-----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, Ak4A5Zgz57UdMbKoXyYiA9kd8INXnVJbteaixXpEYadx/n+My5l1lb6p0ZQLb6Ks VO+CTdDmNXFCKhdX7PeNuQ== 0000927570-01-500037.txt : 20010821 0000927570-01-500037.hdr.sgml : 20010821 ACCESSION NUMBER: 0000927570-01-500037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010627 FILED AS OF DATE: 20010820 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOENIX RESTAURANT GROUP INC CENTRAL INDEX KEY: 0000925779 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 581861457 STATE OF INCORPORATION: GA FISCAL YEAR END: 0101 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13226 FILM NUMBER: 1718999 BUSINESS ADDRESS: STREET 1: 7373 N SCOTTSCALE RD STREET 2: STE D-120 CITY: SCOTTSDALE STATE: AZ ZIP: 85253 BUSINESS PHONE: 6024837055 MAIL ADDRESS: STREET 1: 3000 NORTHWOODS PKWY STREET 2: STE 235 CITY: NORCROSS STATE: GA ZIP: 30071 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN FAMILY RESTAURANTS INC DATE OF NAME CHANGE: 19940622 FORMER COMPANY: FORMER CONFORMED NAME: DENAMERICA CORP DATE OF NAME CHANGE: 19960110 10-Q 1 p2q01.txt PRG 2ND QTR. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 27, 2001 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 1-13226 PHOENIX RESTAURANT GROUP, INC. ------------------------------ (Exact Name of Registrant as Specified in its Charter) GEORGIA 58-1861457 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 1210 BRIARVILLE RD MADISON, TENNESSEE 37115 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (615)277-1234 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of outstanding shares of the Registrant's Common Stock, $.10 par value, as of August 17, 2001, is 13,925,111. PHOENIX RESTAURANT GROUP, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 27, 2001 TABLE OF CONTENTS PAGE ---- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - December 27, 2000 and June 27, 2001..............................1 Condensed Consolidated Statements of Operations - 13-Week Periods ended June 28, 2000 and June 27, 2001 and 26-Week Periods ended June 28, 2000 and June 27, 2001............................2 Condensed Consolidated Statements of Cash Flows - 13-Week Periods ended June 28, 2000 and June 27, 2001 and 26-Week Periods ended June 28, 2000 and June 27, 2001........3 Notes to Condensed Consolidated Financial Statements.............4 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................8 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk........20 PART II. OTHER INFORMATION................................................21 SIGNATURES................................................................22 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PHOENIX RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT FOR SHARE DATA) ASSETS DECEMBER 27, 2000 JUNE 27, 2001 (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 2,681 $ 2,714 Receivables 1,412 1,162 Inventories 1,059 1,111 Other current assets 1,134 3,262 Net assets held for sale 42,649 23,973 ---------- ------------ Total current assets 48,935 32,222 PROPERTY AND EQUIPMENT - Net 18,859 18,397 INTANGIBLE ASSETS - Net 8,768 8,622 OTHER ASSETS 2,808 4,160 ---------- ------------ TOTAL $ 79,370 $ 63,401 ========== ============ LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 15,257 $ 13,850 Accrued compensation 5,324 4,766 Accrued taxes 4,302 5,930 Other current liabilities 28,544 37,904 Current debt obligations 79,040 69,914 ---------- ----------- Total current liabilities 132,467 132,364 LONG-TERM DEBT OBLIGATIONS - Less current portion 1,096 1,008 OTHER LONG-TERM LIABILITIES 6,929 6,354 ---------- ----------- TOTAL LIABILITIES 140,492 139,726 ---------- ----------- SHAREHOLDERS' DEFICIT: Preferred stock, $.01 par value; authorized, 5,000,000 shares; issued and outstanding, none Common stock, $.10 par value; authorized, 40,000,000 shares; 13,485,277 and 13,925,111 shares issued and outstanding at December 27, 2000 and June 27, 2001, respectively 1,349 1,393 Additional paid-in capital 34,982 34,942 Treasury stock, at cost, 403,456 shares (252) (252) Accumulated deficit (97,201) (112,408) ---------- ----------- TOTAL SHAREHOLDERS' DEFICIT (61,122) (76,325) ---------- ----------- TOTAL $ 79,370 $ 63,401 ========== =========== See accompanying notes to condensed consolidated financial statements. 1 PHOENIX RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA) 13-WEEK PERIODS ENDED 26-WEEK PERIODS ENDED (UNAUDITED) (UNAUDITED) JUNE 28, 2000 JUNE 27, 2001 JUNE 28, 2000 JUNE 27, 2001 RESTAURANT SALES $ 55,523 $ 46,494 $ 111,994 $ 94,083 --------- --------- --------- ---------- RESTAURANT OPERATING EXPENSES: Food and beverage costs 15,263 12,860 30,484 25,984 Payroll and payroll related costs 19,202 17,860 38,574 35,949 Other operating expenses 14,671 16,081 29,551 31,203 Loss on sale of note receivable - - - 389 Restructuring expenses - 700 - 700 Depreciation and amortization 633 680 1,309 1,352 --------- --------- --------- ---------- Total restaurant operating expenses 49,769 48,181 99,918 95,577 --------- --------- --------- ---------- RESTAURANT OPERATING INCOME (LOSS) 5,754 (1,687) 12,076 (1,494) ADMINISTRATIVE EXPENSES 3,100 4,081 6,074 7,220 --------- --------- --------- ---------- OPERATING INCOME (LOSS) 2,654 (5,768) 6,002 (8,714) INTEREST EXPENSE - Net 3,043 3,277 5,914 6,477 --------- --------- --------- ---------- INCOME (LOSS) BEFORE INCOME TAXES (389) (9,045) 88 (15,191) INCOME TAX EXPENSE - 5 - 16 --------- --------- --------- ---------- NET INCOME (LOSS) $ (389) $ (9,050) $ 88 $ (15,207) ========= ========= ========= ========== Basic and diluted income (loss) per share: Applicable to common shareholders $ (.03) $ (.67) $ .01 $ (1.14) ========= ========= ========= ========== Basic and diluted weighted average shares outstanding: Basic 13,081 13,522 13,081 13,321 ========= ========= ========= ========== Diluted 13,081 13,522 13,559 13,321 ========= ========= ========= ==========
See accompanying notes to condensed consolidated financial statements. 2 PHOENIX RESTAURANT GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) 13-WEEK PERIODS ENDED 26-WEEK PERIODS ENDED (UNAUDITED) (UNAUDITED) JUNE 28, 2000 JUNE 27, 2001 JUNE 28, 2000 JUNE 27, 2001 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (389) $ (9,050) $ 88 $ (15,207) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Restructuring expenses - 700 - 700 Depreciation and amortization 633 680 1,309 1,352 Amortization of deferred financing costs - 2 187 4 Loss on sale of note receivable - - - 389 Deferred rent 82 50 197 103 Other - net (31) (219) (34) 6 Changes in operating assets and liabilities: Receivables 720 57 65 250 Inventories 37 1 76 (52) Other current assets (217) (1,191) (98) (2,794) Accounts payable and accrued liabilities 204 11,013 1,755 11,310 --------- --------- --------- ---------- Net cash provided by (used in) operating activities 1,039 2,043 3,545 (3,939) --------- --------- --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (584) (841) (1,014) (1,485) Proceeds from sale of assets 145 (82) 145 2,937 --------- --------- --------- ---------- Net cash (used in) provided by investing activities (439) (923) (869) 1,452 --------- --------- --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings - - - 1,533 Note receivable collections 112 6 197 103 Proceeds from sale of note receivable - - - 973 Issuance of common stock - - - 4 Principal reductions of long-term debt (1,108) (48) (1,899) (93) --------- --------- --------- ---------- Net cash (used in) provided by financing activities (996) (42) (1,702) 2,520 --------- --------- --------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (396) 1,078 974 33 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,861 1,636 1,491 2,681 --------- --------- --------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,465 $ 2,714 $ 2,465 $ 2,714 ========= ========= ========= ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 2,289 $ 6 $ 4,237 $ 51 Cash paid during the period for income taxes $ - $ 5 $ - $ 16 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Exchange of note receivable for common stock and note payable Subordinated debenture - - $ 1,456 - Note receivable - - $ 2,600 - Treasury stock - - $ 252 - Additional paid-in capital - - $ 887 -
See accompanying notes to condensed consolidated financial statements. 3 PHOENIX RESTAURANT GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE DATA) (UNAUDITED) (1) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Phoenix Restaurant Group, Inc. ("PRG") and subsidiaries (collectively, the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q and do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for audited financial statements. In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. However, these operating results are not necessarily indicative of the results expected for the full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in PRG's Annual Report on Form 10-K for the fiscal year ended December 27, 2000 and MD&A in Part I, Item 2 of this Quarterly Report on Form 10-Q. The accompanying financial statements have been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. From 1997 through June 27, 2001, the Company has experienced net losses aggregating approximately $97,490, which includes restructuring charges and asset impairment losses of $42,995. As a result, at June 27, 2001, the Company had a shareholders' deficit of $76,325 and the Company's current liabilities exceeded current assets by $100,142. These factors, among others, may indicate that at some point in the foreseeable future, the Company will be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Continuation as a going concern depends upon the Company's ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required and ultimately to attain successful operations. The Company is continuing its efforts to obtain additional funds so that it can meet its obligations and sustain its operations. There can be no assurance that additional financing will be available to the Company or available on satisfactory terms. (2) ACQUISITIONS AND DIVESTITURES The Company closed one Denny's restaurant and one Black-eyed Pea restaurant in 2000 and closed two Denny's restaurants in the first 13 week period of 2001 and one Black-eyed Pea restaurant in the second 13 week period of 2001. All of these restaurants were underperforming and failed to meet certain operational and financial goals established by the Company. The Company will continue to evaluate all remaining restaurants and intends to sell or close any restaurants that do not meet its criteria for operating results. In October 1999, the Company retained CNL Advisory Services, Inc. to act as the agent in the sale of all the Company's Denny's restaurants. On January 26, 2001, the Company sold 23 Denny's restaurants to Mountain Range Restaurants, LLC ("MRR") for $20,300, consisting of cash of $17,300 and a note for $3,000. The note is secured by warrants that give the Company the right to a 40% equity position in MRR in the event of a default by MRR. MRR is owned by Messrs. William G. Cox and Robert J. Gentz. Mr. Cox was formerly the Chief Operating Officer of PRG and continues 4 to serve as a director. Mr. Gentz was formerly an Executive Vice President of PRG and also continues to serve as a director. The sales price of $20,300 exceeded the Company's cost basis plus selling costs by approximately $13,000. The gain on this sale was offset, however, as a result of management's determination that an additional reserve of approximately $13,000 was needed to reduce the carrying value of the remaining Denny's restaurants to their net realizable value. Cash proceeds from the sale transaction were primarily used to reduce capital lease obligations associated with these properties by approximately $1,500, retire debt of approximately $7,700 to CNL APF Partners, LP (collectively, with its affiliates, "CNL"), retire a note payable of approximately $1,700 to Advantica (Denny's, Inc.'s parent company), repay approximately $3,100 of accrued interest and infuse additional working capital into the Company. (3) DEBT AND OBLIGATIONS UNDER CAPITAL LEASES On June 30, 1999, CNL acquired the remaining outstanding indebtedness under PRG's existing senior credit facility and advanced PRG an additional $5,400. As part of this transaction, PRG issued to CNL a $20,100 interim balloon note. In August 1999, this debt was modified to be interest only through January 31, 2000. Concurrent with the sale of the restaurants to MRR, the Company paid CNL all accrued interest outstanding on this note through December 27, 2000 and received a waiver of defaults along with an extension of the due date to March 31, 2001. On March 31, 2001, the maturity date of this note was extended until December 31, 2001. As of June 27, 2001, accrued and unpaid interest on the note due to CNL totaled $1,044. The Company is currently in default on the note and has classified it as a current liability. PRG intends to pursue an extension of the maturity date and waiver of default on the note from CNL. PRG cannot provide assurance, however, that CNL will agree to any further extension or waiver or that other revisions in the payment terms of the note will be acceptable to the Company. During the second quarter of 2000, the Company stopped making payments due to CNL for principal and interest on debt, principal and interest on several capital leases and rent on several operating leases. On March 29, 2001, $3,700 of these delinquent payments due to CNL was transferred to an affiliate of CNL with the same terms and conditions of payment. On June 30, 2001, an additional $2,100 was transferred to an affiliate of CNL with the same terms and conditions of payment. During the second quarter of 2000, PRG received a waiver of a substantial portion of the payments on an operating lease from a secondary lender. The waiver was for a period of one year expiring on March 31, 2001. As of June 27, 2001, PRG has not received an extension of the waiver from the secondary lender and has not re-instituted full payments under the terms of the lease agreement. At June 27, 2001, the Company had outstanding approximately $16,000 carrying amount (net of discount) of Series B 13% Subordinated Notes ("Series B Notes") due 2003. The Company is in default on the Series B Notes due to non-payment of interest since March 31, 1997. As of June 27, 2001, accrued and unpaid interest due to these holders totaled approximately $12,531. Waivers for non-payment were received from the noteholders through June 1999 but no interest waivers have been received since that date. The par value of the Series B Notes at June 27, 2001 was approximately $16,800. In March 2001, the Company received notice from Mr. Jack Lloyd, PRG's former Chairman of the Board and Chief Executive Officer and holder (together with Ms. Cathy Lloyd) of approximately $11,200 par value of the Series B Notes, of his intention to accelerate the payment of all principal and interest due under the Series B Notes and to declare all amounts immediately due and payable. The Company believes that Mr. Lloyd is presently unable to pursue any remedies for any defaults under the Series B Notes which are subordinated, unsecured obligations of PRG. To date, PRG has received no further correspondence from Mr. Lloyd with respect to the Series B Notes. 5 (4) CONCENTRATION OF RISKS AND USE OF ESTIMATES As of June 27, 2001, the Company operated 162 restaurants in 19 states, consisting of two separate concepts, Black-eyed Pea and Denny's. The majority of the Company's restaurants are located in Texas, Florida, Oklahoma and Arizona. Both concepts are full-service, dining establishments offering a broad menu and a comfortable dining atmosphere. The Company believes there is no concentration of risk with any single customer, supplier or small group of customers or suppliers whose failure or nonperformance would materially affect the Company's results of operations. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to use judgments and make estimates that affect the amounts reported in the Condensed Consolidated Financial Statements. Management believes that such estimates have been based on reasonable and supportable assumptions and that the resulting estimates are reasonable for use in the preparation of the Condensed Consolidated Financial Statements. Changes in such estimates will be made as appropriate as additional information becomes available and may affect amounts reported in future periods. (5) BUSINESS SEGMENTS The Company owns and operates 92 Black-eyed Pea restaurants, including a total of 80 restaurants located in Texas, Arizona and Oklahoma. The Company also operates 70 Denny's restaurants, including a total of 40 restaurants located in Texas and Florida. The Company owns the Black-eyed Pea brand and operates the Denny's restaurants under the terms of franchise agreements. The Company's revenue and restaurant operating income for the thirteen-week and twenty-six week periods ended June 28, 2000 and June 27, 2001, respectively, are as follows: 13-WEEK PERIOD 26-WEEK PERIOD ENDED ENDED June 28, 2000 June 27, 2001 June 28, 2000 June 27, 2001 REVENUES: ------------- ------------- ------------- ------------- Black-eyed Pea $ 29,612 $ 28,571 $ 61,090 $ 56,392 Denny's 25,911 17,923 50,904 37,691 -------- -------- --------- -------- Total revenues $ 55,523 $ 46,494 $ 111,994 $ 94,083 ======== ======== ========= ======== RESTAURANT OPERATING INCOME (LOSS): Black-eyed Pea $ 2,771 $ (2,832) $ 6,158 $ (3,433) Denny's 2,955 1,145 5,824 1,939 Gain on sale of assets 28 - 94 - -------- --------- --------- --------- Total restaurant operating income (loss) 5,754 (1,687) 12,076 (1,494) Administrative expenses 3,100 4,081 6,074 7,220 -------- --------- --------- --------- Total operating income (loss) $ 2,654 $ (5,768) $ 6,002 $ (8,714) ======== ========= ========= ========= 6 (6) OTHER MATTERS In August 1999, PRG entered into a foreclosure and settlement agreement whereby a $2,600 note receivable (collateralized by 403,456 shares of PRG's common stock) was exchanged for $1,456 in Series B Notes payable and the collateral of 403,456 shares of PRG's common stock. The effective date of this transaction was January 3, 2000, at which time PRG recorded the cancellation of the $2,600 note receivable and the $1,456 in Series B Notes payable at face value while reflecting the transfer of 403,456 shares of common stock as treasury stock. In the first quarter of 2000, PRG recorded the transaction as an acquisition of treasury stock for $252, representing its market value at the effective date, and a reduction of additional paid-in capital of $887. During the quarter ended June 27, 2001, the Company executed agreements to sell 6 of its Denny's restaurants for an aggregate of $7.45 million and received deposits in the amount of the purchase prices. These agreements give the Company the right to terminate the agreements upon a refund of the deposits. Subsequent to the end of the second quarter, the Company entered into an agreement with an entity owned by William J. Howard, a director of PRG, to sell 13 of its Denny's restaurants, including 6 of the restaurants previously discussed, in which case the Company will terminate the previous agreements with respect to these restaurants. The Company presently anticipates that the sales of these restaurants will close on or before September 30, 2001. (7) SUBSEQUENT EVENTS In September 1999, the Company committed to a plan to sell all of its Denny's restaurants. Consequently, the assets of these restaurants were reclassified as held for sale. On January 26, 2001, the sale of 23 restaurants to MRR was completed. On August 6, 2001, the Company changed its intent with regard to selling its remaining Denny's restaurants. The Company will continue its efforts to sell approximately 29 Denny's restaurants located primarily in Florida and Colorado. The Company now intends to continue operating in the family dining segment with Denny's restaurants primarily in its core market areas of Texas, Oklahoma and Florida. Therefore, as of August 6, 2001 the carrying amount of the Denny's restaurants not being sold will be reclassified from net assets held for sale to property, plant and equipment. The amount of the reclassification will be approximately $10,300, which will become the new historical cost basis of the assets. Depreciation and amortization for these assets will commence as of August 6, 2001. On June 29, 2001 several debt agreements with CNL totaling $16,900 were modified to be interest only until maturity. Maturity dates for these debt agreements range from 2002 though 2013. The Company is currently in default on these notes due to non-payment of interest. On July 12, 2001 the Company entered into a purchase agreement to sell 13 Denny's restaurants for $11,000 in cash. It is anticipated that this transaction will close during the third quarter of 2001. On July 27, 2001 the Company entered into a purchase agreement to sell 7 Denny's restaurants for $2,250 in cash. It is anticipated that this transaction will close during the third quarter of 2001. During the second quarter of fiscal 2001, the Company recorded restructuring expenses of $700 related to four underperforming Black-eyed Pea restaurants which the Company closed in July 2001. This adjustment reflects the estimated liability for future rents, equipment leases, property taxes, and other costs associated with the closure of these restaurants. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL As of June 27, 2001, the Company operated 92 Black-eyed Pea restaurants in nine states, including a total of 80 restaurants located in Texas, Arizona and Oklahoma. During the first 26 weeks of 2001, comparable store sales at its Black-eyed Pea restaurants decreased 8.1% as compared with the first twenty-six week period of 2000. The decrease in comparable store sales was attributable primarily to significant coupon advertising in the first quarter of 2000, which did not occur in the first quarter of 2001. In addition, the elimination of television advertising, which occurred in the first quarter of 2000 and continued until the first quarter of 2001, resulted in negative sales trends throughout 2000 and into 2001. In March 2001, the television advertising program was re-instituted. Comparable store sales during the second quarter of 2001 decreased 5.0% as compared with the second quarter of 2000. Carry-out sales accounted for approximately 12.5% and 13.0% of restaurant sales for the thirteen-week periods and 12.8% and 12.9% for the twenty-six week periods ended June 27, 2001 and June 28, 2000, respectively. As of June 27, 2001, the Company operated 70 Denny's restaurants in 14 states, including a total of 40 restaurants located in Texas and Florida. Through June 27, 2001, comparable store sales at the Company's Denny's restaurants increased 0.2% as compared with the first twenty-six week period of 2000. This increase in comparable store sales is the result of the closure of certain underperforming restaurants and the improvement in the operations of the remaining restaurants. COMPARISON OF RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain items in the Condensed Consolidated Statements of Operations expressed as a percentage of total restaurant sales: 8 13-WEEK PERIOD ENDED 26-WEEK PERIOD ENDED (Unaudited) (Unaudited) (All amounts in percentages (%)) JUNE 28, 2000 JUNE 27, 2001 JUNE 28, 2000 JUNE 27, 2001 Restaurant sales 100.0 100.0 100.0 100.0 ------ ------ ----- ------ Restaurant operating expenses: Food and beverage costs 27.5 27.7 27.2 27.6 Payroll and payroll related costs 34.6 38.4 34.4 38.2 Other operating expenses 26.4 34.6 26.4 33.3 Loss on sale of note receivable - - - .4 Restructuring expenses - 1.5 - .7 Depreciation and amortization 1.1 1.5 1.2 1.4 ------ ------ ----- ------ Total restaurant operating expenses 89.6 103.7 89.2 101.6 ------ ------ ----- ------ Restaurant operating income (loss) 10.4 (3.7) 10.8 (1.6) Administrative expenses 5.6 8.8 5.4 7.7 ------ ------ ----- ------ Operating income (loss) 4.8 (12.5) 5.4 (9.3) Interest expense - net 5.5 7.0 5.3 6.9 ------ ------ ----- ------ Income (loss) before income taxes (0.7) (19.5) .1 (16.2) Income tax expense - - - - ------ ------ ----- ------ Net income (loss) (0.7) (19.5) .1 (16.2) ====== ====== ===== ======
