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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 March 22, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from..............to...............
Commission file number -
AFC ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Minnesota 58-2016606
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Six Concourse Parkway, Suite 1700
Atlanta, Georgia 30328-5352
(Address of principal executive offices) (Zip Code)
(770) 391-9500
(Registrant's telephone number, including area code)
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
_____ _____
As of May 6, 1998, there were 36,286,438 shares of the registrant's Common Stock
outstanding.
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AFC ENTERPRISES, INC.
INDEX
Page
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the Twelve
Week Periods Ended March 22, 1998 and March 23, 1997 .................... 3
Condensed Consolidated Balance Sheets - March 22, 1998 and
December 28, 1997 ....................................................... 4
Condensed Consolidated Statements of Cash Flows - For the Twelve
Week Periods Ended March 22, 1998 and March 23, 1997 .................... 5
Notes to Condensed Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 9
PART 2 OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ................................ 17
Item 6. Exhibits and Reports on Form 8-K ......................................... 17
(a) Exhibits ..................................................... 17
(b) Current Reports on Form 8-K .................................. 17
SIGNATURE .......................................................................... 18
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PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
12 Weeks Ended
3/22/98 3/23/97
- --------------------------------------------------------------------------------
Revenues:
Restaurant sales................................ $ 97,027 $103,181
Revenues from franchising....................... 13,851 13,184
Revenues from manufacturing..................... 1,319 1,604
Other revenues.................................. 2,050 1,739
-------- --------
Total revenues................................ 114,247 119,708
-------- --------
Costs and expenses:
Restaurant cost of sales........................ 30,941 33,218
Restaurant operating expenses................... 47,547 51,698
Manufacturing cost of sales..................... 638 1,024
General and administrative...................... 20,268 20,300
Depreciation and amortization................... 8,659 7,103
-------- --------
Total costs and expenses...................... 108,053 113,343
-------- --------
Income from operations............................ 6,194 6,365
Other expenses:
Interest, net................................... 6,066 3,191
-------- --------
Net income before extraordinary loss
and income taxes................................ 128 3,174
Income tax expense.............................. (55) (1,262)
-------- --------
Net income........................................ 73 1,912
Preferred stock dividends......................... - 1,289
-------- --------
Net income attributable to common stock........... $ 73 $ 623
======== ========
See accompanying notes to financial statements.
3
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AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
3/22/98 12/28/97
- ------------------------------------------------------------------------------
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents............................. $ 23,855 $ 32,964
Accounts and current notes receivable, net............ 14,096 8,305
Income taxes, current................................. 1,407 998
Inventories........................................... 10,837 4,447
Deferred income taxes................................. 770 662
Prepaid expenses and other............................ 1,799 1,539
-------- --------
Total current assets........................... 52,764 48,915
-------- --------
Long-term assets:
Notes receivable, net................................. 4,007 4,477
Deferred income taxes................................. 1,777 1,481
Property and equipment, net........................... 231,814 207,807
Other assets.......................................... 18,430 17,049
Intangible assets, net................................ 178,359 100,273
-------- --------
Total long-term assets......................... 434,387 331,087
-------- --------
Total assets................................. $487,151 $380,002
======== ========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable...................................... $ 32,835 $ 22,123
Current portion of long-term debt and capital
lease obligations................................... 12,215 10,994
Bank overdrafts....................................... 13,241 9,707
Accrued expenses and other............................ 25,568 23,923
-------- --------
Total current liabilities...................... 83,859 66,747
-------- --------
Long-term liabilities:
Long-term debt, net of current portion................ 44,694 45,150
Acquisition line of credit............................ 59,000 -
10.25% Subordinated notes payable..................... 175,000 175,000
Capital lease obligations, net of current portion..... 12,264 12,738
Other liabilities..................................... 37,573 31,908
-------- --------
Total long-term liabilities.................... 328,531 264,796
-------- --------
Total liabilities............................ 412,390 331,543
-------- --------
Shareholders' equity:
Common stock.......................................... 363 344
Capital in excess of par value........................ 128,136 101,840
Accumulated deficit................................... (49,250) (49,323)
Notes receivable - officers........................... (4,488) (4,402)
-------- --------
Total shareholders' equity..................... 74,761 48,459
-------- --------
Total liabilities and shareholders' equity... $487,151 $380,002
======== ========
See accompanying notes to financial statements.
4
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AFC ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
12 Weeks Ended
3/22/98 3/23/97
- -------------------------------------------------------------------------------
Cash flows provided by (used in) operating activities:
Net income............................................. $ 73 $ 1,912
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 8,659 7,103
Deferred compensation and other...................... 819 323
Other................................................ 311 1,299
(Increase) decrease in operating assets.............. (17,380) (16)
Increase (decrease) in operating liabilities......... 16,609 (3,156)
-------- -------
Total adjustments................................ 9,018 5,553
-------- -------
Net cash provided by operating activities.............. 9,091 7,465
-------- -------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment.... 268 596
Investment in property and equipment................... (5,072) (6,667)
Investment in Pinetree goodwill........................ (21,859) -
Investment in Pinetree property and equipment.......... (8,737) -
Investment in SCC goodwill............................. (28,673) -
Investment in SCC property and equipment............... (14,586) -
Notes receivable additions............................. (142) (2,000)
Payments received on notes ........................... 573 206
-------- -------
Net cash used in investing activities.................. (78,228) (7,865)
-------- -------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net.............. (866) (1,293)
Net borrowings under Acquisition line of credit........ 59,000 -
Principal payments for capital lease obligations....... (1,541) (1,408)
Increase (decrease) in bank overdrafts, net............ 3,534 (1,268)
Notes receivable - officers payments................... 1 19
Notes receivable - officers interest................... (65) (42)
Debt issuance costs ................................... (35) -
-------- -------
Net cash provided by (used in) financing activities.... 60,028 (3,992)
-------- -------
Net decrease in cash and cash equivalents.............. (9,109) (4,392)
Cash and cash equivalents at beginning of the period... 32,964 19,216
-------- -------
Cash and cash equivalents at end of the period......... $ 23,855 $14,824
======== =======
Supplemental Cash Flow Information:
Cash payments for income taxes........................ $ 300 $ 625
Cash payments for interest............................ 1,641 3,258
Noncash investing and financing activities:
Capital lease obligations incurred.................. 1,294 4,531
Issuance of common stock, options and warrants...... 25,496 -
See accompanying notes to financial statements.
5
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AFC Enterprises, Inc.
Notes to Condensed Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The condensed consolidated financial statements include the accounts of AFC
Enterprises, Inc., a Minnesota corporation, and its wholly-owned subsidiaries,
AFC Properties, Inc., a Georgia corporation and Seattle Coffee Company, a
Washington corporation (See Note 2). All significant intercompany balances and
transactions are eliminated in consolidation. The consolidated entity is
referred to herein as "AFC" or "the Company".
Nature of Operations and Basis of Presentation
AFC Enterprises, Inc. operates and franchises quick-service restaurants
under the primary trade names of Popeyes Chicken & Biscuits ("Popeyes"), Churchs
Chicken ("Churchs") and Chesapeake Bagel Bakery ("Chesapeake"). In addition,
effective March 18, 1998, AFC acquired all of the common stock of Seattle Coffee
Company which operates and franchises cafes under the Seattle's Best and
Torrefazione Italia brands and operates a wholesale coffee business.
The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The accompanying condensed consolidated financial statements have not been
audited by independent certified public accountants, but in the opinion of
management contain all adjustments (which are of a normal recurring nature)
necessary for a fair presentation of the Company's financial condition and
results of operations for the interim periods presented. Interim period
operating results are not necessarily indicative of the results expected for the
full fiscal year. Certain items in the financial statements of the previous year
have been reclassified in conformity with the 1998 presentation. These
reclassifications had no effect on reported results of operations.
Significant Accounting Policies
The accounting and reporting policies practiced by the Company are set
forth in Note 1 to the Company's consolidated financial statements for the
fiscal year ended December 28, 1997, which are contained in the Company's Form
10-K, filed with the Securities and Exchange Commission on March 30, 1998 and
are incorporated herein by reference.
2. Business Acquisitions
Pinetree Foods, Inc. Acquisition
On February 10, 1998, the Company acquired all of the assets of 81
restaurant properties operated by Pinetree Foods, Inc. ("Pinetree") for a
purchase price of approximately $24.0 million. In addition, the Company recorded
liabilities of approximately $4.0 million in connection with the acquisition. Of
the 81
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restaurants, 66 were or will be converted to Popeyes Company-operated
restaurants with the remaining restaurants closed concurrently with the
purchase. The restaurants are primarily located in North and South Carolina and
Georgia. The Company funded the purchase price with internal funds and its
Acquisition Facility. The condensed consolidated statement of operations for the
twelve weeks ended March 22, 1998 include four weeks of operations generated by
63 converted Popeyes Company-operated restaurants. The conversion of the other
three restaurants had not been completed as of March 22, 1998.
The Pinetree acquisition was accounted for as a purchase in accordance with
Accounting Principles Board Opinion Number 16, "Accounting for Business
Combinations" ("APB 16"). As part of the purchase price allocation, the Company
recorded approximately $24.0 million of goodwill. The Company will amortize
this goodwill amount on a straight-line basis over a forty year period.
Seattle Coffee Company Acquisition
On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for a purchase price of approximately $70.0 million plus
the assumption of approximately $5.0 million of debt. The Company paid
approximately $41.0 million in cash funded by its Acquisition Facility and
approximately $29.0 million in AFC common stock, resulting in the issuance of
1,837,834 common shares, 441,911 options to purchase common shares and 154,454
warrants to purchase common shares. As a result of the transaction, SCC became a
wholly-owned subsidiary of the Company. The transaction included the acquisition
of a roasting and packaging facility, 58 Company-operated cafes and 10
franchised cafes under the Seattle's Best and Torrefazione Italia brands, a
wholesale business including 13 offices and more than 5,000 wholesale accounts
and a Chicago distribution center which is scheduled to open in mid 1998.
Included in the $70.0 million purchase price is a contingent payment of up to
$3.8 million, based upon SCC operations achieving a level of earnings, as
defined in the agreement, over a 52-week period from October 1, 1997 to
September 30, 1998. SCC operations for the four day period ended March 22, 1998
were immaterial and, therefore were excluded from the condensed consolidated
statement of operations for the twelve week period ended March 22, 1998.
The Company accounted for this acquisition as a purchase in accordance with
APB 16. The allocation of the purchase price resulted in the Company recording
goodwill in the amount of approximately $54.0 million which will be amortized on
a straight-line basis over a forty year period.
7
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Pro Forma Financial Information
The following unaudited pro forma results of operations for the twelve
weeks ended March 22, 1998 and fifty-two weeks ended December 28, 1997, assumes
the acquisition of SCC occurred as of the beginning of the respective periods
(in thousands).
12 Weeks 52 Weeks
Ended Ended
-------- --------
3/22/98 3/23/97
------- -------
Total revenues $128,681 $534,549
======== ========
Net income (loss) $ (374) $ 10,201
======== ========
These pro forma results have been prepared for comparative purposes only
and include certain adjustments that result in (i) an increase in amortization
expense related to the recording of SCC goodwill, (ii) an increase in interest
expense related to the acquisition debt used to partially fund the acquisition,
(iii) a decrease in interest expense related to SCC debt that was paid off at
the time of the acquisition and (iv) a decrease in amortization expense related
to the writeoff of SCC's intangible assets at the time of the acquisition. These
results do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions been in effect at the
beginning of the respective periods or of future results of operations of the
consolidated entities.
Pinetree operations have not been included in the pro forma financial
information presented above due to the relative size of the acquisition in
relation to the Company as a whole.
3. Statement of Position 98-5
On April 9, 1998, the AICPA released Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities" ("SOP 98-5"). The new standard requires
that all entities expense costs of start-up activities as those costs are
incurred. SOP 98-5 defines "start-up costs" as those costs directly related to
pre-operating, pre-opening and organization activities. This standard must be
adopted in fiscal years beginning after December 15, 1998.
The Company currently capitalizes pre-opening costs related to major
initiatives and amortizes such costs primarily over a twelve month time frame.
The unamortized balance of capitalized pre-opening costs as of March 22, 1998
will be fully amortized by the end of the Company's fiscal year ending on
December 27, 1998. The Company intends to adopt SOP 98-5 at the beginning of
fiscal year 1999. Upon adoption, the Company does not anticipate writing off any
unamortized balances as all capitalized pre-opening costs will be fully
amortized prior to the adoption of SOP 98-5. Furthermore, the Company does not
believe the adoption of SOP 98-5 will have a material adverse effect on the
Company's financial position and results of operations.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended. Such
forward-looking statements relate to the plans, objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in any discussion of the Company's expected future performance or
operations, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that
these will be realized. Such performance could be materially affected by a
number of factors, including without limitation those factors set forth in the
"Risk Factors" section in the Company's Annual Report on Form 10-K.
ACQUISITIONS
PINETREE FOODS ACQUISITION
On February 10, 1998 the Company acquired the assets of Pinetree Foods,
Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree
included 81 restaurant units located primarily in North Carolina, South Carolina
and Georgia. The assets were acquired in cash for a total purchase price of
approximately $24.0 million. The Company borrowed $16.0 million under its $100.0
million Acquisition Facility and used $8.0 million of its internal funds to
complete the transaction. As of the end of the first quarter of 1998, 63 of
these units had been converted into Company-operated Popeyes restaurants. Three
additional units will be converted into Company-operated Popeyes restaurants and
15 of the units will be closed. The Company intends to spend approximately $14.0
million to convert these restaurants. The acquisition provides Popeyes with an
opportunity to grow in geographical areas in which it formerly had little or no
presence.
SEATTLE COFFEE COMPANY ACQUISITION
On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for a purchase price of approximately $70 million plus the
assumption of approximately $5 million of debt. The Company paid approximately
$41 million in cash funded by its Acquisition Facility and approximately $29
million in AFC common stock. Included in the purchase price is a contingent
payment up to $3.8 million, based upon SCC operations achieving a level of
earnings, as defined in the agreement, over a 52-week period from October 1,
1997 to September 30, 1998.
SCC has two wholly-owned operating subsidiaries, Seattle's Best Coffee LLC
and Torrefazione Italia LLC. As a result of the merger, AFC acquired (i) a
coffee roasting and packaging facility, (ii) 58 Company-operated cafes and 10
franchised cafes under the Seattle's Best and Torrefazione Italia brands, (iii)
a wholesale business (including 13
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offices) and more than 5,000 wholesale accounts and (iv) a soon-to-be-opened
Chicago distribution center.
RESULTS OF OPERATIONS
The following table presents selected revenues and expenses as a percentage
of total revenues for the Company's Consolidated Statements of Operations for
the twelve week periods ended March 22, 1998 and March 23, 1997.
Twelve Weeks Ended
----------------------
March 22, March 23,
1998 1997
---------- ----------
Revenues:
Restaurant sales................... 84.9% 86.2%
Revenues from franchising.......... 12.1 11.0
Revenues from manufacturing........ 1.2 1.3
Other revenues..................... 1.8 1.5
----- ---------
Total revenues.................. 100.0% 100.0%
----- ---------
Costs and expenses:
Restaurant cost of sales (1)....... 31.9% 32.2%
Restaurant operating expenses (1).. 49.0 50.1
Manufacturing cost of sales (2).... 48.4 63.8
General and administrative......... 17.7 17.0
Depreciation and amortization...... 8.9 6.9
Total costs and expenses........ 94.6 94.7
Income from operations............... 5.4 5.3
Interest expense, net................ 5.3 2.6
Net income before taxes.............. 0.1 2.7
Income tax expense................... - 1.1
Net income........................... 0.1% 1.6%
- ------------
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of revenues from manufacturing.
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SELECTED FINANCIAL DATA
The following table sets forth certain financial information and other
restaurant data relating to Company-operated and franchised restaurants (as
reported to the Company by franchisees) for the twelve week periods ended March
22, 1998 and March 23, 1997:
Twelve Weeks Ended
--------------------------------
March 22, March 23, % Change
1998 1997 1997-1998
---------- --------- ---------
(dollars in millions)
EBITDA, as defined (1)........... $ 15.4 $ 14.4 7.0%
EBITDA margin.................... 13.5% 12.0% 12.1%
Capital Expenditures............. $ 5.8 $ 11.2 (48.4)%
Restaurant data (unaudited):
Systemwide restaurant sales:
Popeyes........................ $199.4 $184.5 8.1%
Churchs........................ 167.9 161.5 4.0
Chesapeake..................... 14.8 N/A N/A
------ ------
Total....................... $382.1 $346.0 10.4%
====== ======
Systemwide restaurant openings:
Popeyes........................ 90 24 275.0%
Churchs........................ 19 38 (50.0)
Chesapeake..................... 6 N/A N/A
------ ------
Total....................... 115 62 85.5%
====== ======
Systemwide restaurants open,
end of period:
Popeyes........................ 1,214 1,037 17.1%
Churchs........................ 1,368 1,293 5.8
Chesapeake..................... 143 N/A N/A
------ ------
Total....................... 2,725 2,330 17.0%
===== =====
Systemwide change in comparable
restaurant sales (2)
Popeyes........................ 1.1% 4.9%
Churchs........................ 3.0% 6.8%
- ------------
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for non-cash items related to gains/losses on asset
dispositions and write-downs, compensation expense related to stock option
activity (deferred compensation), the executive compensation award and non-
cash officer notes receivable items related to the executive compensation
award.
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(2) Comparable sales figures are not provided for Chesapeake for the periods
presented, since the Company did not acquire the franchise rights until May
1997.
FOR THE TWELVE WEEKS ENDED MARCH 22, 1998 AND MARCH 23, 1997
Certain items relating to prior periods have been reclassified to conform with
current presentation.
REVENUES
Total revenues decreased 4.6%, or $5.5 million, during the twelve weeks
ended March 22, 1998, as compared to the twelve weeks ended March 23, 1997.
RESTAURANT SALES. Restaurant sales decreased 6.0%, or $6.2 million, from
the prior year. The decrease was primarily attributable to the sale of 100
Company-operated Churchs restaurants to the Atlanta Franchise Development
Company ("AFDC") on the first day of the second quarter of 1997. AFDC operates
these units as franchised Churchs restaurant units and, after the transaction,
became the Company's largest domestic franchisee. These restaurants reported
restaurant sales of $12.3 million during the first quarter of 1997. The overall
sales decrease was partially offset by an increase in comparable sales for the
remaining Company-operated restaurants of 3.5% for the quarter and sales
generated by the 63 Pinetree units converted to Popeyes restaurants during the
latter part of the quarter.
REVENUES FROM FRANCHISING. Revenues from franchising increased $0.7
million or 5.1% from the prior year. Franchise royalty revenue increased $2.0
million or 18.7% The increase in franchise royalty revenue was primarily
attributable to an increase in the number of domestic and international
franchised restaurants from 1,223 to 1,578 and 414 to 483, respectively at March
23, 1997 and March 22, 1998. Royalty revenues during the first quarter of 1998
included royalty revenues recorded for the 100 restaurants franchised in
connection with the AFDC transaction and royalty revenues recorded for
franchised Chesapeake restaurants acquired from The American Bagel Company in
May 1997. Franchise fee income decreased $1.3 million or 52.0% for the twelve
weeks ended March 22, 1998, compared to the twelve weeks ended March 23, 1997.
The decrease in franchise fees was primarily attributable to franchise fees of
$1.2 million recorded during the first quarter of 1997 in connection with the
sale of 47 Company-operated Churchs restaurants to Royal Capital Corporation.
These restaurants are currently operated by Royal Capital Corporation as
franchised Churchs restaurants.
REVENUES FROM MANUFACTURING. Revenues from manufacturing decreased 17.8%,
or $0.3 million for the twelve weeks ended March 22, 1998, as compared to the
twelve weeks ended March 23, 1997. An increase in resources utilized for
intercompany activity related to the outfitting of the converted Pinetree units
during the first quarter of 1998 caused manufacturing revenues from outside
sources to decrease as compared to the prior year.
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OPERATING COSTS AND EXPENSES
RESTAURANT COST OF SALES. Restaurant cost of sales for the first quarter
of 1998 decreased 6.9% or $2.3 million from the prior year. The decrease was
primarily attributable to a decrease in restaurant sales. Expressed as a
percentage of restaurant sales, cost of sales were 31.9% for the twelve weeks
ended March 22, 1998, compared to 32.2% for the twelve weeks ended March 23,
1997. The decrease in the percentage was primarily attributable to a decrease in
the average cost of poultry during the first quarter of 1998 versus the first
quarter of 1997.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses for the
twelve weeks ended March 22, 1998 decreased $4.2 million or 8.0% from the
corresponding period in 1997. The decrease in restaurant operating expenses was
primarily attributable to the sale of the 100 AFDC restaurants. Restaurant
operating expenses as a percentage of restaurant sales were 49.0% for the first
quarter of 1998, compared to 50.1% for the first quarter of 1997. The decrease
in this percentage is primarily attributable to (i) a decrease in utility costs
due to the installation of more energy efficient gas fryers in Company-operated
restaurants and the unseasonably warm weather experienced throughout the nation
during the first quarter of 1998 and (ii) a decrease in maintenance and repair
costs and expenditures for supplies and smallwares due to more effective control
of these costs during the first quarter of 1998.
