECTION 1. DEFINITIONS 1.1 Certain Defined Terms...................................................... 2 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement............................................................ 33 1.3 Other Definitional Provisions.............................................. 33 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 Commitments; Making of Loans; the Register; Notes.......................... 33 2.2 Interest on the Loans...................................................... 41 2.3 Fees....................................................................... 44 2.4 Repayments, Prepayments and Reductions in Commitments; General Provisions Regarding Payments; Application of Proceeds of Collateral and Payments Under Subsidiary Guaranty....................... 45 2.5 Use of Proceeds............................................................ 55 2.6 Special Provisions Governing Eurodollar Rate Loans......................... 55 2.7 Increased Costs; Taxes; Capital Adequacy................................... 57 2.8 Obligation of Lenders and Issuing Lender to Mitigate....................... 61 SECTION 3. LETTERS OF CREDIT 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein..................................................... 62 3.2 Letter of Credit Fees...................................................... 64 3.3 Drawings and Reimbursement of Amounts Drawn Under Letters of Credit.................................................................. 65 3.4 Obligations Absolute....................................................... 67 3.5 Indemnification; Nature of Issuing Lender's Duties......................... 68 3.6 Increased Costs and Taxes Relating to Letters of Credit.................... 69
(i) SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT 4.1 Conditions to Existing Loans and Letters of Credit......................... 70 4.2 Conditions to Tranche B Term Loans......................................... 71 4.3 Conditions to All Loans.................................................... 76 4.4 Conditions to Issuance of Letters of Credit................................ 77 SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES 5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries........................................................... 78 5.2 Authorization of Borrowing, etc............................................ 79 5.3 Financial Condition........................................................ 80 5.4 No Material Adverse Change; No Restricted Junior Payments.................. 81 5.5 Title to Properties; Liens................................................. 81 5.6 Litigation; Adverse Facts.................................................. 82 5.7 Payment of Taxes........................................................... 82 5.8 Performance of Agreements; Materially Adverse Agreements................... 82 5.9 Governmental Regulation.................................................... 83 5.10 Securities Activities...................................................... 83 5.11 Employee Benefit Plans..................................................... 83 5.12 Certain Fees............................................................... 84 5.13 Environmental Protection................................................... 84 5.14 Employee Matters........................................................... 84 5.15 Solvency................................................................... 85 5.16 Intellectual Property...................................................... 85 5.17 Applicable Law............................................................. 85 5.18 Real Property.............................................................. 86 5.19 Insurance.................................................................. 86 5.20 Related Agreements......................................................... 86 5.21 Disclosure................................................................. 87 SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS 6.1 Financial Statements and Other Reports..................................... 87 6.2 Corporate Existence, etc................................................... 92 6.3 Payment of Taxes and Claims; Tax Consolidation............................. 92 6.4 Maintenance of Properties; Insurance....................................... 93 6.5 Inspection; Lender Meeting................................................. 93 6.6 Compliance with Laws, etc.................................................. 94 6.7 Environmental Disclosure and Inspection.................................... 94 6.8 Company's Remedial Action Regarding Hazardous Materials.................... 96 6.9 Environmental Indemnity.................................................... 96
(ii) 6.10 Execution of Loan Documents by Future Subsidiaries........................ 96 6.11 Covenants Regarding Acquisition Properties................................ 97 6.12 Further Assurances........................................................ 99 6.13 Year 2000................................................................. 99 SECTION 7. COMPANY'S NEGATIVE COVENANTS 7.1 Indebtedness.............................................................. 100 7.2 Liens and Related Matters................................................. 101 7.3 Investments; Joint Ventures............................................... 102 7.4 Contingent Obligations.................................................... 103 7.5 Restricted Junior Payments................................................ 104 7.6 Financial Covenants....................................................... 105 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions.......... 109 7.8 Capital Expenditures...................................................... 110 7.9 Fiscal Year............................................................... 111 7.10 Sales and LeaseBacks...................................................... 111 7.11 Sale or Discount of Receivables........................................... 111 7.12 Transactions with Shareholders and Affiliates............................. 111 7.13 Disposal of Subsidiary Stock.............................................. 112 7.14 Conduct of Business....................................................... 112 7.15 Amendments of Documents Relating to Subordinated Indebtedness............. 112 SECTION 8. EVENTS OF DEFAULT 8.1 Failure to Make Payments When Due......................................... 113 8.2 Default in Other Agreements............................................... 113 8.3 Breach of Certain Covenants............................................... 113 8.4 Breach of Warranty........................................................ 113 8.5 Other Defaults Under Loan Documents....................................... 114 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc...................... 114 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc........................ 114 8.8 Judgments and Attachments................................................. 114 8.9 Dissolution............................................................... 115 8.10 Employee Benefit Plans.................................................... 115 8.11 Change in Control......................................................... 115 8.12 Failure of Security....................................................... 116
(iii) 8.13 Invalidity of Subsidiary Guaranty......................................... 116 8.14 Subordination Provisions.................................................. 116 SECTION 9. AGENTS 9.1 Appointment............................................................... 117 9.2 Powers and Duties; General Immunity....................................... 118 9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness....................................................... 119 9.4 Right to Indemnity........................................................ 119 9.5 Collateral Documents...................................................... 120 9.6 Successor Administrative Agent and Swing Line Lender...................... 120 9.7 Agent Authorized to Release Security Interests............................ 121 SECTION 10. MISCELLANEOUS 10.1 Assignments and Participations in Loans and Letters of Credit............. 122 10.2 Expenses.................................................................. 125 10.3 Indemnity................................................................. 125 10.4 Set-Off; Security Interest in Deposit Accounts............................ 126 10.5 Ratable Sharing........................................................... 127 10.6 Amendments and Waivers.................................................... 127 10.7 Independence of Covenants................................................. 128 10.8 Notices................................................................... 128 10.9 Survival of Representations, Warranties and Agreements.................... 129 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative..................... 129 10.11 Marshalling; Payments Set Aside........................................... 129 10.12 Severability.............................................................. 130 10.13 Obligations Several; Independent Nature of Lenders' Rights................ 130 10.14 Headings.................................................................. 130 10.15 Applicable Law............................................................ 130 10.16 Successors and Assigns.................................................... 130 10.17 Consent to Jurisdiction and Service of Process............................ 131 10.18 Waiver of Jury Trial...................................................... 131 10.19 Confidentiality........................................................... 132 10.20 Maximum Amount............................................................ 132 10.21 Counterparts; Effectiveness............................................... 133
(iv) PAGE ---- Signature pages S-1 EXHIBITS I FORM OF NOTICE OF BORROWING II FORM OF NOTICE OF CONVERSION/CONTINUATION III FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV-A FORM OF ACQUISITION LOAN NOTE IV-B FORM OF TERM LOAN NOTE IV-C FORM OF REVOLVING NOTE IV-D FORM OF SWING LINE NOTE IV-E FORM OF TRANCHE B TERM NOTE V FORM OF COMPLIANCE CERTIFICATE VI-A FORM OF OPINION OF COHEN POLLOCK MERLIN AXELROD & TANENBAUM, LLP VI-B FORM OF OPINION OF RICHARDS & O'NEILL VI-C FORM OF OPINION OF DORSEY & WHITNEY VI-D FORM OF OPINION OF SKADDEN ARPS SLATE MEAGHER & FLOM LLP VII FORM OF ASSIGNMENT AGREEMENT VIII FORM OF AGREEMENT OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT IX FORM OF CERTIFICATE RE NON-BANK STATUS X FORM OF COLLATERAL ACCOUNT AGREEMENT XI FORM OF COMPANY PLEDGE AGREEMENT XII FORM OF COMPANY SECURITY AGREEMENT XIII FORM OF COMPANY TRADEMARK SECURITY AGREEMENT XIV FORM OF COMPANY PATENT AND COPYRIGHT SECURITY AGREEMENT XV FORM OF CLOSING DATE MORTGAGE XVI FORM OF MODIFICATION AND ASSIGNMENT OF EXISTING MORTGAGE XVII FORM OF SUBSIDIARY TRADEMARK SECURITY AGREEMENT XVIII FORM OF SUBSIDIARY GUARANTEE XIX FORM OF SUBSIDIARY PLEDGE AGREEMENT XX FORM OF SUBSIDIARY SECURITY AGREEMENT XXI FORM OF ACKNOWLEDGMENT AND CONSENT SCHEDULES 1.1A CERTAIN SPECIFIED INDEBTEDNESS 1.1B FISCAL QUARTERS 1.1C CERTAIN PERMITTED EARNOUT AGREEMENTS 2.1 LENDERS' COMMITMENTS, EXISTING LOANS AND PRO RATA SHARES 3.1 EXISTING LETTERS OF CREDIT 4.2M CORPORATE AND CAPITAL STRUCTURE; MANAGEMENT 5.1 SUBSIDIARIES OF COMPANY 5.2B CERTAIN CONSENTS 5.2F CERTAIN COLLATERAL DOCUMENTS 5.11 CERTAIN EMPLOYEE BENEFIT PLANS 5.14 EMPLOYEE MATTERS 5.16 INTELLECTUAL PROPERTY MATTERS 5.18A REAL PROPERTY ASSETS 5.18B CERTAIN LANDLORDS 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.5 CERTAIN PERMITTED RESTRICTED JUNIOR PAYMENTS AFC ENTERPRISES, INC. AMENDED AND RESTATED CREDIT AGREEMENT This AMENDED AND RESTATED CREDIT AGREEMENT is dated as of October __, 1998, and entered into by and among AFC ENTERPRISES, INC., a Minnesota corporation ("COMPANY"), GOLDMAN SACHS CREDIT PARTNERS L.P. ("GSCP"), as Lead Arranger (in such capacity, "LEAD ARRANGER") and as syndication agent (in such capacity, "SYNDICATION AGENT"), CANADIAN IMPERIAL BANK OF COMMERCE, acting through its New York Agency ("CIBC") as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT") and THE FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and collectively as "LENDERS"). R E C I T A L S - - - - - - - - WHEREAS, Company and certain financial institutions (the "EXISTING LENDERS") are parties to that certain Credit Agreement dated as of May 21, 1997 (as heretofore amended, supplemented or otherwise modified, the "EXISTING CREDIT AGREEMENT"), pursuant to which the Existing Lenders (capitalized terms used in these Recitals without definition shall have the respective meanings assigned in subsection 1.1 hereof) have extended and agreed to extend certain credit facilities to Company, the proceeds of which were or will be used (i) together with the proceeds of the Unsecured Subordinated Notes and certain other funds, to consummate the Refinancings and to fund Permitted Acquisitions and to pay certain related transaction fees and expenses, and (ii) to provide financing for working capital and for other general corporate purposes; WHEREAS, the domestic Subsidiaries of Company have guarantied all of the obligations of Company with respect to the credit facilities provided by Lenders under the Existing Credit Agreement; WHEREAS, Company has secured all of the Obligations under the Existing Credit Agreement, and each such Subsidiary of Company has secured its respective obligations under the Subsidiary Guaranty, by granting to Collateral Agent, for the benefit of Agents and Lenders, (i) a first priority Lien on certain of their respective real and personal property and (ii) a first priority pledge of all of the capital stock of their respective domestic Subsidiaries; WHEREAS, each of Company and AFC Franchise Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Company ("ACQUISITION CORP.") has entered into the Cinnabon Acquisition Agreement with Cinnabon International, Inc., a Delaware corporation ("VENDOR"), pursuant to which, among other things, Vendor will merge with and into Acquisition Corp. in accordance with the Delaware General Corporation Law whereby Vendor will be the surviving entity; WHEREAS, Company desires that Existing Lenders and New Lenders agree to amend and restate the Existing Credit Agreement in its entirety (i) to extend additional credit facilities to Company in an aggregate principal amount of $50,000,000 through the addition of a Tranche B Term Loan facility, the proceeds of which will be used (a) to finance the purchase of the capital stock of Vendor pursuant to the Cinnabon Acquisition Agreement and (b) to pay Transaction Costs, and (ii) to make certain other changes as more fully set forth herein, which amendment and restatement shall become effective upon satisfaction of the conditions precedent set forth herein; WHEREAS, it is the intent of the parties hereto that this Agreement not constitute a novation of the obligations and liabilities of the parties under the Existing Credit Agreement or be deemed to evidence or constitute repayment of all or any portion of such obligations and liabilities and that this Agreement amend and restate in its entirety the Existing Credit Agreement and re-evidence the Obligations of Company outstanding thereunder; and WHEREAS, it is the intent of Loan Parties to confirm that all Obligations of Loan Parties under the other Loan Documents shall continue in full force and effect and that, from and after the Effective Date, all references to the "CREDIT AGREEMENT" contained therein shall be deemed to refer to this Agreement. 1 NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders, Administrative Agent, Lead Arranger and Syndication Agent agree that on the Effective Date the Existing Credit Agreement shall be amended and restated in its entirety as follows: SECTION 10 DEFINITIONS 1.1 CERTAIN DEFINED TERMS. --------------------- The following terms used in this Agreement shall have the following meanings: "ACKNOWLEDGMENT AND CONSENT" means that certain Acknowledgment and Consent executed by the Subsidiary Guarantors dated as of the Effective Date and substantially in the form of Exhibit XXI annexed hereto, as such ----------- Acknowledgment and Consent may be amended, restated, supplemented or otherwise modified from time to time. "ACQUISITION CORP." shall have the meaning attached to it in the Recitals to this Agreement. "ACQUISITION FACILITY COMMITMENT" means (i) with respect to the period prior to the Effective Date, the commitment of a Lender to make Acquisition Loans to the Company pursuant to subsection 2.1A(i) of the Existing Credit Agreement, and (ii) thereafter, the commitments of Lenders to make Acquisition Loans as set forth in subsection 2.1A(ii) of this Agreement and "ACQUISITION FACILITY COMMITMENTS" means such commitments of all Lenders in the aggregate. "ACQUISITION LOAN EXPOSURE" means, with respect to any Lender as of any date of determination (i) prior to the termination of the Acquisition Facility Commitments, that Lender's Acquisition Facility Commitment and (ii) after the termination of the Acquisition Facility Commitments, the sum of the aggregate outstanding principal amount of the Acquisition Loans of that Lender. "ACQUISITION LOAN NOTES" means (i) the promissory notes of the Company issued pursuant to subsection 2.1E of the Existing Credit Agreement and (ii) any promissory notes issued by the Company pursuant to subsection 9.1B(i) in connection with assignments of the Acquisition Facility Commitments or Acquisition Loans, in each case substantially in the form of Exhibit IV-A annexed hereto, as they may be amended, restated, supplemented ------------ or otherwise modified from time to time. "ACQUISITION LOANS" means (i) the Existing Acquisition Loans and (ii) the Loans made by the Lenders to the Company pursuant to subsection 2.1A(ii). "ACQUISITION PROPERTIES" has the meaning assigned that term in subsection 6.11. "ADDITIONAL MORTGAGES" has the meaning assigned that term in subsection 6.11. "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by dividing (i) the arithmetic mean of the offered -------- rates for deposits in Dollars with a term comparable to such Interest Period that appears on the Telerate British Bankers Assoc. Interest Settlement Rates Page (as defined below) at approximately 11:00 A.M., London time, on the second full Business Day preceding the first day of such Interest Period ("TELERATE BRITISH BANKERS ASSOC. INTEREST SETTLEMENT RATES PAGE" shall mean the display designated as Page 3750 on the Telerate System Incorporated Service (or such other page as may replace such page on such service for the purpose of displaying the rates at which Dollar deposits are offered by leading banks in the London interbank deposit market)) by (ii) a percentage equal to 100% minus the stated maximum rate -- ----- of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable on such Interest Rate Determination Date to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D (or any successor category of liabilities under Regulation D). 2 "ADMINISTRATIVE AGENT" means Canadian Imperial Bank of Commerce (acting through its New York Agency) in its capacity as administrative agent for Lenders and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.5A. "AFFECTED LENDER" has the meaning assigned to that term in subsection 2.6C. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise. "AGENT" means, individually, each of the Administrative Agent, Lead Arranger, and Syndication Agent, and "AGENTS" means Administrative Agent, Lead Arranger and Syndication Agent, collectively. "AGREEMENT" means this Amended and Restated Credit Agreement, dated as of October __, 1998, as it may be amended, supplemented or otherwise modified from time to time. "APPLICABLE COMMITMENT FEE PERCENTAGE" means a percentage per annum determined by reference to the Leverage Ratio as set forth below: ================================================== APPLICABLE COMMITMENT LEVERAGE RATIO FEE PERCENTAGE ================================================== greater than 3.00:1.00 1/2% --------------------------======================== less than or equal to 3.00:1.00 but greater 3/8% than 2.50:1.00 -------------------------------------------------- less than or equal to 1/4% 2.50:1.00 ================================================== The Commitment Fee Percentage shall be determined by reference to the Leverage Ratio in effect from time to time; provided, however, that (x) no -------- ------- change in the Applicable Commitment Fee Percentage shall be effective until three Business Days after the date on which the Administrative Agent receives the financial statements and a Compliance Certificate pursuant to subsection 6.1(iv) calculating the Leverage Ratio, and (y) the Applicable Commitment Fee Percentage shall be .50% per annum for so long as Company has not submitted to the Administrative Agent the information described in clause (x) of this proviso as and when required under subsection 6.1(ii). "APPLICABLE MARGIN" means a percentage per annum determined by reference to the Leverage Ratio as set forth below: APPLICABLE MARGIN APPLICABLE MARGIN FOR BASE FOR EURODOLLAR LEVERAGE RATIO RATE LOANS RATE LOANS ================================================================== greater than 3.50:1.0 1-1/4% 2-1/4% ------------------------------------------------------------------ less than or equal to 3.50:1.00 but greater than 7/8% 1-7/8% 3 ------------------------------------------------------------------ 3.00:1.00 ------------------------------------------------------------------ less than or equal to 3.00:1.00 but greater 5/8% 1-5/8% than 2.50:1.00 ------------------------------------------------------------------ less than or equal to 2.50:1.00 but greater 3/8% 1-3/8% than 2.00:1.00 ------------------------------------------------------------------ less than or equal to 1/8% 1-1/8% 2.00:1.00 ================================================================== ; provided that the Applicable Margin for Tranche B Term Loans shall be a -------- percentage per annum determined by reference to the Leverage Ratio set forth below: ================================================================== APPLICABLE MARGIN APPLICABLE MARGIN FOR BASE FOR EURODOLLAR LEVERAGE RATIO RATE LOANS RATE LOANS ------------------------------------------------------------------ greater than 3.00:1.00 1.75% 2.75% ------------------------------------------------------------------ less than or equal to 3.00:1.00 1.50% 2.50% ================================================================== The Applicable Margin for each Base Rate Loan shall be determined by reference to the Leverage Ratio in effect from time to time and the Applicable Margin for each Eurodollar Rate Loan shall be determined by reference to the ratio in effect on the first day of the Interest Period for such Loan; provided, however, that (x) no change in the Applicable -------- ------- Margin shall be effective until three Business Days after the date on which the Administrative Agent receives the financial statements and a Compliance Certificate pursuant to subsection 6.1(iv) calculating the Leverage Ratio, and (y) the Applicable Margin shall be 1.25% in the case of Loans other than Tranche B Term Loans or 1.75% in the case of Tranche B Term Loans, that are Base Rate Loans, and 2.25% in the case of Loans other than Tranche B Term Loans or 2.75% in the case of Tranche B Term Loans, that are Eurodollar Rate Loans, for so long as Company has not submitted to the Administrative Agent the information described in clause (x) of this proviso as and when required under subsection 6.1(ii). "ASSET SALE" means the sale by Company or any of its Subsidiaries to any Person of (i) any of the stock of any of Company's Subsidiaries, (ii) substantially all of the assets of any division or line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries outside of the ordinary course of business excluding tangible personal property that --------- in the reasonable judgment of Company, has become uneconomic, obsolete or worn out and which is disposed of in the ordinary course of business, and any other such assets to the extent that the aggregate amount of sales of such assets during any fiscal year is equal to or less than $1,000,000. "ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially the form of Exhibit VIII annexed hereto. ------------ "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "BASE RATE" means, at any time, the higher of (i) the Prime Rate or (ii) the rate which is 2 of 1% in excess of the Federal Funds Effective Rate. 4 "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "BUSINESS DAY" means (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of the States of Georgia or New York or is a day on which banking institutions located in either such state are authorized or required by law or other governmental action to close, and (ii) with respect to all notices, determinations, fundings, issuances and payments in connection with the Adjusted Eurodollar Rate or any Eurodollar Rate Loans, any day that is a Business Day described in clause (i) above and that is also (a) a day for trading by and between banks in Dollar deposits in the London interbank market and (b) a day on which banking institutions are open for business in London. "CAPITAL LEASE", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "CASH" means money, currency or a credit balance in a Deposit Account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any foreign country that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000 (a "CASH EQUIVALENT BANK"); (v) Eurodollar time deposits having a maturity of less than one year purchased directly from any Lender or Cash Equivalent Bank; and (vi) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) through (v) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "CASH INTEREST COVERAGE RATIO" has the meaning assigned to that term in subsection 7.6A. "CASH PROCEEDS" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale. "CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in the form of Exhibit IX annexed hereto delivered by a Lender to ---------- Administrative Agent pursuant to subsection 2.7B(iii). "CHESAPEAKE TRANSACTION" means the acquisition by the Company from the American Bagel Company of all the intangible assets of the franchise business of Chesapeake Bagel Bakery. "CIBC" has the meaning assigned to that term in the introduction to this Agreement. "CINNABON ACQUISITION" means the transactions contemplated by the Cinnabon Acquisition Agreement. 5 "CINNABON ACQUISITION AGREEMENT" means that certain Agreement and Plan of Merger by and between Company, Acquisition Corp. and Vendor, dated as of August 13, 1998, in the form delivered to Lead Arranger on or prior to the Funding Date for the Tranche B Term Loans and as such agreement may be amended, restated, supplemented or otherwise modified from time to time to the extent permitted under subsection 7.15. "CINNABON ACQUISITION DOCUMENTS" means the Cinnabon Acquisition Agreement and the certificate of merger to be filed on the Effective Date. "CLOSING DATE" means May 21, 1997. "COLLATERAL" means, collectively, all real, personal and mixed property collateral securing the Obligations pursuant to the Collateral Documents. "COLLATERAL ACCOUNT" has the meaning assigned to that term in the Collateral Account Agreement. "COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account Agreement executed by Company and Administrative Agent on the Closing Date, substantially in the form of Exhibit X annexed hereto, pursuant to which --------- Company may pledge cash to Administrative Agent to secure the obligations of Company to reimburse Issuing Lender for payments made under one or more Letters of Credit as provided in Section 8, as such Collateral Account Agreement may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. "COLLATERAL DOCUMENTS" means the Company Pledge Agreement, the Company Security Agreement, the Company Trademark Security Agreement, the Company Patent and Copyright Security Agreement, the Collateral Account Agreement, the Subsidiary Pledge Agreements, the Subsidiary Security Agreements, the Subsidiary Trademark Security Agreements, the Mortgages and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "COMMITMENTS" means (i) with respect to the period prior to the Effective Date, the commitments of Lenders to make Loans as set forth in subsection 2.1A of the Existing Credit Agreement, and (ii) thereafter, the commitments of Lenders to make Loans as set forth in subsection 2.1A of this Agreement. "COMPANY" has the meaning assigned to that term in the introduction to this Agreement. "COMPANY COMMON STOCK" means the common stock of Company, par value $0.01 per share. "COMPANY PATENT AND COPYRIGHT SECURITY AGREEMENT" means the Patent Collateral and Security Agreement executed by Company and Administrative Agent, substantially in the form of Exhibit XIV annexed hereto, as such ----------- Patent Collateral and Security Agreement may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. "COMPANY PLEDGE AGREEMENT" means, collectively, the Pledge Agreement executed by Company and Administrative Agent, substantially in the form of Exhibit XI annexed hereto, relating to the pledge of the shares of capital ---------- stock of its Subsidiary(ies) as such Pledge Agreement may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. "COMPANY SECURITY AGREEMENT" means the Security Agreement executed by Company and Administrative Agent, substantially in the form of Exhibit XII ----------- annexed hereto, as such Security Agreement may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. 6 "COMPANY TRADEMARK SECURITY AGREEMENT" means the Trademark Collateral Security Agreement executed by Company and Administrative Agent, substantially in the form of Exhibit XIII annexed hereto, as such Trademark ------------ Collateral Security Agreement may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. "COMPLIANCE CERTIFICATE" means an Officer's Certificate substantially in the form of Exhibit V annexed hereto delivered to Administrative Agent --------- and Lenders by Company pursuant to subsection 6.1(iv). "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "additions to property, plant or equipment" or comparable items reflected in the consolidated statement of cash flows of Company and its Subsidiaries plus ---- (ii) to the extent not covered by clause (i) of this definition, the aggregate of all expenditures by Company and its Subsidiaries during that period to acquire (by purchase or otherwise) (a) the business, property or fixed assets of any Person, or (b) stock or other evidence of beneficial ownership of any Person to the extent the purchase price of such stock or other evidence of beneficial ownership of such Person is appropriately allocated to property, plant, or equipment in accordance with GAAP; provided, however, Consolidated Capital Expenditures shall not include -------- ------- expenditures made from the proceeds of any insurance or condemnation payments (or payments made in lieu of condemnation) received by Company and its Subsidiaries and used to repair or replace the damaged property with respect to which such proceeds were received. "CONSOLIDATED CASH INTEREST EXPENSE" means, for any period, Consolidated Interest Expense for such period excluding, however, any --------- ------- interest expense not payable in Cash (including amortization of discount and amortization of debt issuance costs). "CONSOLIDATED CURRENT ASSETS" means, as at any date of determination, the total assets of Company and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP excluding Cash and Cash Equivalents. "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of determination, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP excluding, however, the current portion of long- term Indebtedness. "CONSOLIDATED EBITDA" means, for any period, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense, (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense, (vi) other non-cash items reducing Consolidated Net Income (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenditures in any future period) and (vii) to the extent deducted in determining Consolidated Net Income fees, expenses and similar transaction costs paid in connection with Permitted Acquisitions less (viii) other non- ---- cash items increasing Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. 7 "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount (if positive) equal to (i) the sum, without duplication, of the amounts for such period of (a) Consolidated EBITDA and (b) the Consolidated Working Capital Adjustment minus (ii) the sum, without duplication, of the amounts ----- for such period of (a) voluntary, mandatory and scheduled repayments of Consolidated Total Debt (excluding repayments of revolving loans except to the extent the revolving loan commitments are permanently reduced in connection with such repayments and mandatory repayments of the Loans pursuant to subsection 2.4B.(iii)), (b) Consolidated Capital Expenditures (net of any proceeds of any related financings with respect to such expenditures or equity contributions applied to finance such expenditures), (c) Consolidated Cash Interest Expense, (d) provisions for current taxes based on income of Company and its Subsidiaries and payable in cash with respect to such period, (e) to the extent not included in Consolidated Capital Expenditures, payments made in connection with Permitted Acquisitions (net of any proceeds of any related financing with respect to such expenditures or equity contributions applied to finance such expenditures) and (f) to the extent not otherwise deducted in calculating Consolidated Net Income or included in Consolidated Capital Expenditures, payments made under Permitted Earnout Agreements. "CONSOLIDATED FIXED CHARGES" means, for any period, an amount equal to the sum of the amounts for such period of (i) scheduled repayments of principal of all Indebtedness (as reduced as a result of prepayments pursuant to subsection 2.4B in the case of Indebtedness hereunder), (ii) Consolidated Cash Interest Expense, (iii) Maintenance Capital Expenditures (net of related financings) and (iv) the portion of taxes based on income actually paid in cash (excluding taxes on extraordinary gains) all as determined for Company and its Subsidiaries on a consolidated basis in conformity with GAAP. "CONSOLIDATED INTEREST EXPENSE" means, for any period, (i) total interest expense (including that portion attributable to Capital Leases in accordance with GAAP) and capitalized interest including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding that portion attributable to (a) amortization expense associated with the Transaction Costs, (b) the write-off of unamortized deferred financing costs taken by Company in connection with the refinancings of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, and (c) any amounts referred to in subsection 2.3 of this Agreement or subsection 2.3 of the Existing Credit Agreement payable to Lead Arranger, Syndication Agent, Administrative Agent or Lenders on or before the Effective Date, respectively, minus (ii) total ----- interest income of Company and its Subsidiaries on a consolidated basis. "CONSOLIDATED MAINTENANCE CAPITAL EXPENDITURES" means, for any period, the aggregate amount of all Consolidated Capital Expenditures actually paid by Company and its Subsidiaries during that period for repair or maintenance of property, plant or equipment. "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided that there shall be excluded (i) the income (or loss) of any -------- Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has an equity or similar interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary (other than such restriction contained in documents governing Indebtedness of such Subsidiary permitted under this Agreement), (iv) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses. 8 "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries, less an amount equal to the Cash balances of Company and ---- its Subsidiaries (net of any overdraft balances), determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED WORKING CAPITAL" means, as at any date of determination, the amount (which may be a negative number) obtained by subtracting Consolidated Current Liabilities from Consolidated Current Assets. "CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any fiscal year, the amount (which may be a negative number) obtained by subtracting (i) Consolidated Working Capital as of the end of such fiscal year from (ii) Consolidated Working Capital as of the beginning of such fiscal year. "CONTINGENT OBLIGATION", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease, dividend or other obligation of another if the primary purpose, intent or result thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Interest Rate Agreements and Currency Agreements. Contingent Obligations shall include, without limitation, (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non- performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "CONTRACTUAL OBLIGATION", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement designed to protect Company or any of its Subsidiaries against fluctuations in currency values. "CUT-OFF DATE" has the meaning assigned such term in subsection 6.9. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. "EFFECTIVE DATE" means the date on or before October 15, 1998 on which the conditions precedent set forth in subsections 4.2 and 4.3 shall be satisfied or waived in accordance with the terms hereof. 9 "ELIGIBLE ASSIGNEE" means (i) (a) a commercial bank organized under the laws of the United States or any state thereof; (b) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (c) a commercial bank organized under the laws of any other country or a political subdivision thereof, provided that (1) such -------- bank is acting through a branch or agency located in the United States or (2) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (d) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) or which extends credit or buys loans as one of its businesses including, but not limited to, insurance companies, mutual funds and lease financing companies, in each case (under clauses (a) through (d) above) that is reasonably acceptable to Administrative Agent; and (ii) any Lender and any Affiliate of any Lender; provided that no Affiliate of Company shall be an -------- Eligible Assignee. "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA (i) currently maintained or contributed to by Company or any of its ERISA Affiliates, (ii) which was at any time since November 5, 1992 maintained or contributed to by Company or any of its ERISA Affiliates or (iii) with respect to which there is any potential or outstanding liability of Company. "EMPLOYEE TAX LOAN NOTES" mean the promissory notes evidencing the loans made to employees of the Company to cover their tax liabilities in connection with grants made to such employees under the Company's 1996 Stock Bonus Plans. "ENVIRONMENTAL CLAIM" means any written accusation, allegation, notice of violation, claim, demand, abatement order or other order or direction (conditional or otherwise) by any governmental authority or any Person for any damage, including, without limitation, personal injury (including sickness, disease or death), tangible or intangible property damage, contribution, indemnity, indirect or consequential damages, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restrictions, in each case relating to, resulting from or in connection with Hazardous Materials and relating to Company, any of its Subsidiaries, any of their respective Affiliates or any Facility. "ENVIRONMENTAL LAWS" means all statutes, ordinances, orders, rules, regulations, or any published plans, policies or decrees and the like relating to (i) environmental matters, including, without limitation, those relating to fines, injunctions, penalties, damages, contribution, cost recovery compensation, losses or injuries resulting from the Release or threatened Release of Hazardous Materials, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any of their respective properties, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C.(S) 9601 et seq.), the -- --- Hazardous Materials Transportation Act (49 U.S.C.(S) 1801 et seq.), the -- --- Resource Conservation and Recovery Act (42 U.S.C.(S) 6901 et seq.), the -- --- Federal Water Pollution Control Act ( 33 U.S.C.(S) 1251 et seq.), the Clean -- --- Air Act (42 U.S.C.(S) 7401 et seq.), the Toxic Substances Control Act (15 -- --- U.S.C.(S) 2601 et seq.), the Federal Insecticide, Fungicide and Rodenticide -- --- Act (7 U.S.C.(S) et seq.), the Occupational Safety and Health Act (29 -- --- U.S.C.(S) 651 et seq.) and the Emergency Planning and Community Right-to- -- --- Know Act (42 U.S.C.(S) 11001 et seq.), each as amended or supplemented, and -- --- any future or present local, state and federal statutes and regulations promulgated pursuant thereto. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA AFFILIATE", as applied to any Person, means (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a 10 member. Any former ERISA Affiliate of Company shall continue to be considered an ERISA Affiliate within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company and with respect to liabilities arising after such period for which Company could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company or any of its ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4062(e) or 4063 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company or any of its ERISA Affiliates pursuant to Section 4064 or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal by Company or any of its ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company or any of its ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on Company or any of its ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409 or 502(c), (i) or (l) or 4071 of ERISA in respect of any Employee Benefit Plan; (ix) the assertion of a material claim (other than routine claims for benefits or for a qualified domestic relations order) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof, or against Company or any of its ERISA Affiliates in connection with any such Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of a final determination of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR RATE LOANS" means Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "EVENT OF DEFAULT" means each of the events set forth in Section 8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXISTING ACQUISITION LOAN" means, with respect to any Existing Lender, the Acquisition Loan under, as defined in, the Existing Credit Agreement held by such Existing Lender, in the principal amount of such Loan outstanding immediately prior to the Effective Date, and "EXISTING ACQUISITION LOANS" means such Loans of all Existing Lenders, collectively. "EXISTING CREDIT AGREEMENT" has the meaning assigned to that term in the Recitals to this Agreement. 11 "EXISTING FACILITY" means the loan agreement dated November 5, 1992 (as amended and restated) made between Company, the Lenders party to the agreement and CIBC, as Agent. "EXISTING LENDERS" has the meaning assigned to that term in the Recitals to this Agreement. "EXISTING LETTERS OF CREDIT" has the meaning assigned to that term in subsection 3.1. "EXISTING LOAN" or "EXISTING LOANS" means, as the context requires, one or more of the Existing Acquisition Loans, Existing Term Loans or Existing Revolving Loans or any combination thereof. "EXISTING MORTGAGES" means any mortgage, deed of trust or deed to secure debt securing the Specified Indebtedness including any amendments, modifications, restatements or assignments thereof. "EXISTING REVOLVING LOANS" means, with respect to any Existing Lender, the Revolving Loans under, and as defined in, the Existing Credit Agreement held by such Existing Lender, in the principal amount of such Loans outstanding immediately prior to the Effective Date. "EXISTING TERM LOAN" means, with respect to any Existing Lender, the Term Loan under, and as defined in, the Existing Credit Agreement held by such Existing Lender, in the principal amount of such Loan outstanding immediately prior to the Effective Date. "EXISTING TERM LOANS" means such Term Loans made by the Existing Lenders, collectively, pursuant to subsection 2.1A(ii) of the Existing Credit Agreement. "FACILITIES" means any and all real property (including, without limitation, all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased or operated by Company or any of its Subsidiaries or any of their respective predecessors or Affiliates. "FAR WEST DIVISION" means the cooking and restaurant kitchen equipment manufacturing division of the Company. "FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent. "FIRST AMENDMENT DATE" means June 30, 1997. "FISCAL QUARTER" means the periods described in Schedule 1.1B. ------------- "FISCAL YEAR" means the fiscal year of Company and its Subsidiaries ending on the last Sunday of December of each calendar year. "FUNDING AND PAYMENT OFFICE" means the office of the New York Agency of CIBC located at (i) 425 Lexington Avenue, New York, New York 10017 as long as CIBC is Administrative Agent and Swing Line Lender or (ii) the address specified in a written notice to Company and Lenders by any successor Administrative Agent and Swing Line Lender. "FUNDING DATE" means the date of the funding of a Loan. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other 12 entity as may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "GSCP" has the meaning assigned to that term in the introduction to this Agreement. "HAZARDOUS MATERIALS" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste", "infectious waste", "toxic substances" or any other formulations intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws pursuant thereto; (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials; (vi) asbestos in any form; (vii) urea formaldehyde foam insulation; (viii) polychlorinated biphenyls; (ix) pesticides; and (x) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of the Facilities. "INDEBTEDNESS", as applied to any Person, means, without duplication, (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, and (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA and obligations under Permitted Earnout Agreements), which purchase price is (a) due more than twelve months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument. Obligations under Interest Rate Agreements and Currency Agreements constitute Contingent Obligations and not Indebtedness. "INDEMNIFIED ENVIRONMENTAL CLAIM" has the meaning assigned to that term in subsection 6.9. "INDEMNITEE" has the meaning assigned to that term in subsection 10.3. "INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries as currently conducted that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. "INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan, each March 31, June 30, September 30 and December 31 of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan; provided that in the case of each Interest -------- Period of six months "Interest Payment Date" shall also include the date that is three months after the commencement of such Interest Period. "INTEREST PERIOD" has the meaning assigned to that term in subsection 2.2B. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement designed to protect Company or any of its Subsidiaries against fluctuations in interest rates. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the second Business Day prior to the first day of such Interest Period. 13 "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person, (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its Subsidiaries, of any equity Securities of such Subsidiary, or (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person, including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise either from sales to that other Person in the ordinary course of business or from obligations arising in connection with development projects funded by customers of Company. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "ISSUING LENDER" means, with respect to any Letter of Credit, the Lender which agrees or is otherwise obligated to issue such Letter of Credit, determined as provided in subsection 3.1B(ii). "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided that in no event shall any corporate Subsidiary of any Person be -------- considered to be a Joint Venture to which such Person is a party. "LEAD ARRANGER" means GSCP in its capacity as Lead Arranger. "LENDER" and "LENDERS" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1 and the term "Lenders" shall include the Swing Line Lender unless the context otherwise requires; provided that the term "Lenders", when used in the context of a -------- particular Commitment, shall mean Lenders having that Commitment. To the extent the context so requires, the terms "Lender" and "Lenders" shall include "Lenders" under, and as defined in, the Existing Credit Agreement. "LETTER OF CREDIT" or "LETTERS OF CREDIT" means letters of credit issued or to be issued by Issuing Lender for the account of Company pursuant to subsection 3.1. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding plus (ii) the aggregate amount of all drawings under Letters of ---- Credit honored by Issuing Lender and not theretofore reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B). "LEVERAGE RATIO" has the meaning assigned to that term in subsection 7.6B. "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, any Uniform Commercial Code financing statement and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means one or more of the Acquisition Loans, Term Loans, Tranche B Term Loans, Revolving Loans or Swing Line Loans or any combination thereof. "LOAN DOCUMENTS" means this Agreement, the Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of Issuing Lender relating to, the Letters of Credit), the Collateral Documents, Currency Agreements, or Interest Rate Agreements entered into between Company and a Lender and/or its Affiliates, the 14 Acknowledgment and Consent and any document executed and delivered by Company or a Subsidiary pursuant to subsection 6.10, 6.11 or 6.12. "LOAN PARTY" means each of Company and any of Company's Subsidiaries from time to time executing a Loan Document, and "LOAN PARTIES" means all such Persons, collectively. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL CONTRACT'' means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could reasonably be expected to have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means (i) a material adverse effect upon the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company and its Subsidiaries, taken as a whole or (ii) the impairment of the ability of Company to perform, or of Administrative Agent or Lenders to enforce, the Obligations. "MATERIAL SUBSIDIARY" shall mean a Subsidiary that, as of the end of the most recent fiscal quarter accounted for 5% or more of the Company's consolidated (i) total assets, (ii) shareholders' equity or (iii) operating income (calculated for the four most recent fiscal quarters), determined in each case in accordance with GAAP. "MORTGAGE" means an instrument (whether designated as a deed of trust, a trust deed or a mortgage or by any similar title) executed and delivered by Company and Administrative Agent in substantially the form of Exhibit XV ---------- annexed hereto encumbering a fee or leasehold interest in Real Property Assets, as such instrument may be amended, supplemented or otherwise modified from time to time, and "Mortgages" means all such instruments, including any Additional Mortgages, collectively. "MULTIEMPLOYER PLAN" means a "multiemployer plan", as defined in Section 3(37) of ERISA, (i) to which Company or any of its ERISA Affiliates is contributing or has an obligation to contribute, (ii) to which Company or any of its then ERISA Affiliates or its current ERISA Affiliates has contributed or had an obligation to contribute and with respect to which Company or any of its current ERISA Affiliates has any potential or outstanding liability, or (iii) to which neither Company nor any of its ERISA Affiliates has directly contributed or had an obligation to contribute, but with respect to which Company or any of its ERISA Affiliates has any potential or outstanding liability solely as a result of the application of Section 4001(b)(1) of ERISA and the regulations thereunder. "NET CASH PROCEEDS" means, with respect to any Asset Sale, Cash Proceeds of such Asset Sale net of bona fide direct costs of sale including (i) taxes reasonably estimated to be actually payable as a result of such Asset Sale within two years of the date of such Asset Sale, (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof as a result of such Asset Sale, (iii) reasonable reserves taken by Company in accordance with GAAP against any liabilities (actual or contingent) associated with the assets subject to the Asset Sale retained by Company as determined (in the case of any such reserves in excess of $1,000,000) by the Board of Directors of Company in its reasonable good faith judgment and evidenced by a resolution of the Board of Directors, and (iv) reasonable employee termination costs payable in connection with such Asset Sale; provided, that any reduction in such -------- reserve will be treated for all purposes of this Agreement as a new Asset Sale at the time of such reduction with Net Cash Proceeds equal to the amount of such reduction. "NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any business interruption or casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each 15 case net of any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof. "NEW LENDER" means any Lender which is a party to this Agreement as of the Effective Date and which is not an Existing Lender. "NOTES" means one or more of the Acquisition Loan Notes, Term Loan Notes, Revolving Notes or Swing Line Note or any combination thereof. "NOTICE OF BORROWING" means with respect to Loans to be made under subsection 2.1A(ii), 2.1A(iii) , 2.1A(iv) or 2.1A(v), a notice substantially in the form of Exhibit I annexed hereto delivered by Company --------- to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to ---------- Administrative Agent pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein. "NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice substantially in the form of Exhibit III annexed hereto delivered by Company to ----------- Administrative Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. "OBLIGATIONS" means all obligations of every nature of Company or any Subsidiary from time to time owed to Administrative Agent, Syndication Agent, Lead Arranger or Lenders or any of them under the Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "OFFICERS' CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its chairman of the board (if an officer) or its president or one of its vice presidents and by its chief financial officer or its treasurer; provided that every Officers' -------- Certificate with respect to the compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officers' Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "OPERATING LEASE" means, as applied to any Person, any lease (including, without limitation, leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease other than any such lease under which that Person is the lessor. "PBGC" means the Pension Benefit Guaranty Corporation (or any successor thereto). "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. "PERMITTED ACQUISITIONS" means (i) the Cinnabon Acquisition and (ii) an acquisition (whether by means of equity or asset purchase acquisition) by Company or its Subsidiaries, of a business or a series of related businesses, provided that (i) the businesses acquired are suitable for -------- franchising; (ii) with respect to any such acquisition financed with the proceeds of Acquisition Loans after giving effect to such acquisition, Company and its Subsidiaries shall be in compliance, on a Pro Forma Basis, with the financial covenants as required under subsection 7.6F of this Agreement; and (iii) concurrently with such acquisition the Administrative Agent, on behalf of Lenders, shall be granted a first priority security interest in the businesses and assets acquired (to the extent available under applicable law) including Acquisition 16 Properties pursuant to subsection 6.11 of this Agreement (subject to ---------- Permitted Encumbrances and other exceptions expressly set forth in this Agreement). "PERMITTED EARNOUT AGREEMENTS" shall mean (x) the agreements set forth in Schedule 1.1C and (y) any other agreement by Company or one of its ------------- Subsidiaries to pay the seller or sellers of any Person or assets acquired in accordance with the provisions of subsection 7.7(vi) at any time following the consummation of such acquisition by reference to the financial performance of the assets acquired; provided that the aggregate -------- amount of all such payments which may be owed under such agreements contemplated by this clause (y) at any time shall not exceed $10,000,000. "PERMITTED ENCUMBRANCES" means the following types of Liens or defects in title (other than any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA): (i Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3; (ii statutory Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (iii Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety, indemnity and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (iv any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; (v leases or subleases granted to others not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries; (vi easements, rights-of-way, licenses, covenants, conditions, restrictions, zoning requirements, minor defects, encroachments or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries at the Real Property Assets subject to such Lien ; (vii any (a) interest or title of a lessor or sublessor under any lease, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b); (viii Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (ix Liens on goods held by suppliers arising in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made therefore and as long as such Lien remains unperfected; (x Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; 17 (xi rights of franchisees under franchise agreements in keeping with the Company's historical practices; (xii with respect to any Real Property Asset in which the Company owns a leasehold estate, any defect or encumbrance caused by or arising out of the failure to record the lease or a memorandum thereof in the applicable real property records in the county where such Real Property Asset is located other than any defect or encumbrance created or suffered by the Company; and (xiii the effect of any eminent domain or condemnation proceedings. "PERMITTED FOREIGN JOINT VENTURE INVESTMENT" means the Investment by Company in the proposed Joint Venture in Asia; provided that, (i) the joint -------- venture interest shall be at least 10%, (ii) the aggregate investment by Company shall not exceed $30,000,000 and the Investment made by Company in any Fiscal Year shall not exceed $10,000,000, and (iii) the businesses of the Joint Venture shall consist of the development and operation of "quick service restaurants" in Asia using Company's brands. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, joint stock companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments and agencies and political subdivisions thereof. "PREFERRED STOCK" means all issued and outstanding shares of cumulative exchangeable, redeemable 10% Preferred Stock of Company. "PREPAYMENT CUT-OFF DATE" has the meaning assigned to that term in subsection 2.4B(iv). "POTENTIAL EVENT OF DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "PRIME RATE" means the rate that CIBC announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. CIBC or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRO FORMA BASIS" has the meaning assigned that term in subsection 7.6E. "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Acquisition Facility Commitment or the Acquisition Loans of any Lender, the percentage obtained by dividing (a) -------- the Acquisition Loan Exposure of that Lender by (b) the aggregate -- Acquisition Loan Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Term Loan Commitment or the Term Loan of any Lender, the percentage obtained by dividing (a) the Term Loan Exposure of that Lender by (b) the aggregate -------- -- Term Loan Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the Tranche B Term Loan Commitment or the Tranche B Term Loans of any Lender, the percentage obtained by dividing (x) the Tranche B Term Loan Exposure of that Lender by -------- -- (y) the aggregate Tranche B Term Loan Exposure of all Lenders, (iv) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender, or any participations in any Swing Line Loan purchased by any Lender, the percentage obtained by dividing (a) the Revolving Loan Exposure of that -------- Lender by (b) the aggregate Revolving Loan Exposure of all Lenders, and (v) -- for all other purposes with respect to each Lender, the percentage obtained by dividing (a) the sum of the Acquisition Loan Exposure of that Lender -------- plus the Term Loan Exposure of that Lender plus the Tranche B Term Loan ---- ---- Exposure of that Lender plus the Revolving Loan Exposure of that Lender by ---- -- (b) the sum of the aggregate Acquisition Loan Exposure of all Lenders plus ---- the aggregate Term Loan Exposure of all Lenders plus the aggregate Tranche ---- B Term Loan Exposure of all Lenders plus the aggregate Revolving Loan ---- Exposure of all Lenders, in any such case as the 18 applicable percentage may be adjusted by assignments permitted pursuant to subsection 10.1. The initial Pro Rata Share of each Lender for purposes of each of clauses (i), (ii), (iii), (iv) and (v) of the preceding sentence is set forth opposite the name of that Lender in Schedule 2.1 annexed hereto. ------------ "PROJECTIONS" has the meaning assigned to that term in subsection 5.3B. "REAL PROPERTY ASSETS" means interests in land, buildings, improvements, and fixtures attached thereto or used in the operation thereof, in each case owned or leased (as lessee) by Company or any of its Subsidiaries. "REFINANCINGS" means, collectively, (i) the purchase by Company of all of the outstanding Preferred Stock for an aggregate purchase price not to exceed $63,000,000 and (ii) the refinancing by Company of all Specified Indebtedness. "REFUNDED SWING LINE LOANS" has the meaning assigned to that term in subsection 2.1A(iv). "REGISTER" has the meaning assigned to that term in subsection 2.1D. "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REGULATORY SHARES" means, with respect to any Person, shares of such Person required to be issued as qualifying shares to directors or persons similarly situated or shares issued to Persons other than Company or a Wholly Owned Subsidiary of Company in response to regulatory requirements of foreign jurisdictions pursuant to a resolution of the Board of Directors of such Person, so long as such shares do not exceed one percent of the total outstanding shares of equity such Person and any owners of such shares irrevocably covenant with Company to remit to Company or waive any dividends or distributions paid or payable in respect of such shares. "REIMBURSEMENT DATE" has the meaning assigned to that term in subsection 3.3B. "RELATED AGREEMENTS" means the Unsecured Subordinated Notes, the Unsecured Subordinated Note Indenture and the Cinnabon Acquisition Documents. "RELATED PLANT" means any plant or facility that is or is intended to be used by Company or any of its Subsidiaries in connection with the businesses permitted under subsection 7.14. "RELEASE" means any release or any threatened release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including, without limitation, the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), or into or out of any Facility, including the movement of any Hazardous Material through the air, soil, surface water, groundwater or property. "REQUIRED PREPAYMENT DATE" has the meaning assigned to that term in subsection 2.4B(iv). "REQUISITE LENDERS" means, at any time, Lenders having or holding not less than 51% of the sum of (w) the aggregate Acquisition Loan Exposure plus (x) the aggregate Term Loan Exposure plus (y) the aggregate Tranche B ---- ---- Term Loan Exposure plus (z) the aggregate Revolving Loan Exposure; provided ---- -------- that in respect of any amendment which would disproportionately affect the holders of the Term Loans, the Acquisition Loans, the Tranche B Term Loans or Revolving Loans, "REQUISITE LENDERS" shall mean, at any time, Lenders having or holding not less than 51% of such class of Loans. "RESTRICTED JUNIOR PAYMENT" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of stock of Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of 19 any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, the Unsecured Subordinated Notes. "REVOLVING LOAN COMMITMENT" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A(iv), and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "REVOLVING LOAN COMMITMENT TERMINATION DATE" means June 30, 2002. "REVOLVING LOAN EXPOSURE" means, with respect to any Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Lender plus (b) ---- in the event that Lender is an Issuing Lender, the aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Lender (in each case net of any participations purchased by other Lenders in such Letters of Credit or any unreimbursed drawings thereunder) plus (c) the ---- aggregate amount of all participations purchased by that Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit plus (d) in the case of Swing Line Lender, the aggregate ---- outstanding principal amount of all Swing Line Loans (net of any participations therein purchased by other Lenders) plus (e) the aggregate ---- amount of all participations purchased by that Lender in any outstanding Swing Line Loans. "REVOLVING LOANS" means (i) the Loans made by Lenders to Company pursuant to subsection 2.1A(iii) of the Existing Credit Agreement and outstanding after the Effective Date and (ii) any Loans made by Lenders to Company pursuant to subsection 2.1A(iv) of this Agreement. "REVOLVING NOTES" means (i) the promissory notes of Company issued pursuant to the Existing Credit Agreement and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Lenders, in each case substantially in the form of Exhibit IV- ---------- C annexed hereto, as they may be amended, supplemented or otherwise - modified from time to time. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit-sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SOLVENT" means, with respect to any Person, that as of the date of determination both (i) (a) the then fair saleable value of the property of such Person is (1) greater than the total amount of liabilities (including contingent liabilities) of such Person and (2) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (b) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (c) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (ii) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. 20 "SENIOR LEVERAGE RATIO" means the ratio of (I) as of the last day of any four-fiscal quarter period, the sum of Consolidated Total Debt less ---- indebtedness outstanding under the Unsecured Subordinated Notes, determined on a consolidated basis in accordance with GAAP to (II) Consolidated EBITDA for the four-fiscal quarter period then ended, in each case as set forth in the most recent Compliance Certificate delivered by Company to Administrative Agent pursuant to subsection 6.1(iv). "SPECIFIED ASSET SALES" means Asset Sales with respect to (i) sale- leaseback transactions completed within one year following the acquisition of the subject asset; (ii) sales, leases or transfers of restaurant properties to franchisees pursuant to the Company's "turnkey" development programs, (iii) sales, leases or transfers of franchises and related assets and properties repossessed or reacquired by the Company from franchisees and subsequently resold to new franchisees all in the ordinary course of business, (iv) sales or dispositions of restaurant-related properties and assets that are no longer in operation and are surplus to the Company's needs in the ordinary course of business in an amount not in excess of $5,000,000 in any twelve month period, (v) exchanges of properties or assets for other properties or assets (other than cash or cash equivalents) that (1) are useful in the business of the Company and its Subsidiaries as then being conducted and (2) have a fair market value at least equal to the fair market value of the assets or properties being exchanged (as evidenced by a resolution of the directors of the Company in the case of transactions having a fair market value in excess of $1,000,000) in the ordinary course of business and (vi) the Far West Division and (vii) sales of restaurant related properties in connection with a market relocation program. "SPECIFIED INDEBTEDNESS" means (i) the Existing Facility and (ii) other Indebtedness of Company and its Subsidiaries outstanding on the Closing Date described in Schedule 1.1A. ------------- "SPONSOR" means Freeman Spogli & Co. Incorporated or its Affiliates or PENMAN Private Equity Fund L.P. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "SUBSIDIARY GUARANTOR" means any Subsidiary of Company that is a party to the Subsidiary Guarantee on the Effective Date or that executes and delivers a counterpart of the Subsidiary Guaranty from time to time thereafter pursuant to subsection 6.10. "SUBSIDIARY GUARANTY" means the Subsidiary Guaranty executed and delivered by existing Subsidiaries of Company on the Closing Date and delivered by the existing Subsidiary Guarantors on the Effective Date and to be executed and delivered by additional Subsidiaries of Company from time to time thereafter in accordance with subsection 6.10, substantially in the form of Exhibit XVIII annexed hereto, as such Subsidiary Guaranty ------------- may heretofore have been or hereafter may be amended, supplemented or otherwise modified from time to time. "SUBSIDIARY PLEDGE AGREEMENT" means each Subsidiary Pledge Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.10, in each case substantially in the form of Exhibit XIX annexed hereto, as such Subsidiary ----------- Pledge Agreement may heretofore have been or may hereafter be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY PLEDGE AGREEMENTS" means all such Subsidiary Pledge Agreements, collectively. "SUBSIDIARY SECURITY AGREEMENT" means each Subsidiary Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any 21 additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.10, in each case substantially in the form of Exhibit XX ---------- annexed hereto, as such Subsidiary Security Agreement may heretofore have been or may hereafter be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY SECURITY AGREEMENTS" means all such Subsidiary Security Agreements, collectively. "SUBSIDIARY TRADEMARK SECURITY AGREEMENT" means each Subsidiary Trademark Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.10, in each case substantially in the form of Exhibit ------- XVII annexed hereto, as such Subsidiary Trademark Security Agreement may ---- heretofore have been or may hereafter be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY TRADEMARK SECURITY AGREEMENTS" means all such Subsidiary Trademark Security Agreements, collectively. "SWING LINE LENDER" means CIBC or any Person serving as a successor Administrative Agent hereunder, in its capacity as Swing Line Lender hereunder. "SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(v). "SWING LINE LOANS" means (i) the Loans made by Swing Line Lender pursuant to subsection 2.1A(iv) of the Existing Credit Agreement and outstanding after the Effective Date and (ii) the Loans made by Swing Line Lender to Company pursuant to subsection 2.1A(v) of this Agreement. "SWING LINE NOTE" means (i) any promissory note of Company issued pursuant to the Existing Credit Agreement to a Swing Line Lender and (ii) any promissory note issued by Company to any successor Agent and Swing Line Lender pursuant to the last sentence of subsection 9.6B, in each case, substantially in the form of Exhibit IV-D annexed hereto, as it may be ------------ amended, supplemented or otherwise modified from time to time. "SYNDICATION AGENT" means GSCP in its capacity as syndication agent. "TAX" or "TAXES" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "TAX ON THE OVERALL NET INCOME" of a Person -------- shall be construed as a reference to a tax imposed by the jurisdiction in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person is deemed to be doing business on all or part of the net income, profits or gains of that Person (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise). "TERM LOAN COMMITMENT" means the commitment of a Lender to make Term Loans to the Company pursuant to subsection 2.1A(ii) of the Existing Credit Agreement and "TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TERM LOAN EXPOSURE" means, with respect to any Lender as of any date of determination the sum of the aggregate outstanding principal amount of the Term Loans of that Lender. "TERM LOAN NOTES" means (i) the promissory notes of the Company issued pursuant to subsection 2.1E(b) of the Existing Credit Agreement on the Closing Date and (ii) any promissory notes issued by the Company pursuant to subsection 9.1B(i) in connection with assignments of the Term Loan Commitments or Term Loans, in each case substantially in the form of Exhibit IV-B annexed hereto, as they may be amended, restated, supplemented ------------ or otherwise modified from time to time. "TERM LOANS" means the Existing Term Loans. 22 "TITLE COMPANY" means any of Chicago Title Insurance Company, Stewart Title and Guaranty Company, Old Republic National Title Insurance Company and First American Title Insurance Company or such other reputable title insurance company reasonably satisfactory to the Administrative Agent. "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans (other than Revolving Loans made for the purpose of repaying any Refunded Swing Line Loans or reimbursing the applicable Issuing Lender for any amount drawn under any Letter of Credit but not yet so applied) plus (ii) the aggregate principal amount of all ---- outstanding Swing Line Loans plus (iii) the Letter of Credit Usage. ---- "TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(iii), and "TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE B TERM LOAN EXPOSURE" means, with respect to any Lender as of any date of determination (i) prior to the funding of the Tranche B Term Loans, that Lender's Tranche B Term Loan Commitment, (ii) after the Effective Date, the outstanding principal amount of the Tranche B Term Loans of that Lender. "TRANCHE B TERM LOANS" means the Loans made by Lenders to Company pursuant to subsection 2.1A(iii). "TRANCHE B TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1E on the Effective Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 9.1B(i) in connection with assignments of the Tranche B Term Loan Commitments or Tranche B Term Loans of any Lenders, in each case substantially in the form of Exhibit IV-E annexed hereto, as they may be ------------ amended, restated, supplemented or otherwise modified from time to time. "TRANSACTION COSTS" means the fees, costs and expenses payable by Company in connection with the transactions contemplated hereby to occur on the Effective Date. "UNSECURED SUBORDINATED NOTE INDENTURE" means the indenture pursuant to which the Unsecured Subordinated Notes will be issued, in the form delivered as of the Closing Date pursuant to subsection 4.1E of the --------------- Existing Credit Agreement, as such indenture may heretofore have been or may hereafter be amended from time to time to the extent permitted under subsection 7.15. "UNSECURED SUBORDINATED NOTES" means the $175,000,000 aggregate principal amount of Company's 10-1/4% senior subordinated notes due 2007 to be issued pursuant to the Unsecured Subordinated Note Indenture. "VENDOR" has the meaning assigned to that term in the Recitals to this Agreement. "WAIVABLE MANDATORY PREPAYMENT" has the meaning assigned to that term in subsection 2.4B(iv). "WHOLLY OWNED SUBSIDIARY" means, with respect to any Person, a Subsidiary of such Person all of the outstanding capital stock or other ownership interests of which (other than Regulatory Shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. "YEAR 2000 COMPLIANT" means that all computer applications owned and controlled by Company or any of its Subsidiaries that are material to Company and its Subsidiaries' business and operations are or will be able to perform properly date-sensitive functions for all dates before and after January 1, 2000, except to the extent that a failure to do so could not reasonably be expected to have a Material Adverse Effect. 23 1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS UNDER ------------------------------------------------------------------------ AGREEMENT. --------- Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), (iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 6.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize accounting principles in conformity with those used to prepare the financial statements referred to in subsection 5.3. 1.3 OTHER DEFINITIONAL PROVISIONS. ----------------------------- References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. Any of the terms defined in subsection 1.1 may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 COMMITMENTS; MAKING OF LOANS; THE REGISTER; NOTES. ------------------------------------------------- A. COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Lender hereby severally agrees to make (or maintain, as the case may be) the Loans described in subsections 2.1A(ii), 2.1A(iii) and 2.1A(iv) and Swing Line Lender hereby agrees to make the Loans described in subsection 2.1A(v). (i) Existing Loans. Company acknowledges and confirms that each -------------- Existing Lender holds Existing Loans in the respective principal amounts outstanding as of the Effective Date set forth opposite its name on Schedule 2.1 annexed hereto. Company hereby represents, warrants, agrees, ------------ covenants and (1) reaffirms that it has no (and it permanently and irrevocably waives and releases Agents and Lenders from any, to the extent arising on or prior to the Effective Date) defense, set off, claim or counterclaim against any Agent or Lender in regard to its Obligations in respect of such Existing Loans and (2) reaffirms its obligation to pay such Loans in accordance with the terms and conditions of this Agreement and the other Loan Documents. Based on the foregoing, (A) Company and each Lender agree that (x) the Existing Acquisition Loans, (y) the Existing Term Loans and (z) the Existing Revolving Loans, and any amounts owed (whether or not presently due and payable, and including all interest accrued to the Effective Date (which shall be payable on the next Interest Payment Date with respect to the Loans to which such interest relates)) by Company to Lenders thereunder or in respect thereof, shall, as of the Effective Date, be converted to, maintained as, and owed by Company under or in respect of Acquisition Loans, Term Loans and Revolving Loans, respectively, hereunder. Amounts repaid or prepaid in respect of Term Loans may not be reborrowed. Amounts repaid or prepaid in respect of the foregoing Acquisition Loans prior to the third anniversary of the Closing Date may be repaid and reborrowed through the third anniversary of the Closing Date and Revolving Loans may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date, respectively. (ii) Acquisition Loans. Each Lender having an Acquisition Facility ----------------- Commitment severally agrees to lend to Company from time to time during the period from the Effective Date to the third anniversary of the Closing Date an aggregate amount which when aggregated with Existing Loans of the Lender that are Acquisition Loans, shall not exceed its Pro Rata Share of the aggregate amount of the Acquisition Facility Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Lender's Acquisition Facility Commitment is set forth opposite its name on Schedule -------- 2.1 annexed hereto and the aggregate amount of the Acquisition Facility --- Commitments is $100,000,000; provided that the Acquisition Facility -------- Commitments of Lenders shall be adjusted to give effect to any assignments of the Acquisition Facility Commitments pursuant to subsection 10.1B; provided further that the amount of the Acquisition Facility Commitment -------- ------- shall be reduced from time to time by the amount of any reductions thereto made 24 pursuant to subsections 2.4B. Amounts borrowed under this subsection 2.1A (ii) may be repaid and reborrowed through the third anniversary of the Closing Date. (iii) Tranche B Term Loans. Each Lender severally agrees to lend to -------------------- Company on the Effective Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche B Term Loan Commitments to be used for the purposes identified in subsection 2.5C. The amount of each Lender's Tranche B Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate amount of the Tranche B ------------ Term Loan Commitments is $50,000,000; provided that the Tranche B Term Loan -------- Commitments of Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Lender's Tranche B Term Loan Commitment shall expire immediately and without further action on October 15, 1998 if the Tranche B Term Loans are not made on or before that date. Company may make only one borrowing under the Tranche B Term Loan Commitments. Amounts borrowed under this subsection 2.1A(iii) and subsequently repaid or prepaid may not be reborrowed. (iv) Revolving Loans. Each Lender having a Revolving Loan --------------- Commitment severally agrees, subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Effective Date to but excluding June 30, 2002 an aggregate amount which when aggregated with any outstanding Existing Loans of the Lender that are Revolving Loans, shall not exceed its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the purposes identified in subsection 2.5D. The original amount of each Lender's Revolving Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the aggregate original amount of the ------------ Revolving Loan Commitments is $25,000,000; provided that the Revolving Loan -------- Commitments of Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and provided, further that the amount of the Revolving Loan Commitments shall -------- ------- be reduced from time to time by the amount of any reductions thereto made pursuant to subsection 2.4B. Each Lender's Revolving Loan Commitment shall expire on June 30, 2002 and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than that date. Amounts borrowed under this subsection 2.1A(iv) may be repaid and reborrowed to but excluding June 30, 2002. Anything contained in this Agreement to the contrary notwithstanding in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect; (v) Swing Line Loans. Swing Line Lender hereby agrees, subject to ---------------- the limitations set forth below with respect to the maximum amount of Swing Line Loans permitted to be outstanding from time to time, to make a portion of the Revolving Loan Commitments available to Company from time to time during the period from the Effective Date to but excluding June 30, 2002 by making Swing Line Loans to Company in an aggregate amount not exceeding the amount of the Swing Line Loan Commitment to be used for the purposes identified in subsection 2.5D, notwithstanding the fact that such Swing Line Loans, when aggregated with Swing Line Lender's outstanding Revolving Loans and Swing Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect, may exceed Swing Line Lender's Revolving Loan Commitment. The original amount of the Swing Line Loan Commitment is $5,000,000; provided that any reduction of the Revolving Loan Commitments made pursuant -------- to subsection 2.4A(iii), 2.4B(ii) or 2.4B(iii) which reduces the aggregate Revolving Loan Commitments to an amount less than the then current amount of the Swing Line Loan Commitment shall result in an automatic corresponding reduction of the Swing Line Loan Commitment to the amount of the Revolving Loan Commitments, as so reduced, without any further action on the part of Company, Agent or Swing Line Lender. The Swing Line Loan Commitment shall expire on June 30, 2002 and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans shall be paid in full no later than that date. Amounts borrowed under this subsection 2.1A(v) may be repaid and reborrowed to but excluding June 30, 2002. Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the limitation that in no event shall the Total 25 Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect. With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to subsection 2.4B(i), Swing Line Lender may, at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to Company), no later than 10:00 A.M. (New York time) on the first Business Day in advance of the proposed Funding Date, a notice (which shall be deemed to be a Notice of Borrowing given by Company) requesting Lenders to make Revolving Loans that are Base Rate Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which Swing Line Lender requests Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Revolving Loans made by Lenders other than Swing Line Lender shall be immediately delivered by Administrative Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and (ii) on the day such Revolving Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by Swing Line Lender, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note, if any, of Swing Line Lender but shall instead constitute part of Swing Line Lender's outstanding Revolving Loans and shall be due under the Revolving Note, if any, of Swing Line Lender. Company hereby authorizes Administrative Agent and Swing Line Lender to charge Company's accounts with Administrative Agent and Swing Line Lender (up to the amount available in each such account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Revolving Loans made by Lenders, including the Revolving Loan deemed to be made by Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Lenders in the manner contemplated by subsection 10.5. If for any reason (a) Revolving Loans are not made upon the request of Swing Line Lender as provided in the immediately preceding paragraph in an amount sufficient to repay any amounts owed to Swing Line Lender in respect of any outstanding Swing Line Loans or (b) the Revolving Loan Commitments are terminated at a time when any Swing Line Loans are outstanding, each Lender shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans in an amount equal to its Pro Rata Share (calculated, in the case of the foregoing clause (b), immediately prior to such termination of the Revolving Loan Commitments) of the unpaid amount of such Swing Line Loans together with accrued interest thereon. Upon one Business Day's notice from Swing Line Lender, each Lender shall deliver to Swing Line Lender an amount equal to its respective participation in same day funds at the Funding and Payment Office. In order to further evidence such participation (and without prejudice to the effectiveness of the participation provisions set forth above), each Lender agrees to enter into a separate participation agreement at the request of Swing Line Lender in form and substance reasonably satisfactory to Swing Line Lender. In the event any Lender fails to make available to Swing Line Lender the amount of such Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Lender together with interest thereon at the rate customarily used by Swing Line Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. In the event Swing Line Lender receives a payment of any amount in which other Lenders have purchased participations as provided in this paragraph, Swing Line Lender shall promptly distribute to each such other Lender its Pro Rata Share of such payment. Anything contained herein to the contrary notwithstanding, each Lender's obligation to make Revolving Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Lender's obligation to purchase a participation in any unpaid Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including (a) any set-off, counterclaim, recoupment, defense or other right which such Lender may have against Swing Line Lender, Company or any other Person for any reason whatsoever; (b) the occurrence or continuation of an Event of Default or a Potential Event of Default; 26 (c) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (d) any breach of this Agreement or any other Loan Document by any party thereto; or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that -------- such obligations of each Lender are subject to the condition that (X) Swing Line Lender believed in good faith that all conditions under Section 4 to the making of the applicable Refunded Swing Line Loans or other unpaid Swing Line Loans, as the case may be, were satisfied at the time such Refunded Swing Line Loans or unpaid Swing Line Loans were made or (Y) the satisfaction of any such condition not satisfied had been waived in accordance with subsection 10.6 prior to or at the time such Refunded Swing Line Loans or other unpaid Swing Line Loans were made. B. BORROWING MECHANICS. Loans made on any Funding Date (other than Revolving Loans made pursuant to a request by Swing Line Lender pursuant to subsection 2.1A(v) for the purpose of repaying any Refunded Swing Line Loans or Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing Issuing Lender for the amount of a drawing under a Letter of Credit issued by it) shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount. Swing Line Loans made on any Funding Date shall be in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount. Whenever Company desires that Lenders make Loans it shall deliver to Administrative Agent a Notice of Borrowing no later than 12:00 Noon (New York time) at least three Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall deliver to Administrative Agent a Notice of Borrowing no later than 12:00 Noon (New York City time) on the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and type of Loans requested, (iii) in the case of Swing Line Loans, that such Loans shall be Base Rate Loans, (iv) in the case of Acquisition Loans, Term Loans, Tranche B Term Loans and Revolving Loans, whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor. Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall -------- be promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the applicable Funding Date. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company or for otherwise acting in good faith under this subsection 2.1B, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Loans hereunder. Company shall notify Administrative Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. C. DISBURSEMENT OF FUNDS. All Acquisition Loans, Term Loans, Tranche B Term Loans and Revolving Loans under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender, or Swing Line Lender, as the case may be, of the proposed 27 borrowing. Each Lender shall make the amount of its Loan available to Administrative Agent not later than 12:00 Noon (New York City time) on the applicable Funding Date, and Swing Line Lender shall make the amount of its Swing Line Loan available to Administrative Agent not later than 2:00 p.m. (New York time) on the applicable Funding Date, in each case in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 2.1A(v) or subsection 3.3B with respect to Revolving Loans used to repay refunded Swing Line Loans or to reimburse Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.2 (in the case of Loans made on the Effective Date) and 4.3 (in the case of all Loans), Administrative Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders, or Swing Line Lender, as the case may be, to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the customary rate set by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. D. THE REGISTER. (i) Administrative Agent shall maintain, at its address referred to in subsection 10.8, a register for the recordation of the names and addresses of Lenders and the Commitments and Loans of each Lender from time to time (the "REGISTER"). The Register shall be available for inspection by Company or any Lender at any reasonable time and from time to time upon reasonable prior notice. (ii) Administrative Agent shall record in the Register the Commitments and Loans from time to time of each Lender, the Swing Line Loan Commitment and the Swing Line Loans from time to time of Swing Line Lender, and each repayment or prepayment in respect of the principal amount of the Loans of each Lender or the Swing Line Loans of Swing Line Lender. Any such recordation shall be conclusive and binding on Company and each Lender, absent manifest error; provided that failure to make any such recordation, -------- or any error in such recordation, shall not affect Company's Obligations in respect of the applicable Loans. (iii) Each Lender shall record on its internal records (including, without limitation, any Notes held by such Lender) the amount of each Loan made by it and each payment in respect thereof. Any such recordation shall be conclusive and binding on Company, absent manifest error; provided that -------- failure to make any such recordation, or any error in such recordation, shall not affect Company's Obligations in respect of the applicable Loans; and provided, further that in the event of any inconsistency between the -------- ------- Register and any Lender's records, the recordations in the Register shall govern. (iv) Company, Administrative Agent and Lenders shall deem and treat the Persons listed as Lenders in the Register as the holders and owners of the corresponding Commitments and Loans listed therein for all purposes hereof, and no assignment or transfer of any such Commitment or Loan shall be effective, in each case unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent and recorded in the Register as provided in 28 subsection 10.1B(ii). Prior to such recordation, all amounts owed with respect to the applicable Commitment or Loan shall be owed to the Lender listed in the Register as the owner thereof, and any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is listed in the Register as a Lender shall be conclusive and binding on any subsequent holder, assignee or transferee of the corresponding Commitments or Loans. (v) Company hereby designates Administrative Agent to serve as Company's agent solely for purposes of maintaining the Register as provided in this subsection 2.1D, and Company hereby agrees that, to the extent Administrative Agent serves in such capacity, Administrative Agent and its officers, directors, employees, agents and affiliates shall constitute Indemnitees for all purposes under subsection 10.3. E. NOTES AND TRANCHE B TERM NOTES. Company shall execute and deliver on the Effective Date to each Lender providing a Tranche B Term Loan Commitment (or to Administrative Agent for that Lender) a Tranche B Term Note, substantially in the form of Exhibit IV-E annexed hereto, to evidence that Lender's Tranche B ------------ Term Loans in the principal amount of that Lender's Tranche B Term Loans and with other appropriate insertions. The Notes and the Obligations evidenced thereby shall be governed by, subject to and benefit from all of the terms and conditions of this Agreement and the other Loan Documents and shall be guarantied and/or secured by the Collateral as provided in the Loan Documents. Administrative Agent and Company may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until an Assignment Agreement effecting the assignment or transfer thereof shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii). Any request, authority or consent of any person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, assignee or transferee of that Note or of any Note or Notes issued in exchange therefor. 2.2 INTEREST ON THE LOANS. --------------------- A. RATE OF INTEREST. Subject to the provisions of subsections 2:1B, 2.6 and 2.7, each Loan, except for Swing Line Loans, shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. Subject to the provisions of subsection 2.7, each Swing Line Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate. The applicable basis for determining the rate of interest with respect to any Loan shall be selected by Company initially at the time a Notice of Borrowing is given with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that Loan shall bear interest determined by reference to the Base Rate. Subject to the provisions of subsections 2.2E and 2.7, the Acquisition Loans, Term Loans, Tranche B Term Loans and the Revolving Loans shall bear interest through maturity as follows: (i) if a Base Rate Loan, then at the sum of the Base Rate plus the ---- Applicable Margin; or (ii) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus the Applicable Margin. ---- Subject to the provisions of subsections 2.2E and 2.7, the Swing Line Loans shall bear interest through maturity at the sum of the Base Rate plus ---- the Applicable Margin. B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall be, at Company's option, either a one, two, three or six month period; provided -------- that: 29 (i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a Eurodollar Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a Eurodollar Rate Loan; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that, if any Interest Period would -------- otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the Loans shall extend beyond June 30, 2002; (vi) no Interest Period with respect to any portion of the Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal on such Loans unless the sum of (a) the aggregate principal amount of such Loans that are Base Rate Loans plus (b) the ---- aggregate principal amount of such Loans that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on such Loan on such date; (vii) Company may not select an initial Interest Period of longer than one month with respect to Tranche B Term Loans made on the Effective Date; (viii) there shall be no more than 10 Interest Periods outstanding at any time; and (ix) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity); provided that in the event any Swing Line Loans or any Revolving -------- Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i), interest accrued on such Swing Line Loans or Revolving Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding Acquisition Loans or Term Loan or Revolving Loans equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to the alternative basis or (ii) upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount as a Eurodollar Rate Loan; provided, however, that a Eurodollar Rate Loan may only be converted into --------- ------- a Base Rate Loan on the expiration date of an Interest Period applicable thereto. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 12:00 Noon (New York time) at least one Business Day in advance of the proposed conversion date (in the case of a 30 conversion to a Base Rate Loan) and at least three Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; provided that such notice shall be promptly confirmed in -------- writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/continuation date. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company or for otherwise acting in good faith under this subsection 2.2D, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. E. POST-MATURITY INTEREST. Any principal payments on the Loans not paid when due and, to the extent permitted by applicable law, any interest payments on the Loans or any fees or other amounts owed hereunder not paid when due, in each case whether at stated maturity, by notice of prepayment, by acceleration or otherwise, shall thereafter bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws whether or not allowed as a claim against Company under the Bankruptcy Code or other applicable bankruptcy laws) payable on demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans); provided that, in -------- the case of Eurodollar Rate Loans, upon the expiration of the Interest Period in effect at the time any such increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Administrative Agent or any Lender. F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed (i) in the case of Base Rate Loans based on the Prime Rate, on the basis of a 365- day or 366-day year, as the case may be, and (ii) in the case of all other Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided that if a -------- Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. 2.3 FEES. ---- A. COMMITMENT FEES. 31 (i) Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share of the Acquisition Facility Commitments, commitment fees for the period from and including the Closing Date to and excluding the third anniversary of the Closing Date equal to the average of the daily excess of the Acquisition Facility Commitments, as then in effect, over the sum of the aggregate principal amount of Acquisition Loans outstanding multiplied by the ------------- Applicable Commitment Fee Percentage; and (ii) Company agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rata Share of the Revolving Loan Commitments (other than Swing Line Loan Commitments), commitment fees for the period from and including the Closing Date to and excluding June 30, 2002 equal to the average of the daily excess of the Revolving Loan Commitments over the aggregate principal amount of Revolving Loans outstanding (but not any Swing Line Loans outstanding) multiplied by ------------- the Applicable Commitment Fee Percentage. Such commitment fees to be calculated on the basis of a 360-day year and the actual number of days elapsed and to be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on the first such date to occur after the Closing Date and ending on June 30, 2002. B. ADMINISTRATIVE AGENT FEE. Company agrees to pay to Administrative Agent, an Administrative Agent's fee in the amount and at the times separately agreed to by Administrative Agent and Company. C. OTHER FEES. Company agrees to pay to Syndication Agent, Lead Arranger, Administrative Agent and Lenders such other fees (including, without limitation, amendment fees), in the amounts and at the times separately agreed upon between Company, Syndication Agent, Lead Arranger and Administrative Agent. 2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN COMMITMENTS; GENERAL PROVISIONS ------------------------------------------------------------------------- REGARDING PAYMENTS; APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS ---------------------------------------------------------------------- UNDER SUBSIDIARY GUARANTY. ------------------------- A. SCHEDULED PAYMENTS OF ACQUISITION LOANS. (i) Scheduled Payments of Acquisition Loans. Company shall make --------------------------------------- principal payments on the Acquisition Loans in installments on the dates and in amounts equal to the percentage of the aggregate amount of the Acquisition Loans outstanding on the third anniversary of the Closing Date, as set forth below:
===================================================== SCHEDULED REPAYMENTS OF ACQUISITION DATE LOANS ===================================================== September 30, 2000 5.0% ----------------------------------------------------- December 31, 2000 5.0% ----------------------------------------------------- March 31, 2001 5.0% ----------------------------------------------------- June 30, 2001 5.0% ----------------------------------------------------- September 30, 2001 10.0% ----------------------------------------------------- December 31, 2001 10.0% ----------------------------------------------------- March 31, 2002 15.0% ----------------------------------------------------- June 30, 2002 45.0% =====================================================
; provided that the scheduled installments of principal of the Acquisition -------- Loans provided for above shall be reduced in connection with any voluntary or mandatory prepayments of the Acquisition Loans in accordance with subsection 2.4B(iv); and provided further, that the Acquisition Loans and -------- ------- all other amounts owed hereunder with respect to the Acquisition Loans shall be paid in full no later than June 30, 32 2002 with respect thereto and the final installment payable by Company in respect of the Acquisition Loans on such date shall be in an amount, if such amount is different from that provided for above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Acquisition Loans. (ii) Scheduled Payments of Term Loan. Company shall make principal ------------------------------- payments on the Term Loans in installments on the dates and in the amounts set forth below:
============================================================== SCHEDULED REPAYMENT OF DATE TERM LOAN -------------------------------------------------------------- September 30, 1998 $1,250,000 -------------------------------------------------------------- December 31, 1998 $1,250,000 -------------------------------------------------------------- March 31, 1999 $2,000,000 -------------------------------------------------------------- June 30, 1999 $2,000,000 -------------------------------------------------------------- September 30, 1999 $2,000,000 -------------------------------------------------------------- December 31, 1999 $2,000,000 -------------------------------------------------------------- March 31, 2000 $2,500,000 -------------------------------------------------------------- June 30, 2000 $2,500,000 -------------------------------------------------------------- September 30, 2000 $2,500,000 -------------------------------------------------------------- December 31, 2000 $2,500,000 -------------------------------------------------------------- March 31, 2001 $2,500,000 -------------------------------------------------------------- June 30, 2001 $2,500,000 -------------------------------------------------------------- September 30, 2001 $2,500,000 -------------------------------------------------------------- December 31, 2001 $2,500,000 -------------------------------------------------------------- March 31, 2002 $7,500,000 -------------------------------------------------------------- June 30, 2002 $7,500,000 ==============================================================
33 ; provided that the scheduled installments of principal of the Term Loans set -------- forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Term Loans in accordance with subsection 2.4B(iv); and provided further that the Term Loans and all other amounts owed hereunder with - -------- ------- respect to the Term Loans shall be paid in full no later than June 30, 2002, and the final installment payable by Company in respect of the Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Term Loan. (iii) Scheduled Payments of Tranche B Term Loans. Company shall make ------------------------------------------ principal payments on the Tranche B Term Loans in installments on the dates and in the amounts set forth below:
======================================================= DATE SCHEDULED REPAYMENT OF TRANCHE B TERM LOANS ------------------------------------------------------- December 31, 1998 $ 125,000 ------------------------------------------------------- March 31, 1999 $ 125,000 June 30, 1999 $ 125,000 September 30, 1999 $ 125,000 December 31, 1999 $ 125,000 ------------------------------------------------------- March 31, 2000 $ 125,000 June 30, 2000 $ 125,000 September 30, 2000 $ 125,000 December 31, 2000 $ 125,000 ------------------------------------------------------- March 31, 2001 $ 125,000 June 30, 2001 $ 125,000 September 30, 2001 $ 125,000 December 31, 2001 $ 125,000 ------------------------------------------------------- March 31, 2002 $ 125,000 June 30, 2002 $ 125,000 September 30, 2002 $ 3,750,000 December 31, 2002 $ 3,750,000 ------------------------------------------------------- March 31, 2003 $ 3,750,000 June 30, 2003 $ 3,750,000 September 30, 2003 $ 3,750,000 December 31, 2003 $ 3,750,000 ------------------------------------------------------- March 31, 2004 $ 3,750,000 June 30, 2004 $21,875,000 =======================================================
; provided that the scheduled installments of principal of the Tranche B Term -------- Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche B Term Loans in accordance with subsection 2.4C; and provided further that the Tranche B Term Loans and all other amounts -------- ------- owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later than June 30, 2004, and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans. B. PREPAYMENTS AND REDUCTIONS IN COMMITMENTS. (i) Voluntary Prepayments. Company may, upon written or telephonic --------------------- notice to Administrative Agent on or prior to 12:00 Noon (New York time) on the date of prepayment, which notice, 34 if telephonic, shall be promptly confirmed in writing, at any time and from time to time prepay any Swing Line Loan on any Business Day in whole or in part in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount. Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Administrative Agent by 12:00 Noon (New York time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any Acquisition Loans, Term Loans, Tranche B Term Loans or Revolving Loans on any Business Day in whole or in part in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount (or such lesser amount as shall constitute the aggregate amount of all outstanding Loans, as the case may be); provided, however, that -------- ------- with respect to any Eurodollar Rate Loan not prepaid on the expiration of the Interest Period applicable thereto, Company shall pay any amount payable pursuant to subsection 2.6D. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. (ii) Voluntary Reductions of Commitments. Company may, upon not less ----------------------------------- than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Acquisition Loan Commitments, or the Revolving Loan Commitments in each case in an amount up to the amount by which the Acquisition Facility Commitments, or the Revolving Loan Commitments exceed the aggregate amount of all outstanding Acquisition Loans, or aggregate Revolving Loan Exposure, respectively, at the time of such proposed termination or reduction; provided that any such partial reduction of the -------- Commitments shall be in an aggregate minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Commitments shall be effective on the date specified in Company's notice and shall reduce the applicable Commitment of each Lender proportionately to its Pro Rata Share of such Commitments. (iii) Mandatory Prepayments and Mandatory Reductions of Commitments. ------------------------------------------------------------- (a) Prepayments and Reductions from Asset Sales. No later than ------------------------------------------- the first Business Day following the date of receipt by Company or any of its Subsidiaries of Net Cash Proceeds of any Asset Sale, Company shall prepay first the Term Loans, Tranche B Term Loans and, after ----- the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the ------ Revolving Loans and, prior to the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal to such Net Cash Proceeds. Notwithstanding the foregoing, the Net Cash Proceeds of Specified Asset Sales shall not be required to prepay Loans as set forth above to the extent that and so long as such Net Cash Proceeds are (x) within 180 days of receipt of such proceeds, reinvested in the business of the Company and the Subsidiaries or, (y) within 180 days of receipt of such proceeds committed for reinvestment and reinvested within 300 days of receipt of such proceeds in the business of the Company and the Subsidiaries, and (z) the aggregate principal amount of all such proceeds not so reinvested at any time does not exceed $10,000,000; provided that any such funds in excess of $10,000,000 not -------- so committed or reinvested shall be used to make prepayments as required pursuant to this subsection 2.4B(iii)(a). Concurrently with any prepayment of the Loans and/or reduction of the applicable Commitments pursuant to this subsection 2.4B(iii)(a), Company shall deliver to Administrative Agent an Officers' Certificate demonstrating the derivation of the Net Cash Proceeds of the correlative Asset Sale from the gross sales price thereof. In the event that Company shall, at any time after receipt of Cash Proceeds of any Asset Sale requiring a prepayment or a reduction of the applicable Commitments pursuant to this subsection 2.4B(iii)(a), determine that the prepayments and/or 35 reductions of the applicable Commitments previously made in respect of such Asset Sale were in an aggregate amount less than that required by the terms of this subsection 2.4B(iii)(a), Company shall promptly make an additional prepayment of the Loans (and, if applicable, the applicable Commitments shall be permanently reduced), in the manner described above in an amount equal to the amount of any such deficit, and Company shall concurrently therewith deliver to Administrative Agent an Officers' Certificate demonstrating the derivation of the additional Net Cash Proceeds resulting in such deficit. Any mandatory prepayments pursuant to this subsection 2.4B(iii)(a) shall be further applied as specified in subsection 2.4B(iv). (b) Prepayments and Reductions Due to Reversion of Surplus Assets ------------------------------------------------------------- of Pension Plans. On the date of return to Company or any of its ---------------- Subsidiaries of any surplus assets of any pension plan of Company or any of its Subsidiaries, Company shall prepay in an amount (the "NET REVERSION AMOUNT") equal to 100% of such returned surplus assets, net of transaction costs and expenses incurred in obtaining such return, including incremental taxes payable as a result thereof, and Company shall prepay first the Term ----- Loans, Tranche B Term Loans and, after the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the Revolving Loans and, prior to the third anniversary of the ------ Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal thereto. Any such mandatory prepayments shall be further applied as specified in subsection 2.4B(iv). (c) Prepayments Due to Issuance of Equity Securities. No later ------------------------------------------------ than the first Business Day following the date of receipt by Company or any of its Subsidiaries of the Cash proceeds (net of underwriting discounts and commissions and other reasonable costs associated therewith) from the issuance of any equity Securities of such Person (including without limitation additional issuances of Company Common Stock but excluding (x) issuances of Company Common Stock to officers or employees of Company to the extent the proceeds from such issuances do not exceed in the aggregate $1,000,000 during any fiscal year and issuances of any Securities evidencing Indebtedness permitted to be incurred pursuant to subsection 7.1 and (y) issuance of equity Securities to the extent the proceeds of which are used to fund Permitted Acquisitions), Company shall prepay first the ----- Term Loans, Tranche B Term Loans and, after the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the Revolving Loans and, prior to the third ------ anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal to the proceeds of such issuance; provided that on and after the date on which the Leverage Ratio -------- (determined on a Pro Forma Basis giving effect to the issuance and application of the equity securities proceeds) is less than or equal to 2.50:1.0, 50% of the proceeds otherwise required to be utilized to prepay Loans pursuant to this subdivision (c) of subsection 2.4B(iii) may be applied to repurchase or prepay the Unsecured Subordinated Notes. Any such mandatory prepayments shall be further applied as specified in subsection 2.4B(iv). (d) Prepayments Due to Issuance of Debt. On or prior to the ----------------------------------- first Business Day after receipt by Company or any of its Subsidiaries of any proceeds of any Indebtedness (other than the Loans, and any other Indebtedness permitted by this Agreement), Company shall prepay first the Term Loans, Tranche B Term Loans and, after the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the Revolving Loans and, prior to the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal to the amount of such proceeds; provided that payment or acceptance of the amounts provided for in this subsection 2.4B(iii)(d) shall not constitute a waiver of any Event of Default resulting from the incurrence of such Indebtedness or otherwise prejudice any rights or remedies of Agents or Lenders. Any such mandatory prepayments shall be further applied as specified in subsection 2.4(B)(iv). 36 (e) Prepayments and Reductions from Net Insurance/Condemnation ---------------------------------------------------------- Proceeds. No later than the first Business Day following the date of -------- receipt by Agents or by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds that are required to be applied to prepay the Loans pursuant to the provisions of subsection 6.4B, Company shall prepay first the Term Loans, Tranche B Term Loans and, ----- after the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the ------ Revolving Loans and, prior to the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal to such Net Insurance/Condemnation Proceeds. Concurrently with any prepayment of the Loans and/or reduction of the Revolving Loan Commitments pursuant to this subsection 2.4B(iii)(e), Company shall deliver to Administrative Agent an Officers' Certificate demonstrating the calculation of the amount (the "NET PROCEEDS AMOUNT") of the Net Insurance/Condemnation Proceeds, that gave rise to such prepayment and/or reduction. In the event that Company shall subsequently determine that the actual Net Proceeds Amount was greater than the amount set forth in such Officers' Certificate, Company shall promptly make an additional prepayment of the Loans (and, if applicable, the Acquisition Loan Commitments and the Revolving Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officers' Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess. Any such mandatory prepayments shall be applied as specified in subsection 2.4B(iv). (f) Prepayments and Reductions from Consolidated Excess Cash -------------------------------------------------------- Flow. In the event that there shall be Consolidated Excess Cash Flow for any fiscal year commencing on or after December 29, 1997, within 100 days after the last day of such fiscal year Company shall prepay first the Term Loans, ----- Tranche B Term Loans and, after the third anniversary of the Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof), and second the Revolving Loans and, prior to the third anniversary of the ------ Closing Date, the Acquisition Loans on a pro rata basis to the full extent thereof (in accordance with the respective outstanding principal amounts thereof) in an amount equal to 50% of such Consolidated Excess Cash Flow; provided that so long as the Leverage Ratio as of the end of Fiscal Year immediately prior to the date of payment under this subsection 2.4B(f) is less than or equal to 2.5:1.0 then only 25% of such Consolidated Excess Cash Flow shall be required to be prepaid. Any such mandatory prepayments shall be applied as specified in subsection 2.4B(iv). (g) Prepayments Due to Reductions or Restrictions of Revolving ---------------------------------------------------------- Loan Commitments. Company shall from time to time prepay first the Swing ----------------- ----- Line Loans and second the Revolving Loans to the extent necessary so ------ that the Total Utilization of Revolving Loan Commitments shall not at any time exceed the Revolving Loan Commitments then in effect. (iv) Application of Prepayments. -------------------------- (a) Application of Voluntary Prepayments by Type of Loans and --------------------------------------------------------- Order of Maturity. Any voluntary prepayments pursuant to subsection 2.4B(i) shall, with respect to the allocation of such prepayments among Loans and scheduled amortization payments, if applicable, be applied as specified by Company in the applicable notice of prepayment; provided that in the event -------- Company fails to specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied to repay the Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to the full extent thereof. (b) Application of Mandatory Prepayments by Type of Loans and --------------------------------------------------------- Order of Maturity. Any mandatory prepayments of the Loans pursuant to ----------------- subsection 2.4B(iii) shall be applied first pro rata to the scheduled ----- -------- installments of principal of the applicable Loans set forth in subsections 2.4A(i), 2.4A(ii) and 2.4A(iii), respectively, that are unpaid at the time of such prepayment, to the full extent thereof, second to prepay the Swing Line Loans to the full extent ------ 37 thereof, and third to prepay the Revolving Loans to the full extent ----- thereof. Anything contained herein to the contrary notwithstanding, so long as any Tranche B Term Loans are outstanding, in the event Company is required to make any mandatory prepayment (a "WAIVABLE MANDATORY PREPAYMENT") of the Tranche B Term Loans pursuant to subsection 2.4B(iii), -------------------- not less than three Business Days prior to the date (the "REQUIRED PREPAYMENT DATE") on which Company is required to make such Waivable Mandatory Prepayment, Company shall notify Administrative Agent of the amount of such prepayment, and Administrative Agent will promptly thereafter notify each Lender holding an outstanding Tranche B Term Loan of the amount of such Lender's Pro Rata Share of such Waivable Mandatory Prepayment and such Lender's option to refuse such amount. Each such Lender may exercise such option by giving written notice to Company and Administrative Agent of its election to do so on or before the first Business Day (the "PREPAYMENT CUT-OFF DATE") prior to the Required Prepayment Date (it being understood that any Lender which does not notify Company and Administrative Agent of its election to exercise such option on or before the Prepayment Cutoff Date shall be deemed to have elected, as of the Prepayment Cutoff Date, not to exercise such option). On the Required Prepayment Date, Company shall pay to Administrative Agent the amount of the Waivable Mandatory Prepayment, which amount shall be applied (i) in an amount equal to that portion of the Waivable Mandatory Prepayment payable to those Lenders that have elected not to exercise such option, to prepay the Tranche B Term Loans of such Lenders (which prepayment shall be applied to the scheduled installments of principal of the Tranche B Term Loans in accordance with subsection ---------- 2.4A(iii)) and (ii) in an amount equal to that portion of the Waivable ---------- Mandatory Prepayment otherwise payable to those Lenders that have elected to exercise such option, to prepay the Acquisition Loans after the third anniversary of the Closing Date and the Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) to the full extent thereof (which prepayment shall be applied to the scheduled installments of principal of the Acquisition Loans and Term Loans in accordance with subsection 2.4A(i) and subsection 2.4A(ii), respectively). ---------- ---------- (c) Application of Prepayments to Base Rate Loans and Eurodollar ------------------------------------------------------------ Rate Loans. With respect to Acquisition Loans, Term Loans, Tranche B ---------- Term Loans and Revolving Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. C. GENERAL PROVISIONS REGARDING PAYMENTS. (i) Manner and Time of Payment. All payments by Company of principal, -------------------------- interest, fees and other Obligations hereunder and under the Notes shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 12:00 Noon (New York time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (ii) Application of Payments to Principal and Interest. Subject to ------------------------------------------------- subsection 2.2C of this Agreement, all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments shall be applied to the payment of interest before application to principal. (iii) Apportionment of Payments. Aggregate principal and interest ------------------------- payments in respect of Acquisition Loans, Term Loans, Tranche B Term Loans and Revolving Loans shall be apportioned among all outstanding Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set 38 forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (iv) Payments on Business Days. Whenever any payment to be made ------------------------- hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. (v) Notation of Payment. Each Lender agrees that before disposing of ------------------- any Note held by it, or any part thereof (other than by granting participations therein), that Lender will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided -------- that the failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect the obligations of Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note. D. APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER SUBSIDIARY GUARANTY. (i) Application of Proceeds of Collateral. Except as provided in ------------------------------------- subsection 2.4B(iii)(a) with respect to prepayments from Asset Sales, all proceeds received by Administrative Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral pursuant to the exercise of rights and remedies under any Collateral Document shall be applied in full or in part by Agent against, the applicable Secured Obligations (as defined in such Collateral Document) in the following order of priority: (a) To the payment of all costs and expenses of such sale, collection or other realization, including reasonable compensation to Administrative Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Agent in connection therewith, and all amounts for which Agent is entitled to indemnification under such Collateral Document and all advances made by Agent thereunder for the account of the applicable Loan Party, and to the payment of all costs and expenses paid or incurred by Agent in connection with the exercise of any right or remedy under such Collateral Document, all in accordance with the terms of this Agreement and such Collateral Document; (b) thereafter, to the extent of any excess such proceeds, to the payment of all other such Secured Obligations for the ratable benefit of the holders thereof; and (c) thereafter, to the extent of any excess such proceeds, to the payment to or upon the order of such Loan Party or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (ii) Application of Payments Under Subsidiary Guaranty. All payments ------------------------------------------------- received by Agent under the Subsidiary Guaranty shall be applied promptly from time to time by Administrative Agent in the following order of priority: (a) To the payment of the costs and expenses of any collection or other realization under the Subsidiary Guaranty, including reasonable compensation to Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, all in accordance with the terms of this Agreement and the Subsidiary Guaranty; 39 (b) thereafter, to the extent of any excess such payments, to the payment of all other Guarantied Obligations (as defined in the Subsidiary Guaranty) for the ratable benefit of the holders thereof; and (c) thereafter, to the extent of any excess such payments, to the payment to the applicable Subsidiary Guarantor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 2.5 USE OF PROCEEDS. --------------- A. ACQUISITION LOANS. The proceeds of the Acquisition Loans shall be applied by Company to finance Permitted Acquisitions (which may include the simultaneous repayment of debt assumed in connection with Permitted Acquisitions) and to pay related costs and expenses. B. TERM LOANS. The proceeds of the Term Loans were applied by Company in accordance with the Existing Credit Agreement. C. TRANCHE B TERM LOANS. The proceeds of the Tranche B Term Loans shall be applied by Company to finance the Cinnabon Acquisition and to pay Transaction Costs. D. REVOLVING LOANS; SWING LINE LOANS. The proceeds of any Revolving Loans and Swing Line Loans shall be applied by Company for working capital or general corporate purposes. E. MARGIN REGULATIONS. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation U, Regulation T or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS. -------------------------------------------------- Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 10:00 A.M. (New York time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the interbank Eurodollar market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by Company. C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, 40 governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the interbank Eurodollar market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement. D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including, without limitation, any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms of this Agreement. E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Rate Loans - -------- ------- in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. 41 2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY. ---------------------------------------- A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B, in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the Closing Date, or compliance by such Lender with any guideline, request or directive issued or made after the Closing Date by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its applicable lending office) or its obligations hereunder or the interbank Eurodollar market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its reasonable discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. B. WITHHOLDING OF TAXES. (i) Payments to Be Free and Clear. All sums payable by Company under ----------------------------- this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax determined on the basis of the overall net income of any Lender) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. (ii) Grossing-up of Payments. If Company or any other Person is ----------------------- required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Loan Documents: (a) Company shall notify Administrative Agent of any such requirement or any change in any such requirement as soon as Company becomes aware of it; 42 (b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative Agent evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to any -------- Lender under clause (c) above except to the extent that any change after the Closing Date (in the case of each Existing Lender), after the Effective Date (in the case of each New Lender) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. (iii) Evidence of Exemption from U.S. Withholding Tax. ----------------------------------------------- (a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "NON-US LENDER") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Existing Lender), on or prior to the Effective Date (in the case of each New Lender) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank 43 Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) notify Administrative Agent and Company of its inability to deliver any such forms, certificates or other evidence. (c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b) of this subsection 2.7B(iii); provided that if such Lender shall -------- have satisfied the requirements of subsection 2.7B(iii)(a) on the Closing Date (in the case of each Existing Lender) and on the Effective Date (in the case of each New Lender) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that, as a result of any change after the Closing Date in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. 