9 THIRTEEN-WEEK PERIOD ENDED JUNE 27, 2001 COMPARED WITH THIRTEEN-WEEK PERIOD ENDED JUNE 28, 2000 RESTAURANT SALES. The Company's restaurant sales decreased $9.0 million, or 16.3%, to $46.5 million for the thirteen-week period ended June 27, 2001 as compared with restaurant sales of $55.5 million for the thirteen- week period ended June 28, 2000. This decrease was attributable primarily to a reduction in sales of $7.3 million due to the sale in January 2001 of 23 Denny's restaurants to Mountain Range Restaurants, LLC ("MRR"). Comparable store sales at the Denny's restaurants decreased by 0.4% during the second fiscal quarter of 2001 compared to the second fiscal quarter of 2000. Sales for the Black-eyed Pea restaurants declined $1.1 million. This reduction was primarily attributable to a decline in same store sales of 5.0% during the second quarter of fiscal 2001, or $1.5 million, which was partially offset by $589,000 in sales generated by a new Black-eyed Pea restaurant opened in April 2001 in Hendersonville, Tennessee. The Company believes the decrease in comparable store sales was attributable primarily to the cessation of television advertising for the Black-eyed Pea restaurants until March 2001. FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.7% of restaurant sales for the thirteen-week period ended June 27, 2001 as compared with 27.5% of restaurant sales for the thirteen-week period ended June 28, 2000. This increase was attributable primarily to the increased delivery costs by the Company's food distributor. PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were 38.4% of restaurant sales for the thirteen-week period ended June 27, 2001 as compared with 34.6% of restaurant sales for the thirteen-week period ended June 28, 2000. This increase was attributable primarily to the lower sales volumes at the Black-eyed Pea restaurants, higher average wages and higher worker's compensation insurance rates. Also contributing to the increase in payroll costs for the thirteen-week period ended June 27, 2001 was increased staffing resulting from a renewed commitment to outstanding customer service. OTHER OPERATING EXPENSES. Other operating expenses were 34.6% of restaurant sales for the thirteen-week period ended June 27, 2001 as compared with 26.4% of restaurant sales for the thirteen-week period ended June 28, 2000. This increase was attributable primarily to (a) lower sales volumes at the Black-eyed Pea restaurants, (b) an increase in advertising expense of $1.7 million due to the new television and radio advertising campaign that began in March 2001, (c) increases in utility costs of $466,000 and (d) an increase in the Company's general liability insurance premiums. These increases were partially offset by reductions in occupancy costs of $233,000 due to the expiration of 12 Denny's restaurants' equipment leases. RESTRUCTURING EXPENSES. In the second fiscal quarter of 2001, the Company recorded restructuring expenses of $700,000 related to four Black- eyed Pea restaurants which the Company closed in July 2001. This adjustment reflects the estimated liability for furture rents, equipment leases, property taxes, and other costs associated with the closure of these restaurants. DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant equipment, leasehold improvements, intangible assets and other items was $680,000 for the thirteen-week period ended June 27, 2001, as compared with $633,000 for the thirteen-week period ended June 28, 2000. In September 1999, the Company committed to a plan to sell all of its Denny's restaurants. In accordance with SFAS No. 121, the assets of these restaurants were reclassified as being held for sale and depreciation ceased. RESTAURANT OPERATING INCOME (LOSS). Restaurant operating loss was $1.7 million, or 3.7% of restaurant sales, for the thirteen-week period ended June 27, 2001 as compared with restaurant operating income of $5.8 million, or 10.4% of restaurant sales, for the thirteen-week period ended June 28, 2000. The reduction in restaurant operating income of $7.5 million was due primarily to lower sales volumes at the Black-eyed Pea restaurants, the sale of 23 Denny's restaurants to MRR and increased expenses described above. 10 ADMINISTRATIVE EXPENSES. Administrative expenses were $4.1 million, or 8.8% of restaurant sales, for the thirteen-week period ended June 27, 2001 as compared with $3.1 million, or 5.6% of restaurant sales, for the thirteen- week period ended June 28, 2000. This increase was due primarily to an increase of $253,000 in consulting, professional and temporary agency fees, $261,000 in costs associated with moving the corporate office to Tennessee and an increase of $259,000 in travel costs. Reductions in restaurant sales did not result in a corresponding reduction in administrative expense due to the transition to the new management team and the preparation for the move of the corporate office. INTEREST EXPENSE - NET. Net interest expense was $3.3 million, or 7.0% of restaurant sales, for the thirteen-week period ended June 27, 2001 as compared with $3.0 million, or 5.5% of restaurant sales, for the thirteen- week period ended June 28, 2000. The increase in interest expense of $234,000 was due primarily to increases in penalties and late fees of $421,000 and increased interest expense of $210,000 from the Series B Notes. These increases were partially offset by reductions of approximately $275,000 in interest on CNL notes resulting from the partial payoff of the notes from the sale of 23 Denny's restaurants to MRR and $60,000 in interest income from the note receivable resulting from the sale of MRR. INCOME TAX EXPENSE. The Company did not record a federal tax benefit associated with the operating losses in 2001 and 2000 due to the uncertainty of the future realization of any of the Company's tax loss carryforwards. The Company, however, did record and pay state taxes. TWENTY-SIX WEEK PERIOD ENDED JUNE 27, 2001 COMPARED WITH TWENTY-SIX WEEK PERIOD ENDED JUNE 28, 2000 RESTAURANT SALES. The Company's restaurant sales decreased $17.9 million, or 16.0%, to $94.1 million for the twenty-six week period ended June 27, 2001 as compared with restaurant sales of $112.0 million for the twenty- six week period ended June 28, 2000. This decrease was attributable primarily to a reduction in sales of $12.2 million due to the sale in January 2001 of 23 Denny's restaurants to MRR. Comparable store sales at the Company's Denny's restaurants increased by 0.2% during the twenty-six week period ended June 27, 2001 compared to the twenty-six week period ended June 28, 2000. Sales for the Black-eyed Pea restaurants declined $4.7 million. This reduction was primarily attributable to a decline in same store sales of 8.1% during the second quarter of fiscal 2001, or $4.7 million, which was partially offset by $589,000 in sales generated by a new Black-eyed Pea restaurant opened in April 2001 in Hendersonville, Tennessee. The Company believes the decrease in comparable store sales was attributable primarily to the cessation of television advertising until March 2001 and significant coupon advertising which occurred in the first quarter of 2000 that was not repeated in 2001. FOOD AND BEVERAGE COSTS. Food and beverage costs increased to 27.6% of restaurant sales for the twenty-six week period ended June 27, 2001 as compared with 27.2% of restaurant sales for the twenty-six week period ended June 28, 2000. This increase was attributable primarily to the increased delivery costs by the Company's food distributor. PAYROLL AND PAYROLL RELATED COSTS. Payroll and payroll related costs were 38.2% of restaurant sales for the twenty-six week period ended June 27, 2001 as compared with 34.4% of restaurant sales for the twenty-six week period ended June 28, 2000. This increase was attributable primarily to the lower sales volumes at the Black-eyed Pea restaurants, higher average wages and higher worker's compensation insurance rates. Also contributing to the increase in payroll costs for the twenty-six week period ended June 27, 2001 was increased staffing resulting from a renewed commitment to outstanding customer service. 11 OTHER OPERATING EXPENSES. Other operating expenses were 33.3% of restaurant sales for the twenty-six week period ended June 27, 2001 as compared with 26.4% of restaurant sales for the twenty-six week period ended June 28, 2000. This increase was attributable primarily to (a) lower sales volumes at the Black-eyed Pea restaurants, (b) an increase in advertising expense of $2.3 million due to the new television and radio campaign that began in March 2001, (c) increases in utility costs of $1.2 million and (d) an increase in the Company's general liability insurance premiums. These increases were partially offset by reductions in rent expense of $420,000 due to the expiration of 12 Denny's restaurants' equipment leases. LOSS ON SALES OF NOTE RECEIVABLE. The loss recognized in fiscal 2001 resulted from the sale of a note receivable of approximately $2.4 million to CNL, the Company's senior lender, for cash of approximately $973,000 and the payoff of a loan and related interest of approximately $1.0 million. RESTRUCTURING EXPENSES. In the second fiscal quarter of 2001, the Company recorded restructuring expenses of $700,000 related to four Black- eyed Pea restaurants, which the Company closed in July 2001. This adjustment reflects the estimated liability for future rents, equipment leases, property taxes, and other costs associated with the closure of these restaurants. DEPRECIATION AND AMORTIZATION. Depreciation and amortization of restaurant equipment, leasehold improvements, intangible assets and other items was $1.4 million for the twenty-six week period ended June 27, 2001, as compared with $1.3 million for the twenty-six week period ended June 28, 2000. In September 1999, the Company committed to a plan to sell all of its Denny's restaurants. In accordance with SFAS No. 121, the assets of these restaurants were reclassified as being held for sale and depreciation ceased. RESTAURANT OPERATING INCOME (LOSS). Restaurant operating loss was $1.5 million, or 1.6% of restaurant sales, for the twenty-six week period ended June 27, 2001 as compared with restaurant operating income of $12.1 million, or 10.8% of restaurant sales, for the twenty-six week period ended June 28, 2000. The reduction in restaurant operating income of $13.6 million was due primarily to lower sales volumes at the Black-eyed Pea restaurants, the sale of the 23 Denny's restaurants to MRR and increased expenses described above. ADMINISTRATIVE EXPENSES. Administrative expenses were $7.2 million, or 7.7% of restaurant sales, for the twenty-six week period ended June 27, 2001 as compared with $6.1 million, or 5.4% of restaurant sales, for the twenty- six week period ended June 28, 2000. This increase of $1.1 million was due primarily to an increase of $603,000 in consulting, professional and temporary agency fees, $261,000 in costs associated with moving the corporate office to Tennessee and an increase of $304,000 in travel costs. Reductions in restaurant sales did not result in a corresponding reduction in administrative expense due to the transition to the new management team and the preparation for the move of the corporate office. INTEREST EXPENSE-NET. Net interest expense was $6.5 million, or 6.9% of restaurant sales, for the twenty-six week period ended June 27, 2001 as compared with $5.9 million, or 5.3% of restaurant sales, for the twenty-six week period ended June 28, 2000. The increase in interest expense of $563,000 was due primarily to increases in penalties and late fees of $696,000 and increased interest expense of $401,000 from the Series B Notes. These increases were partially offset by reductions of approximately $598,000 in interest on CNL notes resulting from the partial payoff of the notes from the sale of 23 Denny's restaurants to MRR and $150,000 in interest income from the note receivable resulting from the sale to MRR. INCOME TAX EXPENSE. The Company did not record federal tax benefit associated with the operating loss in 2001 due to the uncertainty of the future realization of any of the Company's tax loss carryforwards. The Company, however, did record and pay state taxes. 12 LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has met its liquidity requirements with cash provided by operating activities supplemented by external borrowing. Like other companies in the restaurant industry, the Company operates with a working capital deficit. Due to its default under several debt agreements, the Company has reclassified the majority of its debt as current liabilities thereby substantially increasing its working capital deficit. During the first two quarters of fiscal 2001, the Company had a net increase in cash of $33,000 reflecting net cash used by operating activities of $3.9 million that was offset by net cash provided by investing activities of $1.5 million and by net cash provided by financing activities of $2.5 million. Net cash used by operating activities reflected that restaurant operating expenses absorbed all but approximately $947,000 of cash generated by sales in the first two quarters of 2001. Net cash provided by investing activities included $2.9 million generated from the sale of 23 Denny's restaurants to MRR offset by the purchase of additional property and equipment of $1.5 million. Net cash provided by financing activities primarily reflects the proceeds from borrowings of $1.5 million and proceeds of $1.0 million from the sale of a note receivable to CNL during the first quarter of 2001. The Company's total liabilities decreased from $140.5 million at December 27, 2000 to $139.7 million at June 27, 2001. This change is primarily a result of applying the proceeds from the sale of 23 Denny's restaurants to the capital lease obligations of $1.5 million associated with those properties, the retirement of debt of $7.7 million to the Company's senior lender, retirement of a note payable of $1.7 million to Advantica and the repayment of $3.1 million of accrued interest. The offset of these reductions in liabilities is $7.5 million in deposits for the future sale of restaurants, the non-payment of principal and interest on certain promissory notes and lease obligations, and operational indebtedness incurred during the normal course of business. The Company's debt balance is comprised of promissory notes, obligations under capital leases and subordinated indebtedness. The Company has classified the majority of its debt as current debt obligations since the Company is currently in default to CNL and its related parties for the non-payment of principal and interest on certain promissory notes, capital lease obligations and operating leases. On March 29, 2001 and June 30, 2001, an affiliate of CNL paid $3.7 million and $2.1 million, respectively of payments due CNL from the Company. No additional indebtedness was incurred by the Company nor did the Company agree to repay these amounts to the CNL affiliate. The CNL affiliate is subrogated to the rights of CNL to receive these payments. On June 30, 1999, CNL acquired the remaining outstanding indebtedness under the Company's existing senior credit facility for $14.7 million, restructured $2.2 million of existing debt and advanced an additional $5.4 million to the Company. The original due date of the senior debt was January 31, 2000, for which the Company received an extension of the maturity date to September 2000. At December 27, 2000, the Company was in default on the covenants of the senior debt. Concurrent with the January 26, 2001 sale of 23 Denny's restaurants, CNL agreed to waive existing defaults under the senior credit agreement and extend the maturity of the senior debt to March 31, 2001. On March 31, 2001 the maturity date of this note was extended until December 31, 2001. The Company currently is in default on the indebtedness under its senior credit facility, its subordinated indebtedness and other credit agreements. While certain indebtedness is classified as a current liability, the Company has been engaged in negotiations with CNL and anticipates the indebtedness will be restructured. No assurances can be given, however, that this restructuring will occur. In September 1999 the Company committed to a plan to sell all of its Denny's Restaurants. The assets of these restaurants were reclassified as being held for sale. In January 2001, the Company sold 23 Denny's restaurants to MRR for $20.3 million, consisting of cash of $17.3 million and a note for $3.0 million. MRR is owned by Messrs. William G. Cox and Robert J. Gentz. Mr. Gentz was formerly an Executive Vice President of PRG and continues to serve as a director. Mr. Cox was formerly the Chief Operating Officer of PRG and also continues to serve as a director. 13 During the quarter ended June 27, 2001, the Company executed agreements to sell 6 of its Denny's restaurants for an aggregate of $7.45 million and received deposits in the amount of the purchase prices. These agreements give the Company the right to terminate the agreements upon a refund of the deposits. Subsequent to the end of the second quarter, the Company entered into an agreement with an entity owned by William J. Howard, a director of PRG, to sell 13 of its Denny's restaurants, including 6 of the restaurants previously discussed, in which case the Company will terminate the previous agreements with respect to these restaurants. The Company presently anticipates that the sales of these restaurants will close on or before September 30, 2001. On August 6, 2001 the Company changed its intent with regard to selling its remaining Denny's restaurants. The Company will continue its efforts to sell approximately 29 Denny's restaurants located primarily in Florida and Colorado. The Company now intends to continue operating in the family dining segment with Denny's restaurants primarily in its core market areas of Texas, Oklahoma and Florida. Therefore, as of August 6, 2001 the carrying amount of the Denny's restaurants not being sold will be reclassified from net assets held for sale to property, plant, and equipment. The amount of the reclassification will be approximately $10.3 million which will become the new historical cost basis of the assets. Depreciation and amortization for these assets will commence as of this date. To the extent the sales of any Denny's restaurants occur, the Company anticipates using the sale proceeds to reduce outstanding indebtedness, provide additional working capital and pay costs associated with these transactions. The Company continues to review net assets held for sale to determine whether events or changes in circumstances indicate that the carrying value of the net assets may not be recoverable. The Company will continue to evaluate the operating results of all its restaurants and intends to sell or close any restaurants that do not meet its criteria for operating results. During the second quarter of fiscal 2000, the Company ceased making payments of principal and interest on several capital leases held by CNL and payments on several operating leases to a secondary lender. On March 29, 2001 and June 30, 2001, an affiliate of CNL paid $3.7 million and $2.1 million, respectively, of payments due CNL from the Company. No additional indebtedness was incurred by the Company nor did the Company agree to repay these amounts to the CNL affiliate. The CNL affiliate is subrogated to the rights of CNL to receive these payments. The Company received a waiver of a substantial portion of the payments, for a period of one year expiring on March 31, 2001, from the secondary lender but has not, as of yet, received a waiver from CNL or its related party and has not received an extension of the expired waiver from the secondary lender. During the first quarter of fiscal 2001, the Company borrowed an additional $1.5 million from CNL. The proceeds were used for general operating purposes and the new notes, a demand note and a term note with a maturity date in March 2013, are secured by real and personal property owned by the Company. At June 27, 2001, the Company was not in compliance with certain financial covenants and payment terms set forth in the Series B Notes. Also, the Company will continue to be in default under the senior credit agreement until other acceptable refinancing or restructuring alternatives become available. Additional financing, however, may not be available or may not be available on satisfactory terms. The sale of restaurants has significantly affected liquidity because the Company: * repaid the negative working capital attributable to the restaurants that it sold from cash flows generated by the remaining restaurants, * continued to pay costs associated with subleasing properties for which purchasers defaulted on primary leases and for which the Company remains contingently liable, and 14 * did not realize the beneficial effects of reduced administrative costs commensurate with the reduction in the number of restaurants operated by the Company. The Company currently requires capital principally for general operating purposes as well as maintenance expenditures on existing restaurants. Expenditures for property and equipment totaled approximately $1.5 million for the first two quarters of fiscal 2001. The Company intends to pursue opportunities to develop additional Black-eyed Pea restaurants as favorable locations and acceptable sources of financing for new restaurants are identified. RISK FACTORS The Company's business is highly competitive with respect to food quality, concept, location, service and price. In addition, there are a number of well-established food service competitors with substantially greater financial and other resources as compared to the Company. The Company's Black-eyed Pea restaurants have experienced declining customer traffic during the past three years as a result of intense competition and a decline in operational execution. The Company has initiated a number of programs to address the decline in customer traffic; however, performance improvement efforts for the Black-eyed Pea restaurants during the past three years have not resulted in improvements in customer traffic and margins for the concept as a whole. There can be no assurance that the current programs will be successful. The Company has experienced increased costs for labor and operating expenses at its restaurant concepts which, coupled with a decrease in average restaurant sales volumes in its Black-eyed Pea restaurants, have reduced its operating margins. The Company does not expect to be able to significantly improve Black-eyed Pea restaurants' operating margins until it can consistently increase its comparable restaurant sales. An increase in comparable restaurant sales cannot be assured. SPECIAL CONSIDERATIONS THE COMPANY IS NOT EXPECTED TO BE PROFITABLE IN THE NEAR TERM AND ITS AUDITORS' REPORT EXPRESSES A GOING CONCERN OPINION. The Company has not been profitable in the last four fiscal years and its operations are not expected to be profitable in the near future. Its ability to generate operating profits will depend upon: * its ability to restructure, refinance, or repay its outstanding debt; * successfully obtaining additional capital resources; * the nature and extent of any future developments and acquisitions; and * general economic and demographic conditions. The Company cannot provide assurance that it will be able to sell any of its Denny's restaurants, restructure or refinance its debt, or improve the performance of its Black-eyed Pea restaurants so as to achieve profitability in the future. In addition, the report by its independent auditors on its financial statements for the year ended December 27, 2000, states that the uncertainty relating to its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms and covenants of its financing agreements, to obtain additional financing or refinancing as may be required, and ultimately to attain successful operations raise substantial doubt about its ability to continue as a going concern. 