MANUFACTURING COST OF SALES. Manufacturing cost of sales decreased 37.7%
or $0.4 million, for the twelve weeks ended March 22, 1998, compared to the
twelve weeks ended March 23, 1997. The decrease was primarily attributable to
the decrease in manufacturing revenues during the first twelve weeks of 1998
compared to the first twelve weeks of 1997. Manufacturing cost of sales as a
percentage of manufacturing revenues decreased from 63.8% for the first quarter
of 1997 to 48.4% during the first quarter of 1998. The decrease in this
percentage was primarily due to a shift in the sales mix from the first quarter
of 1997 to the first quarter of 1998. During the first twelve weeks of 1997
revenues were primarily derived from the sale of incentive-priced custom-
fabricated product lines, while revenues during the first twelve weeks of 1998
were primarily derived from the sale of standard product lines.
GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of total revenues,
general and administrative expenses increased from 17.0% for the twelve weeks
ended March 23, 1997 to 17.7% for the twelve weeks ended March 22, 1998. The
increase in this percentage was primarily attributable to an increase in
compensation expense recorded with respect to employee stock options and an
increase administrative salaries and wages.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$1.6 million or 21.9% from the prior year. Depreciation and amortization as a
percentage of total revenues increased from 6.9% for the twelve weeks ended
March 23, 1997 to 8.9% for the twelve weeks ended March 22, 1998. The increase
in this percentage was
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primarily due to an increase in total fixed assets as of March 22, 1998 as
compared to March 23, 1997 and an increase in intangible assets resulting from
the Chesapeake acquisition in 1997 and Pinetree and Seattle Coffee Company
acquisitions in 1998. Overall, net fixed assets of $231.8 million as of March
22, 1998 were up 20.1% over net fixed assets of $193.0 million at March 23,
1997. Net intangible assets as of March 22, 1998 totaling $178.4 million were
up 94.5% over net intangible assets as of March 23, 1997 totaling $91.7 million.
NET INTEREST EXPENSE. Interest expense, net of capitalized interest and
interest income earned on short-term investments, for the twelve weeks ended
March 22, 1998 was $6.1 million, compared to $3.2 million for the twelve weeks
ended March 23, 1997. The $2.9 million increase in interest expense was due to
higher levels of average debt outstanding and higher effective interest rates
during the first quarter of 1998 as compared with the first quarter of 1997.
The increase in average debt outstanding was primarily attributable to the
refinancing transaction completed during the second quarter of 1997. The
refinancing transaction also led to higher effective interest rates during the
twelve weeks ended March 22, 1998 compared to the twelve weeks ended March 23,
1997.
INCOME TAXES. The Company's effective tax rate for the twelve weeks ended
March 22, 1998 was 43.0%, compared to an effective tax rate of 39.8% for the
twelve weeks ended March 23, 1997. The Company's effective tax rate for the
year ended December 28, 1997 was 43.9%.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its business activities primarily with funds
generated from operating activities, proceeds from the sale of shares of common
stock, proceeds from long-term debt and a revolving line of credit and proceeds
from the sale of certain Company-operated restaurants.
Net cash provided by operating activities for the twelve week periods ended
March 22, 1998 and March 23, 1997 was $9.1 million and $7.5 million,
respectively. Available cash and cash equivalents, net of bank overdrafts, as
of March 22, 1998 was $10.6 million, compared to $23.2 million at December 28,
1997. The Company's working capital deficit as of March 22, 1998 and December
28, 1997 was approximately $31.1 million and $17.8 million, respectively. The
decrease in available cash and cash equivalents, net of bank overdrafts from
December 28, 1997 to March 22, 1998 was primarily due to the acquisition of
Pinetree and debt payoffs made in connection with the Seattle Coffee Company
transaction during the first quarter of 1998.
On February 10, 1998 the Company acquired the assets of Pinetree Foods,
Inc. ("Pinetree") based in Asheville, North Carolina. The assets of Pinetree
included 81 restaurant units located primarily in North Carolina, South Carolina
and Georgia. The assets were acquired in cash for a total purchase price of
approximately $24.0 million.
14
<PAGE>
The Company borrowed $16.0 million under its $100.0 million Acquisition Facility
and used $8.0 million of its internal funds to complete the transaction. The
Company plans to convert 66 of these restaurants into Company-operated Popeyes
restaurants during the first and second quarters of 1998. The Company intends to
spend approximately $14.0 million to convert these restaurants during this
period. As of March 22, 1998, the Company had spent $6.1 million to convert
these restaurants to Company-operated Popeyes restaurants. The Company plans to
fund future conversions through cash flows provided from normal operating
activities and funds provided by its Acquisition Facility.
On March 18, 1998, the Company acquired all of Seattle Coffee Company's
("SCC") common stock for a purchase price of approximately $70 million plus the
assumption of approximately $5 million of debt. The Company paid approximately
$41 million in cash funded by its Acquisition Facility and approximately $29
million in AFC common stock. Included in the purchase price is a contingent
payment up to $3.8 million, based upon SCC operations achieving a level of
earnings, as defined in the agreement, over a 52-week period from October 1,
1997 to September 30, 1998.
During the twelve weeks ended March 22, 1998 the Company invested in
various capital projects totaling $5.8 million. During this period the Company
invested $1.3 million in new restaurant locations, $1.1 million in its re-
imaging and renovation program and $0.7 million in new management information
systems. In addition, during the first twelve weeks of 1998, the Company
invested $2.7 million in other capital assets to update, replace and extend the
lives of restaurant equipment and facilities and complete other minor projects.
Approximately $1.1 million of the above capital projects were financed through
capital lease obligations. The remaining capital projects were financed
primarily through cash flows provided from normal operating activities and
internal funds.
Based upon the current level of operations and anticipated growth,
management of the Company believes that available cash flow, together with the
available borrowings under the Senior Secured Credit Facility and other sources
of liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures, Pinetree conversion
costs and scheduled payments under the Senior Subordinated Notes and the Senior
Secured Credit Facility.
IMPACT OF INFLATION
The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs through increased prices of its menu
items. Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse. Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs.
15
<PAGE>
SEASONALITY
The Company has historically experienced the strongest operating results
during the summer months while operating results have been somewhat lower during
the winter season. Certain holidays and inclement winter weather reduce the
volume of consumer traffic at quick-service restaurants and may impair the
ability of certain restaurants to conduct regular operations for short periods
of time.
16
<PAGE>
PART 2. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) In connection with the acquisition of SCC on March 18, 1998, the
Company issued 1,837,834 shares of Common Stock, options to purchase
441,911 shares of Common Stock and warrants to purchase 154,454
shares of Common Stock to various SCC stockholders, optionholders
and warrantholders, respectively, in exchange for their SCC stock,
options and warrants. In addition, the Company has placed into
escrow an additional 139,914 shares of Common Stock, options to
purchase an additional 33,655 shares of Common Stock and warrants to
purchase an additional 45,407 shares of Common Stock to be issued to
the former SCC securityholders upon expiration of the escrow period;
provided, that neither SCC nor the former securityholders have
breached the representations of the applicable acquisition
agreement. Further, the Company has reserved for issuance up to the
former SCC securityholders an additional 139,914 shares of Common
Stock, options to purchase an additional 33,655 shares of Common
Stock and warrants to purchase an additional 45,407 shares of Common
Stock. These securities will be issued upon SCC meeting certain
earnings targets during fiscal year 1998. All of these unregistered
securities were issued by AFC pursuant to the limited offering
exemption under Rule 506 of Regulation D.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are included herewith:
10.01 Agreement and Plan of Merger among AFC Enterprises, Inc. and
Seattle Coffee Company, all of the Principal Shareholders of
Seattle Coffee Company (collectively "SCC") and AFC
Acquisition Corp (the "Merger Agreement")
10.02 Exhibit A of Merger Agreement with SCC--Disclosure Statement
10.03 Exhibit B of Merger Agreement with SCC--Stockholders
Agreement
10.04 First Amendment to Merger Agreement with SCC
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
17
<PAGE>
SIGNATURE
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.
AFC Enterprises, Inc.
Date: May 6, 1998 By: /s/ Gerald J. Wilkins
---------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18
<PAGE>
EXHIBIT 10.01
AGREEMENT AND PLAN OF MERGER
----------------------------
AMONG
AFC ENTERPRISES, INC.,
SEATTLE COFFEE COMPANY,
ALL OF THE PRINCIPAL SHAREHOLDERS OF
SEATTLE COFFEE COMPANY,
AND
AFC ACQUISITION CORP.
DATED AS OF JANUARY 23, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER is made and entered into as of the 23rd day
of JanuaryJanuary, 1998, by and among SEATTLE COFFEE COMPANY, a Washington
corporation ("SCC"); LARRY MCDONALD, KAREN MCDONALD, THE LAWRENCE MCDONALD
CHARITABLE REMAINDER UNITRUST, THE KAREN F. MCDONALD CHARITABLE REMAINDER
UNITRUST, MICHELE MCCARTHY REVOCABLE TRUST, PATRICK MCDONALD LIVING TRUST, GAI
FAMILY TRUST B, GAI FAMILY TRUST C, JAMES V. STEWART, PINCO PALLINO, INC.,
UMBERTO BIZZARRI and FREDERICK O. PAULSELL, JR. (hereinafter, sometimes
referred to, individually, as a "Principal Shareholder" and, collectively, as
the "Principal Shareholders"); AFC ENTERPRISES, INC., a Minnesota corporation
("AFC"), and AFC ACQUISITION CORP., a Georgia Corporation ("MergerCo").
RECITALS
A. SCC is engaged, either directly or through its wholly-owned subsidiaries,
Seattle's Best Coffee, Inc., a Washington corporation ("Best") and Torrefazione
Italia, Inc., a Washington corporation ("Italia") (hereinafter, Best and Italia
are sometimes collectively referred to as the "Subsidiaries"), in the United
States, London and Canada in the businesses of (i) operating a coffee roasting
facility (the "Roasting Business"); (ii) developing and operating systems (the
"Systems") for the operation of Cafes (the "Cafes") specializing in gourmet
coffees and related items; opening and operating Cafes; and franchising to
others ("Franchisees") the right to open and operate Cafes (the "Retail
Business"); (iii) operating a mail order catalogue business (the "Mail Order
Business"); and (iv) operating a wholesale distribution business specializing in
the sale and distribution of gourmet coffees and related items (the "Wholesale
Business")(hereinafter the Roasting Business, the Retail Business, the Mail
Order Business and the Wholesale Business are sometimes referred to,
individually, as a "Business" and, collectively, as the "Businesses").
B. AFC owns all of the issued and outstanding capital stock of MergerCo; and
the Principal Shareholders own more than sixty-seven percent (67%) of the issued
and outstanding capital stock of SCC.
C. The parties hereto desire to effect a merger of MergerCo into SCC (the
"Merger") pursuant to which (i) AFC will acquire all of the issued and
outstanding shares of capital stock of SCC (on a fully diluted and as converted
basis); and (ii) the shareholders of SCC will acquire cash, stock and rights to
acquire stock of AFC, all on the terms and conditions set forth in this
Agreement. If certain criteria are met, the Merger is intended to comply with
the provisions of Section 368(a)(1)(A) of the Internal Revenue Code.
AGREEMENT
The parties to this Agreement hereby acknowledge the accuracy of the foregoing
recitals, and in consideration of the mutual covenants and conditions
hereinafter set forth, and other good and valuable consideration, the receipt,
sufficiency and adequacy of which are hereby acknowledged, the parties hereto
hereby mutually agree as follows:
1
<PAGE>
1. MERGER.
------
a. The Merger.
----------
(1) Surviving Corporation. Upon the terms and subject to the conditions
---------------------
hereof, at the Effective Time (as defined in Paragraph 1.a(2)
below), MergerCo shall be merged with and into SCC and the separate
existence of MergerCo shall thereupon cease, and SCC shall continue
as the surviving corporation in the Merger (hereinafter sometimes
called the "Surviving Corporation") under the laws of the State of
Washington under the name set forth in the Certificate of
Incorporation of the Surviving Corporation.
(2) Effective Time of the Merger. As soon as practicable on the Closing
----------------------------
Date (as hereinafter defined), AFC and the Principal Shareholders
shall cause a Certificate of Merger to be filed with the office of
the Secretary of State of the State of Washington (the "Washington
Certificate of Merger") in accordance with the provisions of the
Washington Business Corporations Act (the "Washington Merger Law"),
and shall cause a Certificate of Merger to be filed with the office
of the Secretary of State of Georgia (the "Georgia Certificate of
Merger") in accordance with the provisions of the Georgia Business
Corporation Code, as amended. When used in this Merger Agreement,
the term "Effective Time" shall mean the time at which the
Washington Certificate of Merger is accepted for filing by the
Secretary of State of the State of Washington and the Georgia
Certificate of Merger is accepted for filing with the Secretary of
State of Georgia or such other time as shall be agreed to by SCC and
MergerCo and specified in each of the Certificates of Merger.
(3) Effect of the Merger. The Merger shall, from and after the
--------------------
Effective Time, have all the effects provided by the Washington
Merger Law.
(4) Certificate of Incorporation. The Certificate of Incorporation of
----------------------------
SCC as in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation of the Surviving Corporation after
the Effective Time, until thereafter changed or amended as provided
therein or by applicable law.
(5) Bylaws. The Bylaws of SCC as in effect immediately prior to the
------
Effective Time shall be the Bylaws of the Surviving Corporation,
until thereafter changed or amended as provided therein or by
applicable law.
(6) Board of Directors. The current directors and officers of SCC
------------------
immediately prior to the Effective Time shall resign, as of the
Effective Time and new directors and officers of the Surviving
Corporation shall be elected by AFC, to serve for the period
commencing as of the Effective Time and continuing until the earlier
of their respective resignations or removals or the times that their
respective successors are duly elected or appointed and qualified.
b. Status and Conversion of Securities. At the Effective Time, by virtue of
-----------------------------------
the Merger and without any action on the part of the holders thereof:
2
<PAGE>
(1) Each share of capital stock of SCC (each an "SCC Share" and,
collectively, the "SCC Shares"), which is being held by SCC as
treasury shares shall be canceled and retired without any payment
therefor.
(2) All of the SCC Shares and any and all warrants, options and other
rights to acquire SCC Shares (the "SCC Acquisition Rights")
outstanding immediately prior to the Effective Time shall be
converted, in the aggregate, into the right to receive cash, shares
of common stock of AFC (the "AFC Shares") and warrants, options and
other rights to acquire AFC Shares (the "AFC Acquisition Rights") as
set forth below. The total consideration payable to the holders of
SCC Shares (the "SCC Shareholders") for their SCC Shares and to the
holders of SCC Acquisition Rights for such SCC Acquisition Rights,
subject to adjustment as hereinafter provided, shall equal (i) Sixty
Six Million Six Hundred Fifty-One Thousand One Hundred Sixty
ThreeDollars ($66,651,163) less (ii) the amount of any Debt (as
----
defined in Paragraph 6.mm.) of SCC or the Subsidiaries which
remains unpaid as of the Closing Date less (iii) any investment
----
banking, legal or accounting fees incurred by SCC or the SCC
Shareholders in connection with the transactions contemplated herein
which are in excess of the amounts required to be paid by SCC as set
forth in Paragraph 4.e. below; and less (iv) any other fees and
----
expenses or other transaction costs required to be paid by the SCC
Shareholders as provided in Paragraph 18 below or by or any other
provision of this Agreement or any other agreement referred to
herein the payment of which has not been made or provided for by the
SCC Shareholders as of the Closing (the result being referred to as
the "Base Purchase Price"); less (v) any amounts paid by SCC to
reduce the principal of any Debt prior to Closing, as described in
Section 8.aplus (vi) the Contingent Payment, if applicable,
described in Paragraph 1.f(2) below (the Base Purchase Price plus
the Contingent Payment are hereinafter referred to as the "Purchase
Price"). The Base Purchase Price less the Holdback Funds (as
defined in Paragraph 1.f(1) below) are hereinafter sometimes
referred to as the "Net Closing Payment". The Purchase Price shall
be payable as follows:
(1) The Net Closing Payment shall be paid as follows:
(a) the holders of SCC Acquisition Rights (the "SCC Acquisition
Rights Holders") representing, on the date hereof, no less than
eighty percent (80%) of the SCC Shares subject thereto shall
convert such SCC Acquisition Rights into AFC Acquisition Rights
as set forth herein. The SCC Acquisition Rights consist of
either options to acquire SCC Shares (the "SCC Options") or
warrants to acquire SCC Shares (the "SCC Warrants"), a full and
complete list of which is set forth in Schedule 6.f. hereof. At
-------------
closing, AFC shall convert SCC Options and SCC Warrants
representing no less than eighty percent (80%) of the SCC Shares
subject thereto, as of the date hereof, to an option to acquire
AFC Shares (the "AFC Option") or a warrant to acquire AFC Shares
(the "AFC Warrant") equal in value, as of the Effective Time, to
the value of the SCC Option or SCC Warrant, as of the Effective
Time (the
3
<PAGE>
"Acquisition Rights Portion of the Purchase Price").
The AFC Options and AFC Warrants shall be exercisable upon
substantially the same terms and conditions as the SCC Options
and the SCC Warrants exchanged therefor and such other terms and
conditions as shall be reasonably required by AFC, including
without limitation an agreement to execute a shareholders
agreement in substantially the form of that contemplated by
Paragraph 4 hereof upon acquisition of any AFC Shares. For
purposes of determining the number of AFC Shares subject to each
AFC Option and AFC Warrant, the value of the AFC Shares (the "AFC
Per Share Value") shall be determined in accordance with the
terms of Paragraph 1.b(4). The value of each SCC Option and each
SCC Warrant to be exchanged hereunder shall be determined by (i)
multiplying the SCC Option Per Share Value (hereinafter defined)
times the number of SCC Shares subject to such SCC Option, and
(ii) multiplying the SCC Warrant Per Share Value (hereinafter
defined) times the number of SCC Shares subject to such SCC
Warrant. The total value of the SCC Options (the "SCC Options
Value") and the SCC Warrants (the "SCC Warrants Value") shall be
the aggregate value of all the SCC Options and the aggregate
value of all the SCC Warrants. The SCC Option Per Share Value
shall be the Net Closing Payment, divided by the sum of (i) the
number of SCC Shares issued and outstanding and owned by the SCC
Shareholders immediately prior to the Effective Time, plus (ii)
the number of SCC Shares subject to the SCC Options and SCC
Warrants granted and outstanding immediately prior to the
Effective Time (i.e. all SCC Shares on a fully diluted basis),
less the total exercise price of the SCC Option. The SCC Warrant
Per Share Value shall be the Net Closing Payment divided by the
sum of (i) the number of SCC Shares issued and outstanding and
owned by the SCC Shareholders immediately prior to the Effective
Time, plus (ii) the number of SCC Shares subject to the SCC
Options and SCC Warrants granted and outstanding immediately
prior to the Effective Time (i.e. all SCC Shares on a fully
diluted basis), less the total exercise price of the SCC Warrant.
The SCC Per Share Value shall be the Net Closing Payment less the
sum of (i) the SCC Options Value; plus (ii) the SCC Warrants
Value, divided by the number of SCC Shares issued and outstanding
owned by the SCC Shareholders immediately prior to the Effective
Time. The number of AFC Shares to be subject to each AFC Option
and AFC Warrant issued pursuant hereto shall be determined by
dividing the total value of each SCC Option and SCC Warrant being
exchanged by the AFC Per Share Value. AFC shall have the right
to pay, in cash, to the SCC Acquisition Rights Holder, the value
of any fractional AFC Share resulting from the exchange described
herein. In the event that the SCC Acquisition Rights Holders
cannot determine among themselves which SCC Acquisition Rights
will be converted to AFC Acquisition Rights for purposes of the
eighty percent (80%) requirement hereunder, then and in such
event, eighty percent (80%) of each SCC Option and SCC Warrant
shall be converted to an AFC Option and AFC Warrant as provided
herein. In the event that it is determined, in the reasonable
opinion of counsel to SCC, that the SCC Warrants
4
<PAGE>
cannot be converted into AFC Warrants as contemplated herein on a
tax-free basis to the SCC Warrantholders, then the requirements
of this subparagraph shall not apply to the SCC Warrants and the
SCC Warrantholders may elect to receive cash or AFC Shares equal
to the value of their SCC Warrants in the same manner as the SCC
Shareholders.