2.8 OBLIGATION OF LENDERS AND ISSUING LENDER TO MITIGATE. ---------------------------------------------------- Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; 44 provided that such Lender or Issuing Lender will not be obligated to utilize - -------- such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. SECTION 3. LETTERS OF CREDIT SECTION 3.1 ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS --------------------------------------------------------------------- THEREIN ------- A. LETTERS OF CREDIT. Company acknowledges and confirms that Schedule 3.1 ------------ annexed hereto sets forth each letter of credit issued under the Existing Credit Agreement (collectively, the "EXISTING LETTERS OF CREDIT") and outstanding as of the Effective Date. Company hereby represents, warrants, agrees, covenants and (a) reaffirms that it has no (and it permanently and irrevocably waives and releases Agents and Lenders from any, to the extent arising on or prior to the Effective Date) defense, set off, claim or counterclaim against any Agent or Lender in regard to its Obligations in respect of such Existing Letters of Credit and (b) reaffirms its obligation to reimburse the applicable Issuing Lenders for honored drawings under such Existing Letters of Credit in accordance with the terms and conditions of this Agreement and the other Loan Documents applicable to Letters of Credit issued hereunder. Based on the foregoing, each Lender agrees that (1) each Existing Letter of Credit which is a Standby Letter of Credit shall, as of the Effective Date, be deemed for all purposes of this Agreement to be a Standby Letter of Credit issued hereunder, and (2) each Existing Letter of Credit which is a Commercial Letter of Credit shall, as of the Effective Date, be deemed for all purposes of this Agreement to be a Commercial Letter of Credit issued hereunder. In addition to Company requesting that Lenders make Revolving Loans pursuant to subsection 2.1A(iv) and that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(v), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Effective Date to but excluding June 30, 2002, that Issuing Lender issue Letters of Credit for the account of Company for general corporate purposes. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, Issuing Lender shall issue such Letters of Credit in accordance with the provisions of this subsection 3.1; provided that Company -------- shall not request that Issuing Lender issue (and Issuing Lender shall not issue): (i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments then in effect; or (ii) any Letter of Credit having an expiration date later than the earlier of (a) June 30, 2002 and (b) the date which is two years from the date of issuance of such Letter of Credit; provided that the immediately -------- preceding clause (b) shall not prevent Issuing Lender from agreeing that a Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each upon 40 days prior written request of Company and the beneficiary thereof, so long as Issuing Lender notifies Company or such beneficiary, as the case may be, in writing not less than 20 days prior to the expiration date that it has agreed to extend for any such additional period; and provided, further that Issuing Lender shall -------- ------- give notice that it will not extend such Letter of Credit if it has knowledge that an Event of Default has occurred and is continuing (and has not been waived in accordance with subsection 10.6) at the time Issuing Lender must elect whether or not to allow such extension. B. MECHANICS OF ISSUANCE. (i) Notice of Issuance. Whenever Company desires the issuance of a ------------------ Letter of Credit, it shall deliver to Administrative Agent a Notice of Issuance of Letter of Credit substantially in the form of Exhibit III ----------- annexed hereto no later than 1:00 P.M. (New York time) at least five Business Days or such shorter period as may be agreed to by Issuing Lender in any particular instance, in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) the face amount of the Letter of Credit, (c) the expiration date of the 45 Letter of Credit, (d) the name and address of the beneficiary, and (e) the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents and the verbatim text of any certificates to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require Issuing Lender to make payment under the Letter of Credit. Company shall further execute and deliver any application and other customary form documents required by Issuing Lender. Company shall notify the applicable Issuing Lender (and Administrative Agent, if Administrative Agent is not Issuing Lender) prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit is no longer true and correct as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit. (ii) Determination of Issuing Lender. Upon receipt by a proposed ------------------------------- Issuing Lender of a Notice of Issuance of Letter of Credit pursuant to subsection 3.1B(i) requesting the issuance of a Letter of Credit, (a) in the event Administrative Agent is the proposed Issuing Lender, Administrative Agent shall be the Issuing Lender with respect to such Letter of Credit, notwithstanding the fact that the Letter of Credit Usage with respect to such Letter of Credit and with respect to all other Letters of Credit issued by Administrative Agent, when aggregated with Administrative Agent's outstanding Revolving Loans and Swing Line Loans, may exceed Administrative Agent's Revolving Loan Commitment then in effect; and (b) in the event any other Lender is the proposed Issuing Lender, such Lender shall promptly notify Company and Administrative Agent whether or not, in its sole discretion, it has elected to issue such Letter of Credit, and (1) if such Lender so elects to issue such Letter of Credit it shall be the Issuing Lender with respect thereto and (2) if such Lender fails to so promptly notify Company and Administrative Agent or declines to be the Issuing Lender with respect to such Letter of Credit in accordance with the provisions of this subsection 3.1B Company may request Administrative Agent or another Lender to (and in the case of the Administrative Agent, Administrative Agent will) be the Issuing Lender with respect to such Letter of Credit in accordance with the provisions of this subsection 3.1B. (iii) Issuance of Letter of Credit. Upon satisfaction or waiver of ---------------------------- the conditions set forth in subsection 4.4, Issuing Lender shall issue the requested Letter of Credit in accordance with Issuing Lender's standard operating procedures. (iv) Notification to Lenders. Upon the issuance of any Letter of ----------------------- Credit, Issuing Lender shall promptly notify Administrative Agent (if Issuing Lender is not Administrative Agent) and each other Lender of such issuance. Promptly after receipt of such notice, Administrative Agent shall notify each Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C. (v) Reports to Lenders. At the request of any Lender, Issuing ------------------ Lender shall deliver to each other Lender a report setting forth the average for the immediately preceding calendar quarter of the daily maximum amount available to be drawn under the Letters of Credit issued by Issuing Lender that were outstanding during such calendar quarter, if any. C. LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Lender having a Revolving Loan Commitment shall be deemed to, and hereby agrees to, have irrevocably purchased from Issuing Lender a participation in such Letter of Credit and drawings thereunder in an amount equal to such Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. D. EXISTING LETTERS OF CREDIT. As of the Closing Date the Existing Letters of Credit shall be deemed to have been issued under this Agreement and from and after the Closing Date shall be deemed Letters of Credit for all purposes hereunder. 3.2 LETTER OF CREDIT FEES. --------------------- 46 Company agrees to pay the following amounts to Issuing Lender with respect to Letters of Credit issued by it: (i) with respect to each Letter of Credit, a fronting fee equal to .25% per annum of the daily maximum amount available to be drawn under such Letter of Credit payable in arrears on and to (but excluding) each March 31, June 30, September 30 and December 31 of each year and computed on the basis of a 360-day year for the actual number of days elapsed; provided -------- that the fronting fee payable with respect to each Letter of Credit shall not be less than $500 per annum; and (ii) with respect to the issuance, amendment or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clause (i) above), documentary and processing charges in accordance with Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be. Company further agrees to pay to Administrative Agent, for distribution to each Lender in proportion to that Lender's Pro Rate Share of the Revolving Loan Commitments, a letter of credit fee equal to the product of (y) a percentage equal to the Applicable Margin with respect to Eurodollar Loans and (z) daily maximum amount available to be drawn under each Letter of Credit, payable in arrears on and to (but excluding) each March 31, June 30, September 30 and December 31 of each year and computed on the basis of a 360-day year for the actual number of days elapsed. 3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT. ------------------------------------------------------------------- A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in substantial compliance with the terms and conditions of such Letter of Credit. B. REIMBURSEMENT BY COMPANY OF AMOUNTS DRAWN UNDER LETTERS OF CREDIT. In the event Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, Issuing Lender shall immediately notify Company and Administrative Agent, and Company shall reimburse Issuing Lender on or before the Business Day immediately following the date on which such drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars and in same day funds equal to the amount of such drawing; provided that, anything contained in this -------- Agreement to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent (if Issuing Lender is not Administrative Agent) and Issuing Lender prior to 11:00 A.M. (New York time) on the date of such drawing that Company intends to reimburse Issuing Lender for the amount of such drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars equal to the amount of such drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.3B, Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse Issuing Lender for the amount of such drawing; and provided, further that if for any reason -------- ------- proceeds of Revolving Loans are not received by Issuing Lender on the Reimbursement Date in an amount equal to the amount of such drawing, Company shall reimburse Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this Agreement, and Company shall retain any and all rights it may have against any Lender resulting from the failure of such Lender to make such Revolving Loans under this subsection 3.3B. C. PAYMENT BY LENDERS OF UNREIMBURSED DRAWINGS UNDER LETTERS OF CREDIT. (i) Payment by Lenders. In the event that Company shall fail for any ------------------ reason to reimburse Issuing Lender as provided in subsection 3.3B in an amount equal to the amount of any drawing honored by Issuing Lender under a Letter of Credit issued by it, Issuing Lender shall promptly notify each other 47 Lender having a Revolving Loan Commitment of the unreimbursed amount of such drawing and of such other Lender's respective participation therein based on such Lender's Pro Rata Share. Each Lender shall make available to Issuing Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of Issuing Lender specified in such notice, not later than 1:00 P.M. (New York time) on the first business day (under the laws of the jurisdiction in which such office of Issuing Lender is located) after the date notified by Issuing Lender. In the event that any Lender fails to make available to Issuing Lender on such business day the amount of such Lender's participation in such Letter of Credit as provided in this subsection 3.3C, Issuing Lender shall be entitled to recover such amount on demand from such Lender together with interest thereon at the rate customarily used by Issuing Lender for the correction of errors among banks for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Lender to recover from Issuing Lender any amounts made available by such Lender to Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by Issuing Lender in respect of which payment was made by such Lender constituted gross negligence or willful misconduct on the part of Issuing Lender. (ii) Distribution to Lenders of Reimbursements Received From Company. --------------------------------------------------------------- In the event Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by Issuing Lender under a Letter of Credit issued by it, Issuing Lender shall distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such drawing such other Lender's Pro Rata Share of all payments subsequently received by Issuing Lender from Company in reimbursement of such drawing when such payments are received. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request. D. INTEREST ON AMOUNTS DRAWN UNDER LETTERS OF CREDIT. (i) Payment of Interest by Company. Company agrees to pay to ------------------------------ Issuing Lender, with respect to drawings made under any Letters of Credit issued by it, interest on the amount paid by Issuing Lender in respect of each such drawing from the date of such drawing to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date of such drawing to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. (ii) Distribution of Interest Payments by Issuing Lender. Promptly --------------------------------------------------- upon receipt by Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing under a Letter of Credit issued by it, (a) Issuing Lender shall distribute to each other Lender having a Revolving Loan Commitment, out of the interest received by Issuing Lender in respect of the period from the date of such drawing to but excluding the date on which Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been made under such Letter of Credit, and (b) in the event Issuing Lender shall have been reimbursed by other Lenders pursuant to subsection 3.3C(i) for all or any portion of such drawing, Issuing Lender shall distribute to each other Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such drawing such other Lender's Pro Rata Share of any interest received by Issuing Lender in respect of that portion of such drawing so reimbursed by other Lenders for the period from the date on which Issuing Lender was so reimbursed by other Lenders to but excluding the date on which such portion of such drawing is reimbursed by Company. Any such distribution shall be made to a Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request. 48 3.4 OBLIGATIONS ABSOLUTE. -------------------- Subject to the provisions of subsection 3.3A, the obligation of Company to reimburse Issuing Lender for drawings made under the Letters of Credit issued by it and to repay any Revolving Loans made by Lenders pursuant to subsection 3.3B and the obligations of Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including, without limitation, the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company or any Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by Issuing Lender under any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (vi) any breach of this Agreement or any other Loan Document by any party thereto; or (vii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing; provided, in each case, that payment by Issuing Lender under the applicable - -------- Letter of Credit shall not have constituted gross negligence or willful misconduct of Issuing Lender under the circumstances in question (as determined by a final judgment of a court of competent jurisdiction). 3.5 INDEMNIFICATION; NATURE OF ISSUING LENDER'S DUTIES. -------------------------------------------------- A. INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless Issuing Lender from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "GOVERNMENTAL ACTS"). B. NATURE OF ISSUING LENDER'S DUTIES. As between Company and Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, Issuing Lender shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, 49 even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond the control of Issuing Lender, including without limitation any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of Issuing Lender's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5 and without limiting the provisions of subsection 3.3A, Company shall retain any and all rights it may have against Issuing Lender for any liability arising solely out of the gross negligence or willful misconduct of Issuing Lender, as determined by a final judgment of a court of competent jurisdiction. 3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT. ------------------------------------------------------- In the event that Issuing Lender or any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the Closing Date, or compliance by Issuing Lender or any Lender with any guideline, request or directive issued or made after the Closing Date by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects Issuing Lender or any Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of Issuing Lender or any Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered by Issuing Lender; (ii) imposes, modifies or holds applicable any reserve (including without limitation any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement in respect of any Letters of Credit issued by Issuing Lender or participations therein purchased by any Lender; or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting Issuing Lender or any Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; and the result of any of the foregoing is to increase the cost to Issuing Lender or any Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by Issuing Lender or such Lender (or its applicable lending or letter of credit office) with respect thereto; then, in any case, Company shall promptly pay to Issuing Lender or such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate Issuing Lender or such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Issuing Lender or such Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to Issuing Lender or such 50 Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT 4.1 CONDITIONS TO EXISTING LOANS AND LETTERS OF CREDIT. -------------------------------------------------- The conditions to the making of the Existing Loans and the issuance of the Existing Letters of Credit have been satisfied. 4.2 CONDITIONS TO TRANCHE B TERM LOANS. ---------------------------------- The obligations of Lenders to make the Tranche B Term Loans are, in addition to the conditions precedent specified in subsection 4.3, subject to prior or concurrent satisfaction of the following conditions: A. COMPANY DOCUMENTS. On or before the Effective Date, Company shall deliver or cause to be delivered to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following, each, unless otherwise noted, dated the Effective Date: (i) Certified copies of its Certificate of Incorporation, together with a good standing certificate from the Secretary of State of the State of Minnesota and each other state in which it is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such states, each dated a recent date prior to the Effective Date; (ii) Copies of its Bylaws, certified as of the Effective Date by its corporate secretary or an assistant secretary; (iii) Resolutions of its Board of Directors approving and authorizing the execution, delivery and performance of this Agreement, the other Loan Documents and the Cinnabon Acquisition Documents to which it is a party and approving the Cinnabon Acquisition as contemplated by the Cinnabon Acquisition Documents, certified as of the Effective Date by its corporate secretary or an assistant secretary as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates of its officers executing this Agreement and the other Loan Documents; (v) Executed originals of this Agreement and (to the extent not previously executed and delivered to the Lenders) the other Loan Documents to which it is a party; and (vi) Such other documents as Lead Arranger or Administrative Agent may reasonably request. B. ACQUISITION DOCUMENTS. On or before the Effective Date, Company shall, or shall cause Acquisition Corp. to, deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) the following with respect to the Cinnabon Acquisition, each dated the Effective Date: (i) Certified copies of the Certificate of Incorporation of Acquisition Corp., together with a good standing certificate from the Secretary of State of Delaware and each other state in which Acquisition Corp. is qualified as a foreign corporation to do business and, to the extent generally available, a certificate 51 or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Effective Date; (ii) Copies of the Bylaws of Acquisition Corp., certified as of the Effective Date by its corporate secretary or an assistant secretary; (iii) Resolutions of the Board of Directors of Acquisition Corp. approving and authorizing the execution, delivery and performance of the Cinnabon Acquisition Agreement, and approving and authorizing the consummation of the Cinnabon Acquisition in the manner contemplated by the Cinnabon Acquisition Documents, certified as of the Effective Date by the secretary or an assistant secretary of Acquisition as being in full force and effect without modification or amendment; and (iv) Signature and incumbency certificates of the officers of Acquisition executing the Cinnabon Acquisition Agreement. C. CINNABON ACQUISITION DOCUMENTS. (i) Cinnabon Acquisition Documents. On or before the Effective Date, Company shall, or shall cause Acquisition Corp. to, deliver to Lenders (or to Administrative Agent for Lenders with sufficient originally executed copies, where appropriate, for each Lender and its counsel) a fully executed or conformed copy of each Cinnabon Acquisition Document, each of which shall be reasonably satisfactory in form and substance to Lead Arranger and Administrative Agent. The Cinnabon Acquisition Documents shall each be in full force and effect and no provision thereof shall have been modified or waived in any respect which could be reasonably expected to have a Material Adverse Effect, in each case without the consent of Lead Arranger and Administrative Agent, such consent not to be unreasonably withheld. (ii) No Material Litigation. There shall be no material litigation ---------------------- pending which challenges the Cinnabon Acquisition in any respect which is, in the reasonable judgment of Lead Arranger or Administrative Agent, material. D. SECURITY INTERESTS. Company and Subsidiary Guarantors shall have taken or caused to be taken (and Lead Arranger and Administrative Agent shall have received satisfactory evidence thereof) such actions (other than the filing or recording of items described in clauses (ii) and (iv) below) in such a manner so that Administrative Agent, for the benefit of Lenders, will have, a valid first priority security interest (subject to Liens permitted under subsection 7.2) in the entire Collateral (except to the extent any such security interest cannot be granted under applicable laws). Such actions shall include, without limitation, (i) certificates (which certificates shall be registered in the name of Administrative Agent or properly endorsed in blank for transfer or accompanied by irrevocable undated stock powers duly endorsed in blank, all in form and substance satisfactory to Administrative Agent) representing the capital stock pledged pursuant to the Company Pledge Agreement and delivery to Administrative Agent of all other instruments (duly endorsed where appropriate) evidencing the Collateral, (ii) delivery to Administrative Agent of Uniform Commercial Code financing statements and fixture filings as to the Collateral for all jurisdictions as may be necessary or desirable to perfect the security interests in the Collateral, (iii) delivery to Administrative Agent of the Acknowledgment and Consent and (iv) delivery to Administrative Agent of such other documents and instruments that Lead Arranger or Administrative Agent reasonably deems necessary or advisable to establish, preserve and perfect as of the Closing Date the first priority Liens granted to Administrative Agent on behalf of Lenders under the Collateral Documents. E. OPINIONS OF COMPANY'S COUNSEL. Lenders and their respective counsel shall have received (i) originally executed copies of one or more favorable written opinions of Cohen Pollock Merlin Axelrod & Tanenbaum, LLP, Dorsey & Whitney, and Richards & O'Neil, L.L.P., counsel for Company, in form and substance reasonably satisfactory to Lead Arranger and its counsel and Administrative Agent, dated as of the Effective Date and setting forth substantially the matters in the opinions designated in Exhibits VI-A, VI-B and VI-C annexed hereto and as to such other matters as ------------- ---- ---- Lead Arranger and Administrative Agent acting on behalf of Lenders may reasonably request, and (ii) evidence satisfactory to 52 Lead Arranger and Administrative Agent that Company has requested such counsel to deliver such opinions to Lenders. F. OPINIONS OF LEAD ARRANGER'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of Skadden, Arps, Slate, Meagher & Flom LLP, counsel to Lead Arranger, dated as of the Effective Date, substantially in the form of Exhibit VI-D annexed ------------ hereto and as to such other matters as Lead Arranger acting on behalf of Lenders may reasonably request. G. FEES. Company shall have paid to Syndication Agent, Lead Arranger, Administrative Agent and Lenders, the fees payable on the Effective Date referred to in subsection 2.3. H. NO MATERIAL ADVERSE EFFECT. Since December 29, 1996, no Material Adverse Effect (in the reasonable opinion of Lead Arranger and Administrative Agent) shall have occurred. Since June 14, 1998, there shall not have been an adverse change, or any development involving a prospective adverse change, in or affecting the general affairs, management, financial position, shareholders' equity or results of operation of Company and its Subsidiaries or of Cinnabon, which is, in the reasonable judgment of Lead Arranger and Administrative Agent, material. I. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Lead Arranger and Administrative Agent an Officers' Certificate, in form and substance satisfactory to Lead Arranger and Administrative Agent, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Effective Date to the same extent as though made on and as of such date and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before such date except as otherwise disclosed to and agreed to in writing by Lead Arranger, Administrative Agent and Requisite Lenders. J. COMPLETION OF PROCEEDINGS. All corporate and other proceedings taken or to be taken in connection with the transactions contemplated hereby and all documents incidental thereto not previously found acceptable by Lead Arranger, acting on behalf of Lenders, and its counsel shall be satisfactory in form and substance to Lead Arranger and such counsel, and Lead Arranger and such counsel shall have received all such counterpart originals or certified copies of such documents as Lead Arranger or Administrative Agent may reasonably request. K. INSURANCE APPRAISAL; EVIDENCE OF INSURANCE. Administrative Agent and Lead Arranger shall have received satisfactory certificates of insurance with respect to each of the insurance policies required pursuant to subsection 6.4, and Administrative Agent and Lead Arranger shall be satisfied with the nature and scope of these insurance policies. L. NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Company shall have obtained all Governmental Authorizations that are necessary in connection with the Cinnabon Acquisition and the other transactions contemplated by the Loan Documents and the Related Agreements, and the continued operation of the business conducted by Vendor and its Subsidiaries in substantially the same manner as conducted prior to the Acquisition, and each of the foregoing shall be in full force and effect and in form and substance satisfactory to Lead Arranger (except as disclosed to and approved by Lead Arranger). All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose adverse conditions on the Cinnabon Acquisition or the financing thereof. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. M. CORPORATE STRUCTURE; MANAGEMENT. 53 (i) Corporate Structure. The corporate organizational structure, ------------------- capital structure and ownership of Company and its Subsidiaries, after giving effect to the Cinnabon Acquisition, shall be as set forth on Schedule 4.2M annexed hereto. ------------- (ii) Management. The management structure of Company, after ---------- giving effect to the Cinnabon Acquisition, shall be as set forth on Schedule 4.2M annexed hereto and there shall not have been any material ------------- adverse changes to the Material Contracts since the Closing Date. N. REPAYMENT OF SWING LINE LOANS. On the Effective Date, immediately before and after giving effect to any borrowings hereunder on such date, no Swing Line Loans shall be outstanding. O. NO EVENT OF DEFAULT. Company shall have delivered to Administrative Agent an Officer's Certificate, in form and substance satisfactory to Administrative Agent, to the effect that immediately prior to the Effective Date, no event has occurred and is continuing that would constitute an Event of Default or Potential Event of Default under the Existing Credit Agreement. P. FINANCIAL STATEMENTS; PRO FORMA BALANCE SHEET. On or before the Effective Date, Lenders shall have received from Company and be satisfied with (i) audited financial statements of Vendor and its Subsidiaries for the periods ending March 31, 1997 and March 31, 1998 (it being understood and agreed that the foregoing audited financial statements for the said periods shall not be released by Vendor to Company until the Effective Date), consisting of consolidated and consolidating balance sheets and the related consolidated and consolidating statements of income, stockholders' equity and cash flows for such periods, (ii) unaudited financial statements of Vendor and its Subsidiaries for the period from April 1, 1998 through the monthly period most recently ended (for which such statements are available), consisting of a consolidated balance sheet (prepared on a divisional basis) and the related consolidated statement of income for the period ending on each such date, all in reasonable detail and the accuracy and preparation of which have been represented to by Vendor under the Cinnabon Acquisition Agreement that they fairly present, in all material respects, the financial condition of Vendor and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (iii) audited financial statements of the Company and its Subsidiaries for the period ending December 28, 1997, consisting of consolidated and consolidating balance sheets and the related consolidated and consolidating statements of income, stockholders' equity and cash flows for such period, (iv) unaudited financial statements of Company and its Subsidiaries for the period from December 29, 1997 through August 9, 1998, consisting of a consolidated balance sheet and the related consolidated statements of income, stockholders' equity and cash flows for the period ending on each such date, all in reasonable detail and certified by the chief financial officer of the Company that they fairly present, in all material respects, the financial condition of the Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, (v) pro forma combined balance sheets of Company and its Subsidiaries as at June 14, 1998, prepared in accordance with GAAP and reflecting the consummation of the Merger, the related financings and the other transactions contemplated by the Loan Documents, which pro forma financial statements shall be in form and substance satisfactory to Lenders, and (vi) the Projections. Q. CAPITALIZATION OF COMPANY. On or before the Effective Date, Sponsor and other investors shall have purchased common stock of Company for cash consideration of not less than $20,000,000, which amount shall be contributed by Company to the consideration due under the Cinnabon Acquisition Agreement. For purposes of determining compliance with the conditions specified in subsection 4.2, each Lender that has executed this Agreement or subsequently becomes a party to this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter either sent or made available by Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or required hereunder to be consented to or approved by or acceptable or satisfactory to the Lender or Administrative Agent, unless Administrative Agent shall have received written notice from such Lender prior to the Closing Date specifying its objection thereto and either such objection shall not have 54 been withdrawn by written notice to Administrative Agent to that effect on or prior to the Effective Date or, if any borrowing on the Effective Date has been requested, the Lender shall not have made available to Administrative Agent on or prior to the Closing date the Lender's Pro Rata Share of such borrowing. 4.3 CONDITIONS TO ALL LOANS. The obligations of Lenders to make Loans on each Funding Date are subject to the following conditions precedent: A. Administrative Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the president, chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above- described officers on behalf of Company in a writing delivered to Administrative Agent. B. As of that Funding Date: (i) The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before that Funding Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Loans to be made by it on that Funding Date; (v) The making of the Loans requested on such Funding Date shall not violate any law including, without limitation, Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System; and (vi) There shall not be pending or, to the knowledge of Company, threatened, any action, suit, proceeding, governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that has not been disclosed by Company in writing pursuant to subsection 5.6 or 6.1(x) prior to the making of the last preceding Loans (or, in the case of the Tranche B Term Loans, prior to the Effective Date), and there shall have occurred no development not so disclosed in any such action, suit, proceeding, governmental investigation or arbitration so disclosed, that, in either event, in the opinion of Lead Arranger, Administrative Agent or of Requisite Lenders, would be expected to have a Material Adverse Effect; and no injunction or other restraining order shall have been issued and no hearing to cause an injunction or other restraining order to be issued shall be pending or noticed with respect to any action, suit or proceeding seeking to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated by this Agreement or the making of Loans hereunder. 4.4 CONDITIONS TO ISSUANCE OF LETTERS OF CREDIT. ------------------------------------------- 55 The issuance of any Letter of Credit (other than the Existing Letters of Credit) hereunder (whether or not Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: A. On or before the date of issuance of such Letter of Credit, Administrative Agent shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Notice of Issuance of Letter of Credit, in each case signed by the president, chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent, together with all other information specified in subsection 3.1B(i) and such other documents or information as Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. B. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.3B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date. SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders to enter into this Agreement and to make (or maintain, as the case may be) the Loans, to induce Issuing Lender to issue (or maintain, as the case may be) Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender, on the date of this Agreement, on the Effective Date, on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements are true, correct and complete; provided, however, that any representations and -------- warranties made on the Effective Date only regarding Vendor and its Subsidiaries are based upon Company's knowledge as of the Effective Date: 5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND ---------------------------------------------------------------- SUBSIDIARIES. ------------ A. ORGANIZATION AND POWERS. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Company has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents and to carry out the transactions contemplated thereby. B. QUALIFICATION AND GOOD STANDING. Company is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing has not had and will not have a Material Adverse Effect. C. CONDUCT OF BUSINESS. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.14. D. SUBSIDIARIES. All of the Subsidiaries of Company (as of the Effective Date and after giving effect to the Cinnabon Acquisition) are identified in Schedule 5.1 annexed hereto, as said Schedule 5.1 may be supplemented from time - ------------ ------------ to time pursuant to the provisions of subsection 6.1(xvii). The capital stock of each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto ------------ (as so supplemented) is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto (as so ------------ supplemented) is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority, singly or in the aggregate, has not had and will not have a Material Adverse Effect. Schedule 5.1 annexed hereto (as so supplemented) correctly sets ------------ forth the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein. 56 5.2 AUTHORIZATION OF BORROWING, ETC. ------------------------------- A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents have been duly authorized by all necessary corporate action on the part of Company. B. NO CONFLICT. After giving effect to the consummation of the transactions contemplated hereby to occur on the Effective Date, the execution, delivery and performance by Company of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Company or any of its Subsidiaries, the Certificate or Articles of Incorporation or Bylaws or any other organizational documents of Company or any of its Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Company or any of its Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Company or any of its Subsidiaries, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Company or any of its Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of stockholders or any approval or consent of any Person under any Contractual Obligation of Company or any of its Subsidiaries, except for such approvals or consents which will be obtained on or before the Effective Date and disclosed in writing to Lenders and except as disclosed on Schedule 5.2B. ------------- 57 C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Company of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body, other than filings required in connection with the perfection of security interests granted pursuant to the Collateral Documents. D. BINDING OBLIGATION. This Agreement has, and each of the other Loan Documents have been duly executed and delivered by Company and this Agreement and each of the other Loan Documents is the legally valid and binding obligation of Company, enforceable against Company in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. E. VALID ISSUANCE OF UNSECURED SUBORDINATED NOTES. The Unsecured Subordinated Notes are the legally valid and binding obligations of Company, enforceable against Company in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Unsecured Subordinated Notes will be enforceable against the holders thereof, and the Loans and all other monetary Obligations hereunder are and will be within the definition of "SENIOR DEBT" included in such provisions. The Unsecured Subordinated Notes, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. F. COLLATERAL DOCUMENTS. Except as set forth in Schedule 5.2F, the ------------- security interests created in favor of Administrative Agent under the Collateral Documents (to the extent purported to be created thereunder) will at all times from and after the Effective Date constitute, as security for the obligations purported to be secured thereby, a legal, valid and enforceable security interest in and Lien on all of the Collateral referred to therein in favor of Administrative Agent for the benefit of the Lenders and, from and after the date of filing of the documents delivered on the Closing Date pursuant to subsection 4.2D perfected and prior to the rights of all third persons (other than Permitted Encumbrances) in accordance with the requirements of all applicable Collateral Documents. Each Loan Party has title to its Collateral as set forth in clauses (i), (ii) and (iii) of subsection 5.5, as the case may be, and all such Collateral is free and clear of all Liens except for Liens permitted by subsection 7.2. No consents, filings or recordings are required in order to perfect (or maintain the perfection or priority of) the security interests purported to be created by any of the Collateral Documents, other than such as have been obtained and which remain in full force and effect and uniform commercial code financing statements to be filed, or delivered to Administrative Agent for filing, on the Effective Date and periodic uniform commercial code continuation filings or as is specifically otherwise permitted by the terms of any applicable Collateral Document. 5.3 FINANCIAL CONDITION. ------------------- A. FINANCIAL STATEMENTS. Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheet of Company and its Subsidiaries for fiscal years 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the fiscal year then ended together with auditors letters provided to Company in respect of such balance sheets, (ii) the unaudited consolidated balance sheet of Company and its Subsidiaries for the Company's last fiscal period ending August 9, 1998 and the related unaudited consolidated statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for the period from December 28, 1997 to the fiscal period then ended, (iii) a pro forma balance sheet for Company and its Subsidiaries as of June 14, 1998 giving effect to the transaction to be consummated on the Effective Date together with an income statement for Company and its Subsidiaries for the three fiscal periods ending on such date, (iv) the consolidated balance sheet of Vendor and its Subsidiaries as at June 30, 1998 and the related consolidated statements of income, stockholders' equity and cash flows of Vendor and its Subsidiaries for the three-month period then ended, together with the corresponding figures for the corresponding period ending on June 30 of the previous year, together with monthly financial statements of Vendor and its Subsidiaries for each month from June 30, 1998 to the month most recently ended (for which such statements are available), and (v) the financial statements required to be delivered pursuant to subsection 4.2P. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated 58 basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from audit and normal year-end adjustments and to the omission of footnotes. Neither Company, Acquisition Corp. nor Vendor has (and will not following the funding of the Tranche B Term Loans), any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long-term commitment that is not reflected in the foregoing financial statements or the notes thereto or the most recent financial statements delivered by Company pursuant to subsection 6.1 of the Existing Credit Agreement or subsection 4.2P of this Agreement in the case of Vendor and which singly or in the aggregate would reasonably be expected to have a Material Adverse Effect. B. PROJECTIONS. On and as of the Effective Date, the financial projections of Company and its Subsidiaries for fiscal years 1998 through 2004 (giving effect to the Cinnabon Acquisition) previously delivered to Lenders (the "PROJECTIONS") are based on good faith estimates and assumptions made by the management of Company, it being recognized, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the Projections may differ from the projected results and that the differences may be material. Notwithstanding the foregoing, as of the Effective Date, management of Company believed that the Projections were reasonable and attainable. 5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS. --------------------------------------------------------- Since December 31, 1996, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect. Since the Closing Date, neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted by subsection 7.5. 5.5 TITLE TO PROPERTIES; LIENS. -------------------------- After giving effect to the transactions contemplated by this Agreement to occur on the Effective Date, and subject to Permitted Encumbrances, Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1 of the Existing Credit Agreement, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7, or the leasehold properties the loss of which could not reasonably be expected to have a Material Adverse Effect. Except as permitted by this Agreement or the Collateral Documents, all such properties and assets are free and clear of Liens. 