15 THE COMPANY IS IN DEFAULT ON THE PAYMENT OF SUBSTANTIALLY ALL OF ITS OUTSTANDING INDEBTEDNESS. As of the filing date of this Report, the Company is in default on the payment of its $22.3 million promissory note to its senior lender, $16.8 million principal amount of subordinated indebtedness, as well as interest and rent payments to CNL and interest on its subordinated indebtedness (see the Company's Form 10-K for the period ended December 27, 2000, Item 7. "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Liquidity and Capital Resources"). THE COMPANY HAS SIGNIFICANT INDEBTEDNESS. As of June 27, 2001, the Company had a working capital deficit of $100.1 million and total debt obligations of $70.9 million, including subordinated indebtedness in the outstanding principal amount of approximately $16.8 million and obligations under capital leases aggregating $19.6 million. The Company has incurred substantial debt to develop and acquire restaurants and to operate its business. The Company will continue its efforts to sell approximately 29 of its remaining Denny's restaurants and plans to use the proceeds from those sales to refine and reposition the Black-eyed Pea restaurant brand and reduce outstanding indebtedness. In addition, the Company has been engaged in negotiations with CNL and anticipates that its senior indebtedness will be restructured. No assurances can be given, however, that this restructuring will occur. The Company may seek additional equity or debt financing in the future to provide funds to support its operations or to develop or acquire additional restaurants. The Company, however, cannot provide assurance that: * such financing will be available or will be available on satisfactory terms; * the Company will be able to develop or acquire new restaurants or to otherwise expand its restaurant operations; or * the Company will be able to restructure, refinance, or satisfy its obligations as they become due. Any additional debt financings obtained by the Company will increase expenses and must be repaid regardless of the Company's operating results. Also, any new equity financings would result in dilution to existing shareholders. THE COMPANY HAS SIGNIFICANT CONTINGENT LIABILITIES ASSOCIATED WITH RESTAURANTS IT HAS SOLD. Since 1996, the Company has sold a total of 167 restaurants. The Company has assigned or subleased the real property leases and other obligations to the buyers of these restaurants, but it generally remains liable under those obligations if the buyers default. During 1999, three buyers of 87 restaurants that the Company sold during 1997 and 1998 filed for bankruptcy or failed to perform on their obligations to third parties. As a result, the Company recorded charges of $4.8 million for equipment leases, rents, property taxes, and other obligations for which it remains contingently liable. As of June 27, 2001, the Company had a reserve of approximately $5.8 million for closed restaurant properties where the Company subsidizes the existing rent payments and remains liable until the end of the lease term. As the Company sells additional restaurants, it may remain contingently liable for obligations on those restaurants. Any further defaults by buyers of restaurants that the Company has sold in the past or that it sells in the future could have a material adverse effect on its operating results and financial condition. 16 RELIANCE ON DENNY'S. As of June 27, 2001, the Company operated 70 franchised Denny's restaurants. As a result of the nature of operating franchised restaurants and the franchise agreements with Denny's, Inc. (together wtih its affiliates, "Denny's"), as long as the Company operates Denny's restaurants, its success depends, to a significant extent, on: * the continued vitality of the Denny's restaurant concept and the overall success of the Denny's system; * the ability of Denny's to identify and react to new trends in the restaurant industry, including the development of popular menu items; * the ability of Denny's to develop and pursue appropriate marketing strategies in order to maintain and enhance the name recognition, reputation, and market perception of Denny's restaurants; * the goodwill associated with the Denny's trademark; * the quality, consistency, and management of the overall Denny's system; and * the successful operation of Denny's restaurants owned by Denny's and other Denny's franchisees. The Company has no control over the management or operation of Denny's or other Denny's franchisees. A variety of factors affecting Denny's could have a material adverse effect on the Company, including the following: * any business or financial reversals or illiquidity on the part of Denny's or its parent corporation, Advantica; * a failure by Denny's to promote the Denny's name or restaurant concept; * the inability or failure of Denny's to support its franchisees, including the Company; * the failure to operate successfully the Denny's restaurants that Denny's itself owns; or * negative publicity with respect to Denny's or the Denny's restaurant concept. RESTRICTIONS IMPOSED BY THE DENNY'S FRANCHISE AGREEMENTS. So long as the Company operates Denny's restaurants, the cancellation of the Denny's franchise agreements, which include the right to what the Company believes are favorable franchise arrangements and the right to use the "Denny's" trademarks and trade styles, would have a material adverse effect on the Company's business. The Denny's franchise agreements impose a number of restrictions and obligations on the Company. The Company must pay royalties and an advertising contribution to Denny's regardless of the profitability of its Denny's restaurants. The Denny's franchise agreements also require the Company to operate its Denny's restaurants in accordance with the requirements and specifications established by Denny's. In addition, Denny's has the right to require the Company to modify its restaurants to conform to the then-existing Denny's restaurant format. Denny's has retained the right to open on its own behalf or to grant to other franchisees the right to open other Denny's restaurants in the immediate vicinity of the Company's Denny's restaurants. An agreement between the Company and Denny's gives Denny's the right to terminate substantially all of the Denny's franchise agreements in the event that CNL, as the successor to PRG's previous senior lender, takes certain actions while PRG is in default under the terms of its credit facility with CNL. If PRG fails to satisfy the requirements described above 17 or otherwise defaults under the Denny's franchise agreements, it could be subject to potential damages for breach of contract and could lose its rights under those agreements. The Denny's franchise agreements also provide that, in the event the Company assigns its rights under any of those agreements, Denny's will have the option to purchase the interest being transferred. An assignment under the Denny's franchise agreements will be deemed to have occurred if a person, entity, or group of persons (other than a group including William J. Howard and William G. Cox, each of whom is a director of the Company, Jack M. Lloyd or BancBoston Ventures, Inc., significant shareholders of the Company) acquires voting control of the Company's Board of Directors. Without the consent of Denny's, the Company may not directly or indirectly own, operate, control, or have any financial interest in any coffee shop or family-style restaurant business or any other business that would compete with the business of any Denny's restaurant, Denny's, or any affiliate, franchisee, or subsidiary of Denny's, other than restaurants the Company currently operates. For two years after the expiration or termination of a Denny's franchise agreement, the Company will not be permitted, without the consent of Denny's, directly or indirectly to own, operate, control, or have any financial interest in any coffee shop or family-style restaurant substantially similar to a Denny's located within a 15-mile radius of a Denny's restaurant subject to the expired or terminated agreement. These restrictions will not apply to the operation of another Denny's restaurant or the ownership of less than 5% of the publicly traded stock of any other company. CERTAIN SHAREHOLDERS MAY CONTROL THE COMPANY AND CERTAIN OF THE COMPANY'S DIRECTORS MAY HAVE CONFLICTS OF INTEREST. William J. Howard, a director of the Company, currently owns (together with his spouse) approximately 12.2% of the Company's outstanding common stock. On March 23, 2001, Mr. Howard exercised a stock purchase warrant and purchased 146,611 shares of PRG's common stock (at an exercise price of $0.01 per share) by submitting funds to PRG in the amount of $1,466. Jack M. Lloyd, former Chairman of the Board and Chief Executive Officer of PRG, currently owns (together with Ms. Cathy Lloyd) approximately 24.9% of PRG's outstanding common stock. Mr. Lloyd and Ms. Lloyd also exercised a stock purchase warrant and acquired an additional 293,223 shares of common stock at an exercise price of $0.01 per share on March 20, 2001 by submitting funds to PRG in the amount of $2,932. BancBoston Ventures, Inc. currently owns approximately 15.3% of PRG's outstanding common stock. Accordingly, this group of shareholders collectively has the power to elect all of the members of the Company's Board of Directors and thereby control the business and policies of the Company. Messrs. Howard and Lloyd (and Mrs. Howard and Ms. Lloyd) currently hold an aggregate of $16,794,000 in principal amount of PRG's Series B Notes in addition to their common stock. The Series B Notes contain restrictive covenants relating to the operation of the Company and the maintenance of certain financial ratios and tests. A default not waived by a majority of the holders of the Series B Notes could have a material adverse effect on the holders of PRG's common stock. Certain holders of the Series B Notes have not received interest payments since March 31, 1997. As of June 27, 2001, accrued and unpaid interest due to these holders totaled $12.5 million. The Company has not received waivers from these holders for noncompliance of certain of the debt covenants under the Series B Notes since June 1999. On March 26, 2001, PRG received a notice from Mr. Lloyd in which he stated that he is the holder of more than 25% of the Series B Notes and purported to accelerate the payment of all principal and interest under the Series B Notes and to declare all amounts under the Series B Notes to be immediately due and payable. On March 30, 2001, PRG also received a copy of a letter to State Street Bank and Trust Company, the trustee (the "Trustee") under the Indenture pursuant to which PRG issued the Series B Notes, from Mr. Lloyd, who represented that he is a holder of Series B Note No. B-1. In his letter, Mr. Lloyd advised the Trustee of the existence of defaults under the Indenture. He also stated his belief that the Company has defaulted in complying with debt priorities under the Indenture with respect to the application of 18 proceeds from the sale of assets. Mr. Lloyd further requested that the Trustee commence immediate litigation against PRG to recover all amounts due on the Series B Notes, including unpaid principal, accrued unpaid interest and interest on overdue installments at the default rate. In the event that the Trustee elects not to comply with his request, Mr. Lloyd indicated that he is ready, willing and able to pursue PRG on his own behalf. To date, the Company has received no further correspondence from Mr. Lloyd or the Trustee with respect to Mr. Lloyd's request. The Company believes that it has complied with its obligations under the Indenture and its other credit agreements with respect to sales of assets and the application of the proceeds from those sales. As of June 30, 1999, Mr. Lloyd and certain other holders of the Series B Notes waived defaults existing under the Series B Notes at that time. Furthermore, the enforcement of remedies under the Indenture and the Series B Notes is limited by the terms of the Senior Subordinated Intercreditor Agreement, dated March 29, 1996 (the "Intercreditor Agreement"), among Banque Paribas, as Agent under the Credit Agreement (as defined therein), certain holders of the Series B Notes (including Mr. Lloyd) and the Trustee. CNL APF Partners, LP, has succeeded to the interest of Banque Paribas. Under the terms of the Intercreditor Agreement, the Company believes that both the Trustee and holders of the Series B Notes (including Mr. Lloyd) presently are unable to pursue any remedies for any alleged defaults under the Indenture or the Series B Notes (including the initiation of litigation to collect the indebtedness owing under the Series B Notes), which are subordinated, unsecured obligations of the Company. SEASONALITY The Company's operating results fluctuate from quarter to quarter as a result of the seasonal nature of the restaurant industry and other factors. Restaurant sales generally are greater in the first and second fiscal quarters (January through June) than in the third and fourth fiscal quarters (July through December). Occupancy and other operating costs, which remain relatively constant, have a disproportionately negative effect on operating results during quarters with lower restaurant sales. The Company's working capital requirements also fluctuate seasonally. INFLATION The Company does not believe that inflation has had a material effect on operating results in past years. Although increases in labor, food or other operating costs could adversely affect the Company's operations, the Company generally has been able to modify its operating procedures or to increase menu prices to offset increases in operating costs. NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 is effective as follows: a) use of the pooling-of-interest method is prohibited for business combinations initated after June 30, 2001; and b) the provisions of SFAS 141 also apply to all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of the acquisition is July 2001 or later). There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The Company is currently evaluating the provisions of SFAS 141 and SFAS 142 and has not adopted such provisions in its June 27, 2001 condensed consolidated financial statements. FORWARD-LOOKING STATEMENTS The forward-looking statements included in this Form 10-Q relating to certain matters involve risks and uncertainties, including the ability of management to successfully implement its strategy for improving the performance of the Black- 19 eyed Pea restaurants, the ability of management to effect asset sales consistent with projected proceeds and timing expectations, the results of pending and threatened litigation, adequacy of management personnel resources, shortages of restaurant labor, commodity price increases, product shortages, adverse general economic conditions, adverse weather conditions that may affect the Company's markets, turnover and a variety of other similar matters. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "continue" (or the negative thereof) or similar terminology. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and under the caption "Special Considerations" included in Part I, Item 2 herein and in Part II, Item 7 of PRG's Annual Report on Form 10-K. Forward-looking information provided by the Company pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Item 7A of PRG's Annual Report on Form 10-K for the fiscal year ended December 27, 2000, and filed with the Commission on April 11, 2001, is incorporated herein in this item of this report by this reference. 20 PART II. OTHER INFORMATION ITEM 3. DEFAULTS UPON SENIOR SECURITIES Note 3 of the Notes to Condensed Consolidated Financial Statements is incorporated herein by this reference. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index immediately following the signature page hereto. (b) Reports on Form 8-K On April 13, 2001, PRG filed an Amendment to Current Report on Form 8-K/A which amended PRG's Current Report on Form 8-K, dated January 26, 2001. This Amendment was filed to set forth pro forma financial information in connection with the Company's sale of 23 Denny's restaurants to Mountain Range Restaurants, LLC. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHOENIX RESTAURANT GROUP, INC. Dated: AUGUST 20, 2001 By: /s/ Jeffrey M. Pate ----------------------------------------- Jeffrey M. Pate, Chief Financial Officer, Secretary and Senior Vice President 22 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.1 $ 4,000,000 Asset Purchase Agreement, made and entered into as of May 24, 2001, by and among CNL Restaurants IV, Inc. and Phoenix Restaurant Group, Inc. 10.2 $2,250,000 Asset Purchase Agreement, made and entered into as of March 30, 2001, by and among CNL Restaurants IV, Inc. and Phoenix Restaurant Group, Inc., pertaining to Unit 6788 located at 2335 West Highway 76, Branson, Missouri (1) 10.3 $1,100,000 Asset Purchase Agreement, made and entered into as of May 1, 200, by and among CNL Restaurants IV, Inc. and Phoenix Restaurant Group, Inc., pertaining to Unit 6394 located at 4999 34th Street North, St. Petersburg, Florida (1) 10.4 $100,000 Asset Purchase Agreement, made and entered into as of May 1, 2001, by and among CNL Restaurants IV, Inc. and Phoenix Restaurant Group, Inc., pertaining to Unit 7027 located at 5003 Highway 301 North (1) 10.5 Modification of Consolidated Interim Promissory Note Revising Maturity Date, made and entered into as of March 31, 2001, by and between CNL APF Partners, LP and Phoenix Restaurant Group, Inc. 10.6 Employment Agreement between Phoenix Restaurant Group, Inc. and Robert M. Langford 10.7 Employment Agreement between Phoenix Restaurant Group, Inc. and W. Craig Barber - --------------------- (1) Document not filed because substantially similar in all material respects to Exhibit 10.1. 