(b) AFC shall issue to each SCC Shareholder electing to convert
all or a portion of his SCC Shares into AFC Shares, that number
of AFC Shares (valued at the AFC Per Share Value) determined by
dividing the value of the SCC Shares (the SCC Per Share Value
times the number of SCC Shares to be exchanged owned by such SCC
Shareholder) to be exchanged for AFC Shares, by the AFC Per
Share Value (the resulting number of AFC Shares being hereinafter
referred to as the "AFC Stock Portion of the Purchase Price").
Each SCC Shareholder shall indicate the number of SCC Shares to
be exchanged for AFC Shares in a written election form completed
by the SCC Shareholder and provided to SCC, AFC and the Funding
Agent (as hereinafter defined) not less than five (5) days prior
to Closing; provided that AFC shall have the right to pay, in
cash, to the holders of SCC Shares, the value of any fractional
AFC Share resulting from the exchange described herein.
(c) To the extent that all of the SCC Shareholders and SCC
Acquisition Rights Holders have not elected to exchange such SCC
Shares and SCC Acquisition Rights for AFC Shares and AFC
Acquisition Rights as provided herein, the remaining balance of
the Net Closing Payment, if any, shall be paid to the SCC
Shareholders and SCC Acquisition Rights Holders in cash (the
"Cash Portion of the Purchase Price") based upon the value of the
SCC Shares and SCC Acquisition Rights surrendered to the Funding
Agent as more particularly described in Paragraph 1.c. below;
(2) The Holdback Funds shall be paid to the SCC Shareholders and the
SCC Acquisition Rights Holders in the same ratio of cash, AFC Shares
and AFC Acquisition Rights as the Net Closing Payment payable to the
SCC Shareholders and SCC Acquisition Rights Holders pursuant to
subparagraphs (a), (b) and (c) above and as reflected on Schedule 1.c.
-------------
(the "Net Closing Payment Ratio").
(3) The Contingent Payment, if any, shall be paid, as provided in
Paragraph 1.(f)(2) below, to the SCC Shareholders and the SCC
Acquisition Rights Holders in the ratio of cash, AFC Shares and AFC
Acquisition Rights equal to the Net Closing Payment Ratio.
(4) The amounts withheld pursuant to subparagraphs b.2(iii) and
b.2(iv) above, if any, shall be paid by SCC or AFC at Closing in
satisfaction of the obligations referred to in such subparagraphs.
5
<PAGE>
The funding of the amounts payable hereunder shall be effected as
provided in Paragraph 1.c. below.
(3) Each share of common stock of MergerCo outstanding immediately prior
to the Effective Time shall be converted into one fully paid and
nonassessable share of common stock of the Surviving Corporation.
(4) For purposes hereof, if on the Closing Date, AFC's stock is traded on
a national securities exchange, or in the NASDAQ National Market System
or over-the-counter market, the value of each AFC Share as of the
Effective Time shall be the average closing bid price for the five (5)
trading days immediately preceding the Closing Date; otherwise, the value
of each AFC Share as of the Effective Time shall be determined, in good
faith, by the accountant then regularly servicing AFC (the "AFC
Accountant") as follows:
(a) Multiply AFC's EBITDA (as determined by the AFC Accountant in
accordance with the definition hereinafter set forth) for the
fiscal year ending December 28, 1997 times nine (9);
(b) Subtract from such product the total amount of AFC's long-term
debt and capital leases as of the Closing Date;
(c) Add to the difference the amount of AFC's cash and cash
equivalents as of the Closing Date;
(d) Divide the total by the number of AFC Shares outstanding as of
the Closing Date and all AFC Shares issuable pursuant to
warrants, options and other acquisition rights (i.e. AFC
Shares on a fully diluted basis) immediately prior to the
Effective Date; and
(e) The quotient shall be the value per AFC Share.
For purposes of this subparagraph, the term "AFC's EBITDA" shall
mean AFC's income from operations exclusive of interest expense and
taxes increased by depreciation and amortization and adjusted for
non-cash items related to gains/losses on asset dispositions and
writedowns, compensation expense related to stock option activity
(deferred compensation), any executive compensation awards payable
in stock of AFC and non-cash officer notes receivable related to
executive compensation awards. All determinations by the AFC
Accountant pursuant to this Paragraph 1.b (4) shall be binding on
all parties, unless such determination was not made in good faith,
in which event the dispute resolution procedure contained in
Paragraph 1.f(2)(d) shall apply.
c. Transaction Funding. At the Closing, AFC shall, either through a loan to
-------------------
the Surviving Corporation or MergerCo or a contribution to MergerCo's
capital, deposit with a national banking institution to be mutually
agreed upon by the Principal Shareholders and AFC, as funding agent (the
"Funding Agent"): (i) immediately available funds in an amount equal to
the Cash Portion of the Purchase Price; (ii)
6
<PAGE>
AFC Shares having a value equal to the AFC Stock Portion of the Purchase
Price; and (iii) AFC Acquisition Rights having a value equal to the
Acquisition Rights Portion of the Purchase Price. Funding Agent shall
hold and disburse the Cash Portion of the Purchase Price, the AFC Share
Portion of the Purchase Price and the Acquisition Rights Portion of the
Purchase Price to the SCC Shareholders and SCC Acquisition Rights holders
pursuant to Schedule 1.c. which shall be delivered on or before the
-------------
Closing Date and attached to the Disclosure Statement (as hereinafter
defined) to reflect the election of the SCC Shareholders and SCC
Acquisition Rights holders described in Paragraph 1.b(2) above. All fees
and expenses of the Funding Agent shall be paid from the Cash Portion of
the Purchase Price.
d. Exchange of Certificates; Termination of Options and Warrants.
-------------------------------------------------------------
(1) Upon surrender to the Funding Agent of all stock certificates (the
"Certificates") evidencing his, her or its SCC Shares (and upon
delivery of an executed Shareholders Agreement), each SCC
Shareholder shall be entitled to receive, without interest, that
portion of the Cash Portion of the Purchase Price and that portion
of the AFC Stock Portion of the Purchase Price set forth opposite
such SCC Shareholder's name on Schedule 1.c. attached to the
---------------
Disclosure Statement (as hereinafter defined). Until so surrendered
and exchanged, each such Certificate shall represent solely the
right to receive the consideration described in Schedule 1.c. In
---------------
case any payment pursuant to this Paragraph 1.d(1) is made to a
holder other than a registered owner of a surrendered Certificate,
it shall be a condition to such payment that the Certificate so
surrendered shall be properly endorsed in proper form for transfer
and that all applicable transfer and other taxes have been paid. As
soon as practical after execution of this Agreement, SCC shall mail
to each SCC Shareholder of record (other than to SCC Shareholders as
to whom surrender and payment arrangements previously have been
made) a form letter of transmittal, a copy of this Agreement and
instructions for use in surrendering Certificates and other
documents and receiving payment for each SCC Share.
(2) Upon execution and delivery to the Funding Agent of termination
agreements in form and substance acceptable to AFC (the "SCC
Acquisition Rights Termination Agreements") pursuant to which the
SCC Acquisition Rights Holders either (i) cancel all of their SCC
Acquisition Rights or (ii) exchange their SCC Acquisition Rights for
that portion of the Cash Portion of the Purchase Price, if any, that
portion of the AFC Stock Portion of the Purchase Price, if any, and
that portion of the Acquisition Rights Portion of the Purchase
Price, if any, set forth opposite their respective names on Schedule
--------
1.c. attached to the Disclosure Statement (as hereinafter defined).
------
(3) All stock certificates evidencing the AFC Shares issued pursuant
hereto shall bear all legends required by applicable state and
federal securities laws and by the Shareholders Agreement (as
defined in Paragraph 4 hereof).
e. Dissenting Shares. Notwithstanding anything herein to the contrary, SCC
-----------------
Shares outstanding immediately prior to the Effective Time and held by an
SCC
7
<PAGE>
Shareholder (a "Dissenting Shareholder") who has not voted in favor of
the Merger or consented thereto in writing and who has demanded appraisal
for such shares in accordance with Washington Merger Law, if the
Washington Merger Law provides for appraisal rights for such shares as a
result of the Merger (the "Dissenting Shares"), shall not be converted
into a right to receive any portion of the Purchase Price.
Notwithstanding the foregoing, if, after the Effective Time, the
Dissenting Shareholder fails to perfect his, her or its right of
appraisal or withdraws or loses his, her or its right of appraisal, such
Dissenting Shares shall be treated as if they had been converted as of
the Effective Time into a right to receive the consideration, if any, to
which the Dissenting SCC Shareholder is entitled as provided in Schedule
--------
1.c. attached to the Disclosure Statement (the "Dissenting Shareholder
----
Consideration") without interest or dividends thereon. In the event the
Dissenting Shareholder perfects and prosecutes his, her or its appraisal
rights, then the Dissenting Shareholder Consideration shall be retained
by the Funding Agent until the amount payable to the Dissenting
Shareholder for the Dissenting Shares is finally determined. If the
Dissenting Shareholder Consideration so retained exceeds the actual
consideration determined to be payable to the Dissenting Shareholder,
then such consideration shall be paid from the Dissenting Shareholder
Consideration held by the Funding Agent and the balance shall be paid to
the non-dissenting shareholders. In the event the Dissenting Shareholder
Consideration so retained is insufficient to pay the actual consideration
determined to be payable to the Dissenting Shareholder, then all of the
Dissenting Shareholder Consideration shall be paid by the Funding Agent
to the Dissenting Shareholder and the balance (the "Deficiency") shall be
paid by the non-dissenting shareholders (including the Principal
Shareholders), who shall be jointly and severally liable for such excess.
The Principal Shareholders shall be responsible for the collection of any
such Deficiency and if the entire amount is not collected within five (5)
days of the determination of the amount due, the Principal Shareholders
shall pay the remaining Deficiency to the Funding Agent. SCC will give
AFC prompt notice of any demands received by SCC for appraisal of SCC
Shares, and prior to the Effective Time, AFC shall have the right to
participate in all negotiations and proceedings with respect to such
demands. Prior to the Effective Time, SCC shall not, except with the
prior written consent of AFC, make any payment with respect to, or settle
or offer to settle any such demands.
f. Deferred Payment; Contingent Payment; Adjustment of Purchase Price.
-------------------------------------------------------------------
(1) Deferred Payment. At the expiration of the twelve (12) consecutive
----------------
month period following the Closing Date (the "Holdback Period"), the
Surviving Corporation or AFC (through a loan or capital contribution
to the Surviving Corporation), shall pay to, and deposit with, the
Funding Agent, in proportion to the Net Closing Payment Ratio, cash,
AFC Shares or AFC Acquisition Rights, with an aggregate value equal
to Three Million Five Hundred Ninety Thousand Dollars ($3,590,000)
plus interest on such amount payable, in one (1) installment at the
end of the Holdback Period, at the rate of 5.7% per annum compounded
monthly from the Effective Date through the last day of the Holdback
Period (the aggregate of such amounts being hereinafter referred to
as the "Holdback Funds"). The Holdback Funds will be retained by
the Funding Agent in escrow for a period of two
8
<PAGE>
(2) years following the Holdback Period (the "Escrow Period") to
secure the continuing obligations of the Principal Shareholders for
indemnification as described in Paragraph 12 below. The Principal
Shareholders, AFC and the Funding Agent shall, prior to Closing,
enter into an Escrow Agreement setting forth the terms and
conditions of such escrow and providing, inter alia, for the payment
----------
of all interest on the escrowed funds, pro rata, to the SCC
--------
Shareholders and SCC Acquisition Rights Holders during the term
thereof based upon their relative shares of the cash portion of the
Holdback Funds as set forth on Schedule 1.c..
------------
(2) Contingent Payment.
------------------
(a) Amount. In addition to the Holdback Funds and at the end of
------
the Holdback Period, the Surviving Corporation or AFC (through
a loan or contribution to the Surviving Corporation) shall,
pay to the Funding Agent, in proportion to the Net Closing
Payment Ratio, cash, AFC Shares and AFC Acquisition Rights
with an aggregate value of Three Million Eight Hundred
Thousand Dollars ($3,800,000) (the "Contingent Payment") to be
distributed among the SCC Shareholders and the SCC Acquisition
Rights Holders, as set forth on Schedule 1.c., if, but only
-------------
if, SCC's EBITDA (as hereinafter defined) for SCC's thirteen
(13), four (4) week periods commencing October 1, 1997 and
ending September 30, 1998 (the "Determination Year"), equals
or exceeds the sum of Nine Million Eight Hundred Fifty Four
Thousand Dollars ($9,854,000) (the "Target EBITDA"); provided,
however, that if SCC's EBITDA as computed hereunder is less
than the Target EBITDA but at least Eight Million Eight
Hundred Sixty-eight Thousand Six Hundred Dollars ($8,868,600)
(the "Minimum EBITDA"), the Contingent Payment hereunder shall
be One Million Nine Hundred Thousand Dollars ($1,900,000). If
SCC's EBITDA as computed hereunder is less than the Minimum
EBITDA, no payment shall be due hereunder.
(b) Determination of EBITDA. As used herein "EBITDA" shall mean
-----------------------
the earnings of SCC and the Subsidiaries on a consolidated
basis before deductions or offset for interest expense, taxes,
depreciation and amortization, as determined by the accountant
regularly servicing SCC at the end of the Determination Year
(the "SCC Accountant") in accordance with generally accepted
accounting principals ("GAAP") consistently applied with
respect to prior periods. Such determination shall be
exclusive of Extraordinary Business Expenses incurred by SCC,
including, but not limited to, any amounts paid by SCC (i)
under Section 4.e, and (ii) in satisfaction of all or part of
the WC Line of Credit after Closing, and shall be adjusted for
non-cash items related to gains/losses on asset dispositions
and writedowns, compensation expense related to stock option
activity (deferred compensation), any executive compensation
awards payable in stock of SCC or, after Closing,
9
<PAGE>
AFC and non-cash officer notes receivable related to executive
compensation awards. The term "Extraordinary Business
Expenses" shall mean any expense or liability incurred by SCC
as a result of this transaction or as a result of material
variances in the 1998 Business Plan (attached hereto as
Schedule 1.f(2)) incurred at AFC's request or direction. AFC
----------------
shall cause the SCC Accountant to prepare and deliver to AFC
and the SCC Shareholder Representative, on or before the last
day of the Holdback Period, a statement of SCC's EBITDA for
the Determination Year, together with the work papers
reflecting the computation thereof (collectively the "EBITDA
Statement"). If the actual EBITDA for the Determination Year
equals or exceeds the Minimum EBITDA, then AFC shall, on or
before the last day of the Holdback Period, pay the applicable
Contingent Payment (i.e. $1,900,000 if the Minimum EBITDA is
achieved or $3,800,000 if the Target EBITDA is achieved, as
the case may be) to the Funding Agent to be disbursed in
accordance with Schedule 1.c.
-------------
(c) AFC Negative Covenant. AFC shall not take any action or
---------------------
require SCC to take any action not included in, or
contemplated by, SCC's 1998 Business Plan attached hereto as
Schedule 1.f(2) that materially adversely impacts SCC's
---------------
ability to achieve the Minimum EBITDA or Target EBITDA. In
the event the Principal Shareholders become aware of any
action taken or required by AFC in violation of this covenant,
the Principal Shareholders shall deliver to AFC written notice
of such adverse action. If AFC fails or refuses to cure or
take material steps to commence to cure such adverse action
within fifteen (15) days after such notice, such adverse
action shall become an "Alleged Default Event". If SCC fails
to accomplish the Minimum or Target EBITDA and such failure
was caused by the Alleged Default Event or an adverse action
by AFC with respect to which a Principal Shareholder was not
aware, then the Contingent Payment shall become due and
payable, subject to AFC's right to dispute as hereinafter set
forth, as if the Minimum or Target EBITDA had been achieved.
If AFC disputes the contention of the Principal Shareholders
regarding the effect of such adverse action or Alleged Default
Event, such dispute shall be resolved in accordance with the
dispute resolution procedure described in Paragraph 1.f(2)(d);
provided, however, that the prevailing party in such dispute
shall be entitled to recover from the non-prevailing party all
of the fees, costs and expenses (including reasonable
attorney's fees) incurred by such party in connection with
such dispute.
(d) Dispute Resolution. In the event AFC or the SCC Shareholder
------------------
Representative shall disagree with the determination of EBITDA
or, Extraordinary Expenses, as provided for above, or the
determination of the Working Capital Ratio as provided for
below, then such party shall deliver to the other party or
parties a notice, within fifteen (15)
10
<PAGE>
business days after delivery to AFC and the SCC Shareholder
Representative of the EBITDA Statement or the Working Capital
Ratio certificate, as the case may be, identifying in
reasonable detail any such proposed adjustments to the EBITDA
Statement or Working Capital Ratio certificate, and AFC and
the SCC Shareholder Representative shall negotiate in good
faith to resolve any disagreement with respect thereto. If,
after a period of ten (10) business days following the date of
delivery of the notice of proposed adjustments referred to
above, AFC and the SCC Shareholder Representative shall not
have resolved any such disagreements, then AFC and the SCC
Shareholder Representative shall jointly select an independent
public accounting firm of nationally recognized reputation,
which firm of accountants shall make a final and binding
resolution of the disagreement. Such selection shall be made
in the following manner: AFC shall submit within ten (10)
business days a list of three (3) nationally recognized
accounting firms (together with the name of the partner at
each firm who will be responsible for handling the firm's
engagement) who are not then engaged by AFC or its affiliates,
from which list the SCC Shareholder Representative shall
select one (1) firm (which is not then engaged by the SCC
Shareholder Representative or any Principal Shareholder or any
of his, her or its affiliates) within ten (10) business days.
The costs and expenses for the services of such independent
public accounting firm shall be borne equally between AFC and
the SCC Shareholders.
(e) Default. Time is of the essence in this Agreement. The
-------
occurrence of any one of the following events shall constitute
a default by AFC under this Agreement:
(i) Any failure to pay when due the full amount of principal
interest due under Paragraphs f(1) or f(2) above.
(ii) If AFC becomes insolvent or is the subject of a petition
in bankruptcy, either voluntary or involuntary (which is
not dismissed within thirty days), or in any other
proceeding under the federal bankruptcy laws, or makes an
assignment for the benefit of creditors.
(f) Effect of Default. In the event AFC defaults with respect to
-----------------
its obligations to pay all or any portion of the Holdback
Funds or Contingent Payment when due then, commencing on the
due date, any unpaid amounts shall accrue interest at a rate
of 18% per annum until paid in full.
(g) Valuation. Regardless of the timing of delivery, all AFC
---------
Shares and AFC Acquisition Rights delivered pursuant to this
Paragraph 1.f(1) and 1.f(2) shall be valued based upon the AFC
Per Share Value as computed herein as of the Effective Time.
11
<PAGE>
g. Tax-free Reorganization. Notwithstanding anything herein to the
-----------------------
contrary, in the event SCC, the SCC Shareholders and the SCC Acquisition
Rights Holders satisfy all requirements of the Internal Revenue Code of
1986, as amended (the "Code") such that the Merger contemplated herein
may be structured as a tax-free reorganization to the surviving company,
SCC and the SCC Shareholders (except to the extent of cash consideration
and other boot paid to the SCC Shareholders) including, but not limited
to, the requirement that a sufficient percentage of the value of the
consideration be paid in AFC Shares (the "Minimum Exchange Percentage"),
then AFC hereby agrees that it will, upon the request of SCC and the
Principal Shareholders, execute an amendment to this Agreement to
structure the Merger as a forward merger in which the Minimum Exchange
Percentage requirement is satisfied, provided that AFC receives opinions
from both its accountants, Arthur Andersen, LLP, and attorneys, Cohen
Pollock Merlin Axelrod & Tanenbaum, P.C., that, the forward merger, as
structured, should (except to the extent of cash paid to the SCC
Shareholders) qualify for tax-free treatment under Section 368(a)(1)(A)
of the Code.