5.6 LITIGATION; ADVERSE FACTS. ------------------------- There are no actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, pending or, to the knowledge of Company, threatened against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. Neither Company nor any of its Subsidiaries is (i) in violation of any applicable laws that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect or (ii) subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. 5.7 PAYMENT OF TAXES. ---------------- Except to the extent permitted by subsection 6.3, all tax returns and reports of Company and its Subsidiaries required to be filed by any of them have been timely filed, and all material taxes, assessments, fees and other governmental charges upon Company and its Subsidiaries and upon their respective properties, assets, income, 59 businesses and franchises which would be delinquent if unpaid have been paid. Company knows of no proposed material tax assessment against Company or any of its Subsidiaries which is not being actively contested by Company or such Subsidiary in good faith and by appropriate proceedings; provided that such -------- reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 5.8 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS. -------------------------------------------------------- A. Neither Company nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not have a Material Adverse Effect. B. Neither Company nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. 5.9 GOVERNMENTAL REGULATION. ----------------------- Neither Company nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 5.10 SECURITIES ACTIVITIES. --------------------- A. Neither Company nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. B. Following application of the proceeds of each Loan, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock. 5.11 EMPLOYEE BENEFIT PLANS. ---------------------- A. Company and each of its ERISA Affiliates are in compliance in all material respects with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their obligations under each Employee Benefit Plan in all material respects. B. There has been no ERISA Event which is continuing or in respect of which there is any outstanding liability of Company or any of its ERISA Affiliates which would reasonably be expected to have a Material Adverse Effect. No ERISA Event is reasonably expected to occur which would reasonably be expected to have a Material Adverse Effect. C. Except to the extent required under Section 4980B of the Internal Revenue Code or conversion rights under applicable state law or except as set forth in Schedule 5.11 annexed hereto, no Employee Benefit Plan provides health ------------- or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employees of Company or any of its ERISA Affiliates. D. As of the most recent valuation date for any Pension Plan, the excess of the actuarial present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Pension Plan) of the benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the fair market value of the assets of such 60 Pension Plan, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which there is no such excess), does not exceed $1,000,000. E. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Company or any of its ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal for all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $1,000,000. 5.12 CERTAIN FEES. ------------ No broker's or finder's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's or finder's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 5.13 ENVIRONMENTAL PROTECTION. ------------------------ A. The operations of Company and each of its Subsidiaries (including, without limitation, all operations and conditions at or in the Facilities) comply in all material respects with all Environmental Laws except to the extent a failure to so comply would not have a Material Adverse Effect; B. None of the operations of Company or any of its Subsidiaries is subject to any judicial or administrative proceeding alleging the violation of or liability under any Environmental Laws which if adversely determined could reasonably be expected to have a Material Adverse Effect; C. Neither Company nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order or agreement with any governmental authority or private party relating to (a) prior administrative or judicial proceedings relating to the violation by Company or such Subsidiary of any Environmental Laws or (b) any Environmental Claims; and D. No Hazardous Materials exist on, under or about any Facility in a manner that has a reasonable possibility of giving rise to an Environmental Claim having a Material Adverse Effect, and neither Company nor any of its Subsidiaries has filed any notice or report of a Release of any Hazardous Materials that in any single case or in the aggregate has a reasonable possibility of giving rise to an Environmental Claim having a Material Adverse Effect. 5.14 EMPLOYEE MATTERS. ---------------- Neither Company nor any of its Subsidiaries as of the date hereof is party to any collective bargaining agreement. Except as set forth on Schedule 5.14, there is no strike, work stoppage, slow down, lock-out or other labor dispute pending or, to the knowledge of Company, threatened involving Company or any of its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. 5.15 SOLVENCY. --------- Each of Company and each of its Subsidiaries, is and, upon the incurrence of any Obligations by Company on any date on which this representation is made, will be, Solvent except to the extent the failure of any such Subsidiaries to be Solvent would not in the aggregate be reasonably expected to have a Material Adverse Effect. 5.16 INTELLECTUAL PROPERTY. ----------------------- A. Company and its Subsidiaries own, or are licensed (to the extent required to be so licensed) to use, the Intellectual Property and all such Intellectual Property is, to the extent reasonably deemed necessary and appropriate by Company for the conduct of its business, fully protected and duly and properly registered, filed or 61 issued in the appropriate office and jurisdictions for such registrations, filing or issuances, and Company owns all of the right, title and interest in and to the "Churchs Fried Chicken " and "Popeyes Chicken and Biscuits" trademarks and the other Intellectual Property listed on Schedule 5.16 under the ------------- applicable laws of the United States free and clear of any Lien (other than Permitted Encumbrances and Liens created in favor of Administrative Agent on behalf of Lenders pursuant to the Loan Documents). B. Except as disclosed in Schedule 5.16, no material claim has been ------------- asserted by any Person with respect to the use of any such Intellectual Property, or challenging or questioning the validity or effectiveness of any such Intellectual Property. Except as disclosed in Schedule 5.16, the use of ------------- such Intellectual Property by Company or any of its Subsidiaries does not infringe on the rights of any Person, subject to such claims and infringements as do not, in the aggregate, give rise to any liabilities on the part of Company or any of its Subsidiaries that are material to Company or any of its Subsidiaries. The consummation of the transactions contemplated by this Agreement or the Refinancings will not in any material manner or to any material extent impair the ownership of (or the license to use, as the case may be) any of such Intellectual Property by Company or any of its Subsidiaries. 5.17 APPLICABLE LAW. -------------- Company and each of its Subsidiaries is in compliance with the requirements of all applicable laws, rules, regulations, orders, applications, reporting and licensing requirements of all governmental authorities except for violations thereof which in the aggregate could not reasonably be expected to have a Material Adverse Effect. 5.18 REAL PROPERTY. ------------- A. Neither Company nor any of its Subsidiaries owns any interest in real property other than the Real Property Assets identified in Schedule 5.18A -------------- annexed hereto (as supplemented from time to time pursuant to subsection 6.1(xvii)). B. Except as set forth in Schedule 5.18B, with respect to each lease -------------- for a Real Property Asset in which the Company or one of its Subsidiaries has a leasehold interest, either (i) no consent is required from the lessor thereunder in order for the Company or applicable Subsidiary to encumber its leasehold interest or (ii) the Company or such Subsidiary has obtained from the lessor all required consents to the Mortgages and assignment and modification thereof, to the extent required and not excluded by subsection 6.11. 5.19 INSURANCE. --------- Company and its Subsidiaries maintain, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and business of its Subsidiaries, against loss or damage of the kinds customarily insured against by corporations of established reputation engaged in the same or similar business of such types and in such amounts as are customarily carried under similar circumstances by such other corporations, all as determined by the officers of Company in their reasonable discretion. 5.20 RELATED AGREEMENTS. ------------------ A. DELIVERY OF RELATED AGREEMENTS. Company has delivered to Agents complete and correct copies of each Related Agreement and of all exhibits and schedules thereto. B. VENDOR'S WARRANTIES. Except to the extent otherwise set forth herein or in the schedules hereto, to Company's knowledge each of the representations and warranties given by Vendor to Company in the Cinnabon Acquisition Agreement was true and correct in all material respects as of the Effective Date (or as of any earlier date to which such representation and warranty specifically relates), subject to the qualifications set forth in the schedules to the Cinnabon Acquisition Agreement. C. WARRANTIES OF COMPANY. Subject to the qualifications and the schedules set forth therein, each of the representations and warranties given by Company to Vendor in the Cinnabon Acquisition Agreement was true and correct in all material respects as of the Effective Date. 62 D. SURVIVAL. Notwithstanding anything in the Cinnabon Acquisition Agreement to the contrary, the representations and warranties of Company set forth in subsections 5.20B and 5.20C shall, for purposes of this Agreement, survive the Effective Date for the benefit of Agents and Lenders. 5.21 DISCLOSURE. ---------- No representation or warranty of Company or any of its Subsidiaries contained in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement (including, without limitation, the Summary Information Memorandum dated September 1998, slides and other material distributed to Lenders in syndication meetings and for due diligence purposes) contains as of its date any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 FINANCIAL STATEMENTS AND OTHER REPORTS. -------------------------------------- Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Administrative Agent and Lenders: (i) Four-week Financials: as soon as available and in any event -------------------- within 30 days after the end of each four-week accounting period ending after the Closing Date, a consolidated profit and loss statement for Company and its Subsidiaries as at the end of such four-week period in the form prepared for presentation to the Board of Directors of Company for such period and for the period from the beginning of the then current fiscal year to the end of such period; (ii) Quarterly Financials: as soon as available and in any event -------------------- within 45 days after the end of each of the first, second and third fiscal quarter of each fiscal year, (a) the consolidated and consolidating balance sheets of Company and its Subsidiaries as at the end of such fiscal quarter and the related consolidated and consolidating statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous fiscal year and the corresponding figures from the consolidated plan for the current fiscal year delivered pursuant to subsection 6.1(xiii), all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to the Board of Directors of Company for such 63 fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter; (iii) Year-End Financials: as soon as available and in any event ------------------- within 90 days after the end of each fiscal year, (a) the consolidated and consolidating balance sheets of Company and its Subsidiaries as at the end of such fiscal year and the related consolidated and consolidating statements of income, stockholders' equity and cash flows of Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year and the corresponding figures from the consolidated plan delivered pursuant to subsection 6.1(xiii) for the fiscal year covered by such financial statements, all in reasonable detail and certified by the chief financial officer of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to the Board of Directors of Company for such fiscal year, and (c) in the case of such consolidated financial statements, a report thereon of Arthur Andersen & Co. or other independent certified public accountants of recognized national standing selected by Company and satisfactory to Administrative Agent, which report shall be unqualified, shall express no doubts about the ability of Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iv) Officers' and Compliance Certificates: (a) together with each ------------------------------------- delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, an Officers' Certificate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officers' Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Company has taken, is taking and proposes to take with respect thereto; and (b) together with each delivery of financial statements of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 7 and the provisions of 2.4B(iii); (v) Reconciliation Statements: if, as a result of any change in ------------------------- accounting principles from those used in the preparation of the audited financial statements referred to in subsection 5.3, the consolidated financial statements of Company and its Subsidiaries delivered pursuant to subdivisions (i), (ii), (iii) or (xiii) of this subsection 6.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles been made, then (a) together with the first delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, consolidated financial statements of Company and its Subsidiaries for (y) the current fiscal year to the effective date of such change and (z), if requested by Administrative Agent, the one full fiscal year immediately preceding the fiscal year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection 6.1 following such change, a written statement of the chief accounting officer or chief financial officer of Company setting forth the differences (including without limitation any differences that would affect any calculations relating to the financial covenants set forth in subsection 7.6) which would have resulted if such financial statements had been prepared without giving effect to such change; 64 (vi) Accountants' Certification: together with each delivery of -------------------------- consolidated financial statements of Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of this Agreement and the other Loan Documents as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants shall not be liable by -------- reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (iv) above is not correct or that the matters set forth in the Compliance Certificates delivered therewith pursuant to clause (b) of subdivision (iv) above for the applicable fiscal year are not stated in accordance with the terms of this Agreement; (vii) Accountants' Reports: promptly upon receipt thereof (unless -------------------- restricted by applicable professional standards), copies of all reports submitted to Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Company and its Subsidiaries made by such accountants, including, without limitation, any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon their becoming ------------------------------ available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Company to its security holders or by any Subsidiary of Company to its security holders other than Company or another Subsidiary of Company, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Company or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (c) all press releases and other statements made available generally by Company through its corporate office to the public concerning material developments in the business of Company or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any executive officer of ----------------------- Company obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Company or any of its Subsidiaries or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officers' Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: promptly upon any executive ------------------------------- officer of Company obtaining knowledge of (1) the institution of, or non- frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously disclosed in writing by Company to Lenders or (2) any material development in any Proceeding that, in any case: (x) if adversely determined, has a reasonable possibility of giving rise to a Material Adverse Effect; or 65 (y) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their counsel to evaluate such matters; (xi) ERISA Events: promptly upon becoming aware of the occurrence ------------ of or forthcoming occurrence of any ERISA Event that could have a Material Adverse Effect, a written notice specifying the nature thereof, what action Company or any of its ERISA Affiliates has taken, is taking or proposes to take with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) each ------------- Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by Company or any of its ERISA Affiliates with the Internal Revenue Service with respect to each Pension Plan; (b) all notices received by Company or any of its ERISA Affiliates concerning an ERISA Event with respect to a Multiemployer Plan that could have a Material Adverse Effect; and (c) such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no --------------- later than 75 days after the beginning of each fiscal year, (a) a consolidated and consolidating plan and financial budget for such fiscal year, including without limitation budgeted consolidated and consolidating balance sheets and budgeted consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for such fiscal year, and an explanation of the assumptions on which such budgets are based, and (b) to the extent otherwise prepared by Company, projected consolidated and consolidating statements of income and cash flows of Company and its Subsidiaries for the period remaining through June 30, 2004 together with an explanation of the assumptions on which such long term projections are based; (xiv) Insurance: as soon as practicable and in any event by April 1 --------- of each fiscal year, a report in form and substance satisfactory to Administrative Agent outlining all material deviations in insurance coverage maintained as of the date of such report by Company and its Subsidiaries from that maintained during the immediately preceding period; (xv) Environmental Audits and Reports: as soon as practicable -------------------------------- following receipt thereof, copies of all environmental audits and reports, whether prepared by personnel of Company or any of its Subsidiaries or by independent consultants, with respect to significant environmental matters at any Facility or which relate to an Environmental Claim which would reasonably be expected to result in a Material Adverse Effect; (xvi) Board of Directors: with reasonable promptness, written ------------------ notice of any material change in the Board of Directors of Company or any of its Subsidiaries; (xvii) New Subsidiaries; New Real Property: (x) not less than ten ----------------------------------- Business Days prior to any Person becoming a Subsidiary of Company, a written notice setting forth with respect to such Person (a) the date on which such Person will become a Subsidiary of Company and (b) all of the data required to be set forth in Schedule 5.1 annexed hereto with respect ------------ to all Subsidiaries of Company (it being understood that such written notice shall be deemed to supplement Schedule 5.1 annexed hereto for all ------------ purposes of this Agreement) and (y) no less than once during each six month period, a list of real property acquired by Company and its Subsidiaries since the date of the last list provided pursuant to this clause 6.1(xvii); (xviii) Existing Agreement Financial Covenants: on or before the -------------------------------------- Effective Date, an Officer's Certificate to Lenders evidencing pro forma compliance with the requirements of subsection 7.6 of the Existing Credit Agreement as of June 14, 1998; 66 (xix) Other Information: with reasonable promptness, such other ----------------- information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender through Administrative Agent. 6.2 CORPORATE EXISTENCE, ETC. ------------------------- Except as permitted under subsection 7.7, Company will, and will cause each of its Subsidiaries to, at all times preserve and keep in full force and effect its corporate existence and all rights and franchises material to its business. 6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION. ---------------------------------------------- A. Company will, and will cause each of its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including, without limitation, claims for labor, services, materials and supplies) for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or claim -------- need be paid if being contested in good faith by appropriate proceedings promptly instituted and diligently conducted and if such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor. B. Company will not, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Company or any of its Subsidiaries). 6.4 MAINTENANCE OF PROPERTIES; INSURANCE. ------------------------------------ A. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including, without limitation, Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. Company will maintain or cause to be maintained, with financially sound and reputable insurers, insurance with respect to its properties and business and the properties and businesses of its Subsidiaries against loss or damage of the kinds customarily carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses. Each such policy of insurance (other than general liability policies) shall name Administrative Agent for the benefit of Lenders as the loss payee thereunder and shall provide for at least 30 days prior written notice to Administrative Agent of any modification or cancellation of such policy. B. APPLICATION OF NET INSURANCE/CONDEMNATION PROCEEDS. Upon receipt by -------------------------------------------------- Company or any of its Subsidiaries of any proceeds constituting Net Insurance/Condemnation Proceeds so long as no Event of Default or Potential Event of Default shall have occurred or be continuing, Company or such Subsidiary may retain and apply such Net Insurance/Condemnation Proceeds (i) in the case of business interruption insurance for working capital and general corporate purposes and (ii) in the case of any other insurance proceeds to promptly and diligently apply such Net Insurance/Condemnation Proceeds to pay or reimburse the cost of repairing or restoring or replacing the assets in respect of which such Net Insurance/Condemnation Proceeds were received within 300 days of receipt thereof, provided that any such Net Insurance/Condemnation Proceeds not so applied shall be used to prepay the Loans as provided in subsection 2.4B(iii)(e). 6.5 INSPECTION; LENDER MEETING -------------------------- Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by any Lender to visit and inspect any of the properties of Company or any of its Subsidiaries, including its and their financial and accounting records, and to make copies and take extracts therefrom, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours and as often as may be reasonably requested and provided that Lenders shall make reasonable efforts to coordinate their visits and inspections with each other to minimize the number of such 67 visits and inspections. Without in any way limiting the foregoing, Company will, upon the request of Administrative Agent or Requisite Lenders, participate in a meeting of Administrative Agent and Lenders once during each calendar year to be held at Company's corporate offices (or such other location as may be agreed to by Company and Administrative Agent) at such time as may be agreed to by Company and Administrative Agent. 6.6 COMPLIANCE WITH LAWS, ETC. -------------------------- Company shall, and shall cause each of its Subsidiaries to, comply with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which would reasonably be expected to cause a Material Adverse Effect. 6.7 ENVIRONMENTAL DISCLOSURE AND INSPECTION. --------------------------------------- A. Company shall, and shall cause each of its Subsidiaries to, exercise all due diligence in order to comply and cause (i) all tenants under any leases or occupancy agreements affecting any portion of the Facilities currently owned and leased and (ii) all other Persons on or occupying such property, to comply with all Environmental Laws noncompliance with which would individually or in the aggregate reasonably be expected to have a Material Adverse Effect. B. Company agrees that Administrative Agent may, from time to time, (i) upon reasonable belief based upon information obtained after the Closing Date of the existence of a past or present Release or threatened Release of any Hazardous Materials into, onto, beneath or from any Facility or (ii) upon the occurrence and during the continuance of an Event of Default, retain, at Company's expense, an independent professional consultant to review any report relating to Hazardous Materials prepared by or for Company and to conduct its own investigation of any Facility owned, leased or operated by Company or any of its Subsidiaries, and Company agrees to use its commercially reasonable efforts to obtain permission for Administrative Agent's professional consultant to conduct its own investigation of any Facility previously owned, leased or operated by Company or any of its Subsidiaries. Company hereby, grants to the extent no consent of a landlord is required or, if landlord consent is required, to use its reasonable efforts to obtain a landlord consent to grant, to Administrative Agent and its agents, employees, consultants and contractors the right to enter into or on to the Facilities currently owned, leased, operated by Company or any of its Subsidiaries to perform such tests on such property as are reasonably necessary to conduct such a review and/or investigation. Any such investigation of any Facility shall be conducted, unless otherwise agreed to by Company and Administrative Agent, during normal business hours and, to the extent reasonably practicable, shall be conducted so as not to interfere with the ongoing operations at any such Facility or to cause any damage or loss to any property at such Facility. Company and Administrative Agent hereby acknowledge and agree that any report of any investigation conducted at the request of Administrative Agent pursuant to this subsection 6.7B will be obtained and shall be used by Administrative Agent and Lenders for the purposes of Lenders' internal credit decisions, to monitor and police the Loans and to protect Lenders' security interests, if any, created by the Loan Documents. Administrative Agent agrees to deliver a copy of any such report to Company with the understanding that Company acknowledges and agrees that (i) it will indemnify and hold harmless Administrative Agent and each Lender from any costs, losses or liabilities relating to Company's use of or reliance on such report, (ii) neither Administrative Agent nor any Lender makes any representation or warranty with respect to such report, and (iii) by delivering such report to Company, neither Administrative Agent nor any Lender is requiring or recommending the implementation of any suggestions or recommendations contained in such report. Company acknowledges that Administrative Agent's exercise of its rights under this subsection 6.7B shall not be deemed generation, treatment, storage, transportation, disposal or arrangement for disposal of Hazardous Materials. C. Company shall promptly advise Lenders in writing and in reasonable detail of (i) any Release of any Hazardous Materials required to be reported to any federal, state or local governmental or regulatory agency under any applicable Environmental Laws, (ii) any and all written communications with respect to any Environmental Claims that have a reasonable possibility of giving rise to a Material Adverse Effect or with respect to any Release of Hazardous Materials required to be reported to any federal, state or local governmental or regulatory agency, (iii) any remedial action taken by Company or any other Person in response to (a) any Hazardous Materials on, under or about any Facility, the existence of which has a reasonable possibility of resulting in an Environmental Claim having a Material Adverse Effect, or (b) any Environmental Claim that would reasonably be expected to have a Material Adverse Effect, (iv) Company's discovery of any occurrence or condition on any real 68 property adjoining or in the vicinity of any Facility that could cause such Facility or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use thereof under any Environmental Laws, and (v) any request for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries may be potentially responsible for a Release of Hazardous Materials. D. Company shall promptly notify Lenders of (i) any proposed acquisition of stock, assets, or property by Company or any of its Subsidiaries that could reasonably be expected to expose Company or any of its Subsidiaries to, or result in, Environmental Claims that would reasonably be expected to have a Material Adverse Effect or that could reasonably be expected to have a material adverse effect on any Governmental Authorization then held by Company or any of its Subsidiaries and (ii) any proposed action to be taken by Company or any of its Subsidiaries to commence manufacturing, industrial or other operations that would reasonably be expected to subject Company or any of its Subsidiaries to additional laws, rules or regulations, including, without limitation, laws, rules and regulations requiring additional environmental permits or licenses. E. Company shall, at its own expense, provide copies of such documents or information as Lead Arranger or Administrative Agent may reasonably request in relation to any matters disclosed pursuant to this subsection 6.7. 6.8 COMPANY'S REMEDIAL ACTION REGARDING HAZARDOUS MATERIALS. -------------------------------------------------------- Company shall promptly take, and shall cause each of its Subsidiaries promptly to take, any and all necessary response action in connection with the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about any Facility in order to comply with all applicable Environmental Laws and Governmental Authorizations to the extent that the failure to so comply could reasonably be expected to have a Material Adverse Effect. In the event Company or any of its Subsidiaries undertakes any remedial action with respect to any Hazardous Materials on, under or about any Facility, Company or such Subsidiary shall conduct and complete such remedial action in compliance in all material respects with all applicable Environmental Laws, and in accordance in all material respects with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability for such presence, storage, use, disposal, transportation or discharge of any Hazardous Materials is being contested in good faith by Company or such Subsidiary. 6.9 ENVIRONMENTAL INDEMNITY. ----------------------- Company shall fully and promptly pay, perform, discharge, defend (subject to Indemnitee's reasonable approval of Company's selection of counsel), indemnify and hold harmless each Indemnitee from and against any action, suit, proceeding, claim or loss (an "INDEMNIFIED ENVIRONMENTAL CLAIM") suffered or incurred by that Indemnitee under or on account of any Environmental Laws or any Release of any Hazardous Materials relating to the Facilities or any Hazardous Materials generated at or originating from the Facilities by or at the direction of Company or its Subsidiaries) other than any liability to the extent that such liability results solely from the gross negligence or willful misconduct of the Indemnitee, all as evidenced by a final judgment of a court of competent jurisdiction; provided, however, that if Indemnities acquire title to any -------- ------- Facility and Company and its Subsidiaries are no longer in possession of the Facility (the "CUT-OFF DATE") at the time of an Indemnified Environmental Claim, such Indemnified Environmental Claim shall be covered by the indemnity set forth in this subsection 6.9 only if it arises out of or as a result of: (i) the occurrence, at any time prior to the Cut-off Date, of any use, storage, holding, existence, or Release of any Hazardous Materials whether currently known or unknown; (ii) any use, storage, holding, existence, or Release of any Hazardous Materials that Company or any of its Subsidiaries caused or contributed to directly or indirectly at any time whether currently known or unknown; (iii) any violation, prior to the Cut-off Date, of any applicable Environmental Laws relating to any Facility or to the ownership, use, occupancy or operation thereof; (iv) any investigation, inquiry, order, hearing, action or other proceeding by or before any governmental authority in connection with any use, storage, holding, existence or Release of any Hazardous Materials prior to the Cut-off Date whether currently known or unknown; or (v) the inaccuracy or breach of any representation or warranty set forth in any Loan Document. 6.10 EXECUTION OF LOAN DOCUMENTS BY FUTURE SUBSIDIARIES6. ------------------------------------------------------ 69 In the event that any Person becomes a Subsidiary of Company which is organized under the law of the United States or any state thereof after the date hereof, Company will promptly notify Administrative Agent of that fact and cause such Subsidiary to execute and deliver to Administrative Agent a counterpart of the Subsidiary Guaranty and a Subsidiary Pledge Agreement, a Subsidiary Security Agreement, a Subsidiary Trademark Security Agreement, and Additional Mortgages on all fee interests and material leasehold interests as Administrative Agent or Requisite Lenders may request and to take all such further action and execute all such further documents and instruments as may be required to grant creditors' rights and grant and perfect in favor of Administrative Agent, for the benefit of Lenders, subject to a first-priority Lien in all of the Real Property Assets and all of the personal property assets of such Subsidiary Guarantor (provided that with respect to leased Real Property Assets, Company -------- and its Subsidiaries shall not be required to grant any security interests requested by Administrative Agent or Requisite Lenders which require a landlord consent if Company has exercised commercially reasonable efforts to obtain such consent and has been unable to do so), all in form and substance reasonably satisfactory to Administrative Agent. Company shall deliver to Administrative Agent, together with such Loan Documents, (i) certified copies of such Subsidiary's Articles or Certificate of Incorporation or comparable organizational documents, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation or organization, each to be dated a recent date prior to their delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws, certified by its corporate secretary or an assistant corporate secretary as of a recent date prior to their delivery to Administrative Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the incumbency and signatures of the officers of such Subsidiary executing the guaranty and the Collateral Documents to which such Subsidiary is a party and (b) the fact that the attached resolutions of the Board of Directors of such Subsidiary authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or rescinded, and (iv) a favorable opinion of counsel to such Subsidiary, in form and substance reasonably satisfactory to Administrative Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of the such Loan Documents against such Subsidiary, and (d) such other matters as Administrative Agent may reasonably request, all of the foregoing to be reasonably satisfactory in form and substance to Administrative Agent and its counsel. 6.11 COVENANTS REGARDING ACQUISITION PROPERTIES. ----------------------------------------------- A. With respect to Real Property Assets to be acquired by Company or any of its Subsidiaries after the Effective Date that individually has a book value greater than or equal to $250,000 or in the aggregate has a book value greater than or equal to $5,000,000 (each an "ACQUISITION PROPERTY" and collectively, the "ACQUISITION PROPERTIES") Company shall, and shall cause its Subsidiaries to, (i) not less than ten (10) days prior to the acquisition thereof, notify Administrative Agent and Lead Arranger in writing of such pending acquisition; (ii) not later than the date on which such property is acquired, deliver to Administrative Agent and Lead Arranger a mortgage, deed of trust or deed to secure debt (each an "ADDITIONAL MORTGAGE" and collectively the "ADDITIONAL MORTGAGES") substantially in the form attached hereto as Exhibit XV to be ---------- executed by Company or applicable Subsidiary, encumbering each such Acquisition Property; (iii) not later than the date on which such property is acquired, have delivered to Administrative Agent and Lead Arranger a title report in respect of any such Acquisition Property to be owned by Company or one of its Subsidiaries in fee and, if reasonably required by Administrative Agent, a title report in respect of any such Acquisition Property to consist of material leasehold interests; (iv) if such Acquisition Property is to be held by Company or one of its Subsidiaries as a leasehold interest, exercise commercially reasonable efforts to obtain and deliver to Administrative Agent and Lead Arranger (x) the consent of the lessor thereof to the encumbering by Company or the applicable Subsidiary of its leasehold interest as a condition to Company's obligation to deliver an Additional Mortgage and (y) upon the request of Administrative Agent, deliver to Administrative Agent and Lead Arranger an estoppel letter from the landlord, in form and substance reasonably satisfactory to Administrative Agent; and (v) not less than ten (10) days prior to the acquisition thereof, in the case of any such Acquisition Property to be owned in fee, deliver to Administrative Agent and Lead Arranger environmental audits prepared by nationally recognized professional consultants or other consultants mutually acceptable to Company and Administrative Agent, in form, scope and substance satisfactory to Administrative Agent in its reasonable discretion. B. If required pursuant to subsection 6.11A, on or prior to the date on which any such Acquisition Property is acquired by Company or one of its Subsidiaries, Company shall have, or have caused such Subsidiary to have, with respect to each such Acquisition Property (i) delivered to Administrative Agent fully executed 70 counterparts of an Additional Mortgage previously approved by Administrative Agent and Lead Arranger, together with evidence that such Additional Mortgage has been recorded in all places to the extent necessary or desirable, in the reasonable judgment of Administrative Agent, so as to effectively create a valid and enforceable first priority lien (or such other priority lien as may be specified in the applicable Additional Mortgage), subject to Permitted Encumbrances, on such Acquisition Property in favor of Administrative Agent (or such other trustee as may be required or desired under local law) for the benefit of Lenders; (ii) if required to order a title report pursuant to subsection 6.11(a)(iii) above, deliver an ALTA mortgagee title insurance policy (each an "ADDITIONAL MORTGAGEE POLICY" and collectively, the "ADDITIONAL MORTGAGEE POLICIES") issued by the Title Company, in an amount reasonably satisfactory to Administrative Agent (but not in excess of Agent's reasonable determination of the fair market value of the Acquisition Property), assuring Administrative Agent that the Additional Mortgage to be executed in connection with the acquisition thereof creates a valid and enforceable first priority mortgage lien (or such other priority lien as may be specified in the Additional Mortgage) on such Acquisition Property, free and clear of all defects and encumbrances except Permitted Encumbrances, and subject to a standard survey exception, and which Additional Mortgagee Policy shall provide for affirmative insurance and such reinsurance as Administrative Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Administrative Agent; and (iii) if the Acquisition Property is to be leased or subleased by the Company or applicable Subsidiary to a non-Affiliate of Company a counterpart agreement of subordination, non-disturbance and attornment substantially in the form attached hereto as Exhibit VIII, subordinating the ------------ leasehold interest of such third party to the Additional Mortgage and the Lien created thereby, which agreement shall be executed by Company or the applicable Subsidiary as lessor (or sublessor, as the case may be) and the lessee (or sublessee, as the case may be). Nothing stated in this Section 6.11 shall be interpreted so as to allow the Company or any of its Subsidiaries to acquire fee or leasehold title to any Real Property Asset on or after the Closing Date except in accordance with the terms of Section 7.7 hereof. 6.12 FURTHER ASSURANCES. ------------------ A. At any time or from time to time upon the request of Administrative Agent, the Company will, at its expense, promptly execute, acknowledge and deliver such further documents and do such other acts and things as such Administrative Agent may reasonably request in order to effect fully the purposes of the Loan Documents and to provide for payment of the Obligations in accordance with the terms of this Agreement, the Notes and the other Loan Documents. In furtherance and not in limitation of the foregoing, the Company shall take, and cause each of its Subsidiaries to take, such actions as Administrative Agent may reasonably request from time to time (including, without limitation, the execution and delivery of guaranties, security agreements, pledge agreements, mortgages, deeds of trust, stock powers, financing statements and other documents, the filing or recording of any of the foregoing, and the delivery of stock certificates and other collateral with respect to which perfection is obtained by possession) to ensure that the Obligations are guarantied by Subsidiary Guarantors and are secured by such of the assets of the Company and its Subsidiaries as is provided in the Loan Documents. B. The Company shall promptly record and file or cause to be recorded and filed, as soon as practicable after the Closing Date, the Closing Date Mortgages, Uniform Commercial Code Financing Statements and Fixture Filings and all other necessary documents, certificates and affidavits in the appropriate real and personal property records or filing office in each jurisdiction where the Collateral is located. In connection therewith, the Company shall cooperate with the Administrative Agent and with the Title Company and shall pay all recording and filing fees, taxes (including mortgage recording taxes) and all other costs and expenses incurred with respect thereto. 6.13 YEAR 2000. --------- No later than December 31, 1998, Company shall perform, except for the implementation of a replacement program in respect of point of service cash registers in approximately 450 retail stores, the installation of which shall have occurred no later than June 30, 1999, all acts reasonably necessary to ensure that Company and its Subsidiaries are Year 2000 Compliant. Such acts shall include, to the extent reasonably necessary to become Year 2000 Compliant, performing a comprehensive review and assessment of all of Company's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. Company shall, immediately upon request, provide to Administrative Agent such certifications or other evidence of Company's compliance with the terms of this paragraph as Administrative Agent may from time to time require. 