23 EX-10.1 3 paspur.txt ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT AMONG CNL RESTAURANTS IV, INC. AND PHOENIX RESTAURANT GROUP, INC. Dated as of May 24, 2001 Section 1. Sale and Purchase...............................................1 1.1 Assets and Properties to be Sold and Purchased.......................1 (a) Leased Properties and Improvements...............................1 (b) Franchise Agreements.............................................1 (c) Personal Property................................................1 (d) Contracts........................................................2 (e) Inventory........................................................2 (f) Computer Software and Hardware...................................2 (g) Telephone Numbers................................................2 (h) Ancillary Assets.................................................2 (i) Documents........................................................2 (j) Books and Records................................................2 1.2 Assets and Properties Not to Be Purchased and Sold...................3 Section 2. Liabilities.....................................................3 2.1 Liabilities Remain with Seller.......................................3 2.2 Liabilities Assumed by Buyer.........................................3 Section 3. Purchase Price..................................................3 3.1 Amount and Deposit...................................................3 3.2 Allocation of Purchase Price.........................................4 Section 4. Seller's Representations and Warranties.........................4 4.1 Corporate Status and Authority.......................................4 4.2 Ownership of Assets and Properties...................................4 4.3 Condition of Assets and Properties...................................4 4.4 Leases, Contracts, Agreements and Other Commitments..................4 4.5 Compliance with Law and Other Regulations............................4 4.6 Liabilities..........................................................5 4.7 Statements and Other Documents Not Misleading........................5 Section 5. Buyer's Representations and Warranties..........................5 5.1 Corporate Status and Authority.......................................5 5.2 Knowledge Regarding the Business.....................................5 5.3 Condition of Assets..................................................5 5.4 Statements and Other Documents Not Misleading........................5 5.5 Facts and Circumstances with Respect to Seller.......................6 Section 6. Continuation and Survival of Representations and Warranties..................................6 Section 7. Seller's Covenants..............................................6 Section 8. Buyer's Conditions Precedent to the Closing.....................6 8.1 Compliance With Agreements and Covenants.............................6 8.2 Accuracy of Representations and Warranties...........................6 8.3 Lease Assignments....................................................6 8.4 Corporate Approvals..................................................6 8.5 Consents and Approvals...............................................7 8.6 Litigation...........................................................7 8.7 Delivery of Documents................................................7 Section 9. Seller's Conditions Precedent to the Closing....................7 9.1 Compliance with Agreements and Covenants.............................7 9.2 Accuracy of Representations and Warranties...........................7 9.3 Corporate Approvals..................................................7 9.4 Waivers, Consents and Approvals......................................7 9.5 Litigation...........................................................8 9.6 Delivery of Documents................................................8 Section 10. The Closing....................................................8 10.1 Deliveries by Seller................................................8 10.2 Deliveries by Buyer.................................................8 Section 11. Employees......................................................9 Section 12. Post-Closing Covenants.........................................9 12.1 Bulk Transfer.......................................................9 12.2 Further Assurances..................................................9 Section 13. Indemnification................................................10 13.1 Indemnification by Seller...........................................10 13.2 Indemnification by Buyer............................................10 13.3 Certain Limitations.................................................10 Section 14. Brokers and Finders............................................11 Section 15. Post Closing Obligations of Buyer..............................11 Section 16. Termination....................................................11 16.1 Right to Terminate..................................................11 16.2 Material Breach.....................................................11 16.3 Remedies............................................................12 16.4 Right to Damages....................................................12 16.5 Return of Documents on Termination..................................12 Section 17. General Provisions.............................................12 17.1 Definition of Knowledge.............................................12 17.2 Notices.............................................................12 17.3 Confidentiality and Public Announcements............................13 17.4 Binding Nature of Agreement; Assignment.............................14 17.5 Exhibits and Schedules; Entire Agreement............................14 17.6 Controlling Law.....................................................14 17.7 Indulgences, Not Waivers............................................14 17.8 Attorneys' Fees.....................................................14 17.9 Costs and Expenses..................................................15 17.10 Titles Not to Affect Interpretation; Captitalized Terms............15 17.11 Execution in Counterparts..........................................15 17.12 Provisions Separable...............................................15 17.13 Number of Days.....................................................15 17.14 Waiver of Jury Trial...............................................15 17.15 Construction.......................................................15 17.16 Florida Radon Gas Notification.....................................15 ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as of May 24, 2001, by and among CNL RESTAURANTS IV, INC., a Florida corporation ("Buyer"), and PHOENIX RESTAURANT GROUP, INC., a Georgia corporation ("Seller"). A. Seller conducts the business of the ownership and operation of restaurants, including the three (3) restaurants operated under franchises from Denny's, Inc. and/or DFO, Inc., which are more particularly described on Schedule A hereto and made a part hereof (individually, a "Restaurant" and collectively, the "Restaurants"). B. Seller desires to sell to Buyer, and Buyer desires to purchase from Seller, the Restaurants and certain of the assets associated with the Restaurants, on an "AS IS, WHERE IS" basis, and desires to assume certain obligations associated with the Restaurants, all upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter set forth, the parties hereto agree as follows: Section 1. Sale and Purchase. 1.1 ASSETS AND PROPERTIES TO BE SOLD AND PURCHASED. At the Closing (as defined herein), Seller shall sell to Buyer and Buyer shall purchase from Seller, subject to all the terms and conditions of this Agreement, the following assets and properties of Seller with respect to the Restaurants (the "Purchased Assets") free and clear of all liens, claims and encumbrances, except as set forth in Schedule 4.2 hereto: (a) LEASED PROPERTIES AND IMPROVEMENTS. All of the right, title and interest of Seller in and to (i) the use of the real property parcels and buildings constituting the Restaurants (individually, a "Leased Property" and collectively, the "Leased Properties") and all other improvements, fixtures and structures (collectively, the "Improvements") located on, affixed to and/or appurtenant to the Restaurants or the Leased Properties and that are subject to the real property leases (individually, a "Lease" and collectively, the "Leases") set forth on Schedule 1.1(a) hereto, and (ii) the Leases. (b) FRANCHISE AGREEMENTS. All right, title and interest of Seller in, to and under the franchise and/or license agreements with respect to the Restaurants between Seller and Denny's, Inc. and/or DFO, Inc., as applicable (individually, a "Franchise Agreement" and collectively, the "Franchise Agreements") as set forth on Schedule 1.1(b) hereto, provided, however, that (i) Seller on the one hand, and Buyer, on the other hand, shall each be responsible for and shall pay the costs and fees of their respective counsel incurred in connection with the assignment of the Franchise Agreements, and (ii) Seller shall be solely responsible for and shall pay any and all transfer fees to be paid to Denny's, Inc. and/or DFO, Inc., in connection with the assignment of the Franchise Agreements. (c) PERSONAL PROPERTY. All of the right, title and interest of Seller in and to any and all personal property utilized in connection with the businesses conducted in the Restaurants, including, but not limited to, (i) the mechanical systems, fixtures and equipment comprising a part of or attached to or located at the Restaurants on the Closing Date (as herein defined); (ii) any pylons and other signs, silverware, glassware and other utensils and dishes, tables, chairs, chandeliers, lamps, stained or leaded glass, marble tops, fans, televisions, clocks, carpets, drapes, art work, memorabilia, paintings, posters, graphics and other furnishings owned by Seller and comprising a part of or attached to or located in the Restaurants on the Closing Date, including, but not limited to, any furnishings located in business offices or party rooms; (iii) maintenance equipment and tools owned by Seller and located in the Restaurants on the Closing Date; and (iv) stoves, ovens, refrigerators, walk-in cold storage boxes and other kitchen equipment and other machinery, equipment, fixtures, keys, inventory and personal property of every kind and character owned by Seller and located at the Restaurants on the Closing Date, including food, beverages, spirits, china, silver, glassware, paper goods, food preparation items, uniforms, guest checks and other inventory and supplies (collectively, the "Personal Property"). (d) CONTRACTS. All rights and interests of Seller in, to and under all agreements and contracts relating exclusively to the Restaurants, the Leased Properties, the Improvements or the Personal Property (other than the Leases and the Franchise Agreements), including all management, maintenance, supply or service contracts or any other contracts, arrangements or agreements relating exclusively to the Restaurants, the Leased Properties, the Improvements or the Personal Property pursuant to which goods, services, supplies or any other items whatsoever are furnished and/or are to be furnished in connection with the Restaurants, or the repair, maintenance or operation thereof, and all warranties, guarantees and bonds relating exclusively to the Restaurants, the Leased Properties, the Improvements or the Personal Property, together with all other representations, contract rights and transferable and intangible property, miscellaneous rights, benefits or privileges of any kind or character relating exclusively to the Restaurants, the Leased Properties, the Improvements or the Personal Property (collectively, the "Contracts"), including, but not limited to, those set forth in Schedule 1.1(d) hereto; provided, however, that Buyer shall not be obligated to assume or perform any obligation or liability of Seller pursuant to any Contract or agreement except as specifically provided in Section 2.2 hereof. (e) INVENTORY. All inventory located at the Restaurants on the Closing Date, including, but not limited to, all food items, food preparation items, uniforms and guest checks. (f) COMPUTER SOFTWARE AND HARDWARE. All non-proprietary point-of-sale computer software and all hardware located at the Restaurants on the Closing Date and owned, leased or licensed by or to Seller in connection with the operation of the Restaurants, but only to the extent that such software and hardware are not otherwise prohibited from transfer by contract between Seller and the owner or licensor thereof. (g) TELEPHONE NUMBERS. All of Seller's telephone and facsimile numbers presently used by the Restaurants. (h) ANCILLARY ASSETS. All permits, licenses, equipment warranties, certificates of occupancy, governmental approvals, site plans, surveys, plans and specifications, marketing materials and floor plans in the possession of Seller that specifically and only relate to the Purchased Assets, to the extent transferable (the "Ancillary Assets"). (i) DOCUMENTS. All of the right, title and interest of Seller in and to all information and documentation in Seller's possession relating exclusively to the Restaurants, including, but not limited to, surveys, tax assessment records, engineering plans and specifications, as- built drawings, development plans, plats, site plans, zoning materials, leases, guarantees, contracts and combinations to all locks on or in the Restaurants (collectively, the "Documents"). (j) BOOKS AND RECORDS. All of Seller's books, records (including those relating to financial matters and employees), correspondence and files pertaining to ownership, management and/or operation of the Restaurants or to the Purchased Assets other than (i) Seller's 2 corporate minute books and stock books and records, (ii) any confidential or proprietary information regarding Seller's business, (iii) any gratuitous or subjective information contained in employee or personnel files, and (iv) any other information contained in employee or personnel files that Seller may not disclose to Buyer under applicable law. 1.2 ASSETS AND PROPERTIES NOT TO BE PURCHASED AND SOLD. Notwithstanding anything to the contrary contained in this Agreement, the Purchased Assets do not include any of the following: (a) All cash, bank accounts, notes receivable, loans receivable, certificates of deposit, investment securities, credit card accounts receivable from sales generated from the Restaurants prior to the Closing Date, deposits and prepaid expenses, and allowances or credits due from vendors, suppliers or service providers accrued prior to the Closing Date. (b) Any assets or properties of Seller used in or with respect to Seller's business that are not explicitly to be transferred to Buyer pursuant to Section 1.1 hereof. (c) Any Contracts, Ancillary Assets, telephone or facsimile numbers or computer software or hardware that cannot be transferred to Buyer such that Seller has no further liabilities, obligations or accruals with respect to such items accruing in or relating to the period on and after the Closing Date. SECTION 2. LIABILITIES. 2.1 LIABILITIES REMAIN WITH SELLER. Seller shall be responsible for and shall promptly pay or satisfy all liabilities, obligations or accruals relating to the operation of the Restaurants prior to the Closing Date, whether such liabilities, obligations or accruals are known or discovered prior to or after the Closing Date. 2.2 LIABILITIES ASSUMED BY BUYER. Upon the conveyance, transfer and assignment of the Purchased Assets to Buyer in accordance with this Agreement, Buyer shall assume, and shall thereafter pay or satisfy, as they become due, all liabilities, obligations and accruals relating to the operation of the Restaurants on and after the Closing Date (the "Liabilities"). Buyer shall pay, perform or otherwise dispose of all non- delinquent Liabilities and obligations of Seller in respect of the Restaurants accruing or relating to the period on and after the Closing Date pursuant to the terms and provisions of all operating contracts, commitments, leases and other agreements. At the Closing Date and/or within a reasonable period of time after the Closing Date, as the case may be, to the extent not otherwise provided for by any other provision of this Agreement, Buyer and Seller shall allocate any obligations or liabilities relating to the Restaurants (such as equipment and other operating lease payments, property tax payments and the like) consistent with the agreement by Buyer and Seller that the obligations, liabilities and accruals arising from the operation of the Restaurants by Seller prior to the Closing Date are borne by Seller and the obligations, liabilities and accruals arising from the operation of the Restaurants by Buyer on or after the Closing Date are borne by Buyer. SECTION 3. PURCHASE PRICE. 3.1 AMOUNT AND DEPOSIT. (a) As full and complete payment for the Purchased Assets, Buyer shall pay Seller the aggregate sum of Four Million and No/100 Dollars ($4,000,000.00) (the "Purchase Price"). 3 (b) Buyer shall deposit with Seller an amount equal to the Purchase Price (the "Deposit") payable in cash, certified check, wire transfer or other "good funds" verifiable to Seller as follows: (i) on or before May 25, 2001, Buyer shall deposit with Seller the amount of Two Million Two Hundred Thousand and No/100 Dollars ($2,200,000.00), and (ii) on or before June 6, 2001, Buyer shall deposit with Seller the amount of One Million Eight Hundred Thousand and No/100 Dollars ($1,800,000.00). Seller shall not be obligated to segregate all or any portion of the Deposit or hold all or any portion of the Deposit in trust. Seller shall have the right to commingle all or any portion of the Deposit with Seller's other funds and to utilize all or any portion of the Deposit for Seller's operational needs or other business purposes. 3.2 ALLOCATION OF PURCHASE PRICE. Buyer and Seller agree that the total Purchase Price (including Liabilities assumed) shall be allocated as set forth in Schedule 3.2 to be attached hereto. Prior to Closing, Buyer and Seller shall agree upon the allocations to be set forth in Schedule 3.2 to be attached hereto. Buyer and Seller agree that the allocation set forth in Schedule 3.2 to be attached hereto will have been made in accordance with the requirements of Section 1060 of the Internal Revenue Code of 1986, as amended, and any applicable Treasury Regulations promulgated thereunder. Buyer and Seller, each at its own expense, also agree to file appropriate forms with the Internal Revenue Service setting forth the information required to be furnished to the Internal Revenue Service by Section 1060 and the applicable Treasury Regulations thereunder. SECTION 4. SELLER'S REPRESENTATIONS AND WARRANTIES. Seller represents and warrants as follows: 4.1 CORPORATE STATUS AND AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, has the requisite corporate power and authority to own, operate and lease its assets and properties and to carry on its business as now being conducted. Upon satisfaction of the condition set forth in Section 9.3 hereof, the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the fulfillment of the terms hereof will have been validly authorized by all necessary corporate action of Seller and this Agreement shall constitute the valid, legal and binding obligation of Seller enforceable in accordance with its terms. 4.2 OWNERSHIP OF ASSETS AND PROPERTIES. Except as set forth on Schedule 4.2 hereto, Seller has good title to all of the Purchased Assets. Except as set forth in Schedule 4.2 hereto, all of the Purchased Assets are owned free and clear of all liens, mortgages, pledges, security interests, restrictions, prior assignments, encumbrances and claims. 4.3 CONDITION OF ASSETS AND PROPERTIES. Except as set forth on Schedule 4.3 hereto, the Purchased Assets are in operating condition and the Restaurants are operable as a going business. 4.4 LEASES, CONTRACTS, AGREEMENTS AND OTHER COMMITMENTS. Except as set forth on Schedule 4.4 hereto, to Seller's knowledge (as defined herein), after reasonable inquiry, all mortgages, leases, contracts, agreements and other obligations (including the Leases, the Franchise Agreements, the Contracts and the Documents) with respect to the Restaurants to which Seller is a party or by which Seller is bound are valid, binding and enforceable in accordance with their terms, and no default on the part of Seller exists under any such mortgage, lease, contract, agreement or other obligation that would have a material adverse effect upon the operation of the Restaurants. 4.5 COMPLIANCE WITH LAW AND OTHER REGULATIONS. Except as set forth on Schedule 4.5 hereto, to Seller's knowledge, after reasonable inquiry, Seller has operated the Restaurants in 4 material compliance with all requirements (including, to Seller's knowledge, those relating to environmental matters) of federal, state and local law and all requirements of all governmental bodies and agencies having jurisdiction over it with respect to the Restaurants, the operation of the Restaurants and the use of the Purchased Assets. 4.6 LIABILITIES. Except as set forth on Schedule 4.6 hereto and except and to the extent reflected in this Agreement or any other Schedule or Exhibit hereto, Seller, to Seller's knowledge, after reasonable inquiry, does not have any obligations or liabilities with respect to the Purchased Assets, whether related to tax or non-tax matters, known or unknown, matured or unmatured, liquidated or unliquidated, fixed or contingent, or otherwise, other than obligations or liabilities incurred in the ordinary course of its business or disclosed to the extent required by this Agreement. 4.7 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this Agreement, nor any Schedule or Exhibit hereto, contains any untrue statement of a material fact with respect to Seller or the Restaurants or omits to state a material fact with respect to Seller or the Restaurants required to be stated in order to make such statement, document or other instrument not materially misleading. SECTION 5. BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants as follows: 5.1 CORPORATE STATUS AND AUTHORITY. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida, has the requisite corporate power and authority to own, operate and lease the Restaurants and the Purchased Assets, and is duly qualified to conduct the business of operating the Restaurants in the jurisdictions in which the Restaurants are located. Upon satisfaction of the condition set forth in Section 8.4 hereof, the execution and delivery of this Agreement, the consummation of the transactions contemplated hereby and the fulfillment of the terms hereof will have been validly authorized by all necessary corporate action of Buyer and this Agreement shall constitute the valid, legal and binding obligation of Buyer enforceable in accordance with its terms. 5.2 KNOWLEDGE REGARDING THE BUSINESS. Buyer acknowledges that (i) Buyer has had the opportunity to review the financial condition, assets, liabilities and results of operations pertaining to the operations of the Restaurants, (ii) all materials and information requested by Buyer have been provided to Buyer, and (iii) Buyer has conducted its own independent physical examination and inspection of the Restaurants and the Purchased Assets (including a review of the books, contracts, documents and records related to the operation of the Restaurants) and has made its own independent determination of the value thereof. Buyer possesses sufficient knowledge of and information pertaining to the Restaurants to enable it to make an informed decision regarding the purchase of the Purchased Assets and assumption of the Liabilities pursuant to this Agreement. 5.3 CONDITION OF ASSETS. Buyer has had an opportunity to conduct its own physical inspections of the Restaurants and Purchased Assets. BUYER UNDERSTANDS THAT, EXCEPT TO THE EXTENT EXPLICITLY SET FORTH HEREIN, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE PURCHASED ASSETS, INCLUDING, BUT NOT LIMITED TO, THEIR MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, AND BUYER ACKNOWLEDGES THAT THE PURCHASED ASSETS ARE BEING SOLD ON AN "AS IS, WHERE IS" BASIS. 5.4 STATEMENTS AND OTHER DOCUMENTS NOT MISLEADING. Neither this Agreement, nor any Schedule or Exhibit hereto, contains any untrue statement of a material fact with 5 respect to Buyer or omits to state a material fact with respect to Buyer required to be stated in order to make such statement, document or other instrument not materially misleading. 