2. DUE DILIGENCE REVIEW.
--------------------
a. Access. To enable AFC to conduct a thorough due diligence review (the
------
"Due Diligence Review") of the Businesses and the assets (the "Corporate
Assets") of SCC and the Subsidiaries and any marketing and advertising
fund maintained by SCC or any Subsidiaries for the benefit of any of the
Franchisees (the "Advertising Funds"), SCC and each Principal Shareholder
represents and agrees that, subject to execution and delivery of
Confidentiality and Nondisclosure Agreements satisfactory to SCC, AFC and
AFC's representatives, legal counsel, accountants, advisors and lenders'
representatives shall be given, after the date hereof and until Closing,
full access to (i) the assets and properties of SCC and the Subsidiaries,
the Advertising Funds and the Businesses; (ii) the books and records
(including electronic records) of SCC, the Subsidiaries and the
Advertising Funds, including, but not limited to, income tax returns,
sales and use tax returns, financial statements and related materials,
bank statements, invoices, accounts receivable, accounts payable and
franchisee, developer and supplier lists; (iii) all files maintained by
SCC and its Subsidiaries relating to Franchisees, developers, Corporate
Assets, Advertising Funds and the conduct of the Businesses prior to the
Closing. In addition, SCC shall permit AFC to copy, at AFC's expense,
the contents of all such books, records and files; and upon reasonable
notice to SCC and after public announcement of the transaction
contemplated herein, AFC shall be entitled to contact and communicate
with SCC's and the Subsidiaries' employees, officers, representatives,
Franchisees, creditors, customers and others having a business
relationship with it. Notwithstanding the Due Diligence Review conducted
by AFC and any knowledge of facts determined or determinable by the AFC
pursuant to such Due Diligence Review, AFC has the right to rely upon the
representations, warranties, covenants and agreements of SCC and the
Principal Shareholders contained in this Agreement and any document
executed pursuant hereto or delivered in connection herewith. AFC
agrees, however, to act in good faith with respect to any knowledge
obtained by it in the course of the Due Diligence Review and to use its
reasonable efforts to advise SCC, prior to Closing, of any breaches of
warranties, representations or covenants which AFC may discover in the
course
12
<PAGE>
thereof. Notwithstanding anything herein to the contrary, if AFC or its
independent accountants have actual knowledge prior to Closing, without
having any obligation to undertake any factual inquiry or investigation,
that any representation or warranty made by the Principal Shareholders or
SCC is untrue and fail to so advise the Principal Shareholders prior to
Closing, the Principal Shareholders shall have no liability with respect
to such representation or warranty.
b. Schedules. Unless otherwise provided for in this Agreement, SCC and the
---------
Principal Shareholders shall prepare all Schedules to the Disclosure
Statement (the "Schedules") required herein and deliver such Schedules to
AFC, together with true and correct copies of any documents required to
be attached thereto, on or before the tenth business day following the
date of execution of this Agreement. AFC shall examine each such
Schedule and related documents, and within ten (10) business days
following AFC's receipt thereof, AFC shall notify SCC whether AFC accepts
or rejects such Schedule and related documents. In the event AFC and SCC
and the Principal Shareholders are unable to agree with respect to a
material issue on any Schedule within ten (10) business days following
SCC's receipt of notice of AFC's rejection thereof, AFC shall either
agree in writing within two (2) business days thereafter to accept such
Schedule as submitted by SCC and proceed with the transactions
contemplated hereunder or this Agreement shall terminate.
c. Disclosure Statement. Within five (5) business days after the acceptance
--------------------
by AFC of all Schedules required by this Agreement, SCC and the Principal
Shareholders shall execute and deliver to AFC a Disclosure Statement in
the form attached hereto as Exhibit "A" (the "Disclosure Statement"),
-----------
together with all Schedules referred to therein (as approved by AFC) and
upon such execution and delivery, the Disclosure Statement and all
Schedules shall be attached to and made a part of this Agreement.
3. CLOSING. The closing of the transactions contemplated by this Agreement
-------
(the "Closing") shall take place on or before January 31, 1998 (the "Closing
Date"); provided, however, that AFC or SCC, may at its option, extend the
Closing Date to a date not later than February 27, 1998; provided, further,
however, that either party hereto may require, after January 31, 1997, that the
Closing occur upon five (5) days prior notice to the other party once all
conditions to Closing are either satisfied or waived. The parties agree to use
their reasonable efforts and to act in good faith to satisfy all conditions to
Closing and consummate the transaction at the earliest possible date. The
Closing shall be held at the offices of Cohen Pollock Merlin Axelrod &
Tanenbaum, P.C. in Atlanta, Georgia, at 10:00 a.m. on the Closing Date.
4. ADDITIONAL AGREEMENTS.
---------------------
a. Restrictive Covenant. At Closing, Larry McDonald shall enter into a
--------------------
Confidentiality and Non-Competition Agreement with the Surviving
Corporation in form and substance acceptable to AFC (the "Confidentiality
and Non-Competition Agreement"). Notwithstanding anything herein to the
contrary, such Confidentiality and Non-Competition Agreement shall (i)
be for a term of five (5) years; (ii) prohibit Larry McDonald from,
directly or indirectly, franchising, owning or operating, anywhere in the
world, (x) a coffee roasting facility, (y) cafes or similar facilities
specializing in the sale of coffee or (z) wholesale businesses involved
in the
13
<PAGE>
sale or distribution of coffee; and (iii) be governed by and
construed and enforced under the laws of the State of Washington.
b. Shareholders Agreement. At Closing, each of the SCC Shareholders who
----------------------
acquire AFC Shares and AFC shall enter into a Shareholders Agreement in
the form attached hereto as Exhibit "B" (the "Shareholders Agreement")
-----------
governing the transferability, conversion, disposition and voting of the
AFC Shares owned by the SCC Shareholders.
c. Shareholder Representative Agreement. Simultaneously with the execution
------------------------------------
and delivery of the of the Disclosure Statement, the Principal
Shareholders shall deliver to AFC, an agreement in form and substance
acceptable to AFC and executed by no less than 66-2/3% of the SCC
Shareholders (the "Shareholders Representative Agreement") designating
one individual with whom AFC may communicate with respect to decisions on
behalf of the SCC Shareholders required or permitted to be made pursuant
to this Agreement.
d. Severance Pay. AFC shall cause SCC, immediately following Closing, to
-------------
implement a severance pay policy for employees of SCC and the
Subsidiaries which is substantially the same as the severance pay policy
in effect for the employees of AFC. All employees of SCC or the
Subsidiaries shall receive service credit under such plan for their time
employed by SCC and the Subsidiaries prior to the Effective Time of the
Merger. The payment of any severance pay by SCC or the Subsidiaries
after Closing shall not be considered an Extraordinary Expense for
purposes of computing SCC's EBITDA.
e. Investment Banker and Legal Fees. In the event that the sum of the AFC
--------------------------------
Stock Portion of the Purchase Price and the Acquisition Rights Portion of
the Purchase Price shall be equal to or greater than Twenty-Seven Million
Dollars ($27,000,000), the Surviving Corporation shall pay up to One
Million Two Hundred Thousand Dollars ($1,200,000) for legal, accounting
and investment banker fees incurred in connection with this transaction.
All amounts in excess of One Million Two Hundred Thousand Dollars
($1,200,000) shall be deducted from the Net Closing Payment as provided
above and paid by The Surviving Corporation or AFC as provided in
Paragraph 1.b. above. In the event that the AFC Stock Portion of the
Purchase Price plus the Acquisition Rights Portion of the Purchase Price
shall be less than Twenty-Seven Million Dollars ($27,000,000) but greater
than Nineteen Million Six Hundred Thousand Dollars ($19,600,000), the
Surviving Corporation shall pay up to Eight Hundred Thousand Dollars
($800,000) for legal, accounting and investment banker fees incurred in
connection with this transaction. In the event that the AFC Stock Portion
of the Purchase Price plus the Acquisition Rights Portion of the Purchase
Price shall be less than Nineteen Million Six Hundred Thousand Dollars
($19,600,000) the investment banking fees, accounting and legal fees
shall be deducted from the Net Closing Payment and paid by the Surviving
Corporation or AFC as provided in Paragraph 1.b. above. In addition, in
the event that the legal, accounting and investment banker fees exceed
the amount required to be paid by the Surviving Corporation hereunder,
such excess shall be paid by deducting it from the Net Closing Payment
and it shall be paid by the Surviving Corporation or AFC as provided in
Paragraph 1.b. above. The payment of any such fees by the Surviving
14
<PAGE>
Corporation pursuant to this Section shall not be included in the
calculation of SCC's EBITDA under this Agreement.
f. [Reserved]
g. Continuity of Interest. Prior to Closing, AFC shall enter into a
----------------------
continuity of interest agreement with the SCC Shareholders in form and
substance acceptable to AFC and the SCC Shareholders.
h. Principal Shareholder Approval. The Principal Shareholders covenant and
------------------------------
agree that they will vote all of the shares owned by them in favor of the
transactions contemplated herein.
5. HART-SCOTT-RODINO COMPLIANCE. As soon as practical after the execution
----------------------------
and delivery of this Agreement, AFC and SCC shall prepare and make all necessary
filings under, and shall work in good faith to obtain all consents required
under, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act").
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SCC AND THE PRINCIPAL
------------------------------------------------------------------
SHAREHOLDERS. To induce AFC to enter into this Agreement and consummate the
- ------------
transactions contemplated hereunder, SCC and each of the Principal Shareholders,
jointly and severally, hereby represent, warrant and covenant as of the date
hereof, as follows, which representations, warranties and covenants set forth
herein shall be true and correct on the Closing Date and shall survive the
consummation of the transactions hereunder:
a. Organization and Good Standing of SCC . SCC (i) is a corporation duly
--------------------------------------
organized, validly existing and in good standing under the laws of the
State of Washington; (ii) has all requisite corporate power and authority
to conduct its business and own, operate and lease its properties as and
in the places where such business is now conducted and such properties
are now owned, leased or operated; (iii) is duly qualified as a foreign
corporation in all jurisdictions, both inside and outside of the United
States of America, in which it transacts business and in which failure
to qualify would have a material adverse effect on its business,
financial condition or Corporate Assets, a list of which foreign
jurisdictions is set forth on Schedule 6.a. attached to the Disclosure
---------------
Statement; and (iv) other than Best and Italia, has no subsidiaries
(defined as an affiliated organization in which SCC owns, directly or
indirectly, at least ten percent (10%) of the outstanding stock or other
equity).
b. Organization and Good Standing of Best. Best (i) is a corporation duly
--------------------------------------
organized, validly existing and in good standing under the laws of the
State of Washington; (ii) has all requisite corporate power and authority
to conduct its business and own, operate and lease its properties as and
in the places where such business is now conducted and such properties
are now owned, leased or operated; (iii) is duly qualified as a foreign
corporation in all jurisdictions, both inside and outside of the United
States of America, in which it transacts business and in which failure to
qualify would have a material adverse effect on its business, financial
condition or Corporate Assets, a list of which foreign jurisdictions is
set forth on Schedule 6.b. attached to the Disclosure Statement; and
---------------
(iv) has no subsidiaries, as defined in subparagraph a above.
15
<PAGE>
c. Organization and Good Standing of Italia. Italia (i) is a corporation
----------------------------------------
duly organized, validly existing and in good standing under the laws of
the State of Washington; (ii) has all requisite corporate power and
authority to conduct its business and own, operate and lease its
properties as and in the places where such business is now conducted and
such properties are now owned, leased or operated; (iii) is duly
qualified as a foreign corporation in all jurisdictions in, both inside
and outside of the United States of America, in which it transacts
business and in which failure to qualify would have a material adverse
effect on its business, financial condition or Corporate Assets, a list
of which foreign jurisdictions is set forth on Schedule 6.c. attached to
---------------
the Disclosure Statement; and (iv) has no subsidiaries, as defined in
subparagraph a above.
d. SCC-Corporate Power, Authority and Enforceability. SCC has full right,
-------------------------------------------------
title and authority to enter into this Agreement and, upon SCC's receipt
of necessary third party and shareholder approvals, to consummate the
transactions contemplated hereby. At closing, upon receipt of necessary
shareholder approval all corporate action on the part of SCC, its
directors, necessary for (i) the authorization, execution, delivery and
performance of the Transaction Documents (as defined in Paragraph 11
below) to which it is a party; and (ii) the performance of all of the
obligations of SCC under the Transaction Documents, has been duly and
validly taken. This Agreement when executed and delivered on behalf of
SCC shall constitute a valid and binding obligation of SCC, enforceable
against it in accordance with its terms. Each of the other Transaction
Documents to which SCC is a party shall, when executed and delivered on
behalf of SCC and upon receipt of any consents required in connection
therewith, constitute a valid an binding obligation of SCC, enforceable
against it in accordance with its terms.
e. Principal Shareholders - Authority and Enforceability. Each of the
-----------------------------------------------------
Principal Shareholders have full right, title and authority to enter
into this Agreement and assign the SCC Shares pursuant to the Merger and
consummate the transactions contemplated hereby. This Agreement and each
of the other Transaction Documents to which each Principal Shareholder is
a party, when executed and delivered by such Principal Shareholder, shall
constitute a valid and binding obligation of the Principal Shareholder,
enforceable against him, her or it in accordance with its terms. No
spousal consents are required from any spouse of any Principal
Shareholder who is a party to this Agreement.
f. Capitalization/Stock Ownership.
------------------------------
(1) The authorized capital stock of SCC consists solely of 10,000,000
shares of no par value common voting stock, of which 5,211,260
shares are issued and outstanding and 4,788,740 shares are held as
treasury shares and 2,000,000 shares of no par value preferred
stock, of which no shares are issued and outstanding and 2,000,000
shares are held as treasury shares. Set forth on Schedule 6.f.
--------------
attached to the Disclosure Statement is a true, correct and complete
list of all of the SCC Shareholders and the number of SCC Shares
owned by each of them, together with a true and correct list of all
options, warrants convertible securities and other rights
convertible into shares of SCC. Upon closing, each Principal
Shareholder shall own his, her or its
16
<PAGE>
SCC Shares, as reflected in Schedule 6.f. free and clear of all
------------
liens, claims, charges, encumbrances, voting proxies or voting
agreements, and shall have full and unfettered right to transfer and
deliver such SCC Shares in connection with the Merger. Each issued
SCC Share is duly authorized, validly issued, fully paid and
nonassessable. Except as set forth on Schedule 6.f., there are no
-------------
existing options, warrants, calls or commitments with respect to any
of the authorized and unissued or treasury SCC Shares, and no
outstanding securities convertible into or exchangeable for any
capital stock or any options or warrants to acquire capital stock of
SCC. Except as otherwise provided herein, prior to the Effective
Time all such options, warrants, calls or commitments and all
convertible shares shall be fully executed or converted and no such
options, warrants, calls or convertible securities shall be
outstanding as of the Effective Time.
(2) The authorized capital stock of Best consists solely of Five Million
(5,000,000) shares of $ no par value common voting stock, of which
Two Million Seven Hundred Seventy-nine Thousand Six Hundred and Four
(2,779,604) shares are issued and outstanding and Two Million Two
Hundred Twenty Thousand Three Hundred Ninety-six shares are held as
treasury shares (the "Best Shares"). SCC is the owner of Two
Million Seven Hundred Seventy-nine Thousand Six Hundred and Four
(2,779,604) Best Shares which constitute all of the issued and
outstanding Best Shares. Except for the security interest of U.S.
Bank, which shall be terminated at Closing, SCC owns its Best Shares
free and clear of all liens, claims, charges, encumbrances, voting
proxies or voting agreements. Each issued Best Share is duly
authorized, validly issued, fully paid and nonassessable and is
transferrable by SCC without restriction (except with respect to
Federal or state securities laws). There are no existing options,
warrants, calls or commitments with respect to any of the authorized
and unissued or treasury Best Shares, and no outstanding securities
convertible into or exchangeable for any capital stock or any
options or warrants to acquire capital stock.
(3) The authorized capital stock of Italia consists solely of Five
Million (5,000,000) shares of no par value common voting stock, of
which One Million Four Hundred Sixty-five Thousand (1,465,000)
shares are issued and outstanding and Three Million Five Hundred
Thirty-five Thousand (3,535,000) shares are held as treasury shares
(the "Italia Shares"). SCC is the owner of One Million Four Hundred
Sixty-five Thousand (1,465,000) Italia Shares which constitute all
of the issued and outstanding Italia Shares. Except for the security
interest of U.S. Bank, which shall be terminated at Closing, SCC
owns its Italia Shares free and clear of all liens, claims, charges,
encumbrances, voting proxies or voting agreements. Each issued
Italia Share is duly authorized, validly issued, fully paid and
nonassessable and is transferrable by SCC without restriction
(except with respect to Federal or state securities laws). There
are no existing options, warrants, calls or commitments with respect
to any of the authorized and unissued or treasury Italia Shares, and
no outstanding securities convertible into or exchangeable for any
capital stock or any options or warrants to acquire capital stock.
17
<PAGE>
g. Investment Representation. Each Principal Shareholder acknowledges that
-------------------------
the AFC Shares to be delivered upon consummation of the Merger are not
registered with the Securities and Exchange Commission or under any state
securities laws and that he, she or it is acquiring the AFC Shares for
investment purposes only and with no present intention to make any
further distribution of the AFC Shares and will not make any distribution
of the AFC Shares except in compliance with any applicable securities
laws or pursuant to an opinion of legal counsel, acceptable to AFC, that
such distribution is exempt from registration or compliance with such
laws.
h. Financial Statements. Attached to the Disclosure Statement as Schedule
-------------------- --------
6.h are true, correct and complete copies of (i) SCC's and the
---
Subsidiaries' audited financial statements (including balance sheet,
statement of operations and statement of cash flows) for the periods
ending September 30, 1996 and September 30, 1995; and (ii) SCC's and the
Subsidiaries' unaudited financial statements for the twelve (12) month
period ending September 30, 1997 and the three (3) month period ending
December 28, 1997 (hereinafter, such audited financial statements are
referred to, collectively, as the "Financial Statements", the unaudited
financial statement for September 30, 1997 is hereinafter referred to as
the "1997 Unaudited Statement" and the Financial Statements dated as of
December 28, 1997 are referred to as the "Current Financial Statements").
The Financial Statements have been prepared in accordance with GAAP and
in accordance with the books and records of SCC and the Subsidiaries; the
Financial Statements are complete and correct in all material respects;
and, the Financial Statements accurately set out and describe the
financial condition and operating results of SCC and the Subsidiaries as
of the dates, and during the periods, indicated therein. Since December
28, 1997, there has not been any material change in the Corporate Assets,
liabilities, financial condition or operations of SCC or any Subsidiary
from that reflected in its Financial Statements, except changes in the
ordinary course of business that have not been, individually or in the
aggregate, materially adverse. Except to the extent reflected or
reserved against or noted in the Current Financial Statements or
otherwise disclosed on Schedule 6.h, neither SCC nor any Subsidiary had,
------------
as of such date, any material liabilities or obligations of any nature,
whether accrued, absolute, contingent or otherwise, including without
limitation tax liabilities, whether incurred in respect to or measured by
SCC's or a Subsidiary's income for any period prior to the date of such
Current Financial Statements, or arising out of transactions entered
into, or any set of facts existing prior thereto. Except as described on
Schedule 6.h, there exists no basis for the assertion against SCC, any
------------
Subsidiary, any Corporate Assets, the Businesses, the Cafes or the
Systems, as of the date hereof or as of the date of the Current Financial
Statements, of any material liability of a nature requiring financial
statement disclosure that is not fully reflected or reserved against or
noted in the Current Financial Statements. SCC shall provide to AFC upon
receipt by SCC, but in all events prior to Closing, the audited
Financial Statement for the period ending September 30, 1997. Such
audited Financial Statement shall be consistent, in all material
respects, with the 1997 Unaudited Statement, subject only to normal year
end adjustments. SCC shall provide to AFC upon receipt by SCC interim
financial statements for the periods ending in December, 1997 and
January, 1998. The
18
<PAGE>
quantity and quality of the assets owned by SCC and the Subsidiaries,
the nature of the liabilities owed by SCC and the Subsidiaries and SCC's
and the Subsidiaries' working capital as of the Closing Date will be
comparable to or more favorable than such items as reflected on SCC's
unaudited internal financial statement as at the period ending December
28, 1997.
i. Cafes. Schedule 6.i attached to the Disclosure Statement sets forth the
----- ------------
number of Cafes (the "Company-Owned Cafes") owned and operated by SCC
and the Subsidiaries and indicates how many are operated by Best (the
"Best-Owned Cafes") pursuant to the System (the "Best System") which
operates under the principal service mark "Seattle's Best Coffee" and
related trademarks and service marks, how many of which (the "Italia
Company-Owned Cafes") are operated by Italia pursuant to the System (the
"Italia System") which operates under the principal service mark
"Torrefazione Italia" and related trademarks and service marks.