71 SECTION 7. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause each of its Subsidiaries to perform, all covenants in this Section 7. 7.1 INDEBTEDNESS. ------------ Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: (i) Company may become and remain liable with respect to the Obligations; (ii) Company may become and remain liable with respect to the Unsecured Subordinated Notes; (iii) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any matured obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent Obligations so extinguished; (iv) Company and its Subsidiaries may become and remain liable with respect to intercompany Indebtedness, provided that (a) all such -------- intercompany Indebtedness shall be evidenced by intercompany notes; (b) the obligations of each obligor on such Indebtedness shall be subordinated in right of payment to the payment and performance of such obligor's Obligations, if any, (whether as a borrower, guarantor or pledgor of Collateral under the Loan Documents to which such obligor is a party) pursuant to the terms of the intercompany notes; (c) such intercompany Indebtedness shall be reduced pro tanto by the amount of any payments made --- ----- by such obligor in respect of its Obligations under any guarantee of the Obligations; and (d) the Intercompany Notes evidencing such indebtedness shall be pledged to Lenders; (v) Company may remain liable with respect to Indebtedness described in Schedule 7.1 annexed hereto and any renewals or refinancings ------------ thereof; (vi) Company and its Subsidiaries may become and remain liable with respect to Indebtedness under Capital Leases, to the extent permitted under subsection 7.8; (vii) Company and its Subsidiaries may become and remain liable with respect to Indebtedness incurred in connection with the construction of properties for its "turnkey" program in an aggregate principal amount not to exceed $15,000,000 outstanding at any time; and (viii) Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $20,000,000 at any time outstanding; provided that not more than -------- $10,000,000 of such Indebtedness may be secured pursuant to the provisions of subsection 7.2A(iii). 7.2 LIENS AND RELATED MATTERS. ------------------------- A. PROHIBITION ON LIENS. Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Company or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect 72 to any such property, asset, income or profits under the Uniform Commercial Code of any State or under any similar recording or notice statute, except: (i) Permitted Encumbrances and Liens securing the Obligations; (ii) Liens described in Schedule 7.2 annexed hereto and Liens ------------ securing the refinancing of the Indebtedness secured by such Liens to the extent permitted by subsection 7.1; and (iii) Other Liens securing Indebtedness outstanding pursuant to clause (vii) and (viii) of subsection 7.1, provided that Liens securing -------- Indebtedness permitted under subsection 7.1(vii) and (viii) shall not encumber any assets other than the assets (and proceeds thereof) purchased or financed with the proceeds of such Indebtedness; B. EQUITABLE LIEN IN FAVOR OF LENDERS. If Company or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that, notwithstanding the foregoing, -------- this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A. C. NO FURTHER NEGATIVE PLEDGES. Except (i) with respect to specific property encumbered to secure payment of particular Indebtedness in accordance with this subsection 7.2 or to be sold pursuant to an executed agreement with respect to an Asset Sale, (ii) with respect to assets in connection with the incurrence of Indebtedness permitted under subsection 7.1(vi) or 7.1(vii), or (iii) pursuant to the terms of Unsecured Note Indenture, neither Company nor any of its Subsidiaries shall enter into any agreement prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. D. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO COMPANY OR OTHER SUBSIDIARIES. Company will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Company, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Company or any other Subsidiary of Company, (iii) make loans or advances to Company or any other Subsidiary of Company, or (iv) transfer any of its property or assets to Company or any other Subsidiary of Company, except (a) customary nonassignment provisions in contracts or leases entered into in the ordinary course of business, (b) encumbrances or restrictions contained in agreements relating to Indebtedness incurred by Company or a Subsidiary of Company; provided (1) such -------- Indebtedness is permitted to be incurred pursuant to subsection 7.1, (2) the encumbrances or restrictions relate solely to the property or assets of such Subsidiary, (3) are customary for the type of Indebtedness being incurred and (4) are no more restrictive in any material respect than the existing restrictions. 7.3 INVESTMENTS; JOINT VENTURES7. ------------------------------ Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: (i) Company and its Subsidiaries may make and own Investments in Cash and Cash Equivalents; (ii) Company may make and own Investments in Subsidiaries of Company; (iii) Company and its Subsidiaries may continue to own the Investments owned by them and described in Schedule 7.3 annexed hereto; ------------ (iv) Company may make and own Investments consisting of notes received in connection with Asset Sales permitted under subsection 7.7; 73 (v) Company may make extensions of credit or otherwise provide credit support to franchisees in respect of the deferral of royalty payments, rental payments, taxes, equipment sales, financing of restaurant properties, franchise agreements and development or territory agreements of such franchisees, provided that the aggregate amount thereof created after -------- the Closing Date shall at no time be outstanding in an amount greater than $2,000,000 to any franchisee or $12,500,000 to all franchisees; (vi) Company may make Investments in or loans to franchisees not specified in subsection 7.4(vi) in an aggregate amount not to exceed $1,500,000 at any one time outstanding; (vii) Company may continue to own loans evidenced by the Employee Tax Loan Notes in an aggregate principal amount not to exceed $5,000,000 at any one time outstanding; (viii) Company may make and own Investments consisting of notes received from employees of Company and its Subsidiaries in connection with, and in an amount not to exceed the purchase price of, their purchase of Company Common Stock, provided such notes are secured by the Company Common Stock being purchased with the proceeds thereof; (ix) Company may make and own Investments to be held by a grantor trust established by Company for the purpose of providing a deferred compensation plan for certain members of management; provided that the -------- aggregate amount of all such Investments made shall not at any time exceed $5,000,000; (x) Company may make and own other Investments in an amount not to exceed $5,000,000 in the aggregate; (xi) Company may make and own the Permitted Foreign Joint Venture Investment; and (xii) Company may make and own Investments permitted pursuant to subsection 7.7. 7.4 CONTINGENT OBLIGATIONS. ---------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: (i) Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Subsidiary Guaranty; (ii) Company may become and remain liable with respect to Contingent Obligations in respect of Letters of Credit; (iii) Company may become and remain liable with respect to Contingent Obligations under Interest Rate Agreements with respect to the Obligations; (iv) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of customary indemnification and purchase price adjustment obligations incurred in connection with Asset Sales or other sales of assets; (v) Company and its Subsidiaries, as applicable, may remain liable with respect to Contingent Obligations described in Schedule 7.4 annexed ------------ hereto; (vi) Company and its Subsidiaries may become and remain liable with respect to other Contingent Obligations; provided that the maximum -------- aggregate liability, contingent or otherwise, of Company and its Subsidiaries in respect of all such Contingent Obligations shall at no time exceed $5,000,000; (vii) Company may become and remain liable with respect to commodity hedging arrangements entered into in the ordinary course of business; 74 (viii) Company may become and remain liable with respect to Permitted Earnout Agreements; (ix) To the extent constituting a Contingent Obligation, Company may become and remain liable with respect to credit support obligations relating to franchisees permitted under subsection 7.3(v) and 7.3(ix); and (x) Guarantees of Unsecured Subordinated Notes to the extent required under the terms of the Unsecured Subordinated Note Indenture. 7.5 RESTRICTED JUNIOR PAYMENTS. -------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; provided that Company may (i) make regularly -------- scheduled payments of principal and interest in respect of the Unsecured Subordinated Notes in accordance with the terms of, and only to the extent required by, and subject to the subordination provisions contained in, the Unsecured Subordinated Note Indenture, as the Unsecured Subordinated Note Indenture may be amended from time to time to the extent permitted under subsection 7.15 and repurchases or redemptions of Unsecured Subordinated Notes with the proceeds of equity securities as contemplated by subsection 2.4B(iii)(c), and (ii) make, so long as no Potential Event of Default or Event of Default shall have occurred and be continuing, payments to purchase Company Common Stock or options, warrants or rights to purchase or acquire Company Common Stock to officers or employees or former officers or employees (or their estates or estate beneficiaries) upon death, disability, retirement or termination of employment from Company or its Subsidiaries not to exceed $1,500,000 during any fiscal year, plus the amount of any Cash proceeds received ---- by Company from the sale of Company Common Stock to officers or employees of Company or its Subsidiaries within such fiscal year and (iii) other Restricted Junior Payments described in Schedule 7.5. ------------ 75 7.6 FINANCIAL COVENANTS. ------------------- A. MINIMUM CASH INTEREST COVERAGE RATIO. Company shall not permit the ratio (the "CASH INTEREST COVERAGE RATIO") of (i) Consolidated EBITDA to (ii) Consolidated Cash Interest Expense for any four-fiscal quarter period ending on the dates set forth below to be less than the correlative ratio indicated:
========================================== FISCAL MINIMUM QUARTER CASH INTEREST Ending Coverage Ratio ========================================== 06/14/98 2.25:1.00 ========================================== 09/06/98 2.25:1.00 ========================================== 12/27/98 2.25:1.00 ========================================== 03/21/99 2.50:1.00 ========================================== 06/13/99 2.50:1.00 ========================================== 09/05/99 2.50:1.00 ========================================== 12/26/99 2.50:1.00 ========================================== 03/19/00 2.75:1.00 ========================================== 06/11/00 2.75:1.00 ========================================== 09/03/00 2.75:1.00 ========================================== 12/31/00 2.75:1.00 ========================================== 03/25/01 and 3.00:1.00 thereafter ==========================================
76 B. MAXIMUM LEVERAGE RATIO. Company shall not permit the ratio (the "LEVERAGE RATIO") of (i) Consolidated Total Debt as of the dates set forth below to (ii) Consolidated EBITDA for the four-fiscal quarter period ending on the dates set forth below to exceed the correlative ratio indicated:
FISCAL MAXIMUM QUARTER LEVERAGE Ending Ratio ========================================== 06/14/98 4.00:1.00 ========================================== 09/06/98 4.00:1.00 ========================================== 12/27/98 4.00:1.00 ========================================== 03/21/99 4.00:1.00 ========================================== 06/13/99 4.00:1.00 ========================================== 09/05/99 4.00:1.00 ========================================== 12/26/99 4.00:1.00 ========================================== 03/19/00 3.75:1.00 ========================================== 06/11/00 3.75:1.00 ========================================== 09/03/00 3.75:1.00 ========================================== 12/31/00 3.75:1.00 ========================================== 03/25/01 and 3.50:1.00 thereafter ==========================================
77 C. MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the ratio (the "FIXED CHARGE COVERAGE RATIO") of (i) Consolidated EBITDA to (ii) Consolidated Fixed Charges for any four-fiscal quarter period ending on the dates set forth below shall not be less than the correlative ratio indicated:
=========================================== FISCAL MINIMUM QUARTER FIXED CHARGE Ending Coverage =========================================== 06/14/98 1.25:1.00 =========================================== 09/06/98 1.25:1.00 =========================================== 12/27/98 1.25:1.00 =========================================== 03/21/99 1.30:1.00 =========================================== 06/13/99 1.30:1.00 =========================================== 09/05/99 1.30:1.00 =========================================== 12/26/99 1.30:1.00 =========================================== 03/19/00 1.35:1.00 =========================================== 06/11/00 1.35:1.00 =========================================== 09/03/00 1.35:1.00 =========================================== 12/31/00 1.35:1.00 =========================================== 03/25/01 and 1.40:1.00 thereafter ===========================================
78 D. MAXIMUM SENIOR LEVERAGE RATIO. Company shall not permit the Senior Leverage Ratio as of the last day of any four-fiscal quarter period to exceed 2.50:1.00. E. CERTAIN CALCULATIONS. (i) With respect to any calculation of Consolidated Interest Expense or Consolidated Cash Interest Expense for purposes of subsection 7.6 for a four-fiscal quarter period including the initial Funding Date, Consolidated Interest Expense and Consolidated Cash Interest Expense shall be calculated on a pro forma basis assuming, in each case, that the initial Funding Date, --- ----- and the Refinancings and the borrowings by the Company to fund the same pursuant to this Agreement and the Unsecured Subordinated Notes, occurred on the first day of the applicable four-fiscal quarter period and assuming further, for purposes of calculation of the pro forma interest accrued on --- ----- the Loans during such periods prior to the Closing Date that all Loans outstanding were Eurodollar Loans and that the applicable reference interest rates were the average effective Adjusted Eurodollar Rates plus ---- the Applicable Margin for Loans outstanding during the period from the initial Funding Date through the date of determination. (ii) With respect to any period during which a Permitted Acquisition is made, for purposes of determining compliance with the financial covenants set forth in this subsection 7.6, Consolidated EBITDA, Consolidated Interest Expense and Consolidated Cash Interest Expense shall be calculated with respect to such periods and such Permitted Acquisition on a pro forma basis (a "PRO FORMA BASIS"), including any pro forma expense and cost reductions calculated on a basis consistent with Regulation S-X promulgated under the Securities Act), using the audited (if available) historical financial statements of all entities or assets so acquired or to be acquired and the consolidated financial statements of Company and its Subsidiaries which shall be reformulated as if such Permitted Acquisition, and any other Permitted Acquisitions which have been consummated during such period, and any Indebtedness or other liabilities incurred in connection therewith had been consummated or incurred at the beginning of such period (and assuming that such Indebtedness bears interest during any portion of the applicable measurement period prior to the acquisition date at the average effective Adjusted Eurodollar Rates plus the Applicable ---- Margin applicable to outstanding Loans during such period), and otherwise in conformity with certain procedures to be agreed upon between Administrative Agent and Company, all such calculations to be in form and substance satisfactory to Administrative Agent. F. PRO FORMA COMPLIANCE FOR PERMITTED ACQUISITIONS. On or prior to the consummation of a Permitted Acquisition financed in whole or in part with the proceeds of an Acquisition Loan, Company shall deliver to Administrative Agent an Officer's Certificate, demonstrating compliance, (y) on a Pro Forma Basis, with the financial covenants set forth in Schedule 7.6 as of the fiscal quarter most recently ended, after giving effect to such Permitted Acquisition and (z) projected compliance, on a Pro Forma Basis, with the financial covenants set forth in this subsection 7.6 as of the last day of the next succeeding fiscal quarter. 7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. ---------------------------------------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of Company or any of its Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any part of its business, property or fixed assets, whether now owned or hereafter acquired (other than in the ordinary course of business), or acquire by purchase or otherwise any portion of the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person (other than in the ordinary course of business), except: 79 (i) any Subsidiary of Company may be merged with or into Company or any other Subsidiary of Company, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any other wholly owned Subsidiary of Company; provided that, in the case of such a merger, Company or such -------- wholly owned Subsidiary shall be the continuing or surviving corporation; (ii) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; provided that -------- the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; (iii) Company and its Subsidiaries may lease stores owned or leased by the Company or Subsidiaries to franchisees; provided that the rentals -------- received under any such lease reflect the fair market value of such property; (iv) subject to subsection 7.13, Company and its Subsidiaries may sell or dispose of (y) the Far West Division and (z) may make other Asset Sales (other than Specified Asset Sales) having an aggregate fair market value not in excess of $10,000,000; provided that (a) the consideration -------- received for each such Asset Sale shall be in an amount at least equal to the fair market value thereof; (b) the consideration for each such Asset Sale (other than the Far West Division) is at least 75% Cash, and the balance is promissory notes payable to Company or its Subsidiaries; and (c) the proceeds of such Asset Sales shall be applied as required by subsection 2.4B(iii)(a); (v) Company and its Subsidiaries may make Investments permitted pursuant to subsection 7.3; (vi) Company and its Subsidiaries may make Permitted Acquisitions; and (vii) Company and its Subsidiaries may make Specified Asset Sales; and (viii) Company and Acquisition Corp. may consummate the Cinnabon Acquisition on the Effective Date. 7.8 CAPITAL EXPENDITURES7. ----------------------- A. CONSOLIDATED CAPITAL EXPENDITURES. Except as set forth in subdivision B of this subsection 7.8, Company shall not, and shall not permit its Subsidiaries to, make or incur Consolidated Capital Expenditures, in any fiscal year or period indicated below, in an aggregate amount in excess of the corresponding amount (the "MAXIMUM CONSOLIDATED CAPITAL EXPENDITURES AMOUNT") set forth in the chart below opposite such fiscal year or period; provided that -------- with respect to the Maximum Consolidated Capital Expenditure Amount for any fiscal year or period, at Company's option such amount may be increased (a) by a portion (not to exceed 20%) of the Maximum Consolidated Capital Expenditure amount for the immediately preceding fiscal year which was not utilized during such preceding fiscal year, and (b) a portion (not to exceed 15%) of the amount of Maximum Consolidated Capital Expenditures Amount for the immediately succeeding year (which, to the extent of such increase shall reduce the amount of the Maximum Consolidated Capital Expenditure Amount for such succeeding year), provided that in no event shall the aggregate amount of the increases to -------- the Maximum Consolidated Capital Expenditures Amount pursuant to the foregoing clauses (a) and (b) in any fiscal year or period exceed $10,000,000; provided -------- further that the Maximum Consolidated Capital Expenditures Amount for each - ------- fiscal year set forth below shall be increased by the amount of Consolidated Excess Cash flow for the immediately preceding fiscal year not required to be used to prepay Loans pursuant to subsection 2.4B(iii)(f).
==================================================== Maximum Consolidated FISCAL CAPITAL EXPENDITURES Year/Period Amount ==================================================== 1998 $35,000,000
80
============================================================= 0 ============================================================= 1999 and thereafter $45,000,000 ============================================================= 0
; provided that each of the Maximum Consolidated Capital Expenditure Amounts -------- provided for above shall be increased by an aggregate amount equal to 15% of the purchase price paid by Company in connection with any Permitted Acquisition; provided further that such aggregate amount shall be allocated pro rata among - -------- ------- the remaining periods set forth above after the consummation of the Permitted Acquisition. B. In addition to the foregoing, Company may make Consolidated Capital Expenditures (i) in connection with Permitted Acquisitions and (ii) with the proceeds of Specified Asset Sales, and such Consolidated Capital Expenditures made pursuant to this subsection 7.8B shall not be included for the purposes of calculating the Maximum Consolidated Capital Expenditures set forth in subsection 7.8A. 7.9 FISCAL YEAR. ----------- Company shall not change the fiscal year-end of Company and its Subsidiaries from the last Sunday in December of each calendar year. 7.10 SALES AND LEASEBACKS. -------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease; provided that the foregoing shall not apply with respect to (i) any -------- sale-leaseback transaction consummated prior to the Closing Date and (ii) any property acquired after the Closing Date; provided that (y) the sale of such -------- property constitutes a Specified Asset Sale and (z) the aggregate sale price paid to the Company with respect to all sales or transfers of such property shall not exceed $15,000,000. 7.11 SALE OR DISCOUNT OF RECEIVABLES. ------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. 7.12 TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES. --------------------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with any holder of 5% or more of any class of equity Securities of Company or with any Affiliate of Company or of any such holder, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such a holder or Affiliate; provided that the foregoing restriction -------- shall not apply to (i) any transaction between Company and any of its Wholly Owned Subsidiaries or between any of its Wholly Owned Subsidiaries, (ii) reasonable and customary compensation or employee benefit arrangements with any officer or member of the Board of Directors of Company or any of its Subsidiaries entered into in the ordinary course of business and consistent with past practice or (iii) any transactions permitted pursuant to clause (ii) or (iii) of subsection 7.5 or clauses (vii) and (viii) of subsection 7.3. 7.13 DISPOSAL OF SUBSIDIARY STOCK. ---------------------------- Except for any sale of any Regulatory Shares or 100% of the capital stock or other equity Securities of any of its Subsidiaries in compliance with the provisions of subsection 7.7(iv), Company shall not: 81 (i) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law; or (ii) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries (including such Subsidiary), except to Company, another Subsidiary of Company, or to qualify directors if required by applicable law. 7.14 CONDUCT OF BUSINESS. ------------------- From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the businesses engaged in by Company and its Subsidiaries on the Effective Date (after giving effect to the Cinnabon Acquisition) and similar or related businesses or businesses acquired pursuant to a Permitted Acquisition or otherwise commenced by Company or its Subsidiaries; provided that any such business other than the -------- food service business shall be entered into after reasonable notice to the Lenders and after consultation with the Administrative Agent and (ii) such other lines of business as may be consented to by Requisite Lenders; provided, -------- however, that Company will not permit its Subsidiary, AFC Properties, Inc., a - ------- Georgia corporation, to own, purchase, hold, acquire (including by lease or sublease) any property other than such property it holds as at the Closing Date. 7.15 AMENDMENTS OF DOCUMENTS RELATING TO SUBORDINATED INDEBTEDNESS. ------------------------------------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of the Unsecured Subordinated Note Indenture or the Unsecured Subordinated Notes, or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on the Unsecured Subordinated Notes, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default (other than to eliminate any such event of default), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions thereof (or of any guaranty thereof), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or to confer any additional rights on the holders of the Unsecured Subordinated Notes (or a trustee or other representative on their behalf) which would be adverse to Company or Lenders. Company shall not designate any Indebtedness as "Designated Senior Indebtedness" under the terms of the Unsecured Subordinated Note Indenture without the prior written consent of Administrative Agent and Requisite Lenders. SECTION 8. EVENTS OF DEFAULT If any of the following conditions or events ("EVENTS OF DEFAULT") shall occur: 8.1 FAILURE TO MAKE PAYMENTS WHEN DUE. --------------------------------- Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest, any fee or any other amount due under this Agreement within five days after the date due; or 8.2 DEFAULT IN OTHER AGREEMENTS. --------------------------- (i) Failure of Company or any of its Subsidiaries to pay when due any principal of or interest on or other amounts (to the extent such other amounts are in excess of $750,000) owing in respect of on one or more items of Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations in an individual principal amount of $750,000 or more or with an aggregate principal amount of $3,000,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Company (which breach or default 82 occurs or continues after the Closing Date) or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Contingent Obligations in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 8.3 BREACH OF CERTAIN COVENANTS. --------------------------- Failure of Company to perform or comply with any term or condition contained in subsection 2.4, 2.5 or 6.2 or Section 7 of this Agreement; or 8.4 BREACH OF WARRANTY. ------------------ Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS. ----------------------------------- Company shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within 30 days after the earlier of (i) an officer of Company becoming aware of such default or (ii) receipt by Company of notice from Administrative Agent or any Lender of such default; or 8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. ----------------------------------------------------- (i) A court having jurisdiction in the premises shall enter a decree or order for relief in involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Company or any of its Material Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Company or any of its Material Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Company or any of its Material Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Company or any of its Material Subsidiaries, and any such event described in this clause (ii) shall continue for 60 days unless dismissed, bonded or discharged; or 8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. -------------------------------------------------- (i) Company or any of its Material Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Company or any of its Material Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Company or any of its Material Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Company or any of its Material Subsidiaries (or any 83 committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or 8.8 JUDGMENTS AND ATTACHMENTS. ------------------------- Any final money judgment, writ or warrant of attachment or similar process involving (i) in any individual case an amount in excess of $750,000 or (ii) in the aggregate at any time an amount in excess of $3,000,000 (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Company or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale thereunder); or 8.9 DISSOLUTION. ----------- Any order, judgment or decree shall be entered against Company or any of its Subsidiaries decreeing the dissolution or split up of Company or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or 8.10 EMPLOYEE BENEFIT PLANS. ---------------------- There shall occur one or more ERISA Events which individually or in the aggregate results in liability of Company or any of its ERISA Affiliates in excess of $1,000,000 during the term of this Agreement; or there exists, as of any valuation date for a Pension Plan, an excess of the actuarial present value (determined on the basis of reasonable assumptions employed by the independent actuary for such Pension Plan) of benefit liabilities (as defined in Section 4001(a)(16) of ERISA) over the fair market value of the assets of such Pension Plan, individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which there is no such excess) which exceeds $1,000,000; or 8.11 CHANGE IN CONTROL. ----------------- There shall occur any of (i) (a) prior to an initial public offering of the Company Common Stock, Freeman Spogli & Co. Incorporated and its Affiliates, PENMAN Private Equity Fund L.P. and senior management of the Company shall cease to beneficially own and control in the aggregate at least (1) a majority of the issued and outstanding shares of capital stock of Company entitled (without regard to the occurrence of any contingency) to vote for the election of members of the Board of Directors of Company and (2) more than 50% of the economic interest in all outstanding capital stock of Company or (b) prior to an initial public offering of Company Common Stock, Freeman Spogli & Co. Incorporated and its Affiliates shall cease to own and control 40% of the economic interest in all the outstanding capital stock of the Company, or (ii) following an initial public offering of the Company Common Stock, (1) Freeman Spogli & Co. Incorporated and its Affiliates , PENMAN Private Equity Fund L.P. and senior management of Company, in the aggregate shall cease to beneficially own and control at least 35% of the issued and outstanding shares of capital stock of Company entitled (without regard to the occurrence of any contingency) to vote for the election of members of the Board of Directors of Company and (2) any other Person or Persons acting together that would constitute a group (for purposes of Section 13(d) of the Security Exchange Act of 1934, or any successor provision thereto), together with any Affiliates thereof, shall beneficially own 35% or more of the aggregate voting power of all classes of capital stock of Company entitled to vote generally in the election of directors; or (iii) either (a) any Person or Persons acting together that would constitute a group (for purposes of Section 13(d) of the Security Exchange Act of 1934, or any successor provision thereto), together with any Affiliates thereof, shall beneficially own 30% or more of the aggregate voting power of all classes of stock of Company entitled to vote generally in the election of directors and Freeman Spogli & Co. Incorporated and its Affiliates, PENMAN Private Equity Fund L.P. and senior management of Company, in the aggregate at such time shall not own and control more than 30% of the issued and outstanding shares of capital stock of Company entitled (without regard to the incurrence of any contingency) to vote for the election of members of the Board of Directors of Company or (b) prior to an initial public offering, principals or employees of Freeman Spogli & Co. Incorporated or its Affiliates shall cease to comprise at least 40% of the Board of Directors of Company; or (iv) the occurrence of any "Change of Control" under the Unsecured Subordinated Note Indenture; or 84 8.12 FAILURE OF SECURITY. ------------------- Upon or after execution and delivery thereof, any Collateral Document shall, at any time, cease to be in full force and effect in any material respect (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof) or shall be declared null and void, or the validity or enforceability thereof shall be contested in writing by any Loan Party, or the Administrative Agent shall not have or shall cease to have a valid and perfected first priority security interest (subject to Permitted Encumbrances) in any Collateral purported to be covered thereby (other than Collateral the aggregate fair market value of which does not exceed $750,000), in each case for any reason other than the failure of Administrative Agent or any Lender to take any action within its control; or 8.13 INVALIDITY OF SUBSIDIARY GUARANTY. --------------------------------- Any Subsidiary Guaranty of a Material Subsidiary for any reason other than the satisfaction in full of all Obligations, ceases to be in full force and effect or is declared to be null and void, or any Guarantor denies that it has any further liability, including, without limitation, with respect to future advances by Lenders, under any such Subsidiary Guaranty or other guarantee or gives notice to such effect; or 8.14 SUBORDINATION PROVISIONS. ------------------------ Company shall fail to comply with the subordination provisions contained in the Unsecured Subordinated Note Indenture or the subordination provisions contained in the Unsecured Subordinated Note Indenture shall be declared null and void. THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan, the obligation of Issuing Lender to issue any Letter of Credit shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of each Lender to make any Loan, the obligation of Issuing Lender to issue any Letter of Credit shall thereupon terminate; provided that the -------- foregoing shall not affect in any way the obligations of Lenders under subsection 3.3C(i) or the obligations of Lenders to purchase participations in any unpaid Swing Line Loans as provided in subsection 2.1A(v). Any amounts described in clause (b) above, when received by Administrative Agent shall be delivered to Administrative Agent and shall be held by Administrative Agent pursuant to the terms of the Collateral Account Agreement and shall be applied as therein provided. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non-payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended to benefit Company and do not grant Company the right to require Lenders to rescind or annul any acceleration 85 hereunder or preclude Lenders from exercising any of their rights and remedies under the Loan Documents, even if the conditions set forth herein are met. SECTION 9. AGENTS 9.1 APPOINTMENT. ----------- GSCP is hereby appointed Lead Arranger and Syndication Agent hereunder and each Lender hereby authorizes Lead Arranger and Syndication Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. CIBC is hereby appointed Administrative Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents and the Collateral Documents. Agents agree to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The provisions of this Section 9 are solely for the benefit of Agents and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, each Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. Upon the Effective Date, all obligations of Syndication Agent and Lead Arranger hereunder shall terminate. 9.2 POWERS AND DUTIES; GENERAL IMMUNITY. ----------------------------------- A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes each of the Agents to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Loan Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Agents shall have only those duties and responsibilities that are expressly specified in this Agreement and the other Loan Documents. Agents may each exercise such powers, rights and remedies and perform such duties by or through their agents or employees. Agents shall not have, by reason of this Agreement or any of the other Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon Agents any obligations in respect of this Agreement or any of the other Loan Documents except as expressly set forth herein or therein. B. NO RESPONSIBILITY FOR CERTAIN MATTERS. Agents shall not be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Agents to Lenders or by or on behalf of Company to Agents or any Lender in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Agents be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. C. EXCULPATORY PROVISIONS. None of Agents nor any of their respective officers, directors, partners, employees or agents shall be liable to Lenders for any action taken or omitted by Agents under or in connection with any of the Loan Documents except to the extent caused by their respective gross negligence or willful misconduct. If Agents shall request instructions from Lenders with respect to any act or action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents, Agents shall be entitled to refrain from such act or taking such action unless and until Agents shall have received instructions from Requisite Lenders. Without prejudice to the generality of the foregoing, (i) Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been 86 signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders. Each Agent shall be entitled to refrain from exercising any power, discretion or authority vested in it under this Agreement or any of the other Loan Documents unless and until it has obtained the instructions of Requisite Lenders. D. AGENTS ENTITLED TO ACT AS LENDERS. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, any Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Letters of Credit, each Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Each Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. 9.3 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF ------------------------------------------------------------------ CREDITWORTHINESS. ---------------- Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Loans and the issuance of Letters of Credit hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 9.4 RIGHT TO INDEMNITY. ------------------ Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent (and its respective affiliates and partners), to the extent that such Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including, without limitation, counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Loan Documents or otherwise in its capacity as Agent, in any way relating to or arising out of this Agreement or the other Loan Documents; provided that -------- no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from any Agent's gross negligence or willful misconduct. If the amount of any indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. 9.5 COLLATERAL DOCUMENTS. -------------------- Without limiting the generality of subsection 9.1, each Lender hereby further authorizes Administrative Agent to enter into the Collateral Documents as secured party on behalf of and for the benefit of Lenders and agrees to be bound by the terms of each of the Collateral Documents and the Subsidiary Guaranty; provided that, except as otherwise provided below, Administrative -------- Agent shall not enter into or consent to any amendment, modification, termination or waiver of any provision contained in any Collateral Document and the Subsidiary Guaranty without the prior consent of Requisite Lenders. Anything contained in any of the Loan Documents to the contrary notwithstanding, each Lender agrees that no Lender shall have any right individually to realize upon any of the collateral under any Collateral Document and the Subsidiary Guaranty, it being understood and agreed that all powers, rights and remedies under the Collateral Documents and the Subsidiary Guaranty may be exercised solely 87 by Administrative Agent for the benefit of Lenders in accordance with the terms thereof. Each Lender hereby authorizes Administrative Agent (i) to release or subordinate Collateral as permitted or required under this Agreement or the Collateral Documents and the Subsidiary Guaranty, and agrees that a certificate executed by Administrative Agent evidencing such release of Collateral shall be conclusive evidence of such release as to any third party and (ii) to enter into any amendments of the Collateral Documents and the Subsidiary Guaranty to cure any ambiguity, defect or inconsistency or to amend provisions relating to ministerial or administrative matters which do not materially adversely affect the rights of the Lenders thereunder. In the event Company receives a notice regarding any Subject Lease (as such term is defined in the Closing Date Mortgages) pursuant to clause (b) of item (i) of Schedule -------- 5.2F, Administrative Agent shall release the Subject Lease of record from the - ---- offending Closing Date Mortgage; provided that the Administrative Agent shall be -------- satisfied that such landlord or lessor claim specified in such notice is in good faith. 9.6 SUCCESSOR ADMINISTRATIVE AGENT AND SWING LINE LENDER. ---------------------------------------------------- A. SUCCESSOR ADMINISTRATIVE AGENT. Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to Lenders and Company, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Administrative Agent, and signed by Requisite Lenders. Upon any such notice of resignation or any such removal, Requisite Lenders shall have the right, upon consultation with Company, to appoint a successor Administrative Agent. Upon the acceptance of any appointment Administrative Agent hereunder by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent and the retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. B. SUCCESSOR SWING LINE LENDER. Any resignation or removal of Administrative Agent pursuant to subsection 9.6A shall also constitute the resignation or removal of CIBC or its successor as Swing Line Lender, and any successor Agent appointed pursuant to subsection 9.6A shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (i) Company shall prepay any outstanding Swing Line Loans made by the retiring or removed Administrative Agent in its capacity as Swing Line Lender, (ii) upon such prepayment, the retiring or removed Administrative Agent and Swing Line Lender shall surrender the Swing Line Note held by it to Company for cancellation, and (iii) Company shall issue a new Swing Line Note to the successor Agent and Swing Line Lender substantially in the form of Exhibit IV-D annexed hereto, in the principal amount of the Swing ------------ Line Loan Commitment then in effect and with other appropriate insertions. 