5.5 FACTS AND CIRCUMSTANCES WITH RESPECT TO SELLER. Buyer has no knowledge of any facts or circumstances that would render any of Seller's representations or warranties as set forth in this Agreement untrue or incomplete. Buyer has no knowledge of any obligations or liabilities with respect to the Restaurants or the Purchased Assets, whether related to tax or non-tax matters, known or unknown, matured or unmatured, liquidated or unliquidated, fixed or contingent, or otherwise, except and to the extent reflected in this Agreement or any Schedule or Exhibit hereto. SECTION 6. CONTINUATION AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the representations and warranties contained in this Agreement shall be true and correct on the date hereof and as of the Closing Date with the same force and effect as if made on and as of that date, except to the extent, if any, that such representations and warranties shall be affected by transactions contemplated by this Agreement. All such representations and warranties shall survive the consummation of the transactions contemplated by this Agreement. SECTION 7. SELLER'S COVENANTS. Seller agrees that, between the date hereof and the Closing Date, Seller shall (i) operate the Restaurants only in the regular, ordinary and usual course and manner of Seller's general business practices, (ii) maintain all supplies, inventory and consumables at levels reasonably commensurate with those customarily maintained by Seller in its ordinary course of business, and (iii) make such repairs to and replacements of the mechanical systems, fixtures and equipment comprising a part of or attached to or located at the Restaurants on the date of this Agreement which are necessary to cause such mechanical systems, fixtures and equipment to be in reasonable operating condition on the Closing Date. SECTION 8. BUYER'S CONDITIONS PRECEDENT TO THE CLOSING. The obligations of Buyer hereunder and its obligations to consummate the Closing provided for herein shall be subject to the following conditions precedent, any one or more of which may be waived in writing by Buyer: 8.1 COMPLIANCE WITH AGREEMENTS AND COVENANTS. Seller shall have performed and complied with each of its agreements, covenants and obligations to be performed on or prior to the Closing Date except those calling for performance after the Closing Date. 8.2 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at the Closing Date, with the same force and effect as if made on and as of that date. 8.3 LEASE ASSIGNMENTS. At the Closing, Buyer and Seller shall have entered into an Assignment and Assumption of Lease substantially in the form attached hereto as Exhibit A with respect to each Leased Property (individually, a "Lease Assignment" and collectively, the "Lease Assignments"). Each Lease Assignment shall include a full release of Seller from all obligations and liability under the related Lease. To the extent required by the Leases, Seller shall have obtained the consent of the landlord under each Lease to the Lease Assignment relating to such Lease. Buyer shall cooperate with Seller in connection with obtaining the required landlord consents. 8.4 CORPORATE APPROVALS. All necessary corporate action on the part of Buyer adopting this Agreement and approving the transactions contemplated by this Agreement shall have been taken within thirty (30) days after the date of this Agreement. 6 8.5 CONSENTS AND APPROVALS. Buyer shall have obtained all necessary consents and approvals from its lenders or creditors whose consent or approval is necessary to the performance by Buyer of the transactions contemplated by this Agreement. To the extent required under the Franchise Agreements, Denny's, Inc. and/or DFO, Inc., as the case may be, shall have approved the transactions contemplated hereby, including the transfer of the Franchise Agreements to Buyer, and shall have waived their rights of first refusal under the Franchise Agreements. Seller and Buyer shall use their respective best efforts to obtain such approvals and waivers of the rights of first refusal from Denny's, Inc. and/or DFO, Inc., as the case may be. Seller shall have obtained the consents of any owners of any of the Purchased Assets that are leased to Seller to the assignment of such leases to Buyer and the release of Seller from any liabilities or obligations thereunder except the liabilities Seller has agreed to pay as provided in this Agreement. Buyer shall cooperate in obtaining any such consents. 8.6 LITIGATION. No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated by this Agreement. 8.7 DELIVERY OF DOCUMENTS. All documents required to be delivered at the Closing by Seller under Section 10.1 hereof shall have been delivered or tendered at the Closing SECTION 9. SELLER'S CONDITIONS PRECEDENT TO THE CLOSING. The obligations of Seller hereunder and its obligation to consummate the Closing provided for herein shall be subject to the following conditions precedent, any one or more of which may be waived in writing by Seller: 9.1 COMPLIANCE WITH AGREEMENTS AND COVENANTS. Buyer shall have performed and complied with each of its agreements, covenants and obligations to be performed hereunder on or prior to the Closing Date except those calling for performance after the Closing Date. 9.2 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer contained in this Agreement shall have been true and correct at the Closing Date, with the same force and effect as if made on and as of that date. 9.3 CORPORATE APPROVALS. All necessary corporate action on the part of Seller adopting this Agreement and approving the transactions contemplated by this Agreement shall have been taken within thirty (30) days after the date of this Agreement. 9.4 WAIVERS, CONSENTS AND APPROVALS. Seller shall have obtained all waivers, consents and approvals from any of Seller's lenders or creditors whose waiver, consent or approval is deemed necessary or desirable by Seller in Seller's sole discretion to the consummation of the transactions under this Agreement. To the extent required under the Franchise Agreements, Denny's, Inc. and/or DFO, Inc., as the case may be, shall have approved the transactions contemplated hereby, including the transfer of the Franchise Agreements to Buyer, and shall have waived their rights of first refusal under the Franchise Agreements. Seller and Buyer shall use their respective best efforts to obtain such approvals and waivers of the rights of first refusal from Denny's, Inc. and/or DFO, Inc., as the case may be. To the extent required by Section 8.3 hereof, Seller shall have obtained such landlord consents as may be required in connection with the Lease Assignments, provided, however, that Buyer has cooperated with Seller in obtaining such consents. Seller shall have obtained the consents of any owners of any of the Purchased Assets that are leased to Seller to the assignment of such leases to Buyer and the release of Seller from any liabilities or obligations thereunder except the liabilities Seller has agreed to pay as provided in this Agreement. Buyer shall cooperate in obtaining any such consents. 7 9.5 LITIGATION. No investigation, suit, action or other proceeding shall be threatened or pending before any court or governmental agency that seeks restraint, prohibition, damages or other relief in connection with this Agreement or the consummation of the transactions contemplated by this Agreement. 9.6 DELIVERY OF DOCUMENTS. All documents required to be delivered by Buyer at the Closing under Section 10.2 hereof shall have been delivered or shall be tendered at the Closing. SECTION 10. THE CLOSING. Upon satisfaction or waiver in writing of all conditions precedent set forth in Sections 8 and 9 hereof, the closing under this Agreement (the "Closing") will be at the time and place designated by Buyer upon at least seven (7) business days' notice to Seller. If not sooner designated by Buyer, the Closing shall take place at the offices of Zimmerman, Shuffield, Kiser & Sutcliffe, P.A., in Orlando, Florida, at 10:00 a.m. on August 31, 2001, or at such other date, time and place as may be agreed upon by Seller and Buyer (the "Closing Date"); provided, however, that the Closing Date shall not extend beyond September 30, 2001, unless otherwise agreed by Seller and Buyer. 10.1 DELIVERIES BY SELLER. At the Closing, Seller shall deliver: (a) Such bills of sale, instruments of assignment and other instruments and documents as may be necessary to convey to Buyer title to all the applicable assets and properties to be transferred hereunder, including a Bill of Sale, Assignment and Assumption Agreement (the "Bill of Sale") substantially in the form attached hereto as Exhibit B and the Assignment of Franchise Agreements (the "Franchise Assignment") substantially in the form attached hereto as Exhibit C. (b) The Lease Assignments. (c) The Certificate of the Secretary or other officer of Seller certifying the resolutions constituting all necessary corporate action of Seller to authorize or ratify the consummation of the transactions provided for in this Agreement. (d) An opinion of counsel of Dinsmore & Shohl LLP, as counsel for Seller, to the effect as set forth in Exhibit D hereto. (e) Copies of all waivers, consents or approvals that Seller is responsible for obtaining under this Agreement. All certificates and other documents delivered by Seller shall be in form reasonably satisfactory to Buyer and counsel for Buyer. 10.2 DELIVERIES BY BUYER. At the Closing, Buyer shall deliver: (a) The Purchase Price in the form of a credit for the Deposit. (b) The Lease Assignments. (c) The Bill of Sale and Franchise Assignment. (d) The Certificate of Buyer's Secretary certifying the resolutions constituting all necessary corporate action of Buyer to authorize the consummation of the transactions provided for in this Agreement. 8 (e) A Certificate of Good Standing (or Qualification) for Buyer from the Department of State of the State of Florida, dated within fifteen (15) days prior to the Closing, or other evidence of such qualification that shall be satisfactory to Seller in its reasonable discretion. (f) An opinion of counsel of Zimmerman, Shuffield, Kiser & Sutcliffe, P.A., as counsel for Buyer, to the effect as set forth in Exhibit E hereto. (g) Copies of all consents or approvals described in Section 8.5 hereof. All certificates and other documents delivered by Buyer shall be in form reasonably satisfactory to Seller and counsel for Seller. SECTION 11. EMPLOYEES. Simultaneously with or immediately following the Closing, Seller shall terminate all employees employed at the Restaurants by Seller, excluding any employees whose employment responsibilities extend to restaurants owned or operated by Seller other than the Restaurants. Buyer shall offer employment to all employees employed at the Restaurants by Seller as of the Closing (except that Buyer shall have the option to offer employment to, but shall not be required to offer employment to, the District Managers whose employment responsibilities extend to the Restaurants) identified to Buyer as such by Seller prior to the Closing (individually, a "Continuing Employee" and collectively, the "Continuing Employees"); provided, however, that nothing in this Agreement or otherwise shall (i) limit in any way the right of Buyer to change the rate of pay or salary or benefits of any Continuing Employee, or to assume any of Seller's liabilities with respect to such Continuing Employees for vacation, sick pay, bonuses or the like, or (ii) prevent Buyer from terminating the employment of any Continuing Employee after the Closing Date. Seller hereby agrees to indemnify, defend and hold Buyer harmless from and against any liabilities, claims, losses, fines or liabilities with respect to, and against the claims of any persons alleging violations of, any pension, retirement, profit sharing, compensation, fringe benefit, health or other insurance, or any other employee benefit plans, including any "employee benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended, arising with respect to such persons' employment at the Restaurants prior to the Closing Date, and all other employee claims arising from or related to incidents occurring prior to the Closing Date, and no facts or circumstances exist that would cause Buyer to be liable to any person in connection with any such plans of Seller. SECTION 12. POST-CLOSING COVENANTS. 12.1 BULK TRANSFER. Seller and Buyer hereby acknowledge and agree that, to expedite the closing of the transactions pursuant to this Agreement, Buyer shall be under no obligation to comply with any applicable "Bulk Transfer" provisions of the jurisdiction in which the Restaurants are located. Seller shall pay all of its liabilities, including all accounts payable, in accordance with the terms of Section 2.1 hereof, and Seller shall indemnify and hold harmless Buyer, upon demand, from and against any and all liability incurred by Buyer by reason of Seller's failure to pay any accounts payable or by reason of the failure of Buyer to comply with the requirements of such "Bulk Transfer" provisions. Seller acknowledges that the covenants made in this Section 12.1 hereof have been made with the express purpose of inducing Buyer to waive compliance with such "Bulk Transfer" provisions. The provisions of this Section 12.1 shall survive for the duration of the statute of limitations provisions of the "Bulk Transfer" provisions of the jurisdiction in which the Restaurants are located. 12.2 FURTHER ASSURANCES. Seller and Buyer shall execute and deliver all such other instruments and take all such other action as any party may reasonably request from time to time, before or after the Closing, in order to effectuate the transactions provided for in this Agreement. The parties shall cooperate with each other and with their respective counsel and accountants in connection 9 with any steps to be taken as a part of their respective obligations under this Agreement, including the preparation of financial statements. Buyer and Seller shall use their respective best efforts to obtain any waivers, approvals or consents of third parties that may be required in order to consummate the transactions contemplated by this Agreement. To the extent that the terms of any contract, commitment, lease or other agreement to which Seller is a party and that is to be assigned or transferred to Buyer pursuant to this Agreement (each, an "Other Agreement") requires the consent of any other party to such assignment or transfer, Seller and Buyer shall use their respective best efforts to obtain such consent, except that, if Buyer closes notwithstanding the failure of Seller to obtain any one or more consents under any Other Agreement as of the Closing Date (i) Buyer shall be responsible for all payments, obligations and other liabilities arising under each Other Agreement on and after the Closing Date, and (ii) Seller's failure to obtain any of such consents shall not constitute a breach by Seller of any representation, warranty or covenant made by Seller in this Agreement. SECTION 13. INDEMNIFICATION. 13.1 INDEMNIFICATION BY SELLER. If at any time hereafter it is determined that any representation, warranty or covenant of Seller contained in this Agreement or in any Schedule, Exhibit or document delivered pursuant hereto was materially incomplete, incorrect or untrue when made, or that Seller breached any representation, warranty, covenant or agreement contained in this Agreement and in either case Buyer had no knowledge as of the Closing Date that such representation, warranty, covenant or agreement was incomplete, incorrect or untrue in any respect or that any such covenant or agreement had been or would be breached, Seller shall promptly pay Buyer the amount of the actual loss, expense or damage suffered or incurred by Buyer which would not have been suffered or incurred if the facts set forth in those representations or warranties had been correct or those covenants and agreements had not been breached. Seller shall indemnify and hold Buyer and its employees, agents and representatives harmless from and against all liabilities, suits, actions, proceedings, claims, demands, losses, damages, fees, costs, taxes, penalties and expenses (including, but not limited to, reasonable attorneys' fees) causedby, arising out of or otherwise related to the ownership of the Purchased Assets and the operation of the Restaurants prior to the Closing Date. 13.2 INDEMNIFICATION BY BUYER. If at any time hereafter it is determined that any representation, warranty or covenant of Buyer contained in this Agreement or in any certificate, Schedule, Exhibit or document delivered pursuant hereto was materially incomplete, incorrect or untrue, or that Buyer breached any covenant or agreement contained in this Agreement, Buyer shall promptly pay Seller the amount of the actual loss, expense or damage suffered or incurred by Seller that would not have been suffered or incurred if the facts set forth in those representations or warranties had been correct or those covenants and agreements had not been breached. Buyer shall indemnify and hold Seller, and its employees, agents and representatives harmless for, from and against all liabilities, suits, actions, proceedings, claims, demands, losses, damages, fees, costs, taxes, penalties and expenses (including, but not limited to, reasonable attorneys' fees) caused by, arising out of or otherwise related to the ownership of the Purchased Assets and operation of the Restaurants on and after the Closing Date. 13.3 CERTAIN LIMITATIONS. The rights of indemnification provided under this Section 13 are intended to be and shall constitute the sole and exclusive remedy of any party hereto for any breach of any representation, warranty or covenant contained in this Agreement or the operation of the Restaurants. The obligations of a party to indemnify any other party under Sections 13.1 and 13.2 hereof shall survive until the first anniversary of the Closing Date, except that (i) an indemnifying party's obligations shall continue as to any matter to which a claim identified as a claim for indemnification pursuant to this Agreement is submitted in writing to the indemnifying party prior to the first anniversary of the Closing Date, and (ii) a claim for indemnification arising out of either injury to a person or an employee's employment at the Restaurants shall survive until the fourth anniversary of the Closing Date. 10 SECTION 14. BROKERS AND FINDERS. Seller acknowledges and agrees that it has engaged CNL Advisory Services, Inc., to act as Seller's advisor in connection with the transactions contemplated by this Agreement, and that Seller shall be responsible for and shall pay the fees of CNL Advisory Services, Inc., in connection with the transactions contemplated by this Agreement. Except as set forth in the preceding sentence, each of the parties hereto represents and warrants to the other that it has not employed or retained any broker or finder in connection with the transactions contemplated by this Agreement and that it has not had any dealings with any person which may entitle that person to a fee or commission from the other party hereto. Each of the parties shall indemnify and hold the other harmless for, from and against any claim, demand or damages whatsoever by virtue of any arrangement or commitment made by it with or to any person that may entitle such person to any fee or commission from the other party to this Agreement. SECTION 15. POST CLOSING OBLIGATIONS OF BUYER. Within seven (7) days after the Closing Date, Buyer shall have made such arrangements as may be necessary to transfer to Buyer any obligations or liabilities relating to the Restaurants and the Purchased Assets, including, but not limited to, telephone bills and utility charges. SECTION 16. TERMINATION. 16.1 RIGHT TO TERMINATE. Notwithstanding anything to the contrary contained herein, this Agreement and the transactions contemplated hereby may be terminated: (a) at any time by written agreement between Seller and Buyer; (b) by Seller at any time after September 30, 2001, if the conditions precedent set forth in Section 9 hereof are not satisfied or waived in writing by Seller; (c) by Buyer at any time after September 30, 2001, if the conditions precedent set forth in Section 8 hereof are not satisfied or waived in writing by Buyer; (d) by Seller at any time prior to the Closing upon the return to Buyer of the portion of the Deposit paid up to the date of termination, less any amounts otherwise due to Seller from Buyer pursuant to this Agreement. Buyer shall not be entitled to interest on any such returned Deposit (or portion thereof); (e) by Seller if the condition precedent to Buyer's obligations set forth in Section 8.4 hereof is not satisfied within the time period set forth therein; and (f) by Buyer if the condition precedent to Seller's obligations set forth in Section 9.3 hereof is not satisfied within the time period set forth therein. 16.2 MATERIAL BREACH. This Agreement may be terminated upon a material breach by either party, except that if such breach does not place any rights of the other party in immediate jeopardy, and is within the reasonable power of the party in breach to cure within thirty (30) days after receipt of written notice thereof, then such breach shall not create a right to terminate unless otherwise expressly provided herein or unless and until the party in breach shall have received written notice thereof and a period of thirty (30) days shall have elapsed, during which period such party may correct or cure such breach, upon failure of which a right to terminate shall be deemed to exist without further notice or demand of any kind. If, however, such breach cannot reasonably be cured within a thirty (30) day period and the party in breach is diligently pursuing a cure of such breach, then such party in breach shall, after 11 receiving the notice specified in this Section 16.2, have a reasonable period of time within which to cure such breach. 16.3 REMEDIES. No party shall be limited to the termination right granted in Section 16.1 hereof by reason of the nonfulfillment of any condition precedent to such party's closing obligations or a breach of another party's representations and warranties, but may, in the alternative, elect to do one of the following: (a) Proceed to Closing despite the nonfulfillment of any condition precedent to its obligation to proceed to Closing, it being understood that consummation of the transactions contemplated herein shall not be deemed a waiver of a breach of any representation, warranty or covenant or of any party's rights and remedies with respect thereto. (b) Decline to proceed to Closing, terminate this Agreement as provided in Section 16.1 hereof, and thereafter seek damages as limited by, and only to the extent permitted in, Section 16.4 hereof. (c) If this Agreement is terminated, return by Seller to Buyer of an amount equal to the portion of the Deposit paid up to the date of termination, less any amounts otherwise due to Seller from Buyer pursuant to this Agreement, provided, however, that such termination was not the result of either the failure to satisfy any of the conditions precedent set forth in Section 8 hereof or a breach of this Agreement by Buyer. Buyer shall not be entitled to interest on any such returned Deposit (or portion thereof). 