Schedule 6.i. also contains a true, correct and complete list showing
---------------
(x) each of the addresses of the Company-Owned Cafes (the "Company-Owned
Cafe Premises"), (y) an indication of whether such location is owned by
SCC or either of the Subsidiaries or whether such location is leased by
SCC or either of the Subsidiaries.
j. Other Premises. Schedule 6.j. attached to the Disclosure Statement
-------------- ------------
contains a true, correct and complete list of all real estate other than
the Company-Owned Cafe Premises (the "Other Premises") owned or occupied
by SCC or either of the Subsidiaries which Schedule shall include any
manufacturing facilities, distribution facilities and sales offices.
Schedule 6.j. identifies which of the Other Premises are owned by SCC
---------------
or any of the Subsidiaries and which of the Other Premises are leased by
SCC or any of the Subsidiaries (hereinafter all Company-Owned Cafe
Premises and Other Premises owned by SCC or any of the Subsidiaries shall
be referred to as the "Owned Premises;" all Company-Owned Cafe Premises
and Other Premises leased by SCC or any of the Subsidiaries shall be
referred to as the "Leased Premises;" and the Owned Premises and the
Leased Premises shall be referred to, collectively, as the "Premises").
k. Corporate Assets. The Corporate Assets are the sole property of SCC or
----------------
the Subsidiaries, all of the property needed to conduct the Businesses as
currently conducted, and in normal operating condition, free from any
defects, damages or malfunction and free and clear of all claims, liens,
charges, security interests or other encumbrances, except as set forth on
Schedule 6.k. attached to the Disclosure Statement.
---------------
(1) The Corporate Assets include all furniture, fixtures, vehicles,
machinery and equipment (the "FF&E"), used or usable in connection
with the conduct of any of the Businesses, including without
limitation leasehold improvements, signs, chairs, tables,
furnishings, appointments, art and decor items, floor and wall
coverings, light fixtures, restaurant equipment (including, without
limitation, appliances, stoves, ovens, dishwashers, racks, coolers,
freezers, compressors, vacuums and other cleaning apparatus), tools,
office equipment, file cabinets, and safes and all manner of FF&E
presently used or usable to keep and maintain the Premises
(including without limitation manufacturing and distribution
facilities) in their customary operating
19
<PAGE>
condition. A complete inventory of the FF&E at each Premises is set
forth on Schedule 6.k(1) attached to the Disclosure Statement.
---------------
(2) The Corporate Assets include all computer hardware, computer
software (and license agreements with respect thereto), and
electronic data and computer files and the storage media upon which
such files are located including, but not limited to diskettes,
tapes, CD-ROMs or other storage media (collectively, the "Computer
Assets") used or usable in connection with the operation of any of
the Businesses, a complete inventory of which is set forth on
Schedule 6.k(2) attached to the Disclosure Statement.
----------------
(3) The Corporate Assets include all operating assets and supplies (the
"Operating Assets") used in connection with the conduct of the
Businesses, included but not limited to, menus, uniforms, inventory,
ingredients, food products, beverages, dishes, pots, pans, napkins,
and other cooking, serving and eating utensils, paper products,
packaging supplies, cleaning supplies, stationary, forms, labels,
office supplies, production supplies, and advertising, promotional
and sales materials. A complete inventory of the Operating Assets
shall be prepared as of a date no earlier than ten (10) days after
the execution of this Agreement, attached to the Disclosure
Statement as Schedule 6.k(3), and subject to increase or decrease
---------------
after the date of such inventory in the ordinary course of business.
All of such Operating Assets are now, and will be at Closing, (i)
clean and usable in the normal course of business; (ii) located at
the Premises; (iii) except as otherwise provided in the Disclosure
Statement, owned by SCC or the Subsidiaries free and clear of any
and all liens, claims, charges, encumbrances or security interests
in favor of others; and (iv) at their normal levels and sufficient
for the normal requirements of the Businesses and the operation of
the Company-Owned Cafes and the Systems. All items of inventory
reflected on the Financial Statements are valued at the lower of
cost or market value determined on a first in, first out (FIFO)
basis. No inventory of SCC or the Subsidiaries is held on
consignment.
(4) Schedule 6.k(4) attached to the Disclosure Statement contains a
---------------
true, correct and complete list of (i) all unpaid franchise,
license, royalty and advertising fees or other amounts owed by
Franchisees or other parties to SCC or any of the Subsidiaries as of
the date indicated thereon, (ii) all notes receivable, prepaid items
or expenses of whatever nature arising from or related to the
Businesses and (iii) all amounts due and owing to SCC or the
Subsidiaries arising from the sale of merchandise to customers in
the ordinary course of business (collectively, all such amounts due
to SCC or the Subsidiaries are hereinafter referred to as the
"Accounts Receivable"). All Accounts Receivable are valid
obligations of the respective debtors without any claims, set-offs
or defenses. Each Account Receivable as reflected on Schedule
--------
6.k(4), as updated and redelivered at Closing is not in default and
------
will be collectible in accordance with its terms, net of reserves
shown on the Financial Statement. Neither SCC nor any of the
Subsidiaries has granted any concessions or discounts with respect
to any Account Receivable or otherwise offered any discount,
settlement or compromise with respect
20
<PAGE>
thereto. The Accounts Receivable represent bona fide transactions
completed in accordance with the terms and provisions contained in
any documents related thereto. There are no set-offs, counterclaims
or disputes asserted with respect to any Account Receivable. The
Accounts Receivable are collectible in full, subject only to the
allowance for doubtful accounts reflected on the Financial
Statements.
(5) Schedule 6.k.(5) attached to the Disclosure Statement sets forth a
----------------
true and correct list and summary of terms of all leases for real
property to which any of SCC or the Subsidiaries are a party (the
"Premises Leases"). Each of the Premises Leases disclosed on
Schedule 6.k.(5) is in full force and effect and there are no
----------------
existing defaults or events of default, real or claimed, or events
which with notice or lapse of time or both would constitute
defaults, the consequences of which, severally or in the aggregate,
would have an adverse effect on the Businesses or financial
condition of SCC or the Subsidiaries. There are no monetary
obligations to any lessor for acts or events, including without
limitation any damage to such real property or improvements
occurring prior to the Closing Date, other than accrued rent
obligations disclosed on the Current Balance Sheet. Except as
disclosed on Schedule 6.k.(5), neither the execution of this
----------------
Agreement nor the consummation of the transactions contemplated
herein shall constitute a default under any of the Premises Leases.
Except as disclosed on Schedule 6.k.(5), no consent of any landlord
----------------
under the Premises Leases is required as a result of the execution
of this Agreement or the consummation of the transactions
contemplated herein. Except as indicated in Schedule 6.k.(5), all
----------------
improvements on any real property leased to or used by SCC or the
Subsidiaries substantially conforms to all applicable state and
local laws, use restrictions, zoning and building ordinances and
health and safety ordinances, and such property is zoned for the
various purposes for which the real estate and improvements thereon
are presently being used.
(6) Schedule 6.k.(6) attached to the Disclosure Statement contains a
----------------
true and correct list of all of the Owned Premises, the holder of
record, the street address, and a legal description thereof, the
year of building construction and description of the building(s).
SCC shall deliver with the Disclosure Statement complete and
accurate copies of the current abstract of title or existing owner's
title insurance policy for each of the Owned Premises, and none of
such documents has been amended or modified except to the extent
that such amendments or modifications are disclosed in such copies
or in Schedule 6.k.(6). SCC or the Subsidiaries, as the case may
----------------
be, own each Owned Premises in fee simple absolute, free and clear
of all liens, mortgages, pledges, encumbrances, charges,
assessments, restrictions, covenants, claims, and easements, title
defects or exceptions of any nature whatsoever, or written, oral,
recorded, unrecorded, or other leases, except as set forth on
Schedule 6.k.(6) and liens for real estate taxes not yet due and
payable. The buildings located on the Owned Premises are in good
operating condition, normal wear and tear excepted, and are in the
aggregate sufficient to satisfy the current and reasonably
anticipated needs of the Businesses conducted at such parcel. Each
parcel of the Owned Premises
21
<PAGE>
has direct access to public roads and is served by utilities in such
quantity and quality as are sufficient to satisfy the current and
reasonably anticipated needs of the Businesses conducted at such
parcel. Neither SCC nor the Subsidiaries have received notice of (i)
any condemnation proceeding with respect to any portion of any Owned
Premises or any access thereto, and to the best of SCC's knowledge,
no proceeding is contemplated by any governmental authority, or (ii)
any special assessment which may affect any Owned Premises, and to
the best of SCC's knowledge, no such special assessment is
contemplated by any governmental authority.
(7) Schedule 6.k(7) attached to the Disclosure Statement is a true and
---------------
correct list of all leases for machinery, vehicles and equipment
used or employed by SCC or the Subsidiaries, together with true and
correct copies of such leases. Each of the leases disclosed on
Schedule 6.k.(7) is in full force and effect and there are no
----------------
existing defaults or events of default, real or claimed, or events
which with notice or lapse of time or both would constitute
defaults, the consequences of which, severally or in the aggregate,
would have an adverse effect on the Businesses or financial
condition of SCC or the Subsidiaries. The continuation, validity
and effectiveness of such leases will not be adversely affected by
the transactions contemplated by this Agreement. All items leased
under such leases are in good operating condition and in a state of
good maintenance and repair, reasonable wear and tear excepted, and
there shall be no monetary obligations to any lessor thereunder for
acts or events or damage to such items, occurring prior to the
Closing, other than accrued rent obligations disclosed on the
Current Balance Sheet.
l. Gross License Fees. Schedule 6.l. attached to the Disclosure Statement
------------------ -------------
indicates the gross license fees payable to SCC and the Subsidiaries with
respect to sales of franchises to operate Cafes during the twelve (12)
month period ending November 30, 1997; and the gross service fees
collected by SCC and the Subsidiaries from the operation of Cafes by
Franchisees for the twelve (12) month period ending November 30, 1997.
m. Taxes. Attached to the Disclosure Statement as Schedule 6.m. are true,
----- ---------------
correct and complete copies of Federal, state and any foreign income tax
returns (including balance sheets) of SCC and the Subsidiaries for the
periods ending September 30, 1997, September 30, 1996; and September 30,
1995. Schedule 6.m., contains a true and complete list of all taxing
-------------
authorities with whom SCC or any Subsidiary is required to file and pay
taxes based upon income. SCC and the Subsidiaries have filed or obtained
extensions for all required tax returns, state, federal, local, foreign
or otherwise; each return or report is true and correct and all taxes,
fees and other governmental charges reflected thereon have been paid or
accrued. There is not and there will not be any liability for Federal,
state, foreign or local income, sales, use, excise or other taxes arising
out of, attributable to, or affecting the Corporate Assets or the conduct
of the Business or the operation of the Company-Owned Cafes or the
Systems through the Closing Date, or attributable to the conduct of the
operations of SCC and the Subsidiaries at any time prior to the Closing
Date, which has not been fully paid or reserved for on the Current
Financial Statements or disclosed on
22
<PAGE>
Schedule 6.m. (the "Tax Obligations"). Schedule 6.m. lists the fiscal
------------- -------------
years and periods through which SCC and the Subsidiaries have filed
Federal, state, foreign, local or other income tax returns, stating, with
respect to years and periods ending on or after December 31, 1988,
whether they have been examined by the Internal Revenue Service or any
state, foreign, local or other agency with respect to any such period,
giving in each instance all open deficiencies, if any, proposed as a
result of all such examinations, and stating whether such deficiencies
have been paid or settled. Except as described in Schedule 6.m, neither
SCC nor any Subsidiary is presently under, nor has SCC or any Subsidiary
received notice of any contemplated, investigation or audit by the
Internal Revenue Service or any state, local, foreign or other agency
concerning any fiscal year or period ended prior to the date hereof.
Notwithstanding the disclosure of any pending audit on Schedule 6.m., the
Principal Shareholders shall remain liable to indemnify AFC for taxes,
interests, penalties, fees and expenses as set forth in Paragraph 12 with
respect to any such audit for years prior to the Closing Date. Neither
SCC nor any Subsidiary will file any Federal, state or local tax return
or report prior to the Closing Date which shall not have been reviewed in
advance by AFC or its representatives. Neither SCC nor any Subsidiary has
ever granted any waiver of any statute of limitations with respect to, or
any extension of the period for the assessment of, any taxes.
n. Premises.
--------
i. Except as described in Schedule 6.n, all utilities and major service
systems (including without limitation electrical, sanitary and
sewage, HVAC, air ventilation and filtering, refrigeration and water
supply) necessary for the operation of the Company-Owned Cafes, the
manufacturing facilities and other Businesses conducted by SCC and
the Subsidiaries are in good working order and are adequate for the
present needs of the Company-Owned Cafes, manufacturing facilities
and other Businesses. To the best of SCC's and the Principal
Shareholders' knowledge, there are no facts or circumstances that
will result in the termination of the present access from any of the
Premises to utility services or existing streets, highways and roads
adjoining such Premises.
ii. The use, occupancy, operation and condition of all of the Premises
comply with all applicable covenants, conditions, restrictions and
contracts and any applicable zoning, building, health, safety,
environmental and other laws to which they are subject. All
applicable permits, licenses and other evidences of compliance which
are or were required to be obtained in connection with the
construction of the improvements on the Premises and the occupancy,
condition, operation and use of the Premises have been obtained and
complied with. Except as described on Schedule 6.n, neither SCC
nor any Subsidiary has received any Health Department or other
governmental citation with respect to any Company-Owned Cafe,
manufacturing facility or any of the Businesses, which has not been
cured.
iii. Neither SCC nor any Subsidiary has knowledge, or has received
notice, that any of the Company-Owned Cafes or the Premises are or
will be subjected
23
<PAGE>
to or affected by (i) any special assessments, whether or not
presently a lien thereon, or (ii) any condemnation, eminent domain
or similar proceedings.
o. No Violation. The execution, delivery and performance of this Agreement
------------
and the agreements contemplated in this Agreement do not and will not
violate the provisions of (i) the Articles of Incorporation or Bylaws of
SCC or any Subsidiary; (ii) any mortgage, indenture, security agreement,
contract, undertaking or other agreement to which SCC or any Subsidiary
is a party or which is binding upon SCC or any of its property or the
Businesses; or (iii) any law, regulation, judgment or order which is
binding upon SCC or any Subsidiary, any of the Corporate Assets or any of
the Businesses.
p. No Breach. Neither SCC nor any Subsidiary is in breach of any, and SCC
---------
and each Subsidiary have materially complied with and performed all
obligations under each, contract or agreement to which it is a party and,
except as described in Schedule 6.p, there is no basis for the assertion
------------
against SCC, any Subsidiary, the SCC Shares or the Corporate Assets of
any liens, claims, charges, encumbrances, liabilities, debts or
obligations, whether due or to become due, including but not limited to
liabilities or obligations on account of taxes (including without
limitation taxes arising out of this transaction) or other governmental
charges which would adversely affect or cause a lien upon the Corporate
Assets, the SCC Shares, the Best Shares, the Italia Shares or diminish
the rights of SCC and the Subsidiaries in such Corporate Assets or the
rights of AFC in the SCC Shares.
q. Compliance with Laws. Except as described on Schedule 6.q, SCC and the
--------------------
Subsidiaries are, and have been at all times in the past, in compliance
with all laws, rules, ordinances, governmental regulations and orders of
all governmental authorities and/or jurisdictions (collectively
"Applicable Laws") applicable to the conduct of the Businesses, including
without limitation Applicable Laws relating to (i) the offer and sale of
franchises, (ii) the servicing and operation of a franchise system and
(iii) zoning, building, public health, plumbing, electrical, fire, public
health, occupational safety, pollution, food and drug preparation and
labeling, importation, environmental protection, and waste disposal
matters.
r. Consents and Approvals. Except for the HSR Act, consents of landlords
----------------------
and shareholders of SCC, no consent or approval of any other party
(including without limitation any lending institution or any governmental
authority, bureau or agency) is required in connection with the
execution, delivery, performance, validity or enforceability of this
Agreement or the agreements contemplated by this Agreement, other than
consents or approvals which have been obtained and delivered to AFC.
s. Actions and Proceedings. Except as disclosed on Schedule 6.s. to be
----------------------- ---------------
attached to the Disclosure Statement, there is no action, suit or
proceeding pending or, to the best knowledge of SCC and the Principal
Shareholders threatened against or affecting SCC, the Subsidiaries, the
SCC Shares, the SCC Shareholders, the Businesses, the Company-Owned Cafes
or the Systems which would relate to or affect, directly or indirectly,
the Businesses, the Corporate Assets or the SCC Shares, before any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or which would have an adverse
effect on the Businesses, the
24
<PAGE>
Purchased Assets, the SCC Shares, the Company-Owned Cafes or the Systems
or prevent the consummation of the transactions contemplated hereunder.
t. Proprietary Rights.
------------------
i. Attached to the Disclosure Statement as Schedule 6.t.i is a true,
--------------
correct and complete list of all U.S. and Foreign trade names,
trademarks, service marks, logos, slogans, and assumed names
currently used in the conduct of the Businesses as they are
currently being conducted and the operation of the Cafes and the
Systems as they are currently being operated (collectively the
"Marks") and all U.S. and foreign trademark and service mark
registrations and applications for registration (collectively, the
"Trademark Registration Rights") with respect thereto, including (a)
the jurisdictions, if any, by or in which such Marks are registered
or for which an application has been filed, (b) the registration or
application numbers, (c) the dates of any such registration or
application, and (d) the dates that any affidavits of use or
renewals have been or are required to be filed.
ii. Attached to the Disclosure Statement as Schedule 6.t.ii. is a true,
------------------
correct and complete list of all materials in which SCC or any
Subsidiary claims a copyright currently being used for the conduct
of the Businesses as they are currently being conducted and the
operation of the Company-Owned Cafes and the Systems as they are
currently being operated (the "Copyrights"), together with (a) the
jurisdictions, if any, by or in which such Copyrights are registered
or for which an application has been filed, (b) the registration or
application numbers, and (c) the dates of any such registrations or
applications.
iii. Attached to the Disclosure Statement as Schedule 6.t.iii. is a
-------------------
true, correct and complete list, by name or other commonly-used
description, of all U.S. and foreign patents and patent
applications, technology, know-how, processes, training manuals,
operations manuals, proprietary information, trade secrets,
formulae, recipes, technical information and data, research and
development data, confidential information, discoveries, inventions
and improvements currently being used for the conduct of the
Businesses as they are currently being conducted and the operation
of the Company-Owned Cafes and the Systems as they are currently
being operated (collectively the "Trade Secrets"), together with the
number and date of issuance of any patent included within the Trade
Secrets and the application number and filing date of any
application for a patent. Schedule 6.t.iii also contains a complete
----------------
list of the elements of the trade dress (the "Trade Dress")
currently being used for the conduct of the Businesses as they are
currently being conducted and the operation of the Company-Owned
Cafes and the Systems as they are currently being operated.
iv. The Marks, the Trademark Registration Rights, the Trade Dress, the
Copyrights, the U.S. and foreign registrations and applications for
registration of any Copyright (collectively, the "Copyright
Registration Rights"), the Trade Secrets and the other similar
intangible property and
25
<PAGE>
rights used in, or relating to the Businesses or the Systems
(collectively the "Intellectual Property") shall be collectively
referred to as the "Proprietary Rights". Except as otherwise
described on Schedule 6.t.i.,ii., or iii to the Disclosure Schedule,
---------------------------
SCC or either Subsidiary is the sole and exclusive owner of the
Proprietary Rights, free and clear of all liens, claims and
encumbrances. Except for the rights granted to Franchisees or
Developers in the Franchise Agreements and Development Agreements,
SCC and the Subsidiaries have sole and exclusive rights to use,
execute, reproduce, display, perform, modify, enhance, distribute,
prepare derivative works of, license and transfer the Proprietary
Rights; have not granted any options or licenses or entered into any
agreements of any kind relating to the Proprietary Rights or the
marketing and distribution thereof; and the Merger, as contemplated
herein, will not result, directly or indirectly, in the loss or
impairment, in whole or in part, of any Proprietary Right. All
registrations and applications relating to the Proprietary Rights
are standing in the name of SCC or the Subsidiaries.
v. Except as described on Schedule 6.t.v., neither SCC nor any
Subsidiary has, as of and since the date upon which it acquired the
Proprietary Rights, (i) filed or authorized the filing with the
Assignment Division of the United States Patent and Trademark Office
("PTO"), United States Copyright Office or similar foreign office of
any lien, security interest or encumbrance against any registration,
patent or application identified in Schedules 6. t.i, ii or iii;
-----------------------------
(ii) authorized or filed any lien relating to Proprietary Rights
under the UCC or any similar foreign statute; (iii) entered into any
license, franchise or other agreement with respect to any of the
Proprietary Rights with any third person (except for the Franchise
Agreements listed on Schedule 6.u.i. and the Development Agreements
-----------------
listed in Schedule 6.v.i.; (iii) otherwise transferred, conveyed,
---------------
sold, assigned, pledged, mortgaged, granted a security interest in
or encumbered any of the Proprietary Rights, or (iv) entered into
any settlement, consent, covenant not to sue or similar agreement
with respect to any Proprietary Right.
vi. Except as described on Schedule 6.t.vi., neither SCC nor any
Subsidiary has received any notice to the effect that SCC and/or the
Subsidiaries are not the sole owners of, or do not have the sole and
exclusive right to use (except as otherwise provided in the
Franchise Agreements), the Proprietary Rights.
vii. All registrations and applications for the items on Schedules
---------
6.t.i., ii. and iii. are subsisting and in good standing, the
--------------------
Proprietary Rights are valid and enforceable and to the best
knowledge of the Principal Shareholders and SCC no act or omission
has occurred which would adversely affect the validity or
enforceability of any Proprietary Rights. Except as disclosed on
Schedule 6.t.vii, SCC and the Subsidiaries have obtained
----------------
confidentiality and nondisclosure agreements to protect the secrecy
of all Proprietary Rights which are considered to be confidential
information or trade secrets where the failure to obtain such
agreements would have a material adverse effect on the Proprietary
Rights.