9.7 AGENT AUTHORIZED TO RELEASE SECURITY INTERESTS. ---------------------------------------------- Each Lender hereby further authorizes Administrative Agent to enter into each Collateral Document as secured party on behalf of and for the benefit of Lenders and agrees to be bound by the terms of each Collateral Document; provided that Administrative Agent shall not enter into or consent to any - -------- amendment, modification, termination or waiver of any provision contained in any Collateral Document without the prior consent of Requisite Lenders; provided -------- further, however, that, without further written consent or authorization from - ------- ------- Requisite Lenders, Administrative Agent may execute any documents or instruments necessary to effect the release of any asset constituting Collateral from the Lien of the applicable Collateral Document in the event that such asset is sold or otherwise disposed of in a transaction effected in accordance with subsection 7.7 (and shall, at the reasonable request of Company execute such documents and instruments). Anything contained in any of the Loan Documents to the contrary notwithstanding, each Lender agrees that no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document (including without limitation through the exercise of a right of set-off against call deposits of such Lender in which any funds on deposit in the Collateral Account may from time to time be invested), it being understood and agreed that all rights and remedies under the Collateral Documents may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms thereof. SECTION 10. 88 MISCELLANEOUS 10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT. ------------------------------------------------------------- A. GENERAL. Each Lender shall have the right at any time to (i) subject to Section 10.1B, sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Commitments or any Loan or Loans made by it or its Letters of Credit or participations therein or any other interest herein or in any other Obligations owed to it; provided that -------- no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; provided, further that no -------- ------- such sale, assignment or transfer described in clause (i) above shall be effective unless and until an Assignment Agreement effecting such sale, assignment or transfer shall have been accepted by Administrative Agent and recorded in the Register as provided in subsection 10.1B(ii); provided, further -------- ------- that no such sale, assignment, transfer or participation of any Letter of Credit or any participation therein may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Revolving Loan Commitment and the Revolving Loans of the Lender effecting such sale, assignment, transfer or participation and provided, further that, anything -------- ------- contained herein to the contrary notwithstanding, the Swing Line Loan Commitment and the Swing Line Loans of Swing Line Lender may not be sold, assigned or transferred as described in clause (i) above to any Person other than a successor Agent and Swing Line Lender to the extent contemplated by subsection 9.6. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its Commitments or the Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender. B. ASSIGNMENTS. (i) Amounts and Terms of Assignments. Each Commitment, Loan, Letter -------------------------------- of Credit or participation therein, or other Obligation may (a) be assigned in any amount to another Lender, or to an Affiliate of the assigning Lender (provided such Affiliate can reasonably be expected to be able to perform its obligations hereunder) or another Lender, with the giving of notice to Company and Administrative Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall constitute the aggregate amount of the Commitments, Loans, Letters of Credit and participations therein, and other Obligations of the assigning Lender) to any other Eligible Assignee with the giving of notice to Company and with the consent of Company and Administrative Agent (which consent of Company and Administrative Agent shall not be unreasonably withheld). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Commitments, Loans, Letters of Credit or participations therein, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance and recording in the Register, an Assignment Agreement, together with an assignment processing and recordation fee of (a) $2,000 in respect of assignments made between parties which are not Lenders as at the date hereof and (b) $500 in respect of assignments made between parties one of which is a Lender as at the date hereof and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a); provided, however, that such -------- ------- assignment processing and recordation fee shall not be required where the assignee is an Affiliate of the assignor. Upon such execution, delivery, and acceptance and recordation, from and after the effective date specified in such Assignment Agreement, (1) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (2) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto; provided that, anything contained -------- in any of the Loan Documents to the contrary notwithstanding, (x) the assigning Lender shall continue to be entitled to the benefits of subsection 2.7, 3.5A, 3.6, 6.9 and 10.3 hereof subsequent to the effectiveness of such assignment and (y) if such Lender is 89 the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of an Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder). The Commitments hereunder shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the Notes hereunder, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon new Notes shall be issued to the assignee and or to the assigning Lender, substantially in the form of Exhibit IV-A, Exhibit IV-B, Exhibit IV-C or ------------ ------------ ------------ Exhibit IV-E annexed hereto, as the case may be, with appropriate ------------ insertions, to reflect the new Commitments and/or outstanding Loans as the case may be, of the assignee and/or the assigning Lender. (ii) Acceptance by Administrative Agent; Recordation in Register. ----------------------------------------------------------- Upon its receipt of an Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the assignment processing and recordation fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent and Company have consented to the assignment evidenced thereby (in each case to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment), (b) record the information contained therein in the Register, and (c) give prompt notice thereof to Company. Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii). (iii) Representation of Lenders. Each Lender initially party to this ------------------------- Agreement hereby represents, and each Person that becomes a Lender pursuant to an assignment permitted by this subsection 10.1B upon its becoming a Lender under this Agreement shall be deemed to represent, that it is a commercial lender, other financial institution or other "accredited investor" (as defined in Regulation D under the Securities Act) which makes loans in the ordinary course of its business and is acquiring the Loans without a view to distribution of the Loans within the meaning of the federal securities laws, and that it will make or acquire Loans for its own account in the ordinary course of such business; provided that, subject to -------- the provisions of this subsection 10.1, the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Lender shall at all times be within its exclusive control. C. PARTICIPATIONS. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the final maturity of the principal amount of any Loan or Commitment or interest on any Loan allocated to such participation or (ii) a reduction of the principal amount of or the rate of interest payable on any Loan allocated to such participation or (iii) or the release of all or substantially all of the Collateral other than in accordance with the terms of the Loan Documents, and all amounts payable by Company hereunder (including without limitation amounts payable to such Lender pursuant to subsections 2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 10.4 and 10.5, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank; provided that (i) no Lender shall, as between Company and such Lender, be -------- relieved of any of its obligations hereunder as a result of any such assignment and pledge and (ii) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. 90 E. INFORMATION. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. 10.2 EXPENSES. -------- Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable costs and expenses of preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including without limitation any opinions requested by Lenders as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents including, without limitation, with respect to confirming compliance with environmental and insurance requirements; (iii) the reasonable fees, expenses and disbursements of counsel to Agents (including allocated costs of internal counsel) in connection with the negotiation, preparation, execution and administration of the Loan Documents and any consents, amendments, waivers or other modifications thereto and any other documents or matters requested by Company; (iv) all other actual and reasonable costs and expenses (including reasonable fees and expenses of counsel) incurred by Syndication Agent and Administrative Agent in connection with the syndication of the Commitments and the negotiation, preparation and execution of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; (v) the reasonable costs of customary audits conducted by Administrative Agent; and (vi) after the occurrence of an Event of Default, all costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from Company hereunder or under the other Loan Documents by reason of such Event of Default (including, without limitation, in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty) or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings. 10.3 INDEMNITY. --------- In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to Indemnitee's selection of counsel), indemnify, pay and hold harmless Syndication Agent, Lead Arranger, Administrative Agent and Lenders, and the officers, directors, partners, employees, agents and affiliates of Syndication Agent, Administrative Agent, Lead Arranger and Lenders (collectively called the "INDEMNITEES") from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel for such Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including without limitation securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including without limitation Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds of any of the Loans or the issuance of Letters of Credit hereunder or the use or intended use of any of the Letters of Credit hereunder or the use or intended use thereof, or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Subsidiary Guaranty)) (collectively called the "INDEMNIFIED LIABILITIES"); provided that Company shall not have any obligation to any -------- Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise solely from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction; and provided, further, that any Indemnified -------- ------- Environmental Claim arising after the Cut-off Date shall be covered by the indemnity set forth in this subsection 10.3 only if it arises out of or as a result of: (i) the occurrence, at any time prior to the Cut-off Date, of any use, storage, holding, existence, or Release of any Hazardous Materials whether currently known or unknown; (ii) any use, storage, holding, existence of Release of any Hazardous 91 Materials that Company or any of its Subsidiaries caused or contributed to directly or indirectly at any time whether currently known or unknown; (iii) any violation, prior to the Cut-off Date, of any applicable Environmental Laws relating to any Facility or to the ownership, use, occupancy or operation thereof; (iv) any investigation, inquiry, order, hearing, action or other proceeding by or before any governmental authority in connection with any use, storage, holding, existence, or Release of any Hazardous Materials prior to the Cut-off Date whether currently known or unknown; or (v) the inaccuracy or breach of any representation or warranty set forth in any loan document. To the extent that the undertaking to defend, indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by the Indemnitees or any of them. 10.4 SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS. ---------------------------------------------- In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence of any Event of Default each Lender is hereby authorized by Company at any time or from time to time subject to the consent of Administrative Agent, without notice to Company or to any other Person (other than Administrative Agent), any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Company hereby further assigns, pledges and grants to Administrative Agent and each Lender a security interest in all deposits and accounts maintained with Administrative Agent or such Lender as security for the Obligations. 10.5 RATABLE SHARING. --------------- Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (excluding voluntary payments made and applied in accordance with this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations or other interests (which it shall be deemed to have purchased from each seller of a participation or other interests simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that if all or part of such -------- proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations or other interests shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation or other interests so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation or other interests held by that holder. 10.6 AMENDMENTS AND WAIVERS. ---------------------- 92 No amendment, modification, termination or waiver of any provision of this Agreement, the Notes or the Collateral Documents, and no consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders; provided that any such amendment, -------- modification, termination, waiver or consent which: increases the amount of the aggregate Commitments to an amount in excess of $350,000,000 or reduces the principal amount of any of the Loans; changes in any manner the percentages required under the definition of "Requisite Lenders"; changes in any manner any provision of this Agreement which, by its terms, expressly requires the approval or concurrence of all Lenders; postpones the scheduled final maturity date of any of the Loans; postpones the date on which any interest or any fees are payable; decreases the interest rate borne by any of the Loans (other than any waiver of any increase in the interest rate applicable to any of the Loans pursuant to subsection 2.2I) or the amount of any fees payable hereunder; increases the maximum duration of Interest Periods permitted hereunder; reduces the amount or postpones the due date of any amount payable in respect of, or extends the required expiration date of, any Letter of Credit; changes in any manner the obligations of Lenders relating to the purchase of participations in Letters of Credit; releases the Liens granted in favor of Administrative Agent with respect to any material portion of the Collateral other than in accordance with the terms of the Loan Documents; releases any guaranty of the Obligations; or changes in any manner the provisions contained in subsection 8.1 or this subsection 10.6 shall be effective only if evidenced by a writing signed by or on behalf of all Lenders. In addition, (i) any amendment, modification, termination or waiver of any of the provisions contained in Section 4 shall be effective only if evidenced by a writing signed by or on behalf of Administrative Agent and Requisite Lenders, (ii) no amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the Lender which is the holder of that Note, (iii) no amendment, modification, termination or waiver of any provision of Section 3 shall be effective without the written concurrence of Issuing Lender, (iv) no amendment, modification, termination or waiver of any provision of subsection 2.1A (v) or of any other provision of this Agreement relating to the Swing Line Loan Commitment or the Swing Line Loans shall be effective without the written concurrence of Swing Line Lender, and (v) no amendment, modification, termination or waiver of any provision of Section 9 or of any other provision of this Agreement which, by its terms, expressly requires the approval or concurrence of Lead Arranger or Administrative Agent shall be effective without the written concurrence of Lead Arranger or Administrative Agent respectively. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time outstanding, each future Lender and, if signed by Company, on Company. Notwithstanding the above, any amendment, modification, termination, waiver or consent of any provision of this Agreement, the Notes or the Collateral Documents which increases the amount of a Lender's Commitment shall be effective only if evidenced by a writing signed by the affected Lender. 10.7 INDEPENDENCE OF COVENANTS. ------------------------- All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 10.8 NOTICES. ------- Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices to Administrative Agent shall not -------- be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Administrative Agent, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent. 93 10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. ------------------------------------------------------ A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 6.9, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement. 10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of Administrative Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 10.11 MARSHALLING; PAYMENTS SET ASIDE. ------------------------------- Neither Administrative Agent nor any Lender shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or Administrative Agent or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.12 SEVERABILITY. ------------ In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. ---------------------------------------------------------- The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14 HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.15 APPLICABLE LAW. -------------- 94 THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 10.16 SUCCESSORS AND ASSIGNS. ---------------------- This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders. 10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OBLIGATION MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT COMPANY ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, SUCH OTHER LOAN DOCUMENT OR SUCH OBLIGATION. Company hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Company at its address provided in subsection 10.8, such service being hereby acknowledged by Company to be sufficient for personal jurisdiction in any action against Company in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Lender to bring proceedings against Company in the courts of any other jurisdiction. 10.18 WAIVER OF JURY TRIAL. -------------------- EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/COMPANY RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 10.19 CONFIDENTIALITY. --------------- 95 Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature, it being understood and agreed by Company that in any event a Lender may make disclosures to their examiners, outside auditors, counsel and other professional advisors, Affiliates of such Lender or, provided it agrees to the confidentiality obligations set forth herein, disclosures reasonably required by any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loans or any sale of participations therein or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; provided that, unless specifically prohibited by -------- applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided, further that -------- ------- in no event shall any Lender be obligated or required to return any materials furnished by Company or any of its Subsidiaries. 10.20 MAXIMUM AMOUNT. -------------- A. It is the intention of Company and Lenders to conform strictly to the usury and similar laws relating to interest from time to time in force, and all agreements between Company, Administrative Agent and Lenders, whether now existing or hereafter arising and whether oral or written, are hereby expressly limited so that in no contingency or event whatsoever, whether by acceleration of maturity hereof or otherwise, shall the amount paid or agreed to be paid in the aggregate to Lenders or to Administrative Agent on behalf of Lenders as interest hereunder or under the other Loan Documents or in any other security agreement given to secure the Obligations, or in any other document evidencing, securing or pertaining to the indebtedness evidenced hereby or thereby, exceed the maximum amount permissible under applicable usury or such other laws (the "MAXIMUM AMOUNT"). If under any circumstances whatsoever fulfillment of any provision hereof, or of any of the other Loan Documents, at the time performance of such provision shall be due, shall involve exceeding the Maximum Amount, then, ipso facto, the obligation to be fulfilled shall be reduced to the Maximum ---- ----- Amount. For the purposes of calculating the actual amount of interest paid and/or payable hereunder in respect of laws pertaining to usury or such other laws, all sums paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the indebtedness of Company evidenced hereby, outstanding from time to time shall, to the extent permitted by applicable law, be amortized, pro rated, allocated and spread from the date of disbursement of the proceeds of the Loans until payment in full of all of such indebtedness, so that the actual rate of interest on account of such indebtedness is uniform throughout the term hereof. The terms and provisions of this subsection shall control and supersede every other provision of all agreements between Company, the Administrative Agent and the Lenders. B. If under any circumstances Lenders shall receive an amount which would exceed the Maximum Amount, such amount shall be deemed a payment in reduction of the principal amount of the Loans and shall be treated as a voluntary prepayment under subsection 2.4B(i), and shall be so applied in accordance with subsection 2.4B(iv) hereof, or if such amount exceeds the unpaid balance of the Loans and any other indebtedness of Company in favor of Lenders, the excess shall be deemed to have been a payment made by mistake and shall be refunded to Company. 10.21 COUNTERPARTS; EFFECTIVENESS. --------------------------- This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof. It is the intention of each of the parties hereto that the Existing Credit Agreement be amended and restated so as to preserve the perfection and priority of all security interests securing indebtedness and obligations under the Existing Credit Agreement and the other Loan Documents and that all indebtedness and obligations of Company and 96 its Subsidiaries hereunder and thereunder shall be secured by the Collateral Documents and that this Agreement shall not constitute a novation of the obligations and liabilities existing under the Existing Credit Agreement or be deemed to evidence or constitute repayment of all or any portion of any such obligations or liabilities. The parties hereto further acknowledge and agree that this Agreement constitutes an amendment of the Existing Credit Agreement made under the terms of subsection 10.6 thereof. The Agreement shall become effective upon the execution of a counterpart hereof by Company, Administrative Agent, Existing Lenders and the New Lenders; and receipt by Company and Administrative Agent of written or telephonic notification of such execution and authorization of delivery thereof; provided -------- that, unless and until all of the conditions set forth in subsections 4.2 and 4.3 have been satisfied or waived in accordance with subsection 10.6 of the Existing Credit Agreement, the Existing Credit Agreement shall remain in full force and effect without giving effect to the amendments set forth herein, all as if this Agreement had never been executed and delivered. [Remainder of page intentionally left blank] 97 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: AFC ENTERPRISES, INC. By: __________________________________ Name: Title: Chief Financial Officer Notice Address: AFC Enterprises, Inc. Suite 1700 Six Concourse Parkway Atlanta , Georgia 30328 Tel: (770) 353-9500 Fax: (770) 353-3074 Attention: Gerald Wilkins Chief Financial Officer with a copy to: Attention: Samuel N. Frankel, Esq. General Counsel S-1 SYNDICATION AGENT GOLDMAN SACHS CREDIT PARTNERS L.P., AND LEAD ARRANGER: individually as a Lender and as Syndication Agent and Lead Arranger By: _____________________________________________ Authorized Signatory Notice Address: Goldman Sachs Credit Partners L.P. 85 Broad Street New York, New York 10004 Attention: Stephen King S-2 ADMINISTRATIVE AGENT: CANADIAN IMPERIAL BANK OF COMMERCE, as Administrative Agent By: ______________________________________ Name: Title: Notice Address: Canadian Imperial Bank of Commerce Agency Services 425 Lexington Avenue New York, New York 10017 Attention: Marybeth Ross Tel: 212 856-3691 Fax: 212 856-3763 S-3 LENDERS: CIBC INC. as a Lender By: _________________________________ Name: Title: Notice Address: CIBC Inc. 425 Lexington Avenue New York, New York 10017 Attention: Katherine Bass Tel: 212-856-3916 Fax: 212-856-3991 S-4 GENERAL ELECTRIC CAPITAL CORPORATION, AS A LENDER By: _____________________________ Name: Title: Notice Address: GE Capital-Commercial Finance 201 High Ridge Road Sanford, CT 06927-5100 Attention: Joseph Baldini S-5 VAN KAMPEN AMERICAN CAPITAL SENIOR FLOATING RATE FUND, AS A LENDER By: _______________________________ Name: Title: Notice Address: Van Kampen American Capital One Parkview Plaza Oakbrook Terrace, IL 60181 Attention: Jeffrey Maillet S-6 CREDIT LYONNAIS, NEW YORK BRANCH, AS A LENDER By: ___________________________________ Name: Title: Notice Address: Credit Lyonnais, New York Branch 1301 Avenue of the Americas Leveraged Finance Group, 12th Floor New York, New York 10019 Attention: Attila Koc S-7 HIBERNIA NATIONAL BANK, AS A LENDER By: __________________________________ Name: Title: Notice Address: Hibernia National Bank 313 Carondellet Street (7D130) New Orleans, LA 70161 Attention: Karen Debllieux/Troy Villafarra S-8 KZH ING-1 LLC, AS A LENDER By: _____________________________________ Name: Title: Notice Address: KZH ING-1 LLC c/o The Chase Manhattan Bank 450 W. 33rd Street, 15th Floor New York, New York 10001 Attention: Robert Goodwin/Joe Nerich S-9 LTCB TRUST COMPANY, AS A LENDER By: __________________________________ Name: Title: Notice Address: LTCB Trust Company Suite 2801 245 Peachtree Street Atlanta, GA 30303 Attention: Rebecca Silbert S-10 MERRILL LYNCH SENIOR FLOATING RATE FUND, INC., AS A LENDER By: _______________________________ Name: Title: Merrill Lynch Senior Floating Rate Fund, Inc. 800 Scudders Mill Road Plainsboro, NJ 08536 Attention: John Johnson S-11 PNC BANK, NATIONAL ASSOCIATION, AS A LENDER By: ________________________________ Name: Title: Notice Address: PNC Bank, National Association 249 Fifth Avenue Pittsburgh, PA 15222-2707 Attention: Robert Mitchell S-12 [INTENTIONALLY LEFT BLANK] S-13 SANWA BUSINESS CREDIT CORPORATION, as a Lender By: _______________________________ Name: Title: Notice Address: Sanwa Business Credit Corporation One South Wacker Drive Suite 3900 Chicago, Illinois 60606 Attention: Tracy Cassello S-14 TRANSAMERICA BUSINESS CREDIT CORPORATION, AS A LENDER By: _______________________________ Name: Title: Notice Address: Transamerica Business Credit Corporation Suite C-301 555 Theodore Fremd Avenue Rye, NY 10580 Attention: Paul Dellova S-15 EX-10.85 3 DEFERRED COMPENSATION PLAN EXHIBIT 10.85 AFC ENTERPRISES, INC. DEFERRED COMPENSATION PLAN AFC ENTERPRISES, INC. DEFERRED COMPENSATION PLAN Effective as of the 1st day of January, 1998, AFC Enterprises, Inc. (the "Controlling Company") hereby establishes the AFC Enterprises, Inc. Deferred Compensation Plan (the "Plan"). BACKGROUND AND PURPOSE ---------------------- A. GOAL. The Controlling Company desires to provide its designated key ---- management and highly compensated employees (and those of its affiliated companies that participate in the Plan) with an opportunity (i) to defer the receipt and income taxation of a portion of such employees' annual compensation, and (ii) to receive, on a deferred basis, matching contributions made with respect to at least a portion of such employees [] own deferrals. B. PURPOSE. The purpose of the Plan document is to set forth the terms ------- and conditions pursuant to which these deferrals may be made and to describe the nature and extent of the employees' rights to their deferred amounts. C. TYPE OF PLAN. The Plan constitutes an unfunded, nonqualified ------------ deferred compensation plan that benefits certain designated employees who are within a select group of key management or highly compensated employees. STATEMENT OF AGREEMENT ---------------------- To establish the Plan with the purposes and goals as hereinabove described, the Controlling Company hereby sets forth the terms and provisions as follows: i AFC ENTERPRISES, INC DEFERRED COMPENSATION PLAN TABLE OF CONTENTS ARTICLE I DEFINITIONS ................................ 1 1.1 Account..................................... 1 1.2 Administrative Committee.................... 1 1.3 Annual Bonus................................ 1 1.4 Annual Bonus Election....................... 1 1.5 Beneficiary................................. 1 1.6 Board....................................... 1 1.7 Code........................................ 1 1.8 Compensation................................ 1 1.9 Controlled Group............................ 2 1.10 Controlling Company......................... 2 1.11 Deferral Contributions...................... 2 1.12 Deferral Election........................... 2 1.13 Disability or Disabled...................... 2 1.14 Effective Date.............................. 2 1.15 Eligible Employee........................... 2 1.16 ERISA....................................... 2 1.17 Financial Hardship.......................... 2 1.18 Investment Election......................... 3 1.19 Investment Funds............................ 3 1.20 Matching Contributions...................... 3 1.21 Participant................................. 3 1.22 Participating Company....................... 3 1.23 Plan........................................ 3 1.24 Plan Year................................... 3 1.25 Savings Plan................................ 3 1.26 Surviving Spouse............................ 3 1.27 Trust or Trust Agreement.................... 4 1.28 Trustee..................................... 4 1.29 Trust Fund.................................. 4 1.30 Valuation Date.............................. 4
ii ARTICLE II ELIGIBILITY AND PARTICIPATION................................. 5 2.1 Eligibility.................................................... 5 (a) Annual Participation....................................... 5 (b) Interim Plan Year Participation............................ 5 2.2 Procedure for Admission................................... 5 2.3 Cessation of Eligibility.................................. 5 (a) Cessation of Eligible Status............................... 5 (b) Inactive Participant Status................................ 5 ARTICLE III PARTICIPANTS' ACCOUNTS; DEFERRALS AND CREDITING.............. 6 3.1 Participants' Accounts......................................... 6 (a) Establishment of Accounts.................................. 6 (b) Nature of Contributions and Accounts....................... 6 (c) Several Liabilities........................................ 6 (d) General Creditors.......................................... 6 3.2 Deferral Contributions......................................... 6 (a) Effective Date............................................. 7 (b) Term....................................................... 7 (c) Amount..................................................... 7 (d) Revocation................................................. 7 (e) Annual Bonus Election...................................... 7 (f) Crediting of Deferred Compensation......................... 8 3.3 Contributions.................................................. 8 3.4 Debiting of Distributions...................................... 8 3.5 Crediting of Earnings.......................................... 9 3.6 Vesting........................................................ 9 3.7 Notice to Participants of Account Balances..................... 9 3.8 Good Faith Valuation Binding................................... 9 3.9 Errors and Omissions in Accounts............................... 10 ARTICLE IV INVESTMENT FUNDS.............................................. 11 4.1 Selection by Administrative Committe........................... 11 4.2 Participant Direction of Deemed Investments.................... 11 (a) Nature of Participant Direction........................... 11 (b) Investment of Contributions............................... 11 (c) Investment of Existing Account Balances................... 11 (d) Administrative Committee Discretion....................... 12
iii ARTICLE V PAYMENT OF ACCOUNT BALANCES............................... 13 5.1 Benefit Payments Upon Termination of Service for Reasons Other Than Death.............................. 13 (a) General Rule Concerning Benefit Payments............. 13 (b) Timing of Distribution............................... 13 5.2 Form of Distribution...................................... 13 (a) Single-Sum Payment................................... 14 (b) Annual Installments.................................. 14 5.3 Death Benefits............................................ 14 5.4 In-Service Distributions.................................. 15 (a) Hardship Distribut ................................. 15 (b) Distributions with Forfeiture........................ 15 5.5 Beneficiary Designation................................... 16 (a) General.............................................. 16 (b) No Designation or Designee Dead or Missing........... 16 5.6 Taxes..................................................... 16 ARTICLE VI CLAIMS................................................... 17 6.1 Claims.................................................... 17 (a) Initial Claim........................................ 17 (b) Appeal............................................... 17 (c) Satisfaction of Claims............................... 17 ARTICLE VII SOURCE OF FUNDS; TRUST.................................. 18 7.1 Source of Funds........................................... 18 7.2 Trust..................................................... 18 (a) Establishment........................................ 18 (b) Distributions........................................ 18 (c) Status of the Trust.................................. 18 ARTICLE VIII ADMINISTRATIVE COMMITTEE............................... 19 8.1 Action.................................................... 19 8.2 Rights and Duties......................................... 19 8.3 Compensation, Indemnity and Liability..................... 20 ARTICLE IX AMENDMENT AND TERMINATION................................ 21 9.1 Amendments................................................ 21 9.2 Termination of Plan....................................... 21
iv ARTICLE X MISCELLANEOUS............................................ 22 10.1 Taxation................................................. 22 10.2 No Employment Contract................................... 22 12.3 Headings................................................. 22 10.4 Gender and Number........................................ 22 10.5 Assignment of Benefits................................... 22 10.6 Legally Incompetent...................................... 22 10.7 Governing Law............................................ 23 EXHIBIT A PARTICIPATING COMPANIES.................................. A-1
v ARTICLE I DEFINITIONS ----------- For purposes of the Plan, the following terms, when used with an initial capital letter, shall have the meaning set forth below unless a different meaning plainly is required by the context. 1.1. ACCOUNT shall mean, with respect to a Participant or Beneficiary, ------- the total dollar amount or value evidenced by the last balance posted in accordance with the terms of the Plan to the account record established for such Participant or Beneficiary. 1.2. ADMINISTRATIVE COMMITTEE shall mean the committee appointed by ------------------------ the Board to administer the Plan, as provided in Article VIII. 1.3. ANNUAL BONUS shall mean that portion of an Eligible Employee's ------------ Compensation designated by the Administrative Committee as an annual bonus payable with respect to services performed during a Plan Year. 1.4. ANNUAL BONUS ELECTION shall mean a written election form on which --------------------- a Participant may elect to defer under the Plan all or a portion of his Annual Bonus. 1.5. BENEFICIARY shall mean, with respect to a Participant, the ----------- person(s) designated in accordance with Section 5.5 to receive any death benefits that may be payable under the Plan upon the death of the Participant. 1.6. BOARD shall mean the Board of Directors of the Controlling ----- Company. 1.7. CODE shall mean the Internal Revenue Code of 1986, as amended, ---- and any succeeding federal tax provisions. 1.8 COMPENSATION shall mean, for a Participant for any Plan Year, the total of such Participant's wages as defined in Section 3401(a) of the Code together with all other compensatory payments to the Participant by a Participating Company with respect to which the Participating Company must furnish to the Participant a written statement pursuant to Sections 6041(d) and 6051(a)(3) of the Code, but determined without regard to any rules (such as the exception for agricultural labor in Section 3401(a)(2) of the Code) which limit the remuneration included in wages based on the nature or location of the employment or services performed. Notwithstanding the above, Compensation shall include (i) any amount which is contributed by a Participating Company pursuant to a salary reduction agreement and which is not includible in the gross income of the Participant under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code for such Plan Year and (ii) Deferral Contributions for such Plan Year. 1.9 CONTROLLED GROUP shall mean all of the companies that are either ---------------- (i) members of the same controlled group of corporations (within the meaning of Code Section 414(b)) or (ii) under common control (within the meaning of Code Section 414(c)), with the Controlling Company. 1.10 CONTROLLING COMPANY shall mean AFC Enterprises, Inc., a ------------------- corporation with its principal place of business in Atlanta, Georgia. 1.11 DEFERRAL CONTRIBUTIONS shall mean, for each Plan Year, that ---------------------- portion of a Participant's Compensation (inclusive of Annual Bonus deferrals) deferred under the Plan pursuant to Section 3.2. 1.12 DEFERRAL ELECTION shall mean a written election form (or election ----------------- in any other format permitted by the Administrative Committee) on which a Participant may elect to defer a portion of his Compensation (other than his Annual Bonus) under the Plan. 1.13 DISABILITY OR DISABLED shall mean a Participant's status as ---------------------- disabled under the Controlling Company's long-term disability program. 1.14 EFFECTIVE DATE shall mean January 1, 1998, the date that the Plan -------------- initially shall be effective. 1.15 ELIGIBLE EMPLOYEE shall mean, for a Plan Year or portion of a ----------------- Plan Year, an individual: (a) Who is a member of a select group of highly compensated or key management employees who the Administrative Committee, in its sole discretion, determines is eligible to participate in the Plan; and (b) Who has satisfied the minimum compensation and/or other classification requirements, if any, established from time to time by the Administrative Committee. 1.16 ERISA shall mean the Employee Retirement Income Security Act of ----- 1974, as amended. 1.17 FINANCIAL HARDSHIP shall mean a severe financial hardship to the ------------------ Participant resulting from a sudden and unexpected illness or accident of the Participant or of the Participant's dependent [as defined in Code Section 152(a)], loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. Financial Hardship shall be determined by the Administrative Committee on the basis of the facts of each case, including information supplied by the Participant in accordance with uniform guidelines prescribed from time to time by the Administrative Committee; provided, the Participant will be deemed not to have a Financial Hardship to the extent that such hardship is or may be relieved: (a) Through reimbursement or compensation by insurance or otherwise; 2 (b) By liquidation of the Participant's assets, to the extent the liquidation of assets would not itself cause severe financial hardship; or (c) By cessation of deferrals under the Plan. Examples of what are not considered to be unforeseeable emergencies include the need to send a Participant's child to college or the desire to purchase a home. 1.18 INVESTMENT ELECTION shall mean an election, made in such form as the ------------------- Administrative Committee may direct or permit, pursuant to which a Participant may elect the Investment Funds to be used in determining the rate of return to be applied to the amounts credited to the Participant's Account. 1.19 INVESTMENT FUNDS shall mean the investment funds selected from time to ---------------- time by the Administrative Committee for purposes of determining the rate of return to be applied to the amounts credited to Participants' Accounts. 1.20 MATCHING CONTRIBUTIONS shall mean, for each Plan Year, the amount ---------------------- credited to a Participant's Account pursuant to Section 3.3. 1.21 PARTICIPANT shall mean any person who has been admitted to, and has ----------- not been removed from, participation in the Plan pursuant to the provisions of Article II. 1.22 PARTICIPATING COMPANY shall mean the Controlling Company and any --------------------- members of its Controlled Group that adopt the Plan as participating companies therein. A list of such members that are participating in the Plan shall be set forth on Exhibit A hereto. 1.23 PLAN shall mean the AFC Enterprises, Inc. Deferred Compensation Plan, ---- as contained herein and all amendments hereto. For tax purposes and purposes of Title I of ERISA, the Plan is intended to be an unfunded, nonqualified deferred compensation plan covering certain designated employees who are within a select group of key management or highly compensated employees. 1.24 PLAN YEAR shall mean the 12-consecutive-month period ending on --------- December 31 of each year. 1.25 SAVINGS PLAN shall mean the AFC Enterprises, Inc. 401(k) Savings Plan. ------------ 1.26 SURVIVING SPOUSE shall mean, with respect to a Participant, the person ---------------- who is treated as married to such Participant under the laws of the state in which the Participant resides. The determination of a Participant's Surviving Spouse shall be made as of the date of such Participant's death. 1.27 TRUST OR TRUST AGREEMENT shall mean the separate agreement or ------------------------ agreements 3 between the Controlling Company and the Trustee governing the creation of the Trust Fund, and all amendments thereto. 1.28 TRUSTEE shall mean the party or parties so designated from time to ------- time pursuant to the terms of the Trust Agreement. 1.29 TRUST FUND shall mean the total amount of cash and other property held ---------- by the Trustee (or any nominee thereof) at any time under the Trust Agreement. 1.30 VALUATION DATE shall mean each day of the Plan Year on which the -------------- Plan's recordkeeper and the Trustee are each open to the public for business, or such other date(s) determined by the Administrative Committee in its sole discretion. 