16.4 RIGHT TO DAMAGES. If this Agreement is terminated pursuant to this Section 16, no party hereto shall have any liability or obligation to the other; provided, however, that each party shall remain liable for (i) any willful breach of any of such party's representations, warranties and covenants contained in this Agreement, and (ii) any willful failure by the party to perform any of its or their obligations or agreements contained in this Agreement, in which case the party shall be liable for all of the other party's out-of-pocket costs and expenses which were incurred in connection with the negotiations and preparation of this Agreement and all of the other documents related to this transaction and those costs and expenses which are incurred by the other party in pursuing such rights and remedies (including reasonable attorneys' fees), in an amount not to exceed Twenty- Five Thousand and No/100 Dollars ($25,000.00). 16.5 RETURN OF DOCUMENTS ON TERMINATION. In the event of a termination, (i) Buyer agrees to return to Seller any and all documents and copies and extracts therefrom that Buyer obtained pursuant to this Agreement, and (ii) Seller agrees to return to Buyer any and all documents and copies and extracts therefrom that Seller obtained pursuant to this Agreement. SECTION 17. GENERAL PROVISIONS. 17.1 DEFINITION OF KNOWLEDGE. As used in this Agreement, unless expressly provided otherwise in this Agreement (i) the term "knowledge" with respect to any natural person shall mean such person's actual knowledge, without inquiry, and (ii) the term "knowledge" with respect to any entity shall mean the actual knowledge, without inquiry, of such entity's executive officers. 17.2 NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given, made and received when delivered against receipt or upon actual receipt of a facsimile or of registered or certified mail, postage prepaid, return receipt requested, addressed as set forth below: 12 If to Buyer: CNL Restaurants IV, Inc. 450 South Orange Avenue Orlando, Florida 32801 Attention: Robert Bourne Fax: (407) 540-2211 with a copy to: Zimmerman, Shuffield, Kiser & Sutcliffe, P.A. Landmark Center One, Suite 600 315 East Robinson Street Orlando, Florida 32801 Attention: Joseph C. L. Wettach, Esq. Fax: (407) 425-2747 If to Seller: Phoenix Restaurant Group, Inc. 1210 Briarville Road Building E Madison, Tennessee 37115 Attention: President Fax: (615) 865-2064 with a copy to: Dinsmore & Shohl LLP 414 Union Street Suite 1100 Nashville, Tennessee 37219 Attention: David J. White, Esq. Fax: (615) 313-3300 Any party may alter the address to which communications or copies are to be sent by giving notice of such change of address in conformity with the provisions of this Section 17.2 for the giving of notice. 17.3 CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS. Any public announcement or similar publicity with respect to this Agreement or the transactions contemplated hereby will be issued, if at all, at such time and in such manner as Seller and Buyer mutually agree upon. Unless consented to by the other party in advance, each of the parties to this Agreement shall, and shall cause its respective officers, directors, shareholders, employees, affiliates, accountants, counsel and other authorized representatives to, keep this Agreement strictly confidential and shall not make any disclosure of the contents of this Agreement or any information obtained from the other party hereto in connection with the transactions contemplated hereby to any person except to the extent (i) required to comply with the terms of this Agreement; (ii) reasonably necessary to enable Buyer to conduct its due diligence as contemplated herein; (iii) the disclosing party can establish that such information has become publicly available other than as a result of a breach of this Agreement or any other agreement between the parties hereto; (iv) disclosure is required in any judicial or administrative proceedings, pursuant to court order or decree or applicable law, or by any governmental or regulatory authority, provided, however, that the 13 party required to make such disclosure shall give the other party notice of such request as promptly as practicable and shall use its good faith efforts to obtain reasonable assurance that confidential treatment will be accorded to such information. Notwithstanding the foregoing, however, Seller may make any public disclosure that it believes in its good faith to be required by applicable law or the regulations of the Securities and Exchange Commission. 17.4 BINDING NATURE OF AGREEMENT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective, successors and assigns. Buyer may not assign or transfer its rights or obligations under this Agreement without the prior written consent of Seller, which Seller shall not unreasonably withhold. Nothing in this Agreement is intended to confer any rights or benefits to any third party. 17.5 EXHIBITS AND SCHEDULES; ENTIRE AGREEMENT. All Exhibits and Schedules referred to herein or attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. This Agreement, together with the Exhibits and Schedules hereto, contains the entire agreement and understanding among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements, understandings, inducements and conditions, express or implied, oral or written, of any nature whatsoever with respect to the subject matter hereof. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified or amended other than by an agreement in writing signed by the parties hereto, provided, however, that Seller shall have the right, without the consent of Buyer, to supplement, amend or update any of the Schedules hereto prior to the Closing Date by providing a supplemented, amended or updated Schedule to Buyer so long as no such supplement, amendment or update of a Schedule hereto delivered prior to the Closing Date discloses information which has a material adverse effect upon the transactions contemplated by this Agreement. Notwithstanding the fact that the Schedules attached hereto are numbered and have been prepared to relate to specific representations and warranties contained in this Agreement, each of the representations and warranties made herein is modified and supplemented by each of the disclosures in the Schedules. 17.6 CONTROLLING LAW. THIS AGREEMENT AND ALL QUESTIONS RELATING TO ITS VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT, SHALL BE GOVERNED BY AND CONSTRUED, INTERPRETED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA, NOTWITHSTANDING ANY FLORIDA OR OTHER CONFLICT- OF-LAW PROVISIONS TO THE CONTRARY. 17.7 INDULGENCES, NOT WAIVERS. Neither the failure nor any delay on the part of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege, nor shall any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 17.8 ATTORNEYS' FEES. The party prevailing in any legal proceeding hereunder shall be entitled to recover from the other party or parties all costs, expenses and attorneys' fees incurred in connection with the enforcement of its rights and remedies. For the purpose of this Section 17.8, the "prevailing party" shall mean, in the case of the claimant, one who is successful in obtaining substantially all of the relief sought, and in the case of a defendant or respondent, one who is successful in denying substantially all of the relief sought by a claimant. 14 17.9 COSTS AND EXPENSES. Seller shall be responsible for and shall pay all payments to lessors of any of the Purchased Assets in connection with the assignment of such leases, or costs and expenses related to the transactions contemplated by the Lease Assignments. Buyer shall be responsible for and shall pay all costs and expenses related to obtaining any title insurance policies or environmental reports desired by Buyer or its lenders in connection with this Agreement or the Lease Assignments. Except as set forth in the preceding sentences and Section 1.1(b) with respect to the assignment of the Franchise Agreements, each party shall bear its own costs and expenses incurred in connection with the negotiation, preparation and execution of this Agreement, the obtaining of necessary approvals thereof, and the Closing under this Agreement and all matters incident thereto, including fees and expenses of counsel, accountants, investment bankers and other experts. 17.10 TITLES NOT TO AFFECT INTERPRETATION; CAPITALIZED TERMS. The titles of Sections contained in this Agreement are for convenience only, and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. Capitalized terms used in the Schedules and Exhibits hereto and not otherwise defined therein shall have the meanings ascribed to them in this Agreement. 17.11 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. Any photographic or xerographic copy of this Agreement, with all signatures reproduced on one or more sets of signature pages, shall be considered for all purposes as if it were an executed counterpart of this Agreement. 17.12 PROVISIONS SEPARABLE. The provisions of this Agreement are independent and separable from each other, and no provision shall be affected or rendered invalid or unenforceable by virtue of the fact that for any reason any other or others of them may be invalid or unenforceable in whole or in part. 17.13 NUMBER OF DAYS. In computing the number of days for purposes of this Agreement, all days shall be counted, including Saturdays, Sundays and bank holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or bank holiday, then the final day shall be deemed to be the next day which is not a Saturday, Sunday or bank holiday. 17.14 WAIVER OF JURY TRIAL. EACH PARTY HERETO IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 17.15 CONSTRUCTION. The parties hereto acknowledge that each party was represented by legal counsel (or had the opportunity to be represented by legal counsel) in connection with this Agreement and that each of them and its counsel have reviewed and revised this Agreement, or have had an opportunity to do so, and that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement or any amendments or any Exhibits or Schedules hereto or thereto. 17.16 FLORIDA RADON GAS NOTIFICATION. "RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state 15 guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department." IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. BUYER: CNL RESTAURANTS IV, INC., a Florida corporation By: /s/ -------------------------------- Robert A. Bourne, President SELLER: PHOENIX RESTAURANT GROUP, INC., a Georgia corporation By: /s/ -------------------------------- Title: ----------------------------- 16 Exhibits and schedules omitted due to immateriality. EX-10.5 4 pmodq2.txt MODIFICATION TO CONSOLIDATED INTERIM NOTE MODIFICATION OF CONSOLIDATED INTERIM PROMISSORY NOTE REVISING MATURITY DATE THIS MODIFICATION OF CONSOLIDATED INTERIM PROMISSORY NOTE REVISING MATURITY DATE (hereinafter referred to as the "Agreement") is made and entered into as of the 31st day of March, 2001, by and between CNL APF PARTNERS, LP, a Delaware limited partnership, whose address is 450 South Orange Avenue, Orlando, Florida 32801 (hereinafter referred to as the "Lender"), and PHOENIX RESTAURANT GROUP, INC., a Georgia corporation, f/k/a DENAMERICA CORP., a Georgia corporation (hereinafter referred to as "PRG"). W I T N E S S E T H: ------------------- WHEREAS, Lender is the owner and holder of a Consolidated Interim Balloon Promissory Note in the original consolidated principal amount of TWENTY-TWO MILLION THREE HUNDRED THOUSAND AND NO/100 DOLLARS ($22,300,000.00), executed by PRG in favor of Lender, dated June 30, 1999, as modified by that certain Waiver, Extension and Release of Lien Agreement dated as of January 26, 2001 and as otherwise modified and/or extended (hereinafter referred to as the "Note"); and WHEREAS, PRG has requested that the maturity date set forth in the Note be modified to reflect an extension of the maturity date to December 31, 2001; and WHEREAS, Lender and PRG have agreed to modify the Note to extend the Maturity Date. NOW THEREFORE, in consideration of the premises hereof, and the mutual covenants contained herein, and of the sum of TEN AND NO/100 DOLLARS ($10.00) in hand paid by PRG to Lender, the receipt and sufficiency of which is hereby acknowledged, it is agreed as follows: 1. RECITALS CORRECT. The recitals included in this Agreement are not mere recitals, but constitute binding stipulations of fact by all of the parties hereto. 2. REPRESENTATIONS OF PRG. In order to induce Lender to enter into this Agreement, PRG does hereby acknowledge, warrant, and represent to and in favor of Lender that (a) the total cumulative principal balance of the indebtedness represented by the Note as of the Effective Date (as hereinafter defined) is TWENTY-TWO MILLION SIXTY-NINE THOUSAND ONE HUNDRED EIGHTY-SIX AND 37/100 DOLLARS ($22,069,186.37) and that the outstanding accrued interest as of the Effective Date is THREE HUNDRED EIGHTY-SIX THOUSAND TWO HUNDRED TEN AND 76/100 DOLLARS ($386,210.76) and that said indebtedness is due from PRG to Lender in accordance with the terms of the Note as herein modified, free from any defense, claim, or right to set-off; and (b) other than the Loan Documents (as defined in the Note), there are no deeds of trust, liens or other encumbrances against the Property (as defined in the Note), and that there are no suits, judgments, bankruptcies or executions pending against PRG in any court which could in any way adversely affect the title to the Property. 3. THE NOTE: Maturity Date: The maturity date of the Note which is set forth in the first and second paragraphs of the Note is hereby amended, modified and changed from March 31, 2001 to December 31, 2001. 4. WAIVER OF JURY TRIAL. BY THE EXECUTION HEREOF, PRG AND LENDER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY AGREE, THAT: (a) NEITHER PRG NOR LENDER, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR LEGAL REPRESENTATIVE OF ANY OF THE SAME SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION PROCEEDING ARISING FROM OR BASED UPON THIS AGREEMENT OR ANY LOAN DOCUMENT EVIDENCING, SECURING OR RELATING TO THE OBLIGATIONS OR TO THE DEALINGS OR RELATIONSHIP BETWEEN OR AMONG THE PARTIES THERETO; (b) NEITHER PRG NOR LENDER SHALL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL HAS NOT BEEN OR CANNOT BE WAIVED; (c) THE PROVISIONS OF THIS PARAGRAPH HAVE BEEN FULLY NEGOTIATED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS; (d) NEITHER PRG NOR LENDER HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY ENFORCED IN ALL INSTANCES; (e) IN NO EVENT SHALL LENDER BE RESPONSIBLE OR LIABLE FOR CONSEQUENTIAL OR PUNITIVE DAMAGES; AND (f) THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THIS TRANSACTION. 5. EFFECTIVE DATE. The effective date of this Agreement is and shall be March 31, 2001 (the "Effective Date"). 6. RELEASE. PRG hereby remises, releases and forever discharges Lender, its affiliates, successors and/or assigns, and all of its and their respective officers, directors, employees, agents, attorneys and stockholders, of and from any and all manner of actions, causes and causes of action whatsoever, at law or in equity, all claims relating to the Loan Documents, and the relationships and activities of PRG and Lender with respect to this Agreement and the Loan Documents from the beginning of the world to the Effective Date. This Agreement and the Loan Documents, as modified by this Agreement, are not intended to benefit, modify, release or discharge any third party, and all rights as against persons or parties not a party to this Agreement are expressly reserved by Lender. PRG hereby indemnifies and holds Lender harmless from and against any claim, loss, damage, costs, charge or expense (including reasonable attorneys' fees) whatsoever arising out of or relating to any claim by any third party not a party to this Agreement of any alleged or purported benefit, modification, release or discharge resulting from this Agreement or the Loan Documents. Notwithstanding anything in this Agreement to the contrary, the release contained in this Section shall not apply to any and all manners of actions, causes and causes of action whatsoever, at law or in equity, that PRG may have against Paribas, First Source, and/or LaSalle [(as each is defined in the Omnibus Agreement) as defined in that certain Waivers and Agreement to Amend and Restate dated as of June 30, 1999, as modified)], and/or their respective their affiliates, successors and/or assigns (other than Lender), and all of their respective officers, directors, employees, agents, attorneys and stockholders. 7. OTHER PROVISIONS. Except for the changes and modifications effected hereby, it is expressly agreed that the Loan Documents shall remain in full force and effect in strict accordance with the terms thereof, and nothing herein contained shall affect or be construed to affect the lien, charge, or encumbrances effected by the Loan Documents, or the priority thereof over other liens, charges, encumbrances, and conveyances, or to release or affect the liability of any party or parties who may now or hereafter be liable under or on account of the Loan Documents. Under no circumstances shall this Agreement or any portion hereof constitute or be deemed to constitute a novation 2 of the Loan Documents. This Agreement shall be binding upon and shall inure to the benefit of, the heirs, executors, administrators, personal representatives, successors and assigns of the parties hereto. Each of the parties hereto represents and declares that such party has carefully read this Agreement and that such party understands the contents thereof and signs the same freely and voluntarily. The parties hereto acknowledge that they had the opportunity to consult with legal counsel of its own choosing concerning this Agreement. 8. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original. NOTICE: THIS AGREEMENT AND THE LOAN DOCUMENTS CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS LOAN TRANSACTION. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto in manner and form sufficient to bind them as of the day and year first above written. Signed, sealed and delivered in the presence of: CNL APF PARTNERS, LP, a Delaware limited partnership By: CNL APF GP Corp., a Delaware corporation as general partner /s/ Randy Schultz -------------------------- Name: Randy Schultz -------------------------- By: /s/ Raymon Byron Carlock, Jr. ------------------------------------ Raymon Byron Carlock, Jr., Vice President /s/ Daniel R. Holland -------------------------- Name: Daniel R. Holland "LENDER" -------------------------- STATE OF GEORGIA COUNTY OF FULTON The foregoing instrument was acknowledged before me on the 29th day of June, 2001, by Raymon Byron Carlock, Jr. as Vice President of CNL APF GP Corp., a Delaware corporation, as General Partner of CNL APF PARTNERS, LP, a Delaware limited partnership, on behalf of the corporation and limited partnership. He is personally known to me and did not take an oath. /s/ Albert Chaver --------------------------------- Notary Public - State of Georgia Print Name: Albert Chaver ---------------------- Commission Number: --------------- Commission Expires: July 12, 2003 -------------- 3 PHOENIX RESTAURANT GROUP, INC., a Georgia corporation, f/k/a DENAMERICA CORP., a Georgia corporation /s/ Jeffrey M. Pate ------------------------- Name: Jeffrey M. Pate ------------------------- By: /s/ Robert M. Langford ------------------------------------------ Robert M. Langford, Chairman of the Board /s/ Eva M. Grimmett and Chief Executive Officer ------------------------- Name: Eva M. Grimmett ------------------------- "PRG" STATE OF TENNESSEE COUNTY OF DAVIDSON The foregoing instrument was acknowledged before me on the 29th day of June, 2001, by Robert M. Langford, Chairman of the Board and Chief Executive Officer of PHOENIX RESTAURANT GROUP, INC., a Georgia corporation, f/k/a DENAMERICA CORP., a Georgia corporation, for and on behalf of the corporation. He is personally known to me and did not take an oath. /s/ Sandra D. Mills -------------------------------------- Notary Public - State of Tennessee Print Name: Sandra D. Mills -------------------------- Commission Number: ------------------- Commission Expires: November 30, 2002 ------------------ 4 EX-10.6 5 rlemagr.txt R. LANGFORD EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of this 1st day of January, 2001, between PHOENIX RESTAURANT GROUP, INC., a Georgia corporation, whose principal place of business is located at 7373 North Scottsdale Road, Suite D-120, Scottsdale, Arizona 85253 (the "Employer"), and ROBERT M. LANGFORD, a resident of Sumner County, Tennessee, whose address is 141 Lake Valley Road, Hendersonville, Tennessee, 37075 (the "Employee"). 1. TERM OF EMPLOYMENT. 1.1 Employment. Employer hereby employs Employee, and Employee hereby accepts employment with Employer for the Employment Term (as hereinafter defined). Notwithstanding anything to the contrary in this Agreement and subject to the other provisions of this Agreement, Employee's employment is at the will of Employer. 1.2 Employment Term. The term of this Agreement and the Employment Term shall be three years, commencing on January 1, 2001, and terminating on December 31, 2003, unless extended or sooner terminated as herein provided. 1.3 Annual Extension. On January 1 of each year beginning January 1, 2002 (each such date an "Anniversary Date"), unless either party to this Agreement has notified the other in writing not less than five (5) business days prior to such Anniversary Date of that party's intention to allow this Agreement to expire and not be renewed at the end of the then current Employment Term, the Employment Term shall automatically be extended for one (1) calendar year on each Anniversary Date 14. Change in Control. 