26
<PAGE>
viii. To the best of the Principal Shareholders' and SCC's knowledge,
neither the conduct of the Businesses nor the operation of the Cafes
or the Systems, nor the use of any of the Proprietary Rights,
infringes upon, dilutes or constitutes an unauthorized use of any
proprietary rights owned or controlled by any third party. Except
as set forth in Schedule 6.t.viii. attached hereto, there is no
--------------------
claim, suit, action or proceeding (a "Proprietary Right Claim")
pending or threatened against SCC, any Subsidiary or any Franchisee
alleging that use of the Proprietary Rights by SCC, the Subsidiaries
or the Franchisees infringes upon, dilutes or constitutes an
unauthorized use of the proprietary rights of any third person, or
alleging that SCC and/or the Subsidiaries do not have the valid
right to use any Proprietary Right. Schedule 6.t.viii. lists each
--------------------
Proprietary Right Claim pending or threatened against SCC, any
Subsidiary or any Franchisee, together with (i) the identity of the
Proprietary Right alleged to be infringing; (ii) the basis for such
claim, including the right alleged to be infringed; (iii) the name
of the party by whom such Proprietary Right Claim has been made;
(iv) if applicable, the jurisdiction, court or agency before which
the Proprietary Right Claim has been commenced and the number
assigned to such proceeding; and (v) the attorneys representing all
parties involved in such Proprietary Rights Claim.
ix. Except as set forth in Schedule 6.t.ix., to SCC's and the Principal
----------------
Shareholders' knowledge, there are no existing infringements,
dilutions or unauthorized uses by any third party of any of the
Proprietary Rights, and neither SCC nor any Principal Shareholder
has any claim outstanding with respect to prior infringements,
dilutions or unauthorized uses. Schedule 6.t.ix. lists each
------------------
Proprietary Right Claim pending or threatened by SCC or any
Subsidiary, together with (i) the identity of the Proprietary Right
alleged to be infringed; (ii) the basis for such claim, including
the right alleged to be infringed; (iii) the name of the party
against whom such Proprietary Right Claim has been made; (iv) if
applicable, the jurisdiction, court or agency before which the
Proprietary Right Claim has been commenced and the number assigned
to such proceeding; and (v) the attorneys representing all parties
involved in such Proprietary Right Claim.
x. There are no breaches or defaults under agreements which are
included in the Proprietary Rights, including any license agreements
permitting the use of the Proprietary Rights by third parties, and
all such agreements constitute valid and binding obligations of the
parties thereto, enforceable in accordance with their respective
terms. The consummation of the transactions contemplated by this
Agreement will not constitute a breach or default or event which,
with notice, lapse of time, or both, would constitute a default or
an event of default under any agreement included within or relating
to any of the Proprietary Rights.
xi. SCC and the Subsidiaries currently license or own, and, in either
case have the legal right to use, all computer software that is
material to the conduct of the Businesses and the operation of the
Company-Owned Cafes and the Systems and all such computer software
is being so used in compliance with any applicable licenses.
27
<PAGE>
xii. Except as described on Schedule 6.t.xii, to the Principal
----------------
Shareholders' and SCC's knowledge, no former or current officer,
employee or agent has any claim against SCC or any Subsidiary in
connection with such person's involvement in the conception and
development of any Proprietary Rights and no such claim has been
threatened or asserted. To the Principal Shareholders' and SCC's
knowledge, none of the current officers or employees of SCC or any
Subsidiary have any patents issued or applications pending for any
device, process, design or invention of any kind now used or needed
by SCC or any Subsidiary in connection with the conduct of the
Businesses or the operation of the Company-Owned Cafe and the
Systems, which patents or applications have not been assigned to SCC
or the applicable Subsidiary, with such assignments duly recorded in
the PTO.
xiii. All Franchise Agreements and all license agreements granting the
right to use the Proprietary Rights to third parties give SCC or
Best as franchisor (the "Franchisor") or licensor and its successors
and assigns the rights to control the quality of products and
services sold under the Marks described under the Franchise
Agreements or license agreements, as the case may be.
u. Franchise Agreements and License Agreements.
-------------------------------------------
i. Schedule 6.u.i. attached to the Disclosure Statement includes a
-----------------
true, correct and complete list of the franchise agreements and any
license agreements for the Marks pursuant to which SCC or the
Subsidiaries have granted to third parties ("Franchisees" or
"Licensees") the right to operate Cafes (the "Franchised Cafes") or
to use any component of either of the Systems or the Marks, and all
applications to enter into franchise agreements or license
agreements (hereinafter collectively referred to as the "Franchise
Agreements" or "License Agreements"). Schedule 6.u.i shall include
--------------
all such Franchise Agreements and License Agreements (including
master Franchise Agreements, if any) and amendments or modifications
thereto in effect as of the date of this Agreement, indicating with
respect to each Franchise Agreement or License Agreement (a) the
name of the Franchisee or Licensee and the Franchisor; (b) the
System under which the Cafe is operated, (c) the Cafe address; (d)
the commencement and termination dates of the term of the Franchise
Agreement or License Agreement; (e) the monthly royalty fee
percentage payable under the Franchise Agreement or License
Agreement; (f) the monthly royalty fees actually paid by the
Franchisee or Licensee for the 12 month period ending November 30,
1997; (g) all amounts payable by the Franchisee or Licensee,
pursuant to the Franchise Agreement or License Agreement, to the
Advertising Fund, to a regional cooperative and otherwise for local,
regional, or national advertising; (h) the amounts actually paid by
the Franchisee or Licensee to the Advertising Fund, to a regional
cooperative and otherwise for local, regional, or national
advertising for the 12 month period ending November 30, 1997; and
(i) the initial license fee paid by the Franchisee or Licensee
pursuant to the Franchise Agreement or License Agreement. True,
correct and complete copies of all Franchise Agreements and License
Agreements and amendments thereto or modifications thereof are
attached to Schedule 6.u.i.
--------------
28
<PAGE>
There are no oral Franchise Agreements, License Agreements or oral
modifications or amendments to any Franchise Agreements or License
Agreements.
ii. Schedule 6.u.ii attached to the Disclosure Statement includes a
---------------
correct and complete list of all applications to enter into
Franchise Agreements or License Agreements with SCC or any
Subsidiary, including the proposed location and applicant's name.
iii. Neither SCC nor any Subsidiary has endeavored to induce any
applicant or potential applicant for a Franchise Agreement or
License Agreement to enter into a franchise agreement or license
agreement with any system other than the Systems.
iv. Schedule 6.u.iv. specifies each Franchisee that is a party to any
------------------
Franchise Agreement and each Licensee that is a party to a License
Agreement that (a) is in financial default under such Franchise
Agreement or License Agreement; (b) to the best knowledge of the
Principal Shareholders and SCC, is the subject of a case under the
Bankruptcy Code or any other bankruptcy, insolvency, receivership or
similar case or proceeding under state, federal or foreign law, of
which the Franchisor has been notified; (c) to the best knowledge of
the Principal Shareholders and SCC, is maintaining its Cafe in a
condition or operating such Cafe in a manner that is inconsistent
with the requirements of the applicable System; or (d) is otherwise
in material violation of or default under any of the terms of its
Franchise Agreement or License Agreement. Schedule 6.u.iv. further
------------------
specifies, with respect to each Franchisee or Licensee that is in
default under a Franchise Agreement or License Agreement, the date
and contents of each default and/or termination notice sent to such
Franchisee or Licensee and the status of such default or termination
notice.
v. Franchisors have and had, at all relevant times and in all material
respects, the corporate power and authority and legal right to (i)
enter into and carry out the terms of each Franchise Agreement or
License Agreement; (ii) consummate the transactions contemplated
hereby without the consent of third parties (including without
limitation Franchisees).
vi. Each Franchise Agreement or License Agreement, and all agreements,
instruments and documents furnished pursuant to a Franchise
Agreement or License Agreement comply in all material respects with
all federal, state and foreign laws (and rules or regulations
thereunder) and all orders, consents or decrees from any federal,
state or foreign administrative or regulatory agency;
vii. No Franchise Agreement or License Agreement listed on Schedule
--------
6.u.i. has been subordinated, assigned, rescinded, or terminated
------
prior to its stated expiration date without being reinstated within
ninety (90) days of such subordination, assignment, rescission or
termination; no provision regarding the calculation and payment of
royalty fees in any Franchise Agreement or
29
<PAGE>
License Agreement has been waived, altered or modified in any
respect adverse to the Franchisor thereunder; no right of
rescission, set-off, counterclaim or defense exists or has been
asserted or threatened with respect to any Franchise Agreement or
License Agreement; no Franchisor is in violation of or in default
under any term of any Franchise Agreement or License Agreement and
each Franchisor has performed each and every obligation to be
performed by the Franchisor under each Franchise Agreement or
License Agreement to which it is a party in accordance with its
terms; and no Franchisor has waived any default by a Franchisee or
Licensee which would materially adversely affect any Franchise
Agreement or License Agreement.
viii. No Franchise Agreement or License Agreement was originated in, or
is subject to, the laws of any jurisdiction which would make the
transactions contemplated hereby unlawful. Prior to the Closing
Date all filings (including, without limitation, UCC filings) and
notices that must be made by any Franchisor in any relevant
jurisdiction in connection with the transactions contemplated hereby
will have been made.
ix. Each Franchisor currently requires all Franchisees and Licensees to
maintain insurance polices (the "Required Policies") with the
coverage described on Schedule 6.u.ix. attached to the Disclosure
----------------
Statement. To the best knowledge of the Principal Shareholders and
SCC, all Franchisees or Licensees currently have the Required
Policies in full force and effect and have named the Franchisor as
an additional insured thereunder. SCC will use its best efforts to
have AFC named as an additional insured on such policies between the
date hereof and the Closing Date.
x. Schedule 6.u.x attached to the Disclosure Statement (and to be
--------------
updated and supplemented as of the Closing) sets forth a complete
list of (i) all rebates, marketing and advertising allowances
received by each Franchisor from suppliers, vendors or other persons
(collectively "Suppliers") since January 1, 1995; and (ii) all
rebates, marketing and advertising allowances which have accrued but
not been paid as of the date hereof. Except as set forth in
Schedule 6.u.x, all rebates received by each Franchisor prior to the
--------------
date hereof from Suppliers have been contributed by the Franchisor
to the appropriate Advertising Fund. No claim of any nature has
been made by any Franchisee or Licensee with respect to the
application of such funds by any Franchisor.
xi. Schedule 6.u.xi. attached to the Disclosure Statement sets forth a
----------------
complete list of all Franchise Agreements and License Agreements
that have terminated by reason of the expiration of the term thereof
or otherwise. Except as set forth in Schedule 6.u.xi and to the
---------------
best knowledge of Principal Shareholders and SCC, all Cafes (the
"Terminated Cafes") formerly governed by such terminated Franchise
Agreements or License Agreements are no longer operated as Cafes;
and the operators of the Terminated Cafes (a) have ceased to use, by
advertising or in any manner whatsoever, any Proprietary Rights or
other features of the applicable System, including,
30
<PAGE>
without limitation, recipes, menus, equipment, methods, procedures,
and techniques associated with such System, in connection with the
operation of the Terminated Cafe; and (b) have made all changes,
modifications or alterations to the Terminated Cafe premises
necessary to eliminate any interior and exterior design features,
decor items, signage and other Trade Dress items associated with the
System. Except as set forth in Schedule 6.u.xi. all Cafes (other
----------------
than the Company-Owned Cafes) are operating pursuant to valid,
binding and enforceable written Franchise Agreements or License
Agreements.
v. Development Agreements.
----------------------
i. Schedule 6.v.i attached to the Disclosure Statement contains a true
--------------
and complete list of the development agreements pursuant to which
SCC or either of the Subsidiaries has granted other parties
("Developers") the right to develop one or more Cafes or any other
business using any component of either of the Systems, and all
applications to enter into development agreements (hereinafter
collectively referred to as the "Development Agreements") together
with any amendments thereto in effect as of the date of this
Agreement, indicating with respect to each Development Agreement (a)
the name of the Developer and the Franchisor; (b) the territory in
which the Developer is granted development rights and whether that
territory is exclusive; (c) the number of Cafes required to be
developed pursuant to the Development Agreement with respect to each
System; (d) the Cafes developed pursuant thereto which were open and
operating as of November 30, 1997; (e) the Cafes for which Franchise
Agreements had been signed, license fees paid and locations
designated, but which were not open and operating as of November 30,
1997; and (f) the number of Cafes for which Franchise Agreements
had been signed and license fees paid, but no location had been
selected as of November 30, 1997. True, correct and complete copies
of all Development Agreements and amendments thereto or
modifications thereof are attached to Schedule 6.v.i. There are no
--------------
oral Development Agreements or oral modifications or amendments to
any Development Agreements.
ii. Schedule 6.v.ii includes a correct and complete list of all
---------------
applications to enter into Development Agreements with each
Franchisor, including the proposed territory and applicant's name.
iii. Neither SCC nor any Subsidiary has endeavored to induce any
applicant or potential applicant for a Development Agreement to
enter into a development agreement with any system other than the
Systems.
iv. Schedule 6.v.iv. specifies each Developer that is a party to any
------------------
Development Agreement that (i) is not in compliance with the
development schedule set forth in such Developer's Development
Agreement; (ii) is otherwise in material violation or default of any
of the terms of such Development Agreement; or (iii) is the subject
of a case under the Bankruptcy Code or any other bankruptcy,
insolvency, receivership or
31
<PAGE>
similar case or proceeding under state, federal or foreign law, of
which the Franchisor has been notified. Schedule 6.v.iv. further
----------------
specifies, with respect to each Developer that is in default under a
Development Agreement, the date and contents of each default and/or
termination notice sent to such Developer and the status of such
default or termination notice.
v. Each Franchisor has and had, at all relevant times and in all
material respects, the corporate power and authority and legal right
to enter into and carry out the terms of each Development Agreement
to which it is a party.
vi. Each Development Agreement complies in all material respects with
all federal and state laws (and rules or regulations thereunder) and
all orders, consents or decrees from any federal, state or foreign
administrative or regulatory agency.
vii. No development schedule in any Development Agreement listed on
Schedule 6.v.i. has been waived, altered or modified in any
----------------
respect; and no Franchisor is in violation of or in default under
any term of a Development Agreement.
viii. No Development Agreement was originated in, or is subject to, the
laws of any jurisdiction which would make the transactions
contemplated hereby unlawful. Prior to the Closing Date all filings
(including, without limitation, UCC filings) and notices that must
be made by Franchisor relative to the Development Agreements in any
relevant jurisdiction in connection with the transactions
contemplated hereby will have been made.
w. Advertising Fund.
----------------
i. Schedule 6.w.i. attached hereto and made a part hereof, contains a
-----------------
correct and complete list of all assets and all liabilities and
accounts payable of the Advertising Funds as of November 30, 1997,
including without limitation all accounts (the "Ad Fund Accounts")
in which funds have been deposited as of the date of this Agreement.
All assets of the Advertising Funds are, as of the date of this
Agreement, and shall be, as of the Closing Date, deposited in the Ad
Fund Accounts. No monies, other than Franchisees' or Licensees', if
applicable, contributions to the Advertising Funds and supplier
rebates, marketing and advertising allowances have been deposited in
the Ad Fund Accounts.
ii. All contributions to the Advertising Funds made by Franchisees or
Licensees, Suppliers or any other person or entity have been
deposited in the Ad Fund Accounts and used solely for purposes of
marketing and advertising Cafes on behalf, and for the benefit, of
all of the appropriate Franchisees or Licensees.
iii. Neither SCC nor any Subsidiary has possession of or control over
any other funds contributed by Franchisees or Licensees, Suppliers
or any other person or entity for advertising purposes (national or
regional), except the funds in
32
<PAGE>
the Ad Fund Accounts. Neither SCC nor any Subsidiary has collected
or is currently holding any fees designated for use in any
advertising program whether related to the Advertising Funds or
otherwise.
iv. Each Franchisor has operated and administered the Advertising Funds
in compliance with laws, rules and regulations applicable thereto
and in accordance with its fiduciary and legal responsibilities
established in any governing documents of the Advertising Funds and
in any other agreements or understandings entered into with
franchisees, suppliers, vendors or others in connection therewith.
As of the date hereof the Advertising Funds have no material
liabilities or obligations of any nature, whether accrued, absolute,
contingent or otherwise, including without limitation tax
liabilities. There exists no basis for the assertion against the
Advertising Funds, as of the date hereof or as of the Closing Date,
of any material liability of any nature or in any amount.
x. Regional Cooperatives. Schedule 6.x. attached hereto contains a
--------------------- ---------------
complete and correct list of all regional advertising cooperatives
currently in existence and the addresses and owners of the Cafes that
participate in each such cooperative.
y. Franchise Matters/UFOC.
----------------------
i. Schedule 6.u.i. sets forth a true and complete list of (a) all
-----------------
states in which any Franchisor has registered its franchises for
sale; (b) all states in which any Franchisor has received an
official notice from the appropriate state officials that the
Franchisor's offer to sell and the sale of its franchises are exempt
from the registration provisions of such jurisdiction's franchise
registration law; and (c) all other states where SCC or the
Subsidiaries have sold or offered to sell franchises in which, in
the opinion of SCC and the Principal Shareholders, the offer to sell
and the sale of the Franchisor's franchises are exempt from the
registration provisions thereof.
ii. SCC has delivered to AFC true and correct copies of each
Franchisor`s Uniform Franchise Offering Circulars ("UFOCs"), which
are currently being used in connection with the offers to sell and
the sales of its franchises. The UFOCS, and all UFOC's heretofore
used by each Franchisor (a) comply in all material respects with all
applicable federal and state laws and regulations pertaining to
offers to sell and the sale of franchises, including, without
limitation the Federal Trade Commission's Disclosure Rule entitled
"Disclosure Requirements and Prohibitions Concerning Franchising and
Business Opportunity Ventures", 16 C.F.R. (S)436; and (b) do not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under
which they were made, not misleading.
iii. All offers to sell and all sales of each Franchisor's franchises
and development rights, whether made by the Franchisor, its
officers, employees,
33
<PAGE>
agents or brokers, have been made in compliance with all applicable
federal, state or foreign laws and regulations.
z. Other Agreements. Except for the contracts, commitments and leases
----------------
disclosed in Schedules 6.k.(5), 6.k.(7), 6.dd and 6.ll attached to the
-----------------------------------------
Disclosure Statement and except for the Franchise Agreements and
Development Agreements (collectively, the "SCC Contracts"), neither SCC,
any Subsidiary, any Business, any Company-Owned Cafe nor either System is
a party to (in its own name or as successor in interest), or bound by,
any written or oral (i) contract or commitment involving any profit
sharing, pension, bonus, percentage compensation, stock option or
warrants, sick pay, vacation pay, severance pay, health care or other
"fringe benefit" arrangement; (ii) lease or sublease with respect to any
property real, personal or mixed, in which SCC, the Subsidiaries, the
Businesses, the Company-Owned Cafes or the Systems is involved as either
lessor, lessee, sublessor or sublessee; (iii) contract or commitment
involving an obligation of SCC or any Subsidiary, any Business, any
Company-Owned Cafe or the Systems; (iv) contract or commitment under
which SCC or any Subsidiary has assumed, guaranteed, endorsed or
otherwise become liable in connection with the obligation of any person,
firm or corporation; (v) contract or commitment involving any loan or
financing arrangement; (vi) barter or other trade or exchange
arrangement; (vii) contract with any labor union; or (ix) other
arrangement or understanding not included above. A true, correct and
complete copy of each such SCC Contract, or a detailed description of any
oral contract, is attached to the Schedule in which it is listed as a
part thereof. Except at described on Schedule 6.z., all obligations to
----
or on the part of SCC or any Subsidiary under each SCC Contract has been
duly and timely performed; no default exists with respect to any thereof,
nor has any event occurred (or will occur as a result of the transactions
contemplated hereby) which with the passage of time or giving of notice
could cause a default to exist or cause the acceleration of any
obligation of SCC or any Subsidiary or the creation of any lien or
encumbrance on any asset of SCC or any Subsidiary.
aa. Licenses. Schedule 6.aa. attached hereto and made a part hereof
-------- ----------------
contains a complete listing of all governmental or regulatory licenses,
permits and authorizations held by SCC and the Subsidiaries
(collectively, the "Licenses"). Except for licenses that have been
applied for and not yet granted, the Licenses are all in full force and
effect and constitute all of the Licenses necessary to conduct the
Businesses as they are now being conducted and operate the Company-Owned
Cafes and the Systems as they are now being operated, and none of such
Licenses will be impaired as a result of the transactions contemplated by
this Agreement. Except as describe in Schedule 6.aa., Neither SCC nor
any Subsidiary has received any notice to the effect that, or otherwise
been advised that, it is not in compliance with, or that it is in
violation of, any such Licenses and to the Principal Shareholders'
knowledge, there are not currently existing circumstances that are likely
to result in a failure of SCC or any Subsidiary to comply with, or in a
violation by SCC or any Subsidiary of, any such Licenses.
bb. Employees and Labor Matters. Schedule 6.bb. attached to the
--------------------------- ----------------
Disclosure Statement is a list of (i) all employees (part-time and full-
time) of SCC and the Subsidiaries; (ii) the rate of compensation payable
to each such employee; and (iii)
34
<PAGE>
the accrued vacation pay and other benefits payable by SCC or the
Subsidiary to each employee listed on Schedule 6.bb.. Neither SCC nor any
--------------
Subsidiary has made any promise or commitment, whether oral or in
writing, to increase any employee's compensation or, except pursuant to
the SCC Executive Performance Bonus Program, grant any bonus to any
employee. Except as otherwise described in the Disclosure Statement,
neither SCC nor any Subsidiary is a party to or has any obligations under
any agreement, collective bargaining or otherwise, with any party
regarding the rates of pay or working conditions of any of its employees.