4 ARTICLE II ELIGIBILITY AND PARTICIPATION ----------------------------- 2.1 ELIGIBILITY. ----------- (a) ANNUAL PARTICIPATION. Each individual who is an Eligible Employee -------------------- as of the first day of a Plan Year shall be eligible to participate in the Plan for the entire Plan Year. Such individual's participation shall become effective as of the first day of such Plan Year (assuming he satisfies the procedures for admission described below). (b) INTERIM PLAN YEAR PARTICIPATION. ------------------------------- (i) Each individual who is an Eligible Employee as of the Effective Date shall be eligible to participate in the Plan. Such individual's participation shall become effective as of the Effective Date (assuming he satisfies the procedures for admission described below). (ii) Each individual who becomes an Eligible Employee during a Plan Year shall be eligible to participate in the Plan for a portion of such Plan Year. Such individual's participation shall become effective as of the first day of the calendar month coinciding with or next following the date he becomes an Eligible Employee (assuming he satisfies the procedures for admission described below). 2.2 PROCEDURE FOR ADMISSION. ----------------------- Each Eligible Employee shall become a Participant by completing such forms and providing such data in a timely manner, as are required by the Administrative Committee as a precondition of participation in the Plan. Such forms and data may include, without limitation, a Deferral Election, the Eligible Employee's acceptance of the terms and conditions of the Plan, and the designation of a Beneficiary to receive any death benefits payable hereunder. 2.3 CESSATION OF ELIGIBILITY. ------------------------ (a) CESSATION OF ELIGIBLE STATUS. The Administrative Committee may ---------------------------- remove an employee from active participation in the Plan if, as of any day during a Plan Year, he ceases to satisfy the criteria which qualified him as an Eligible Employee, in which case his deferrals under the Plan shall cease. (b) INACTIVE PARTICIPANT STATUS. Even if his active participation in --------------------------- the Plan ends, an employee shall remain an inactive Participant in the Plan until the earlier of (i) the date the full amount of his vested Account (if any) is distributed from the Plan, or (ii) the date he again becomes an Eligible Employee and recommences participation in the Plan. During the period of time that an employee is an inactive Participant in the Plan, his vested Account shall continue to be credited with earnings as provided for in Section 3.5. 5 ARTICLE III PARTICIPANTS' ACCOUNTS; DEFERRALS AND CREDITING ----------------------------------------------- 3.1 PARTICIPANTS' ACCOUNTS. ---------------------- (a) ESTABLISHMENT OF ACCOUNTS. The Administrative Committee shall ------------------------- establish and maintain an Account on behalf of each Participant. Each Account shall be credited with (i) Deferral Contributions, (ii) Matching Contributions, and (iii) earnings attributable to such Account, and shall be debited by distributions. Each Account of a Participant shall be maintained until the vested value thereof has been distributed to or on behalf of such Participant or his Beneficiary. (b) NATURE OF CONTRIBUTIONS AND ACCOUNTS. The amounts credited to a ------------------------------------ Participant's Account shall be represented solely by bookkeeping entries. Except as provided in Article VI, no monies or other assets shall actually be set aside for such Participant, and all payments to a Participant under the Plan shall be made from the general assets of the Participating Companies. (c) SEVERAL LIABILITIES. Each Participating Company shall be ------------------- severally (and not jointly) liable for the payment of benefits under the Plan in an amount equal to the total of (i) all undistributed Deferral Contributions withheld from Participants' Compensation paid or payable by each such Participating Company, (ii) all undistributed Matching Contributions attributable to Deferral Contributions described in clause (i) hereof, and (iii) all undistributed earnings attributable thereto. The Administrative Committee shall allocate the total liability to pay benefits under the Plan among the Participating Companies pursuant to this formula, and the Administrative Committee's determination shall be final and binding. (d) GENERAL CREDITORS. Any assets which may be acquired by a ----------------- Participating Company in anticipation of its obligations under the Plan shall be part of the general assets of such Participating Company. A Participating Company's obligation to pay benefits under the Plan constitutes a mere promise of such Participating Company to pay such benefits, and a Participant or Beneficiary shall be and remain no more than an unsecured, general creditor of such Participating Company. 3.2 DEFERRAL CONTRIBUTIONS. ---------------------- Each Eligible Employee who is or becomes eligible to participate in the Plan for all or any portion of a Plan Year may elect to have Deferral Contributions made on his behalf for such Plan Year by completing and delivering to the Administrative Committee (or its designee) a Deferral Election and/or Annual Bonus Election setting forth the terms of his election. Subject to the terms and conditions set forth below, a Deferral Election may provide for the reduction of an Eligible Employee's Compensation payable in each regular paycheck paid during the Plan Year for which the Deferral Election is in effect, and an Annual Bonus Election shall provide for the reduction of an Eligible Employee's Annual Bonus payable during the Plan year for which the Annual Bonus Election is in effect. Subject to any modifications, additions or exceptions that the Administrative Committee, in its sole discretion, deems necessary, appropriate or helpful, the following terms shall 6 apply to such elections: (a) EFFECTIVE DATE. -------------- (i) INITIAL DEFERRAL ELECTION. A Participant's initial Deferral ------------------------- Election with respect to his Compensation for any Plan Year shall be effective for the first paycheck earned after the date the Deferral Election becomes effective. To be effective, a Participant's initial Deferral Election must be made before the first day of the Plan Year for which Deferral Contributions will be made. If a Participant first becomes eligible to participate in the Plan on a date other than the first day of a Plan Year, the Participant's Deferral Election must be made no later than 30 days after the date on which the Participant first becomes eligible to make Deferral Contributions under the Plan. If an Eligible Employee fails to submit a Deferral Election in a timely manner, he shall be deemed to have elected not to participate in the Plan for that Plan Year. (i) SUBSEQUENT DEFERRAL ELECTION. A Participant's subsequent ---------------------------- Deferral Election with respect to his Compensation for any Plan Year must be made on or before the last day of the Plan Year immediately preceding the Plan Year for which he desires to participate and in which the Compensation to be deferred is earned. (b) TERM. Each Participant's Deferral Election shall remain in ---- effect for all such Compensation earned during a Plan Year until the earliest of (i) the last day of such Plan Year, (ii) the date the Participant ceases to be an active Participant for such Plan Year, or (iii) the date the Participant revokes such Deferral Election. If a Participant is transferred from the employment of one Participating Company to the employment of another Participating Company, his Deferral Election with the first Participating Company will remain in effect and will apply to his Compensation from the second Participating Company until the earliest of those events set forth in the preceding sentence. (c) AMOUNT. A Participant may elect to defer his Compensation payable ------ in each regular paycheck in 1 percent increments, up to a maximum of 20 percent (or such other maximum percentage or amount, if any, established by the Administrative Committee from time-to-time). (d) REVOCATION. A Participant may revoke his Deferral Election by ---------- delivering a written notice of revocation to the Administrative Committee, and such revocation shall be effective as soon as practicable after the date on which it is received by the Administrative Committee. A Participant who revokes a Deferral Election may enter into a new Deferral Election with respect to his Compensation for any subsequent Plan Year by making such Deferral Election on or before the last day of the Plan Year immediately preceding the Plan Year for which he desires to participate and in which the Compensation to be deferred is payable. 7 (e) ANNUAL BONUS ELECTION. A Participant may complete and deliver to --------------------- the Administrative Committee (or its designee) an Annual Bonus Election with respect to an Annual Bonus payable for a Plan Year. The terms of such Annual Bonus Election shall be determined by reference to the foregoing provisions of this Section 3.2; provided, the following modifications shall apply: (i) A Participant's Annual Bonus Election shall be effective for the Annual Bonus payable after the date the Annual Bonus Election is delivered to the Administrative Committee (or its designee). The Participant shall deliver the Annual Bonus Election to the Administrative Committee (or its designee) on or before the last day of the Plan Year immediately preceding the Plan Year during which the amount of the Annual Bonus becomes definitely ascertainable and payable. (ii) Such Annual Bonus Election shall remain in effect only for the Plan Year for which it is effective and a Participant may not revoke his Annual Bonus Election. (iii) If a Participant does not make an Annual Bonus Election for a Plan Year, no part of his Annual Bonus shall be deferred under the Plan. (iv) The Participant may elect to defer his Annual Bonus in 1 percent increments, up to 100 percent, (or such other maximum amount, if any, established by the Administrative Committee from time to time). (v) Such Annual Bonus Election shall terminate at the date the Participant ceases to be an active Participant. (f) CREDITING OF DEFERRED COMPENSATION. For each Plan Year that a ---------------------------------- Participant has a Deferral Election and/or an Annual Bonus Election in effect, the Administrative Committee shall credit the amount of such Participant's Deferral Contributions to his Account on, or as soon as practicable after, the Valuation Date on which such amount would have been paid to him but for his Deferral Election and/or an Annual Bonus Election. 3.3 MATCHING CONTRIBUTIONS. ---------------------- As of such date or time as the Administrative Committee, in its sole discretion, determines from time-to-time, the Administrative Committee may credit to the Account of each Participant who was employed by the Controlling Company or a member of the Controlled Group on the last day of a Plan Year a Matching Contribution in an amount, or equal to such percentage of a Participant's Deferral Contributions for that Plan Year, as the Administrative Committee may determine. 3.4 DEBITING OF DISTRIBUTIONS. ------------------------- As of each Valuation Date, the Administrative Committee shall debit each Participant's Account for any amount distributed from such Account since the immediately preceding Valuation Date. 8 3.5 CREDITING OF EARNINGS. --------------------- As of each Valuation Date prior to the date as of which distribution of a Participant's Account balance is made or commences, the Administrative Committee shall credit to each Participant's Account the amount of earnings and/or losses applicable thereto for the period since the immediately preceding Valuation Date. Such crediting of earnings and/or losses shall be effective as of each Valuation Date, as follows: (a) The Administrative Committee first shall determine the rate of return for the period since the immediately preceding Valuation Date for each of the Investment Funds; (b) The Administrative Committee next shall determine the amount of (i) each Participant's Account that was deemed invested in each such Investment Fund as of the immediately preceding Valuation Date; minus (ii) the amount of any distributions debited from the amount determined in clause (i) since the immediately preceding Valuation Date; and (c) The Administrative Committee shall then apply the rate of return for each such Investment Fund for such Valuation Date (as determined in subsection (a) hereof) to the Participant's amount deemed invested in such Investment Fund for such Valuation Date (as determined in subsection (b) hereof), and the total amount of earnings and/or losses resulting therefrom shall be credited to such Participant's Account as of the applicable Valuation Date. (d) Deferral Contributions and Matching Contributions shall be credited with earnings from the date such amounts would have been paid to the Participant but for his Deferral and/or Bonus Election. 3.6 VESTING. ------- A Participant shall at all times be fully vested in his Deferral Contributions and the earnings credited to his Account with respect to such Deferral Contributions. The Matching Contributions credited to a Participant's Account and the earnings credited with respect thereto shall vest in accordance with the vesting schedule under the Savings Plan based on the Participant's years of service as determined under the Savings Plan. 3.7 NOTICE TO PARTICIPANTS OF ACCOUNT BALANCES. ------------------------------------------ At least once for each Plan Year, the Administrative Committee shall cause a written statement of a Participant's Account balance to be distributed to the Participant. 3.8 GOOD FAITH VALUATION BINDING. ---------------------------- In determining the value of the Accounts, the Administrative Committee shall exercise its best judgment, and all such determinations of value (in the absence of bad faith) shall be binding upon all Participants and their Beneficiaries. 9 3.9 ERRORS AND OMISSIONS IN ACCOUNTS. -------------------------------- If an error or omission is discovered in the Account of a Participant or in the amount of a Participant's deferrals, the Administrative Committee, in its sole discretion, shall cause appropriate, equitable adjustments to be made as soon as administratively practicable following the discovery of such error or omission. 10 ARTICLE IV INVESTMENT FUNDS ---------------- 4.1 SELECTION BY ADMINISTRATIVE COMMITTEE. ------------------------------------- From time to time, the Administrative Committee shall select two or more Investment Funds for purposes of determining the rate of return on amounts deemed invested in accordance with the terms of the Plan. The Administrative Committee may change, add or remove Investment Funds on a prospective basis at anytime(s) and in any manner it deems appropriate. 4.2 PARTICIPANT DIRECTION OF DEEMED INVESTMENTS. ------------------------------------------- Each Participant generally may direct the manner in which his Account shall be deemed invested in and among the Investment Funds; provided, such investment directions shall be made in accordance with the following terms: (a) NATURE OF PARTICIPANT DIRECTION. The selection of Investment ------------------------------- Funds by a Participant shall be for the sole purpose of determining the rate of return to be credited to his Account, and shall not be treated or interpreted in any manner whatsoever as a requirement or direction to actually invest assets in any Investment Fund or any other investment media. The Plan, as an unfunded, nonqualified deferred compensation Plan, at no time shall have any actual investment of assets relative to the benefits or Accounts hereunder. (b) INVESTMENT OF CONTRIBUTIONS. Each Participant may make an --------------------------- Investment Election prescribing the percentage of the future contributions that will be deemed invested in each Investment Fund. An initial Investment Election of a Participant shall be made as of the date the Participant commences participation in the Plan and shall apply to all contributions credited to such Participant's Account after such date. Such Participant may make subsequent Investment Elections as of any Valuation Date, and each such election shall apply to all such specified contributions credited to such Participant's Account after the Administrative Committee (or its designee) has a reasonable opportunity to process such election. Any Investment Election made pursuant to this subsection with respect to future contributions shall remain effective until changed by the Participant. (c) INVESTMENT OF EXISTING ACCOUNT BALANCES. Each Participant may --------------------------------------- make an Investment Election prescribing the percentage of his existing Account balance that will be deemed invested in each Investment Fund. Such Participant may make such Investment Elections as of any Valuation Date, and each such election shall be effective after the Administrative Committee (or its designee) has a reasonable opportunity to process such election. Each such election shall remain in effect until changed by such Participant. 11 (d) ADMINISTRATIVE COMMITTEE DISCRETION. The Administrative Committee ----------------------------------- shall have complete discretion to adopt and revise procedures to be followed in making such Investment Elections. Such procedures may include, but are not limited to, the process of making elections, the permitted frequency of making elections, the incremental size of elections, the deadline for making elections and the effective date of such elections. Any procedures adopted by the Administrative Committee that are inconsistent with the deadlines or procedures specified in this Section shall supersede such provisions of this Section without the necessity of a Plan amendment. 12 ARTICLE V PAYMENT OF ACCOUNT BALANCES --------------------------- 5.1 BENEFIT PAYMENTS UPON TERMINATION OF SERVICE FOR REASONS OTHER THAN ------------------------------------------------------------------- DEATH. - ----- (a) GENERAL RULE CONCERNING BENEFIT PAYMENTS. In accordance with the ---------------------------------------- terms of subsection (b) hereof, if a Participant terminates his employment with the Controlling Company and all other members of the Controlled Group for any reason other than death, he (or his Beneficiary, if he dies after such termination of employment but before distribution of his Account) shall be entitled to receive or begin receiving a distribution of the total of: (i) the entire vested amount credited to his Account, determined as of the Valuation Date on which such distribution is processed; plus (ii) the vested amount of ---- Deferral and Matching Contributions made since such Valuation Date; and minus ----- (iii) the amount of any distributions made to the Participant since such Valuation Date. For purposes of this subsection, the phrase "Valuation Date on which such distribution is processed" refers to the Valuation Date established for such purpose by administrative practice, even if actual payment is made or commenced at a later date due to delays in valuation, administration or any other procedure. (b) TIMING OF DISTRIBUTION. ---------------------- (i) Except as provided in subsection (b)(ii) hereof, the vested benefit payable to a Participant under this Section shall be made or commenced as soon as administratively feasible after the Participant terminates his employment with the Controlling Company and all other members of the Controlled Group for any reason other than death. (ii) A Participant may elect, at the time he makes each Deferral Election and/or Annual Bonus Election, to have his benefit payable with respect to that election paid (or commenced) on any date (on or before the date his employment terminates, but not earlier than 3 years after the end of the Plan Year for which the Deferral Election applies) specified in such election. A Participant may elect a different benefit commencement date with respect to each Deferral Election and/or Annual Bonus Election; provided the Administrative Committee, in its sole discretion, may limit the number of different benefit commencement dates a Participant may elect with respect to all his benefits payable under the Plan. The Administrative Committee shall pay (or commence the payment of) the Participant's benefit as soon as administratively feasible after the time(s) specified in such Deferral Election(s) and/or Annual Bonus Election(s). If the portion of a Participant's Account payable on a benefit commencement date includes non- vested Matching Contributions and the Participant's employment with the Controlling Company and all other members of the Controlled Group has not terminated, such amounts shall not be forfeited and shall be paid on the Participant's next benefit commencement date(s) to the extent they become further vested. (iii) Notwithstanding a Participant's election in subsection (b)(ii), if the Participant's employment with the Controlling Company and all other members of the Controlled 13 Group terminates before a given benefit commencement date elected by a Participant, his benefit corresponding to such benefit commencement date shall be immediately payable. 5.2 FORM OF DISTRIBUTION. -------------------- (a) SINGLE-SUM PAYMENT. Except as provided in subsection (b) hereof, ------------------ the benefit payable to a Participant under Section 5.1 shall be distributed in the form of a single-sum payment in cash. (b) ANNUAL INSTALLMENTS. A Participant may elect, at the time he ------------------- makes each Deferral Election and/or Annual Bonus Election, to have his benefit payable with respect to that election paid in the form of annual or quarterly installment payments. To the extent a Participant elects multiple benefit commencement dates in accordance with Section 5.1(b)(ii), such Participant may elect at the time of such subsequent Deferral Election(s) and/or Annual Bonus Election(s) with respect to the total benefit corresponding to each benefit commencement date, to receive such total benefit in the form of annual or quarterly installments. If a Participant does not elect the installment form of distribution with respect to his benefit corresponding to a benefit commencement date (as selected in accordance with Section 5.1(b)(ii)), his benefit corresponding to such benefit commencement date shall be paid in the form of a single-sum payment in cash unless, at least 1 year before such benefit commencement date, the Participant makes a one-time election in writing to receive such benefit in the form of annual or quarterly installment payments (in accordance with the terms of this subsection). If a Participant elects the installment form of distribution with respect to a benefit commencement date (as selected in accordance with Section 5.1(b)(ii), at least 1 year before such benefit commencement date the Participant may make a one-time election in writing to further delay the payment of the benefit corresponding to such benefit commencement date (by electing a longer term of installment payments in accordance with the terms of this subsection). The following terms and conditions shall apply to installment payments made under the Plan: (i) The installment payments shall be made in substantially equal installments over a period not to exceed 15 years (adjusted for earnings between payments in the manner described in Section 3.5). The initial value of the obligation for the installment payments shall be equal to the amount of the Participant's Account balance calculated in accordance with the terms of Section 5.1(a). (ii) If a Participant dies after payment of his benefit from the Plan has begun, but before his entire benefit has been distributed, the remaining amount of his Account balance shall be distributed to the Participant's designated Beneficiary in the form of a single-sum payment in cash. (iii) Notwithstanding a Participant?s election of installment payments under this subsection (b), if a Participant?s employment with the Controlling Company and all other members of the Controlled Group terminates before a given benefit commencement date, his benefit corresponding to such benefit commencement date shall be paid in the form of a single-sum payment in cash. 5.3 DEATH BENEFITS. -------------- 14 If a Participant dies before payment of his benefit from the Plan is made or commenced, the Beneficiary or Beneficiaries designated by such Participant in his latest beneficiary designation form filed with the Administrative Committee shall be entitled to receive a distribution of the total of (i) the entire vested amount credited to such Participant's Account, determined as of the Valuation Date on which such distribution is processed; plus (ii) the vested amount of Deferral and Matching Contributions made since - ---- such Valuation Date; and minus (iii) the amount of any distributions made to the ----- Participant since such Valuation Date. For purposes of this Section, the phrase "Valuation Date on which such distribution is processed" refers to the Valuation Date established for such purpose by administrative practice, even if actual payment is made at a later date due to delays in valuation, administration or any other procedure. The benefit shall be distributed to such Beneficiary or Beneficiaries as soon as administratively feasible after the date of the Participant's death, in the form of a single-sum payment in cash. 5.4 IN-SERVICE DISTRIBUTIONS. ------------------------ (a) HARDSHIP DISTRIBUTIONS. Upon receipt of an application for an in- ----------------------- service hardship distribution and the Administrative Committee's decision, made in its sole discretion, that a Participant has suffered a Financial Hardship, such Participant shall be entitled to receive an in-service distribution. Such distribution shall be paid in a single-sum payment in cash as soon as administratively feasible after the Administrative Committee determines that the Participant has incurred a Financial Hardship. The amount of such single-sum payment shall be limited to the amount that the Administrative Committee determines is reasonably necessary to meet the Participant's requirements resulting from the Financial Hardship. The amount of such distribution shall reduce the Participant's Account balance as provided in Section 3.4. (b) DISTRIBUTIONS WITH FORFEITURE. Notwithstanding any other ----------------------------- provision of this Article V to the contrary, a Participant may elect, at any time prior to termination of his employment with the Controlling Company and all other members of the Controlled Group, to receive a distribution of a portion of the total of (i) the entire vested amount credited to his Account, determined as of the Valuation Date on which such distribution is processed; plus (ii) the ---- vested amount of Deferral Contributions and Matching Contributions made since such Valuation Date; and minus (iii) the amount of any distributions made to the ----- Participant since such Valuation Date. Such distribution shall be made in the form of a single-sum payment in cash as soon as administratively feasible after the date of the Participant's election under this subsection (b). At the time such distribution is made, an amount equal to 10% of the amount distributed shall be permanently and irrevocably forfeited (and, if the distribution request is for 90% or more of such Participant's Account, the forfeiture amount shall be deducted from his distribution amount to the extent there otherwise will be an insufficient remaining Account balance from which to deduct this forfeiture). In addition, the Participant receiving such distribution shall immediately cease to actively participate in the Plan and shall not be eligible to resume active participation in the Plan for a period of 1 year after such distribution. Such Participant may resume active participation in the Plan on the first day of the calendar month coincident with or next following the 1-year anniversary of such distribution by making a new Deferral Election and satisfying any other procedures for admission under Section 2.2. If the Participant fails to make a new Deferral Election before the date he is eligible to resume active participation in the Plan, he shall be deemed to have elected not to participate in the Plan for 15 the remainder of that Plan Year. 5.5 BENEFICIARY DESIGNATION. ----------------------- (a) GENERAL. Participants shall designate and from time to time may ------- redesignate their Beneficiaries in such form and manner as the Administrative Committee may determine. (b) NO DESIGNATION OR DESIGNEE DEAD OR MISSING. In the event that: ------------------------------------------ (1) a Participant dies without designating a Beneficiary; (2) the Beneficiary designated by a Participant is not surviving when a payment is to be made to such person under the Plan, and no contingent Beneficiary has been designated; or (3) the Beneficiary designated by a Participant cannot be located by the Administrative Committee within 1 year from the date benefits are to be paid to such person; then, in any of such events, the Beneficiary of such Participant with respect to any benefits that remain payable under the Plan shall be the Participant's Surviving Spouse, if any, and if not, the estate of the Participant. 5.6 TAXES. ----- If the whole or any part of any Participant's or Beneficiary's benefit hereunder shall become subject to any estate, inheritance, income or other tax which the Participating Companies shall be required to pay or withhold, the Participating Companies shall have the full power and authority to withhold and pay such tax out of any monies or other property in its hand for the account of the Participant or Beneficiary whose interests hereunder are so affected. Prior to making any payment, the Participating Companies may require such releases or other documents from any lawful taxing authority as it shall deem necessary. Notwithstanding anything in the Plan to the contrary, the distribution of a Participant?s benefit hereunder prior to his termination of employment with the Company shall be limited to an amount that would not cause the Participant to receive compensation that the Administrative Committee determines would not be deductible under Code Section 162(m). 16 ARTICLE VI CLAIMS ------ 6.1 CLAIMS. ------ (a) INITIAL CLAIM. Claims for benefits under the Plan may be filed ------------- with the Administrative Committee on forms or in such other written documents, as the Administrative Committee may prescribe. The Administrative Committee shall furnish to the claimant written notice of the disposition of a claim within 90 days after the application therefor is filed. In the event the claim is denied, the notice of the disposition of the claim shall provide the specific reasons for the denial, citations of the pertinent provisions of the Plan, and, where appropriate, an explanation as to how the claimant can perfect the claim and/or submit the claim for review. (b) APPEAL. Any Participant or Beneficiary who has been denied a ------ benefit shall be entitled, upon request to the Administrative Committee, to appeal the denial of his claim. The claimant (or his duly authorized representative) may review pertinent documents related to the Plan and in the Administrative Committee's possession in order to prepare the appeal. The request for review, together with written statement of the claimant's position, must be filed with the Administrative Committee no later than 60 days after receipt of the written notification of denial of a claim provided for in subsection (a). The Administrative Committee's decision shall be made within 60 days following the filing of the request for review. If unfavorable, the notice of the decision shall explain the reasons for denial and indicate the provisions of the Plan or other documents used to arrive at the decision. (c) SATISFACTION OF CLAIMS. Any payment to a Participant or ---------------------- Beneficiary shall to the extent thereof be in full satisfaction of all claims hereunder against the Administrative Committee and the Participating Companies, any of whom may require such Participant or Beneficiary, as a condition to such payment, to execute a receipt and release therefor in such form as shall be determined by the Administrative Committee or the Participating Companies. If receipt and release is required but the Participant or Beneficiary (as applicable) does not provide such receipt and release in a timely enough manner to permit a timely distribution in accordance with the general timing of distribution provisions in the Plan, the payment of any affected distribution may be delayed until the Administrative Committee or the Participating Companies receive a proper receipt and release. 17 ARTICLE VII SOURCE OF FUNDS; TRUST ---------------------- 7.1 SOURCE OF FUNDS. --------------- Except as provided in this Section and Section 7.2 (relating to the Trust), each Participating Company shall provide the benefits described in the Plan from its general assets. However, to the extent that funds in such Trust allocable to the benefits payable under the Plan are sufficient, the Trust assets may be used to pay benefits under the Plan. If such Trust assets are not sufficient to pay all benefits due under the Plan, then the appropriate Participating Company shall have the obligation, and the Participant or Beneficiary, who is due such benefits, shall look to the such Participating Company to provide such benefits. 7.2 TRUST. ----- (a) ESTABLISHMENT. To the extent determined by the Controlling ------------- Company, the Participating Companies shall transfer the funds necessary to fund benefits accrued hereunder to the Trustee to be held and administered by the Trustee pursuant to the terms of the Trust Agreement. Except as otherwise provided in the Trust Agreement, each transfer into the Trust Fund shall be irrevocable as long as a Participating Company has any liability or obligations under the Plan to pay benefits, such that the Trust property is in no way subject to use by the Participating Company; provided, it is the intent of the Controlling Company that the assets held by the Trust are and shall remain at all times subject to the claims of the general creditors of the Participating Companies. (b) DISTRIBUTIONS. Pursuant to the Trust Agreement, the Trustee shall ------------- make payments to Plan Participants and Beneficiaries in accordance with the terms of the Plan. The Participating Company shall make provisions for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plan and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by the Participating Company. (c) STATUS OF THE TRUST. No Participant or Beneficiary shall have any ------------------- interest in the assets held by the Trust or in the general assets of the Participating Companies other than as a general, unsecured creditor. Accordingly, a Participating Company shall not grant a security interest in the assets held by the Trust in favor of the Participants, Beneficiaries or any creditor. 18 ARTICLE VIII ADMINISTRATIVE COMMITTEE ------------------------ 8.1 ACTION. ------ Action of the Administrative Committee may be taken with or without a meeting of committee members; provided, action shall be taken only upon the vote or other affirmative expression of a majority of the committee members qualified to vote with respect to such action. If a member of the committee is a Participant or Beneficiary, he shall not participate in any decision which solely affects his own benefit under the Plan. For purposes of administering the Plan, the Administrative Committee shall choose a secretary who shall keep minutes of the committee's proceedings and all records and documents pertaining to the administration of the Plan. The secretary may execute any certificate or any other written direction on behalf of the Administrative Committee. 8.2 RIGHTS AND DUTIES. ----------------- The Administrative Committee shall administer the Plan and shall have all powers necessary to accomplish that purpose, including (but not limited to) the following: (a) To construe, interpret and administer the Plan; (b) To make determinations required by the Plan, and to maintain records regarding Participants' and Beneficiaries' benefits hereunder; (c) To compute and certify to the Participating Companies the amount and kinds of benefits payable to Participants and Beneficiaries, and to determine the time and manner in which such benefits are to be paid; (d) To authorize all disbursements by the Participating Companies pursuant to the Plan; (e) To maintain all the necessary records of the administration of the Plan; (f) To make and publish such rules for the regulation of the Plan as are not inconsistent with the terms hereof; (g) To delegate to other individuals or entities from time to time the performance of any of its duties or responsibilities hereunder; (h) To hire agents, accountants, actuaries, consultants and legal counsel to assist in operating and administering the Plan. 19 The Administrative Committee shall have the exclusive right to construe and interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount of such benefits, and its decisions on such matters shall be final and conclusive on all parties. 8.3 COMPENSATION, INDEMNITY AND LIABILITY. ------------------------------------- The Administrative Committee and its members shall serve as such without bond and without compensation for services hereunder. All expenses of the Administrative Committee shall be paid by the Participating Companies. No member of the committee shall be liable for any act or omission of any other member of the committee, nor for any act or omission on his own part, excepting his own willful misconduct. The Participating Companies shall indemnify and hold harmless the Administrative Committee and each member thereof against any and all expenses and liabilities, including reasonable legal fees and expenses, arising out of his membership on the committee, excepting only expenses and liabilities arising out of his own willful misconduct. 20 ARTICLE IX AMENDMENT AND TERMINATION ------------------------- 9.1 AMENDMENTS. ---------- The Administrative Committee shall have the right, in its sole discretion, to amend the Plan in whole or in part at any time and from time to time. Any amendment shall be in writing and executed by a duly authorized officer of the Controlling Company. An amendment to the Plan may modify its terms in any respect whatsoever, and may include, without limitation, a permanent or temporary freezing of the Plan such that the Plan shall remain in effect with respect to existing Account balances without permitting any new contributions; provided, no such action may reduce the amount already credited to a Participant's Account without the affected Participant's written consent. All Participants and Beneficiaries shall be bound by such amendment. 9.2 TERMINATION OF PLAN. ------------------- The Controlling Company reserves the right to discontinue and terminate the Plan at any time, for any reason. Any action to terminate the Plan shall be taken by the Board in the form of a written Plan amendment executed by a duly authorized officer of the Controlling Company. If the Plan is terminated, each Participant shall become 100 percent vested in his Account which shall be distributed in a single-sum payment in cash as soon as practicable after the date the Plan is terminated. The amount of any such distribution shall be determined as of the Valuation Date such termination distribution is to be processed. Such termination shall be binding on all Participants and Beneficiaries. 21 ARTICLE X MISCELLANEOUS ------------- 10.1 TAXATION. -------- It is the intention of the Controlling Companies that the benefits payable hereunder shall not be deductible by the Participating Companies nor taxable for federal income tax purposes to Participants or Beneficiaries until such benefits are paid by the Participating Companies, or the Trust, as the case may be, to such Participants or Beneficiaries. When such benefits are so paid, it is the intention of the Participating Companies that they shall be deductible by the Participating Companies under Code Section 162. 10.2 NO EMPLOYMENT CONTRACT. ---------------------- Nothing herein contained is intended to be nor shall be construed as constituting a contract or other arrangement between a Participating Company and any Participant to the effect that the Participant will be employed by the Participating Company for any specific period of time. 10.3 HEADINGS. -------- The headings of the various articles and sections in the Plan are solely for convenience and shall not be relied upon in construing any provisions hereof. Any reference to a section shall refer to a section of the Plan unless specified otherwise. 10.4 GENDER AND NUMBER. ----------------- Use of any gender in the Plan will be deemed to include all genders when appropriate, and use of the singular number will be deemed to include the plural when appropriate, and vice versa in each instance. 10.5 ASSIGNMENT OF BENEFITS ---------------------- The right of a Participant or his Beneficiary to receive payments under the Plan may not be anticipated, alienated, sold, assigned, transferred, pledged, encumbered, attached or garnished by creditors of such Participant or Beneficiary, except by will or by the laws of descent and distribution and then only to the extent permitted under the terms of the Plan. 10.6 LEGALLY INCOMPETENT. ------------------- The Administrative Committee, in its sole discretion, may direct that payment be made to an incompetent or disabled person, whether because of minority or mental or physical disability, to the guardian of such person or to the person having custody of such person, without further liability on the part of a Participating Company for the amount of such payment to the person on whose account such payment is made. 10.7 GOVERNING LAW. ------------- 22 The Plan shall be construed, administered and governed in all respects in accordance with applicable federal law (including ERISA) and, to the extent not preempted by federal law, in accordance with the laws of the State of Georgia. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. IN WITNESS WHEREOF, the Controlling Company has caused the Plan to be executed by its duly authorized officer as of this _________ day of December, 1997. AFC ENTERPRISES, INC. By:________________________________ Title:__________________________ 23 EXHIBIT A PARTICIPATING COMPANIES ----------------------- (See [_] 1.22) COMPANY NAMES EFFECTIVE DATE - ------------- -------------- AFC Enterprises, Inc. January 1, 1998 A-1 EX-10.86 4 FIRST AMENDMENT TO DEFERRED COMPENSATION PLAN EXHIBIT 10.86 FIRST AMENDMENT TO THE AFC ENTERPRISES, INC. DEFERRED COMPENSATION PLAN THIS FIRST AMENDMENT to the AFC Enterprises, Inc. Deferred Compensation Plan (the "Plan") is made as of the ___ day of ___________, 1998, by AFC Enterprises, Inc. (the "Company".) W I T N E S S E T H : WHEREAS, the Company maintains the Plan for the benefit of the Company's key management and highly compensated employees and the key management and highly compensated employees of its affiliates; and WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan at any time; and WHEREAS, the Company desires to make certain changes to the Plan as embodied herein; NOW, THEREFORE, the Plan hereby is amended as follows: 1. The text of Section 1.2 in Article I is hereby amended by deleting said text in its entirety and by substituting in lieu thereof the following: 1.2 ADMINISTRATIVE COMMITTEE shall mean the committee approved by the ------------------------ Board to administer the Plan, as provided in Article VIII; provided if for any period of time the Board has not specifically appointed any individuals to serve as members of the Administrative Committee under the Plan, the members of the Administrative Committee of the AFC Enterprises, Inc. 401(k) Savings Plan shall serve as the Administrative Committee of the Plan during such period. 2. The changes made in Paragraph 1 shall be effective as of January 1, 1998. 3. Except as otherwise specified herein, the Plan shall remain in full force and effect. -1- IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this First Amendment on the date first above written. AFC ENTERPRISES, INC. By: _________________________________ Title:_______________________________ -2- EX-21.1 5 LIST OF SUBSIDIARIES EXHIBIT 21.1 List of Subsidiaries 1. AFC Properties, a Georgia corporation 2. Seattle Coffee Company, a Washington corporation 3. Cinnabon International, Inc., a Delaware corporation EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMSRY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS OF THE COMPANY FOR THE YEAR ENDED DECEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-27-1998 DEC-29-1997 DEC-27-1998 17,049 0 25,709 4,901 13,160 57,224 378,988 115,847 556,465 91,280 345,150 0 0 392 87,525 556,465 488,574 609,091 155,627 591,174 0 1,063 30,786 12,869 4,223 8,646 0 0 0 8,646 0 0
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