1.4.1 Extension Because of Change in Control. In the event of a Change in Control (as hereinafter defined), the Employment Term shall automatically be extended so that the Employment Term then ends three (3) calendar years from the date of the Change in Control. For purposes of this Agreement, a "Change in Control" of Employer shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer's then-outstanding voting securities (provided, however, that conversion of the Debenture issued by the Employer's predecessor and dated September 30, 1997, in the amount of Four Million Four Hundred Thousand Dollars ($4,400,000.00) and made payable to CNL Growth Corp., as Agent therein, shall not be deemed a Change in Control for purposes of this instrument), (b) all or substantially all of the assets of the Employer are sold, exchanged or otherwise transferred (other than to secure debt owed by Employer); (c) the Employer's shareholders approve a plan of liquidation or dissolution; or (d) during the Employment Term, individuals who at the beginning of the Employment Term constitute members of the Board of Directors of Employer cease for any reason to constitute a majority thereof unless the election, or the nomination for election by Employer's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the Employment Term. 1.4.2 Potential Change in Control. In the event of a Potential Change in Control (as hereinafter defined), Employee agrees to remain employed by Employer from the time period beginning with the Potential Change in Control and continuing through the earlier of two (2) months after a Change in Control occurs (as defined in Section 1.4.1) or the one-year anniversary of the commencement of the Potential Change in Control period. If Employee chooses to terminate his employment after a Change in Control occurs, the provisions set forth at Section 4.2.1 of this Agreement control such action. For purposes of this Agreement, a "Potential Change in Control" shall occur upon the execution of any agreement or memorandum of understanding, the completion of which would result in a "Change in Control" as defined in Section 1.4.1 of this Agreement or the commencement of a proxy contest or a tender offer that has the potential of causing a "Change in Control" as defined in Section 1.4.1 of this Agreement. 2. DUTIES OF EMPLOYEE. 2.1 General Duties. Employee is hereby employed as Chairman of the Board and Chief Executive Officer of Employer with such duties and responsibilities as Employer's Board of Directors shall designate. He shall do and perform all services, acts, or things necessary or advisable to manage and conduct the business of Employer, subject always to the policies set forth by Employer's Board of Directors, in accordance with any and all governing rules and regulations of regulatory agencies. 2.2 Devotion of Entire Time to Employer's Business. Employee will devote his entire productive time, ability, and attention during normal business hours to the business of Employer during the Employment Term; provided, however, that it is acknowledged and understood that the foregoing shall not require Employee to relocate from his home in the Nashville, Tennessee area. Employee shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of Employer's Board of Directors; provided, however, that the foregoing shall not preclude reasonable participation as a member in community, civic, or similar organizations, or the pursuit of personal investments that neither interfere nor conflict with his normal business activities for Employer. 2 2.3 Disclosure of Information. Employee recognizes and acknowledges that, as a result of this employment by Employer, he will become familiar with and acquire knowledge of confidential information and certain trade secrets that are valuable, special, and unique assets of Employer. Employee agrees that any such confidential information and trade secrets are the property of Employer. Therefore, Employee agrees that, for and during the entire Employment Term, any such confidential information and trade secrets shall be considered to be proprietary to Employer and kept as the private records of Employer and will not be divulged to any firm, individual, or institution except pursuant to and within the course and scope of Employee's employment hereunder. Further, upon termination of this Agreement for any reason whatsoever, Employee agrees that he will continue to treat as private and proprietary to Employer any such confidential information and trade secrets to any person, firm or institution, and will not use such information to the detriment of Employer. The parties agree that nothing in this Agreement shall be construed as prohibiting Employer from pursuing any remedies available to it for any breach or threatened breach of this Section 2.3, including, without limitation, the recovery of damages from Employee or any person or entity acting in concert with Employee. 3. COMPENSATION OF EMPLOYEE. 3.1 Salary. As compensation for his services hereunder, Employee shall receive a base salary (the "Base Salary") per annum of $275,000, which shall be payable in accordance with the general payroll practices of Employer. Increases in the Base Salary may be made in the sole discretion of Employer's Board of Directors. 3.2 Bonuses. Employee shall be eligible for an annual bonus as established by the Board of Directors through the annual bonus plan. 3.3 Other Benefit Programs. Employee shall be entitled to participate in all employee benefit, bonus and similar programs, including, without limitation, programs of insurance, deferred compensation arrangements, and all other benefits made available by Employer to management. During the Employment Term, so long as any additional benefit is made available to management by Employer, such benefit shall be provided to Employee. By way of explanation, and not by way of limitation, Employee shall be entitled to additional compensation for the use of an automobile of make, model, and year of manufacture commensurate with the position of Employee. 3.4 Vacation. Employee shall be entitled annually to four (4) weeks of paid vacation. 3 3.5 Expense Reimbursement. Employee shall be entitled reimbursement of all business expenses (including, without limitation, expenses for travel to and from Nashville, Tennessee and Scottsdale, Arizona) upon providing Employer with substantiation of such expenses. 4. TERMINATION OF EMPLOYMENT; SEVERANCE. 4.1 By Employer. 4.1.1 Termination Without Cause. Employer's Board of Directors may terminate Employee's employment, with or without cause, at any time by giving written notice of such termination to Employee, such termination of employment to be effective on a date specified in such notice; provided, however, that only in the event of such a termination without cause Employee shall be entitled to receive the greater of (a) the Base Salary and bonus paid or accrued on Employee's behalf for the fiscal year of Employer immediately prior to the fiscal year in which the termination took place; or (b) the amount due Employee for Base Salary during the balance of the then- current Employment Term. Payments shall be made, at the option of Employer, in cash or, in the case of the preceding item (a), in equal weekly payments using Employer's regular payroll periods or, in the case of the preceding item (b), over the balance of the Employment Term at the same time as current wages and bonuses are normally payable. Employee's participation in all benefit programs other than life, medical and disability insurance shall cease as of the date of termination. Employee's participation in the life, medical and disability insurance programs shall continue until the earlier of: (a) such time as Employee is employed by another employer and is covered or permitted to be covered by benefit plans of another employer without regard to the extent of such coverage; (b) the Employer no longer provides such benefit plans to Employer's management employees; or (c) the expiration of the Employment Term in effect at the time of termination. This provision supersedes any other severance program or policy that may be offered by Employer and is in lieu of such plan rather than in addition to other severance plans that may be in place, except with regard to any rights Employee may have pursuant to COBRA. 4.1.2. Termination for Cause. If Employee is terminated for cause, Employer shall have no further obligation whatsoever to Employee hereunder, and Employee's participation in all benefit programs shall cease as of the date of termination. For purposes of this Agreement, "cause" shall mean any one of the following: (i) Employee's personal dishonesty in connection with his duties to Employer; (ii) Employee's willful misconduct in the performance of his duties with Employer; (iii) breach of fiduciary duty to the Employer involving personal profit by Employee; (iv) conviction of Employee for any felony or crime involving moral turpitude; (v) material intentional breach by Employee of any provision of this Agreement; or (vi) unsatisfactory performance by Employee of the duties designated for Employee by Employer's Board of Directors as a result of alcohol or drug use by Employee. 4.2 Termination by Employee. 4 4.2.1 Termination After Change in Control. In the event a Change in Control occurs, Employee, at any time within ninety (90) days after such Change in Control, may terminate his employment with Employer by giving not less than sixty (60) nor more than ninety (90) days' prior written notice of such termination to Employer. In the event that Employee terminates his employment pursuant to this Section 4.2.1, he shall be entitled to receive the greater of: (A) an amount equal to two (2) times the base salary and bonus paid or accrued on Employee's behalf for the fiscal year of Employer immediately prior to the fiscal year in which the termination took place; or (B) the amount due Employee for base salary during the balance of the then- current Employment Term. Payments shall be made in the case of the preceding item (A) in equal weekly payments using employer's regular payroll periods or, in the case of the preceding item (B), over the balance of the employment term at the same time as current wages and bonuses normally are payable. Employee's participation in all benefit programs other than life, medical and disability insurance shall cease as of the date of termination from active employment with Employer. Employee's participation in the life, medical and disability insurance programs shall continue until the earlier of: (a) such time as Employee is employed by another employer and is covered or permitted to be covered by benefit plans of another employer without regard to the extent of such coverage; (b) the Employer no longer provides such benefit plans to Employer's other management employees; or (c) the expiration of the Employment Term then in effect. Nothing contained herein is intended to in any way limit Employee's rights under COBRA. 4.2.2 Termination Other Than After Change in Control. Except as limited by Section 1.4.2 of this Agreement, Employee may terminate his employment with Employer at any time without further obligation whatsoever by either party hereunder (except for the obligations and covenants of Employee pursuant to Sections 2.3 and 4.4, which shall survive termination as specified herein) by giving not less than sixty (60) nor more than ninety (90) days' prior written notice of such termination to Employer. 4.3 Effect of Termination on Stock Options. In the event of any termination of this Agreement and the Employment Term, all stock options held by Employee that are vested prior to the effective date of the termination shall be exercisable in accordance with their terms, and all stock options held by Employee that are not vested prior to the effective date of the termination shall lapse and be void. Also, in the event of any termination of Employee's employment pursuant to Section 4.1.1 or Section 4.2.1, then, in addition to any other rights of Employee hereunder, Employee shall receive, within thirty (30) days after such termination, a lump sum cash distribution equal to: (a) the number of shares of Employer's common stock that is subject to options held by Employee which are not vested on the date of termination of employment; multiplied by (b) the difference between: (i) the closing price of a share of Employer's common stock as of the day prior to the effective date of termination of employment (or, if the United States securities trading markets are closed on that date, on the last preceding date on which the United States securities trading markets were open for trading), and (ii) the applicable exercise price(s) of such non-vested shares. 5 4.4 Covenant Not to Compete. Employee acknowledges that Employer's business is built upon the confidence of its customers, suppliers, employees, and the general public, and that Employee will acquire confidential knowledge that should not be divulged or used for his own benefit. In the event of any termination of Employee's employment pursuant to Sections 4.1.2, 4.2.1 or 4.2.2 of this Agreement, Employee covenants and agrees that, for a period of one year from the effective date of his termination from active employment with the Employer, he will not engage in, own, manage, operate, control, or participate in any food service business that conducts or franchises activities which are the same as or similar to the restaurant concepts and operations of Employer as an employer, employee, principal, partner, director, agent, or otherwise, directly or indirectly, anywhere in the United States of America. Employee understands and acknowledges that his violation of this covenant not to compete would cause irreparable harm to Employer, and Employer would be entitled to seek an injunction by any court of competent jurisdiction enjoining and restraining Employee and each and every other person concerned from any employment, service, or other act prohibited by this Agreement. Employee and Employer recognize and acknowledge that the area and time limitations contained in this Agreement are reasonable. In addition, Employee and Employer recognize and acknowledge that the area and time limitations are properly required for the protection of the business interests of Employer due to Employee's status and reputation in the industry and the knowledge to be acquired by Employee through his association with Employer's business and the public's close identification of Employee with Employer and Employer with Employee. The parties agree that nothing in this Agreement shall be construed as prohibiting Employer from pursuing any other remedies available to it for any breach or threatened breach of this covenant not to compete, including, without limitation, the recovery of damages from Employee or any other person or entity acting in concert with Employee. Employee also agrees that, in the event he breaches this covenant not to compete, Employee will pay reasonable attorneys' fees and expenses incurred by Employer in enforcing this covenant not to compete. Employee acknowledges and understands that, as consideration for his execution of this Agreement and his agreement with the terms of this covenant not to compete, Employee will receive employment by Employer in accordance with this Agreement. Employer acknowledges that Employee's execution of this Agreement and agreement with the terms of this covenant not to compete is consideration for Employer's agreement to employ Employee pursuant to this Agreement. If any part of this covenant not to compete is found to be unreasonable, then it may be amended by appropriate order of a court of competent jurisdiction to the extent deemed reasonable. Employer shall receive injunctive relief without the necessity of posting bond or other security, such bond or other security being hereby waived by Employee. 5. DEATH OR DISABILITY OF EMPLOYEE. 5.1 Death of Employee. In the event Employee dies during the Employment Term, this Agreement and the Employment Term shall terminate upon Employee's death. Employee's estate shall be entitled to any Base Salary earned but not paid plus any bonus 6 accrued by Employer for Employee through the date of death plus an amount equal to the Base Salary and bonus received by Employee in the last full year immediately prior to the death of Employee. Such payment shall be paid in lump sum to the Employee's estate within ninety (90) days after Employer is given notice of Employee's death. 5.2 Disability of Employee. Employer has disability insurance insuring those individuals holding management positions, and Employee is included under such disability insurance. In the event of the Disability (as hereinafter defined) of Employee, this Agreement and the Employment Term shall terminate. Upon a termination resulting from the Disability of Employee, Employee shall be entitled to receive (i) any Base Salary earned but not paid through the date that Employee becomes eligible for disability payments under such disability insurance, and (ii) an amount equal to the Base Salary and bonus received by Employee in the last full fiscal year of Employer immediately prior to the Disability of Employee, which amount shall be payable, at the option of Employee, in a lump sum payment or in equal installments paid in accordance with the general payroll policies of Employer over a period not to exceed three (3) years from the effective date of a termination due to the Disability of Employee; provided, however, that Employee shall not be entitled to any payments under this Section 5.2 in the event this Agreement is terminated pursuant to Section 4.1.2 hereof regardless of whether the "cause" for which this Agreement is terminated pursuant to Section 4.1.2 also may constitute a Disability. For purposes of this Agreement, a "Disability" of Employee shall occur if (i) Employee suffers any mental or physical condition that impairs Employee's ability to perform the essential functions of his duties hereunder and (ii) Employee, within thirty (30) days after Employee receives written notice from Employer requesting that Employee resume his duties hereunder, is unable or refuses to do so. 6. GENERAL PROVISIONS. 6.1 Expenses. Employer shall reimburse Employee for all reasonable and necessary business expenses of Employee incurred in the conduct of his duties hereunder. Employee shall comply with all applicable policies of Employer with respect to documentation and approval of such expenses. 6.2 Notices. Any notices to be given hereunder by either party to the other may be effected by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing in the introductory paragraph of this Agreement (to the attention of the Secretary in the case of notices to Employer), but each party may change such address by written notice in accordance with this Section 6.2. Notices delivered personally shall be deemed communicated at the time of the actual receipt; mailed notices shall be deemed communicated as of the second day following deposit in the United States Mail. 7 6.3 Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever, with the exception of certain stock options, the terms and conditions of which shall be governed by the particular stock option agreements. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein and that no other agreement shall be valid or binding unless in writing and signed by the party against whom enforcement of such agreement is sought. Any modification of this Agreement will be effective only if it is in writing signed by the party against whom enforcement of such modification is sought. 6.4 Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nonetheless continue in full force without being impaired or invalid in any way. 6.5 Law Governing Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 6.6 Waiver of Jury Trial. Employer and Employee hereby expressly waive any right to a trial by jury in any action or proceeding to enforce or defend any rights under this Agreement, and agree that any such action or proceeding shall be tried before a court and not a jury. Employee and Employer hereby agree that any action or proceeding to enforce any claim arising out of this Agreement shall be brought and maintained in any state or federal court having subject matter jurisdiction and located in Nashville, Tennessee. Employee irrevocably waives, to the fullest extent permitted by law, any objection he may have or hereafter have to the laying of the venue of any such action or proceeding brought in any court located in Nashville, Tennessee, and any claim that any such action or proceeding brought in such a court has been brought in an inconvenient forum. 6.7 Miscellaneous. Failure or delay of either party to insist upon compliance with any provision hereof will not operate as and is not to be construed to be a waiver or amendment of the provision or the right of the aggrieved party to insist upon compliance with such provision or to take remedial steps to recover damages or other relief for noncompliance. Any express waiver of any provision of this Agreement will not operate and is not to be construed as a waiver of any subsequent breach, irrespective of whether occurring under similar or dissimilar circumstances. Employee acknowledges and represents that the services to be rendered by him are unique and personal. Accordingly, Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. 8 IN WITNESS WHEREOF, Employee has hereunto affixed his hand, and Employer has caused this Agreement to be executed by its duly authorized officer as of the day and year first above written. EMPLOYER: PHOENIX RESTAURANT GROUP, INC. By: /s/ R. H. Manschot -------------------------------- Title: Director ----------------------------- EMPLOYEE: /s/ Robert M. Langford ----------------------------------- ROBERT M. LANGFORD 9 EX-10.7 6 cbemagr.txt C. BARBER EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of this 1st day of January, 2001, between PHOENIX RESTAURANT GROUP, INC., a Georgia corporation, whose principal place of business is located at 7373 North Scottsdale Road, Suite D-120, Scottsdale, Arizona 85253 (the "Employer"), and W. CRAIG BARBER, a resident of Davidson County, Tennessee, whose address is 1609 Clearview Drive, Brentwood, Tennessee, 37027 (the "Employee"). 1. TERM OF EMPLOYMENT. 1.1 Employment. Employer hereby employs Employee, and Employee hereby accepts employment with Employer for the Employment Term (as hereinafter defined). Notwithstanding anything to the contrary in this Agreement and subject to the other provisions of this Agreement, Employee's employment is at the will of Employer. 1.2 Employment Term. The term of this Agreement and the Employment Term shall be three years, commencing on January 1, 2001, and terminating on December 31, 2003, unless extended or sooner terminated as herein provided. 1.3 Annual Extension. On January 1 of each year beginning January 1, 2002 (each such date an "Anniversary Date"), unless either party to this Agreement has notified the other in writing not less than five (5) business days prior to such Anniversary Date of that party's intention to allow this Agreement to expire and not be renewed at the end of the then current Employment Term, the Employment Term shall automatically be extended for one (1) calendar year on each Anniversary Date 14. Change in Control. 