Neither SCC nor any Subsidiary is obligated under any agreement to
recognize or bargain with any labor organization or union on behalf of
its employees. There is not now any formal organization activity among
any of the employees of SCC or any Subsidiary, nor has SCC or any
Subsidiary been charged with, or received notice of any threatened action
with respect to, any unfair labor practice.
SCC and the Subsidiaries have materially complied with all applicable
federal, state and foreign laws and regulations concerning the
employer/employee relationship and with all of their respective
agreements relating to the employment of their employees, including
without limitation provisions thereof relating to wages, bonuses, hours
of work and payment of Social Security and other withholding taxes.
Except as disclosed on Schedule 6.bb., neither SCC nor any Subsidiary is
--------------
liable for any unpaid wages, bonuses or commissions, or any tax, penalty,
assessment or forfeiture, for failure to comply with any of the
foregoing.
cc. Interest in Franchisees, Developers, Suppliers, Restaurants and
---------------------------------------------------------------
Competitors. Except as set forth on Schedule 6.cc. attached to the
----------- ----------------
Disclosure Statement and except for ownership of the Company-Owned Cafes,
neither SCC nor any Subsidiary nor to the best knowledge and belief of
each Principal Shareholder and SCC, any officer, director or employee of
SCC or any Subsidiary, has any direct or indirect interest in any
franchisee, developer, supplier or competitor of SCC or any Subsidiary
or in any Cafe or any person from whom or to whom SCC or any Subsidiary
leases any real or personal property, or in any other person with whom
SCC or any Subsidiary is doing business, except as a wholesale and retail
vendee of coffee in the ordinary course of business, whether in existence
as of the date hereof or proposed, other than the ownership of stock of
publicly traded corporations which does not exceed one percent (1%) of
the issued and outstanding stock of any such corporation.
dd. Benefit Plans. The employee benefit plans and agreements described on
-------------
Schedule 6.dd. attached to the Disclosure Statement are the only
----------------
employee benefit plans and agreements maintained by SCC and any of the
Subsidiaries for the benefit of their shareholders, officers, directors,
employees or independent contractors, including without limitation (i)
any affirmative action plans or programs; (ii) current and deferred
compensation, pension, profit sharing, severance, vacation, stock
purchase, stock option, bonus and incentive compensation benefits and
other employee benefit plans (as defined in Title I, Subtitle A, Section
3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"))
for such shareholders, employees, directors, agents and independent
contractors; and (iii) the medical, hospital, life, health, accident,
disability, death and other fringe and welfare benefits for such
shareholders, employees, directors, agents and independent contractors,
including any split-dollar life insurance policies, all of which plans,
programs, practices,
35
<PAGE>
policies and other individual and group arrangements and agreements,
including any unwritten compensation, fringe benefit, payroll or
employment practices, procedures or policies of any kind or description
are hereinafter referred to as "Benefit Programs and Employment
Policies." Except as disclosed on Schedule 6.dd., there are no
--------------
contributions or payments due with respect to any of the Benefit Programs
and Employment Policies. Except as disclosed on Schedule 6.dd., SCC, each
--------------
Subsidiary, and each Benefit Program and Employment Policy are or will
be, within the time permitted by law, in material compliance with the
provisions of ERISA and the Internal Revenue Code of 1986, as amended
(the "Code") applicable to it. No Benefit Program or Employment Policy
which is subject to the minimum funding standards of ERISA or the Code,
if any, has incurred any material accumulated funding deficiency within
the meaning of ERISA or the Code. Neither SCC nor any Subsidiary has
incurred any liability to the Pension Benefit Guaranty Corporation in
connection with any Benefit Program or Employment Policy which is subject
to Title IV of ERISA, if any. Except as disclosed on Schedule 6.dd., the
--------------
assets of each Benefit Program and Employment Policy that are subject to
Title IV of ERISA, if any, are sufficient to provide the benefits under
such Benefit Program or Employment Policy which the Pension Benefit
Guaranty Corporation would guarantee the payment thereof if such Benefit
Program or Employment Policy terminated, and are also sufficient to
provide all other benefits due under the Benefit Program or Employment
Policy. No event which constitutes a "reportable event" as defined in
Section 4043 of ERISA has occurred and is continuing with respect to any
Benefit Program or Employment Policy covered by ERISA.
Neither SCC nor any Subsidiary has failed at any time to provide to the
extent required by law, continuation coverage with respect to group
health coverage to any former employee under the Consolidated Omnibus
Budget Reconciliation Act of 1985, or any laws of any state to which SCC
or any Subsidiary is subject.
ee. Environmental Compliance.
------------------------
i. Neither SCC nor any Subsidiary is in violation of any judgment,
decree, order, law, license, rule or regulation pertaining to
environmental matters, foreign or domestic, including, without
limitation, those arising under the Resource Conservation and
Recovery Act ("RCRA"), the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 as amended ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986 ("SARA"), the
Federal Water Pollution Control Act, the Toxic Substances Control
Act or any state or local statute, regulation, ordinance, order or
decree relating to health, safety or the environment (hereinafter
"Environmental Laws"), which violation would have a material adverse
effect on the Businesses, the Corporate Assets or financial
condition of SCC or any Subsidiary.
ii. Neither SCC nor any Subsidiary has received notice that it has been
identified by the United States Environmental Protection Agency as a
potentially responsible party under CERCLA with respect to a site
listed on the National Priorities List, 40 C.F.R. Part 300 Appendix
B (1986) except as noted in Schedule 6.ee.; nor has SCC or any
--------------
Subsidiary received any
36
<PAGE>
notification that any hazardous waste, as defined by 42 U.S.C.
(S)9601(14), any "pollutant or contaminant" as defined by 42 U.S.C
(S)9601(33) and any toxic substance, hazardous materials, oil, or
other chemicals or substances regulated by any Environmental Laws
("Hazardous Substances") which it has disposed of has been found at
any site at which a federal or state agency is conducting a remedial
investigation or other action pursuant to any Environmental Law.
iii. Except as set forth on Schedule 6.ee., (i) no portion of SCC's or
--------------
any Subsidiaries' properties has been used for the handling,
processing, storage or disposal of Hazardous Substances and no
underground tank or other underground storage receptacle for
Hazardous Substances is located on such properties; (ii) in the
course of its activities, neither SCC nor any Subsidiary has
generated, nor is it generating, any Hazardous Substance on any of
its properties, except to the extent that exhaust from SCC's
roasting facility if deemed to be a Hazardous Substance; (iii) to
the knowledge of the Principal Shareholders and SCC there have been
no releases (i.e., any past or present releasing, spilling, leaking,
pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, disposing or dumping) of Hazardous Substances by
SCC or any Subsidiary on, upon, or into its properties, which
releases would have a material adverse effect on the value of such
properties. In addition, to the best knowledge of SCC and the
Principal Shareholders, there have been no such releases on, upon,
or into any real property or within one hundred (100) feet of any of
the real properties of SCC or any Subsidiary, which, through soil or
groundwater contamination, may have come to be located on and which
would have a material adverse effect on the value of any real
properties of SCC or any Subsidiary.
ff. No Material Changes or Facts. Neither SCC nor any Principal Shareholder
----------------------------
is aware of any fact relating specifically to the Businesses, the
Company-Owned Cafes or the Systems including, but not limited to,
material customer dissatisfaction, licensing problems, material supplier
dissatisfaction, material equipment malfunction or material and
unfavorable employee relations, which is likely to adversely affect the
value of the Corporate Assets or the SCC Shares or prevent the conduct of
the Businesses as presently conducted or the operation of the Company-
Owned Cafes and the Systems as presently operated, except that, there is
a risk that certain green bean coffee suppliers may not deliver on a
timely basis green beans that have been purchased by SCC or Subsidiaries
at comparably favorable prices. Neither SCC nor any Principal
Shareholder is aware of any supplier, franchisee or developer which
plans to terminate his, her or its relationship with any of the
Businesses, any of the Company Owned Cafes or the Systems where such
termination would have a material adverse effect on the Businesses.
gg. Insurance. Schedule 6.gg. contains a list of all policies of insurance,
--------- ----------------
surety bonds and letters of credit maintained by SCC and each of the
Subsidiaries, which list is true, complete and accurate in all material
respects as of the date hereof. Neither SCC not any Subsidiary is in
default with respect to its obligations under any such policies. All of
such policies are sufficient for compliance with all requirements of
37
<PAGE>
law and all contracts, leases and other agreements to which SCC or any
Subsidiary is a party. Neither SCC nor any Subsidiary has failed to give
any notice or to present any material claim under any such policy or
binder in a due and timely fashion. Such policies and binders are in full
force and effect on the date hereof and will continue to be kept in full
force and effect on substantially equivalent terms through the
consummation of the transactions contemplated hereby except to the extent
policies expire and are replaced in the ordinary course of business with
policies and binders on substantially equivalent terms.
hh. Further Assurances. SCC and each Principal Shareholder shall, at any
------------------
time and from time to time after the date of this Agreement, upon the
reasonable request of AFC, execute, acknowledge and deliver, or cause to
be executed, acknowledged and delivered, all such further documents as
may be necessary and appropriate to confirm or perfect the transactions
contemplated by this Agreement.
ii. Brokers and Finders. Except as set forth in Schedule 6.ii., neither SCC,
------------------- --------------
any Subsidiary nor any Principal Shareholder has employed any investment
banker, broker, agent or finder or incurred any liability for any
investment banking fees, brokerage fees, agent's commissions or finder's
fees concerning the transactions contemplated hereby.
jj. No Material Adverse Changes. Since November 30, 1997, there has not
---------------------------
been (i) any transaction or transactions by SCC or any Subsidiary which,
either individually or in the aggregate, are materially adverse; (ii) any
change in the financial condition, operations, properties or assets of
the Businesses, the Company-Owned Cafes or the Systems, except changes in
the ordinary course of business, none of which have been, individually or
in the aggregate, materially adverse; (iii) any damage or destruction to,
or loss of, any material assets of SCC or any Subsidiary; (iv) any
mortgage, pledge, grant of a security interest or other encumbrance of
any tangible assets of SCC or any Subsidiary; (v) with respect to SCC and
the Subsidiaries, any material contract canceled or any notice received
with respect to any such contract terminating or threatening termination
of any such contract; or (vii) any material adverse change in the gross
sales or gross profits of SCC or any Subsidiary.
kk. Products Liability and Warranties. There are no product liability,
---------------------------------
warranty claims or other claims existing or, to the best knowledge and
belief of SCC and the Principal Shareholder, threatened against SCC or
any Subsidiary which relate to the products sold or distributed by SCC,
any Subsidiary or any Franchisee.
ll. Suppliers. Schedule 6.ll. attached to the Disclosure Statement sets
--------- ----------------
forth a true, correct and complete list of each material Supplier who has
furnished inventory or other merchandise to SCC, any Subsidiary or the
Franchisees at any time since January 1, 1995; also, attached to Schedule
--------
6.ll. is a true and correct copy of each written agreement, and a
-----
description of the terms of any oral agreement, with any Supplier
relating to any of the Businesses, any of the Company-Owned Cafes or the
Systems (to the extent not disclosed on Schedule 6.ll). Except as set
-------------
forth on Schedule 6.ll, no Supplier is a sole source of supply of any
-------------
good or service used by SCC, any Subsidiary or the Franchisees. In the
reasonable business judgment of the Principal Shareholders, SCC and the
Subsidiaries have good business relationships
38
<PAGE>
with each Supplier. None of the Suppliers has (i) canceled or otherwise
terminated, or threatened in writing to cancel or otherwise terminate its
relationship with SCC, any Subsidiary or any Franchisee; or (ii) since
January 1, 1995, decreased materially, or threatened to decrease or limit
materially, its services, supplies or materials sold or furnished to SCC,
any Subsidiary or any Franchisee where such action would have a material
adverse effect on SCC or the Subsidiaries.
mm. Accounts and Notes Payable. All accounts and notes payable of each of
--------------------------
SCC and the Subsidiaries are currently within their respective terms or
understandings and are not in default or otherwise past due. SCC and the
Subsidiaries acknowledge that, prior to or at closing, all Debt of SCC
and the Subsidiaries will either be satisfied in full or the amount
thereof deducted from the Net Closing Payment as provided in Paragraph
1(b)(2) above. For purposes of this Agreement, the term "Debt" shall
mean all liabilities and obligations of SCC and the Subsidiaries
(including all long-term and current portions of any debt, and all
capital leases, but excluding the WC Line of Credit, as defined below)
other than accounts payable incurred in the ordinary course of business
and not past due more than ninety (90) days and accrued liabilities
relating to employee compensation and benefits. It is acknowledged and
agreed that the certain working capital line of credit from U.S. Bank
(the "WC Line of Credit") shall be assumed or paid by AFC or the
Surviving Corporation at Closing. The Principal Shareholders represent
and warrant that the outstanding principal balance of the WC Line of
Credit as of December 28, 1997 was $3,338,837.
nn. Disclosure. No representation or warranty by SCC or any Principal
----------
Shareholder contained in this Agreement, nor any statement, certificate,
schedule or exhibit hereto furnished or to be furnished by or on behalf
of SCC or any Principal Shareholder pursuant to this Agreement, nor any
document or certificate delivered to AFC pursuant to this Agreement or in
connection with the transactions contemplated hereby, contains or shall
contain any untrue statement of material fact or omits or shall omit a
material fact necessary to make the statement contained therein not
misleading.
oo. Exhibits and Schedules. All Exhibits and Schedules prepared or to be
----------------------
prepared by or on behalf of SCC, any Subsidiary or SCC Shareholders are
or will be attached hereto or to the Disclosure Schedule and made a part
hereof on or before the Closing Date and are or shall be true, correct
and complete. SCC and the Principal Shareholders have delivered, or will
deliver prior to the Closing Date, to AFC, a true, correct and complete
copy of all Exhibits and Schedules (and attachments thereto) required to
be delivered by them pursuant to this Agreement. Each Schedule shall be
deemed to apply to the entire Agreement and any omission from any
Schedule that appears on another Schedule, shall be deemed to be included
in such Schedule.
pp. Knowledge of SCC. Whenever used herein, the term "knowledge of SCC" or
----------------
"SCC's knowledge" shall be deemed to include the knowledge of Larry
McDonald, Kimberly Beach, Lee Brettin, Jim Clark, Pat McCarthy and Matt
Galvin. The term "knowledge of the Principal Shareholders" or the
"Principal Shareholders' knowledge" or "best knowledge" shall mean the
actual knowledge of such Principal Shareholder.
39
<PAGE>
7. REPRESENTATIONS AND WARRANTIES OF AFC AND MERGERCO. AFC and MergerCo.
--------------------------------------------------
hereby represent and warrant as follows, which representations, warranties and
covenants set forth herein shall be true and correct on the Closing Date and
shall survive the consummation of the transactions hereunder:
a. Organization and Good Standing. AFC and MergerCo are corporations duly
------------------------------
organized, validly existing and in good standing under the laws of, with
respect to AFC, the State of Minnesota and with respect to MergerCo, the
State of Georgia.
b. Corporate Authority. AFC and MergerCo have taken all necessary corporate
-------------------
action to authorize the execution, delivery and performance of the
Transaction Documents to which AFC and MergerCo are a party, and AFC and
MergerCo have the power to make, deliver and perform their respective
obligations under the Transaction Documents.
c. Enforceability. The Transaction Documents, when executed, will
--------------
constitute the valid obligation of AFC and MergerCo, legally binding upon
them and enforceable against them in accordance with their respective
terms.
d. Consents. No consent or approval of any other party, including, but not
--------
limited to, any lending institution or any governmental authority, bureau
or agency, is required in connection with the execution, delivery,
performance, validity and enforceability of this Agreement which has not
been obtained.
e. No Violation. The execution, delivery, and performance of the
------------
Transaction Documents will not violate the provisions of (i) AFC's or
MergerCo's Articles of Incorporation or by-laws; (ii) any mortgage,
indenture, security agreement, contract, undertaking or other agreement
to which AFC or MergerCo is a party or which is binding upon AFC or
MergerCo or any of their property or assets; or (iii) any law,
regulation, judgment or order which is binding upon AFC or MergerCo or
any of their property or assets.
f. Disclosure. No representation or warranty by AFC or MergerCo contained
----------
in this Agreement, nor any statement, certificate, schedule or exhibit
hereto furnished or to be furnished by or on behalf of AFC or MergerCo
pursuant to this Agreement, nor any document or certificate delivered to
SCC pursuant to this Agreement or in connection with the transactions
contemplated hereby, contains or shall contain any untrue statement of
material fact or omits or shall omit a material fact necessary to make
the statement contained therein not misleading.
g. Investment Intent. AFC is acquiring the SCC Shares for its own account
-----------------
and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act.
h. Brokers and Finders. Neither AFC nor MergerCo have employed any
-------------------
investment banker, broker, agent or finder or incurred any liability for
any investment banking fees, brokerage fees, agent's commissions or
finder's fees concerning the transactions contemplated hereby.
40
<PAGE>
i. Title to AFC Shares. Upon issuance and delivery by AFC, the SCC
-------------------
Shareholders shall own good title to the AFC Shares, free and clear of
any liens, claims and assessments. The AFC Shares shall be validly
issued, fully paid and non-assessable.
8. PRE-CLOSING COVENANTS REGARDING SCC AND THE PRINCIPAL SHAREHOLDERS. SCC
------------------------------------------------------------------
and the Principal Shareholders, jointly and severally, covenant that prior to
Closing:
a. Conduct of Businesses/Operation of System. SCC and the Subsidiaries
------------------------------------------
shall carry on their respective Businesses and operate the Company-
Owned Cafes and the Systems in the ordinary course in substantially
the same manner as they were carried on and operated prior to the
execution of this Agreement and as contemplated in the Business Plan
(including, without limitation, operating substantially in accordance
with current budgets, expansion plans, capital expenditure plans and
the like and retaining and handling all cash and cash equivalents in
a manner consistent with prior practices) and, to the extent
consistent therewith, use all reasonable efforts, in good faith, to
preserve its relationship with Franchisees, Developers, Suppliers and
others having business dealings with them to the end that such
Businesses, as going concerns, and the Company-Owned Cafes and the
Systems shall be unimpaired at the Closing. Without limiting the
foregoing, SCC shall not draw down or otherwise utilize the proceeds
of the WC Line of Credit to (i) reduce Debt, except to the extent
necessary to make payments on interest or to meet scheduled
obligations to make payments on principal, or (ii) for any purpose
other than payment of trade payables and funding the purchase of
assets of SCC in the ordinary course of business. If and to the
extent that SCC makes payments after December 28, 1997 and prior to
Closing against the principal amount (but not the interest) of any
Debt, then the amount the amount of such principal payment(s) shall be
deducted from the Base Purchase Price. In no event shall the
outstanding principal balance on the WC Line of Credit exceed, at any
time and at Closing, Five Million Dollars ($5,000,000).
b. Obligations. SCC and the Subsidiaries shall perform all of their
-----------
obligations under all agreements, contracts and instruments relating to
or affecting the Corporate Assets, the Businesses, the Company-Owned
Cafes and the Systems.
c. Compliance. SCC and the Subsidiaries shall comply in all material
----------
respects with all Applicable Laws.
d. Other Agreements. SCC and the Subsidiaries shall not enter into or
----------------
assume any agreement, contract or commitment disposing of or altering any
of the Corporate Assets outside the ordinary course of business; and the
Principal Shareholders shall not enter into any agreement, contract or
commitment disposing of, or impairing their ability to convey, all or any
portion of the SCC Shares pursuant to the Merger.