1.4.1 Extension Because of Change in Control. In the event of a Change in Control (as hereinafter defined), the Employment Term shall automatically be extended so that the Employment Term then ends three (3) calendar years from the date of the Change in Control. For purposes of this Agreement, a "Change in Control" of Employer shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); provided, however, that, without limitation, such a Change in Control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Employer representing 50% or more of the combined voting power of Employer's then-outstanding voting securities (provided, however, that conversion of the Debenture issued by the Employer's predecessor and dated September 30, 1997, in the amount of Four Million Four Hundred Thousand Dollars ($4,400,000.00) and made payable to CNL Growth Corp., as Agent therein, shall not be deemed a Change in Control for purposes of this instrument), (b) all or substantially all of the assets of the Employer are sold, exchanged or otherwise transferred (other than to secure debt owed by Employer); (c) the Employer's shareholders approve a plan of liquidation or dissolution; or (d) during the Employment Term, individuals who at the beginning of the Employment Term constitute members of the Board of Directors of Employer cease for any reason to constitute a majority thereof unless the election, or the nomination for election by Employer's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the Employment Term. 1.4.2 Potential Change in Control. In the event of a Potential Change in Control (as hereinafter defined), Employee agrees to remain employed by Employer from the time period beginning with the Potential Change in Control and continuing through the earlier of two (2) months after a Change in Control occurs (as defined in Section 1.4.1) or the one-year anniversary of the commencement of the Potential Change in Control period. If Employee chooses to terminate his employment after a Change in Control occurs, the provisions set forth at Section 4.2.1 of this Agreement control such action. For purposes of this Agreement, a "Potential Change in Control" shall occur upon the execution of any agreement or memorandum of understanding, the completion of which would result in a "Change in Control" as defined in Section 1.4.1 of this Agreement or the commencement of a proxy contest or a tender offer that has the potential of causing a "Change in Control" as defined in Section 1.4.1 of this Agreement. 2. DUTIES OF EMPLOYEE. 2.1 General Duties. Employee is hereby employed as President of Employer with such duties and responsibilities as Employer's Board of Directors shall designate. He shall do and perform all services, acts, or things necessary or advisable to manage and conduct the business of Employer, subject always to the policies set forth by Employer's Board of Directors, in accordance with any and all governing rules and regulations of regulatory agencies. 2.2 Devotion of Entire Time to Employer's Business. Employee will devote his entire productive time, ability, and attention during normal business hours to the business of Employer during the Employment Term; provided, however, that it is acknowledged and understood that the foregoing shall not require Employee to relocate from his home in the Nashville, Tennessee area. Employee shall not, directly or indirectly, render any services of a business, commercial, or professional nature to any other person or organization, whether for compensation or otherwise, without the prior written consent of Employer's Board of Directors; provided, however, that the foregoing shall not preclude reasonable participation as a member in community, civic, or similar organizations, or the pursuit of personal investments that neither interfere nor conflict with his normal business activities for Employer. 2 2.3 Disclosure of Information. Employee recognizes and acknowledges that, as a result of this employment by Employer, he will become familiar with and acquire knowledge of confidential information and certain trade secrets that are valuable, special, and unique assets of Employer. Employee agrees that any such confidential information and trade secrets are the property of Employer. Therefore, Employee agrees that, for and during the entire Employment Term, any such confidential information and trade secrets shall be considered to be proprietary to Employer and kept as the private records of Employer and will not be divulged to any firm, individual, or institution except pursuant to and within the course and scope of Employee's employment hereunder. Further, upon termination of this Agreement for any reason whatsoever, Employee agrees that he will continue to treat as private and proprietary to Employer any such confidential information and trade secrets to any person, firm or institution, and will not use such information to the detriment of Employer. The parties agree that nothing in this Agreement shall be construed as prohibiting Employer from pursuing any remedies available to it for any breach or threatened breach of this Section 2.3, including, without limitation, the recovery of damages from Employee or any person or entity acting in concert with Employee. 3. COMPENSATION OF EMPLOYEE. 3.1 Salary. As compensation for his services hereunder, Employee shall receive a base salary (the "Base Salary") per annum of $275,000, which shall be payable in accordance with the general payroll practices of Employer. Increases in the Base Salary may be made in the sole discretion of Employer's Board of Directors. 3.2 Bonuses. Employee shall be eligible for an annual bonus as established by the Board of Directors through the annual bonus plan. 3.3 Other Benefit Programs. Employee shall be entitled to participate in all employee benefit, bonus and similar programs, including, without limitation, programs of insurance, deferred compensation arrangements, and all other benefits made available by Employer to management. During the Employment Term, so long as any additional benefit is made available to management by Employer, such benefit shall be provided to Employee. By way of explanation, and not by way of limitation, Employee shall be entitled to additional compensation for the use of an automobile of make, model, and year of manufacture commensurate with the position of Employee. 3.4 Vacation. Employee shall be entitled annually to four (4) weeks of paid vacation. 3 3.5 Expense Reimbursement. Employee shall be entitled reimbursement of all business expenses (including, without limitation, expenses for travel to and from Nashville, Tennessee and Scottsdale, Arizona) upon providing Employer with substantiation of such expenses. 4. TERMINATION OF EMPLOYMENT; SEVERANCE. 4.1 By Employer. 4.1.1 Termination Without Cause. Employer's Board of Directors may terminate Employee's employment, with or without cause, at any time by giving written notice of such termination to Employee, such termination of employment to be effective on a date specified in such notice; provided, however, that only in the event of such a termination without cause Employee shall be entitled to receive the greater of (a) the Base Salary and bonus paid or accrued on Employee's behalf for the fiscal year of Employer immediately prior to the fiscal year in which the termination took place; or (b) the amount due Employee for Base Salary during the balance of the then- current Employment Term. Payments shall be made, at the option of Employer, in cash or, in the case of the preceding item (a), in equal weekly payments using Employer's regular payroll periods or, in the case of the preceding item (b), over the balance of the Employment Term at the same time as current wages and bonuses are normally payable. Employee's participation in all benefit programs other than life, medical and disability insurance shall cease as of the date of termination. Employee's participation in the life, medical and disability insurance programs shall continue until the earlier of: (a) such time as Employee is employed by another employer and is covered or permitted to be covered by benefit plans of another employer without regard to the extent of such coverage; (b) the Employer no longer provides such benefit plans to Employer's management employees; or (c) the expiration of the Employment Term in effect at the time of termination. This provision supersedes any other severance program or policy that may be offered by Employer and is in lieu of such plan rather than in addition to other severance plans that may be in place, except with regard to any rights Employee may have pursuant to COBRA. 4.1.2. Termination for Cause. If Employee is terminated for cause, Employer shall have no further obligation whatsoever to Employee hereunder, and Employee's participation in all benefit programs shall cease as of the date of termination. For purposes of this Agreement, "cause" shall mean any one of the following: (i) Employee's personal dishonesty in connection with his duties to Employer; (ii) Employee's willful misconduct in the performance of his duties with Employer; (iii) breach of fiduciary duty to the Employer involving personal profit by Employee; (iv) conviction of Employee for any felony or crime involving moral turpitude; (v) material intentional breach by Employee of any provision of this Agreement; or (vi) unsatisfactory performance by Employee of the duties designated for Employee by Employer's Board of Directors as a result of alcohol or drug use by Employee. 4.2 Termination by Employee. 4 4.2.1 Termination After Change in Control. In the event a Change in Control occurs, Employee, at any time within ninety (90) days after such Change in Control, may terminate his employment with Employer by giving not less than sixty (60) nor more than ninety (90) days' prior written notice of such termination to Employer. In the event that Employee terminates his employment pursuant to this Section 4.2.1, he shall be entitled to receive the greater of: (A) an amount equal to two (2) times the base salary and bonus paid or accrued on Employee's behalf for the fiscal year of Employer immediately prior to the fiscal year in which the termination took place; or (B) the amount due Employee for base salary during the balance of the then- current Employment Term. Payments shall be made in the case of the preceding item (A) in equal weekly payments using employer's regular payroll periods or, in the case of the preceding item (B), over the balance of the employment term at the same time as current wages and bonuses normally are payable. Employee's participation in all benefit programs other than life, medical and disability insurance shall cease as of the date of termination from active employment with Employer. Employee's participation in the life, medical and disability insurance programs shall continue until the earlier of: (a) such time as Employee is employed by another employer and is covered or permitted to be covered by benefit plans of another employer without regard to the extent of such coverage; (b) the Employer no longer provides such benefit plans to Employer's other management employees; or (c) the expiration of the Employment Term then in effect. Nothing contained herein is intended to in any way limit Employee's rights under COBRA. 4.2.2 Termination Other Than After Change in Control. Except as limited by Section 1.4.2 of this Agreement, Employee may terminate his employment with Employer at any time without further obligation whatsoever by either party hereunder (except for the obligations and covenants of Employee pursuant to Sections 2.3 and 4.4, which shall survive termination as specified herein) by giving not less than sixty (60) nor more than ninety (90) days' prior written notice of such termination to Employer. 4.3 Effect of Termination on Stock Options. In the event of any termination of this Agreement and the Employment Term, all stock options held by Employee that are vested prior to the effective date of the termination shall be exercisable in accordance with their terms, and all stock options held by Employee that are not vested prior to the effective date of the termination shall lapse and be void. Also, in the event of any termination of Employee's employment pursuant to Section 4.1.1 or Section 4.2.1, then, in addition to any other rights of Employee hereunder, Employee shall receive, within thirty (30) days after such termination, a lump sum cash distribution equal to: (a) the number of shares of Employer's common stock that is subject to options held by Employee which are not vested on the date of termination of employment; multiplied by (b) the difference between: (i) the closing price of a share of Employer's common stock as of the day prior to the effective date of termination of employment (or, if the United States securities trading markets are closed on that date, on the last preceding date on which the United States securities trading markets were open for trading), and (ii) the applicable exercise price(s) of such non-vested shares. 5 4.4 Covenant Not to Compete. Employee acknowledges that Employer's business is built upon the confidence of its customers, suppliers, employees, and the general public, and that Employee will acquire confidential knowledge that should not be divulged or used for his own benefit. In the event of any termination of Employee's employment pursuant to Sections 4.1.2, 4.2.1 or 4.2.2 of this Agreement, Employee covenants and agrees that, for a period of one year from the effective date of his termination from active employment with the Employer, he will not engage in, own, manage, operate, control, or participate in any food service business that conducts or franchises activities which are the same as or similar to the restaurant concepts and operations of Employer as an employer, employee, principal, partner, director, agent, or otherwise, directly or indirectly, anywhere in the United States of America. Employee understands and acknowledges that his violation of this covenant not to compete would cause irreparable harm to Employer, and Employer would be entitled to seek an injunction by any court of competent jurisdiction enjoining and restraining Employee and each and every other person concerned from any employment, service, or other act prohibited by this Agreement. Employee and Employer recognize and acknowledge that the area and time limitations contained in this Agreement are reasonable. In addition, Employee and Employer recognize and acknowledge that the area and time limitations are properly required for the protection of the business interests of Employer due to Employee's status and reputation in the industry and the knowledge to be acquired by Employee through his association with Employer's business and the public's close identification of Employee with Employer and Employer with Employee. The parties agree that nothing in this Agreement shall be construed as prohibiting Employer from pursuing any other remedies available to it for any breach or threatened breach of this covenant not to compete, including, without limitation, the recovery of damages from Employee or any other person or entity acting in concert with Employee. Employee also agrees that, in the event he breaches this covenant not to compete, Employee will pay reasonable attorneys' fees and expenses incurred by Employer in enforcing this covenant not to compete. Employee acknowledges and understands that, as consideration for his execution of this Agreement and his agreement with the terms of this covenant not to compete, Employee will receive employment by Employer in accordance with this Agreement. Employer acknowledges that Employee's execution of this Agreement and agreement with the terms of this covenant not to compete is consideration for Employer's agreement to employ Employee pursuant to this Agreement. If any part of this covenant not to compete is found to be unreasonable, then it may be amended by appropriate order of a court of competent jurisdiction to the extent deemed reasonable. Employer shall receive injunctive relief without the necessity of posting bond or other security, such bond or other security being hereby waived by Employee. 5. DEATH OR DISABILITY OF EMPLOYEE. 5.1 Death of Employee. In the event Employee dies during the Employment Term, this Agreement and the Employment Term shall terminate upon Employee's death. Employee's estate shall be entitled to any Base Salary earned but not paid plus any bonus 6 accrued by Employer for Employee through the date of death plus an amount equal to the Base Salary and bonus received by Employee in the last full year immediately prior to the death of Employee. Such payment shall be paid in lump sum to the Employee's estate within ninety (90) days after Employer is given notice of Employee's death. 5.2 Disability of Employee. Employer has disability insurance insuring those individuals holding management positions, and Employee is included under such disability insurance. In the event of the Disability (as hereinafter defined) of Employee, this Agreement and the Employment Term shall terminate. Upon a termination resulting from the Disability of Employee, Employee shall be entitled to receive (i) any Base Salary earned but not paid through the date that Employee becomes eligible for disability payments under such disability insurance, and (ii) an amount equal to the Base Salary and bonus received by Employee in the last full fiscal year of Employer immediately prior to the Disability of Employee, which amount shall be payable, at the option of Employee, in a lump sum payment or in equal installments paid in accordance with the general payroll policies of Employer over a period not to exceed three (3) years from the effective date of a termination due to the Disability of Employee; provided, however, that Employee shall not be entitled to any payments under this Section 5.2 in the event this Agreement is terminated pursuant to Section 4.1.2 hereof regardless of whether the "cause" for which this Agreement is terminated pursuant to Section 4.1.2 also may constitute a Disability. For purposes of this Agreement, a "Disability" of Employee shall occur if (i) Employee suffers any mental or physical condition that impairs Employee's ability to perform the essential functions of his duties hereunder and (ii) Employee, within thirty (30) days after Employee receives written notice from Employer requesting that Employee resume his duties hereunder, is unable or refuses to do so. 6. GENERAL PROVISIONS. 6.1 Expenses. Employer shall reimburse Employee for all reasonable and necessary business expenses of Employee incurred in the conduct of his duties hereunder. Employee shall comply with all applicable policies of Employer with respect to documentation and approval of such expenses. 6.2 Notices. Any notices to be given hereunder by either party to the other may be effected by personal delivery in writing or by mail, registered or certified, postage prepaid, with return receipt requested. Mailed notices shall be addressed to the parties at the addresses appearing in the introductory paragraph of this Agreement (to the attention of the Secretary in the case of notices to Employer), but each party may change such address by written notice in accordance with this Section 6.2. Notices delivered personally shall be deemed communicated at the time of the actual receipt; mailed notices shall be deemed communicated as of the second day following deposit in the United States Mail. 7 6.3 Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by Employer and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever, with the exception of certain stock options, the terms and conditions of which shall be governed by the particular stock option agreements. Each party to this Agreement acknowledges that no representations, inducements, promises, or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein and that no other agreement shall be valid or binding unless in writing and signed by the party against whom enforcement of such agreement is sought. Any modification of this Agreement will be effective only if it is in writing signed by the party against whom enforcement of such modification is sought. 6.4 Partial Invalidity. If any provision in this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions shall nonetheless continue in full force without being impaired or invalid in any way. 6.5 Law Governing Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. 6.6 Waiver of Jury Trial. Employer and Employee hereby expressly waive any right to a trial by jury in any action or proceeding to enforce or defend any rights under this Agreement, and agree that any such action or proceeding shall be tried before a court and not a jury. Employee and Employer hereby agree that any action or proceeding to enforce any claim arising out of this Agreement shall be brought and maintained in any state or federal court having subject matter jurisdiction and located in Nashville, Tennessee. Employee irrevocably waives, to the fullest extent permitted by law, any objection he may have or hereafter have to the laying of the venue of any such action or proceeding brought in any court located in Nashville, Tennessee, and any claim that any such action or proceeding brought in such a court has been brought in an inconvenient forum. 6.7 Miscellaneous. Failure or delay of either party to insist upon compliance with any provision hereof will not operate as and is not to be construed to be a waiver or amendment of the provision or the right of the aggrieved party to insist upon compliance with such provision or to take remedial steps to recover damages or other relief for noncompliance. Any express waiver of any provision of this Agreement will not operate and is not to be construed as a waiver of any subsequent breach, irrespective of whether occurring under similar or dissimilar circumstances. Employee acknowledges and represents that the services to be rendered by him are unique and personal. Accordingly, Employee may not assign any of his rights or delegate any of his duties or obligations under this Agreement. The rights and obligations of Employer under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of Employer. 8 IN WITNESS WHEREOF, Employee has hereunto affixed his hand, and Employer has caused this Agreement to be executed by its duly authorized officer as of the day and year first above written. EMPLOYER: PHOENIX RESTAURANT GROUP, INC. By: /s/ R. H. Manschot ----------------------------- Title: Director -------------------------- EMPLOYEE: /s/ W. Craig Barber -------------------------------- W. CRAIG BARBER 9 -----END PRIVACY-ENHANCED MESSAGE-----