41
<PAGE>
e. Maintain Property. SCC and the Subsidiaries shall maintain, at their
-----------------
sole expense, all of their property in customary repair, order and
condition, reasonable wear and use and damage by fire or unavoidable
casualty excepted.
f. No Contracts or Commitments. Neither SCC nor any Subsidiary shall enter
---------------------------
into any contract relating to the Businesses, the Company-Owned Cafes or
the Systems extending beyond the date of the Closing with either (i) a
value in excess of $50,000 or (ii) which cannot be terminated by SCC or
the Subsidiary without cost or penalty upon no more than sixty (60) days
written notice, without AFC's written approval, including without
limitation Franchise Agreements and Development Agreements.
g. No Borrowings. Neither SCC nor any Subsidiary shall assume, guarantee,
-------------
endorse or otherwise become responsible, directly or indirectly, for the
obligations of any other individual, firm or corporation, except as may
be approved in writing by AFC.
h. Compensation and Bonuses. Neither SCC nor any Subsidiary shall increase
------------------------
the formula in the compensation payable or to become payable to any
officers, or make any bonus payment or arrangement to or with any
officer, except for the formula as existed during SCC and each
Subsidiary's last fiscal or calendar year.
i. Maintain Books. SCC and the Subsidiaries shall continue to maintain
--------------
their books of account and records in the usual, regular and ordinary
manner.
j. Distributions/SCC Shares. Neither SCC nor the Subsidiaries shall make
------------------------
any distributions of cash or other property (other than to pay normal
operating expenses) to the SCC Shareholders or to any other party and
shall not issue or grant any rights to acquire any SCC Shares or shares
of stock of any of the Subsidiaries without the prior written consent of
AFC. In addition, neither SCC nor the Principal Shareholders shall enter
into any agreement, contract or commitment disposing of or affecting
their SCC Shares; provided, however, that SCC may modify its existing
stock option plan and certain existing stock option agreements entered
into pursuant thereto, to accelerate the vesting of options that have
been held for less than one (1) year to acquire up to One Hundred Fifty
Thousand (150,000) SCC Shares.
k. Maintain Insurance. SCC and the Subsidiaries shall maintain insurance
------------------
upon all of their respective Corporate Assets and with respect to the
conduct of their respective Businesses in at least such amounts and of
such kinds as are listed on Schedule 6.gg attached to the Disclosure
-------------
Statement.
l. No Sale of Assets. Neither SCC nor any Subsidiary shall sell, dispose of
-----------------
or encumber, directly or indirectly, any of its assets or engage in any
activity or transaction, except in the ordinary course of business.
m. No Mortgages. Neither SCC nor any Subsidiary shall subject any of its
------------
assets to any mortgage, pledge or lien.
n. No Modification of Contracts. Neither SCC nor any Subsidiary shall
----------------------------
modify, amend, cancel or terminate any existing agreement or arrangement
relating to the Businesses involving any obligation with a value in
excess of $50,000, except in the ordinary course of business and not
enter into any transaction involving the exchange of ownership of any
Cafes operated by Franchisees for retail units currently operated by any
other entity or under any other name without the written consent of AFC.
42
<PAGE>
o. Litigation, Etc. SCC and the Principal Shareholders shall promptly
----------------
notify AFC in writing of any judgments, orders or decrees entered or any
suits, actions, claims, administrative proceedings or labor negotiations
instituted, threatened or asserted by or against SCC, any Subsidiary or
any SCC Shareholder, after the date of this Agreement and before the
Closing, which have or may reasonably be expected to have a materially
adverse effect on SCC, any SCC Subsidiary or any of the SCC Shares.
p. Notice of Changes. SCC and the Principal Shareholders shall promptly
-----------------
advise AFC in writing of any adverse change in the financial condition,
operation, business, properties or prospects of SCC or any Subsidiary
relative to the Corporate Assets, the Businesses, the Company-Owned
Cafes, and the Systems.
q. Cooperation. SCC and the Principal Shareholders shall cooperate with AFC
-----------
in securing all necessary licenses, approvals, consents and estoppel
letters required by this Agreement.
9. CONDITIONS PRECEDENT TO OBLIGATIONS OF AFC. The following shall
------------------------------------------
constitute conditions precedent to AFC's obligations to consummate the
transactions contemplated herein, and the failure of any such condition shall
give AFC the option of terminating this Agreement:
a. Due Diligence Review. AFC shall be satisfied with its findings in the
--------------------
Due Diligence Review, which conditions shall either be waived or
satisfied by AFC in writing to SCC on or before (i) January 31, 1998 or
(ii) if the Closing Date is extended in accordance with Paragraph 3
hereof, the earlier of the Closing Date or February 21, 1998; otherwise,
this Agreement shall terminate.
b. Financing. AFC shall have obtained financing for the full amount of the
---------
Cash Portion of the Purchase Price payable at Closing upon terms and
conditions satisfactory to it, which condition shall be satisfied or
waived by AFC in writing to SCC on or before (i) January 31, 1998 or
(ii) if the Closing Date is extended as provided in Paragraph 3 hereof,
until the earlier of the Closing Date or February 21, 1998; otherwise
this Agreement shall terminate.
c. Representations and Warranties. The representations and warranties of
------------------------------
SCC and the Principal Shareholders contained herein shall be true and
correct as of Closing in all material respects; SCC and the Principal
Shareholders shall have complied with, performed or satisfied all
agreements, covenants and conditions required by this Agreement to be
complied with, performed or satisfied by them, in each case, in all
material respects; and, SCC and the Principal Shareholders shall have
delivered to AFC a certificate to such effect.
d. Legal Opinion. AFC shall have received the favorable legal opinion of
-------------
Hillis Clark Martin & Peterson, counsel for SCC and the SCC Shareholders,
dated as of the Closing Date, in form and substance acceptable to counsel
for AFC.
e. Absence of Changes. Since the date of this Agreement there shall not
------------------
have occurred any material adverse change in the financial condition of
SCC and the Subsidiaries.
43
<PAGE>
f. Approvals. All actions, proceedings, instruments and documents required
---------
to carry out this Agreement, or incidental thereto, and all other related
legal matters, shall have been approved by counsel for AFC, which
approval shall not be unreasonably withheld.
g. Actions. No action, suit or proceeding shall have been instituted before
-------
a court or governmental body, or instituted or threatened by any
governmental agency or body, to restrain or prevent the carrying out of
the transactions contemplated hereby, which shall not have been disposed
of to the satisfaction of AFC.
h. Governmental Consents. Necessary approvals shall have been obtained from
---------------------
the Justice Department and Federal Trade Commission and any state and
foreign regulatory bodies under Applicable Laws, including without
limitation the HSR Act.
i. Agreements. Larry McDonald shall have entered into Non-Competition and
----------
Confidentiality Agreement. Umberto Bizzarri and AFC (or the Surviving
Corporation) shall have entered into a consulting agreement (the
"Consulting Agreement") containing such terms and conditions as shall be
mutually acceptable to the parties thereto.
j. Consents. AFC shall have received written consents of any party to any
--------
contract which may, in the opinion of AFC's counsel, be required in
connection with the transactions contemplated hereby.
k. Release of Liens. All liens and encumbrances listed on Schedule 6.k
---------------- ------------
shall have been satisfied in full and released except for liens and
encumbrances in connection with the WC Line of Credit, in the event AFC
or the Surviving Corporation elect not to pay off or otherwise satisfy
the WC Line of Credit at Closing.
l. Landlord Estoppel Letters/Nondisturbance. SCC and each Subsidiary shall
----------------------------------------
have received an estoppel letter (the "Landlord Estoppel Letters"), in
form and substance satisfactory to AFC, from each landlord under the
Premises Leases. The Landlord Estoppel Letter for each Premises Lease
shall include (i) standard estoppel language; (ii) the landlord's
consent, if required, to the consummation of the Merger; (iii) the
landlord's consent to SCC or the Subsidiary's mortgaging of its leasehold
interest in the Premises to AFC's lenders; (iv) landlord subordination,
nondisturbance and attornment provisions. In addition, and where
applicable, mortgagee's of any Leased Premises shall provide a
nondisturbance agreement in favor of AFC and AFC's lenders.
m. Franchisee/Developer Estoppel Letters. Each Franchisor shall have
-------------------------------------
received estoppel letters (the "Franchisee Estoppel Letters"), in form
and substance satisfactory to AFC from each of its Franchisees and
Developers.
n. SCC Payment of Debts. SCC and the Subsidiaries shall have paid all of
--------------------
their Debt or the appropriate adjustment to the Net Closing Payment shall
have been agreed upon by SCC and AFC.
44
<PAGE>
o. Investment Letters and Shareholder Agreement. Each SCC Shareholder who
--------------------------------------------
will receive AFC Shares in the Merger shall execute an investment letter
(an "Investment Letter") in form and substance satisfactory to AFC.
Each SCC Shareholder who will receive AFC Shares in the Merger shall
execute the Shareholders Agreement.
p. Acquisition Rights Termination Agreements. Each of the SCC Acquisition
-----------------------------------------
Rights Holders shall have executed and delivered to Funding Agent an
Acquisition Right Termination Agreement.
q. Dissenting SCC Shareholders. The Dissenting Shares shall not exceed, in
---------------------------
the aggregate, more than five percent (5%) of the SCC Shares issued and
outstanding as of the Effective Time.
r. Audited Financial Statement. AFC shall have received the audited
---------------------------
Financial Statement for the twelve (12) month period ending September 30,
1997 and such statement shall be consistent, in all material respects,
with the 1997 Unaudited Statement, except for normal year end
adjustments.
10. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PRINCIPAL SHAREHOLDERS. The
------------------------------------------------------------------
following shall constitute conditions precedent to the Principal Shareholders'
obligations to consummate the transactions contemplated herein, and the failure
of any such condition shall give the Principal Shareholders the option of
terminating this Agreement (which shall result in termination of this Agreement
in full):
a. Representations and Warranties. The representations and warranties of
------------------------------
AFC contained herein shall be true and correct as of Closing; AFC shall
have complied with, performed or satisfied all agreements, covenants and
conditions required by this Agreement to be complied with, performed or
satisfied by it; and, AFC shall have delivered to the Principal
Shareholders a certificate to such effect.
b. Legal Opinion. The Principal Shareholders shall have received the
-------------
favorable legal opinion of Cohen Pollock Merlin Axelrod & Tanenbaum,
P.C., counsel for AFC, dated as of the Closing Date, in form and
substance acceptable to counsel for the Principal Shareholders.
c. Approvals. The consummation of the Merger and the transactions
--------- ---------------------------------------------------
contemplated herein, shall have been approved by at least 66 2/3% of the
-------------------
SCC Shareholders and counsel for SCC, which approval shall not be
unreasonably withheld.
d. Actions. No action, suit or proceeding shall have been instituted before
-------
a court or governmental body, or instituted or threatened by any
governmental agency or body, to restrain or prevent the carrying out of
the transactions contemplated hereby, which shall not have been disposed
of to the satisfaction of the Principal Shareholders.
e. Governmental Consents. Necessary approvals shall have been obtained from
---------------------
the Justice Department and Federal Trade Commission and any state and
foreign regulatory bodies under Applicable Laws, including without
limitation the HSR Act.
45
<PAGE>
11. DOCUMENTS DELIVERED AT CLOSING. Execution and delivery of the following
------------------------------
documents, in form and substance acceptable to counsel for AFC and the Principal
Shareholders, shall also be conditions precedent to Closing:
a. the Washington Merger Certificate and the Georgia Merger Certificate;;
b. delivery to the Funding Agent of the Cash Portion of the Purchase Price
(less the Holdback Funds), the AFC Share Portion of the Purchase Price
and the Acquisition Rights Portion of the Purchase Price and execution of
the Escrow Agreement contemplated in connection therewith;
c. the Non-Competition and Confidentiality Agreement and the Consulting
Agreement;
d. updated Schedules 6.k.(4) and 6.u.x;
e. the Certificates of the Secretaries, of AFC, SCC, each Subsidiary and
each corporate SCC Shareholder, if any, certifying as true and correct a
copy of such party's Articles of Incorporation, By-Laws (and all
amendments thereto) and resolutions approving the transactions
contemplated by this Agreement dated as of the Closing Date;
f. a certificate of good standing as to AFC, SCC and each Subsidiary issued
not more than fifteen (15) days prior to the Closing Date by the
Secretary of State of the state of its incorporation;
g. the "bring down" certificates described in Paragraphs 4.c. and 5.a.
hereof;
h. the legal opinions described in Paragraphs 4.d. and 5.b. hereof;
i. the Landlord Estoppel Letters and Mortgagee Nondisturbance Letters;
j. the Franchisee Estoppel Letters;
k. the Shareholders Agreement;
l. the Investment Letters;
m. the resignation of the officers and directors of SCC and the Subsidiaries
required in Paragraph 1.a.(6) above;
n. the Acquisition Rights Termination Agreements;
o. the exchange of the SCC Acquisition Rights for AFC Acquisition Rights;
p. such other documents as shall be necessary to evidence compliance by AFC,
SCC and the SCC Shareholders with the terms and conditions set forth in
this Agreement.
46
<PAGE>
As used in this Agreement, "Transaction Documents" means, collectively, this
Agreement, the Non-Competition and Confidentiality Agreements, the Shareholders
Agreement, the Investment Letters, the Escrow Agreement and the Acquisition
Rights Termination Agreements.
12. INDEMNIFICATION BY THE PRINCIPAL SHAREHOLDERS.
---------------------------------------------
a. General. The Principal Shareholders, jointly and severally, hereby agree
-------
to indemnify, defend and hold harmless AFC, SCC and the Subsidiaries on
demand, from and against any and all loss, liability, claim cost, damage
or deficiency, including interest, penalties, and reasonable attorneys'
fees, (herein, collectively referred to as a "Loss") arising out of or
due to:
i. a breach of, or inaccuracy in, any representation or warranty made
by any Principal Shareholder or SCC or any of them, and contained in
this Agreement or in any certificate, document or instrument
delivered to AFC pursuant hereto or in connection herewith, or any
nonfulfillment of any covenant made by any Principal Shareholder or
SCC, or any of them, contained herein or in any certificate,
document or instrument delivered to AFC pursuant hereto or in
connection herewith;
ii. any and all Tax Obligations for any period prior to the Closing Date
not reserved for in the Financial Statements;
iii. any Debt of SCC and the Subsidiaries; and
iv. any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses including, without
limitation, legal fees and expenses, incident to any of the
foregoing or incurred in investigating or attempting to avoid the
same or to oppose the imposition thereof, or in enforcing this
indemnity.
b. Offset. Upon prior written notice to the Principal Shareholders
------
specifying in reasonable detail the basis for such set-off, prior to
payment of the Holdback Funds, the Contingent Payment, or distributions
from the Escrow, AFC may offset from such payments or withdraw from the
Escrow, pro rata as to each SCC Shareholder and each SCC Acquisition
Rights Holder in proportion to such SCC Shareholders' and SCC Acquisition
Rights Holders' percentage of such funds as reflected on Schedule 1.c.
-------------
(a) any amounts previously applied by AFC, the Surviving Corporation or
the Subsidiaries to satisfy the indemnification obligations of the
Principal Shareholders as set forth herein; and (b) the amount (as
estimated by AFC in good faith) of any outstanding, but unliquidated,
claims for indemnification made by AFC, the Surviving Corporation or the
Subsidiaries against the Principal Shareholders prior to the expiration
of the applicable periods (the "Estimated Claims"). Any such remaining
Holdback Funds (after expiration of the Escrow Period) or Contingent
Payment not applied to any such indemnification obligations shall be paid
to the Funding Agent for disbursement as provided above. The right of
offset described in this Section 12.b shall be AFC's exclusive remedy
with respect to claims for indemnification or otherwise against the SCC
Shareholders under this Section 12. The right of offset described in
this Section 12.b. shall be satisfied
47
<PAGE>
proportionately with respect to the cash, AFC Shares and AFC Acquisition
Rights composing a part of the Holdback Funds, the Escrow or the
Contingent Payment, as the case may be.
c. Survival. The obligation to indemnify contained herein shall survive the
--------
Closing; provided, however, that such obligation shall terminate on the
following dates with respect to the following categories of claims:
i. On the first anniversary of the Closing Date, the obligation to
indemnify shall terminate with respect to all claims not heretofore
made arising under this Agreement except claims arising under
Section 6.m (Taxes), Section 6.t (Proprietary Rights), Section 6.dd
(Benefit Plans), Section 6.ee (Environmental Compliance), Section
6.q. (OSHA), Section 6.q. (Food & Drug Administration Compliance)
and fraud or any intentional misrepresentations of SCC, any
Subsidiary or the Principal Shareholders.
ii. On the second anniversary of the Closing Date, the obligation to
indemnify shall terminate with respect to claims not heretofore made
arising under Section 6.t (Proprietary Rights), Section 6.dd
(Benefit Plans), Section 6.ee (Environmental Compliance), Section
6.q. (OSHA), and Section 6.q. (Food & Drug Administration
Compliance).
iii. On the third anniversary of the Closing date, all of the
obligations to indemnify contained herein and otherwise except for
claims heretofore made shall terminate, after which, the Principal
Shareholders shall have no liability (for indemnification or
otherwise) with respect to any representation or warranty, or
covenant or obligation.
d. Limitations on Amount.
---------------------
i. With respect to any claims asserted on or before the first
anniversary of the Closing Date, the Principal Shareholders shall
have no liability (for indemnification or otherwise) until the total
Losses with respect to indemnifiable claims exceeds $100,000, and
then only for the amount by which such Losses exceeds $100,000. In
no event shall the aggregate liability of the Principal Shareholders
with respect to claims made on or before the first anniversary of
the Closing exceed the total amount of the Deferred Payment and the
Contingent Payment described in Section 1.f, notwithstanding whether
the Contingent Payment is earned.
ii. With respect to any claims asserted after the first anniversary of
the Closing and before the third anniversary of the Closing, the
Principal Shareholders shall have no liability (for indemnification
or otherwise) until the total Losses with respect to indemnifiable
claims exceeds $200,000, and then only for the amount by which such
Losses exceeds $100,000. In no event shall the aggregate liability
of the Principal Shareholders with respect to claims made after the
first anniversary exceed the amount of the Deferred Payment.
48
<PAGE>
e. Tax Effect and Insurance. The liability of the Principal Shareholders
------------------------
under this Section shall be reduced by the tax benefit actually realized
and any insurance proceeds received by the indemnitees as a result of any
Losses upon which such Indemnification Claim is based, and shall include
any tax detriment actually suffered by the Indemnitees as a result of
such Losses. The amount of any such tax benefit or detriment shall be
determined by taking into account the effect, if any and to the extent
determinable, of timing differences resulting from the acceleration or
deferral of items of gain or loss resulting from such Losses and shall
otherwise be determined so that payment by the Indemnitors of the
Indemnification Claim, as adjusted to give effect to any such tax benefit
or detriment, will make the Indemnitee as economically whole as is
reasonably practical with respect to the Losses upon which the
Indemnification Claim is based. Any dispute as to the amount of such tax
benefit or detriment shall be resolved as provided in Section 15 of this
Agreement.
13. INDEMNIFICATION BY AFC.
----------------------
a. General. AFC hereby agrees to indemnify, defend and hold harmless the
-------
Principal Shareholders from and against any and all loss, liability,
damage or deficiency (including interest, penalties, and reasonable
attorney's fees) arising out of or due to:
i. A breach of, or inaccuracy in, any representation or warranty made
by AFC and contained in this Agreement or in any certificate,
document or instrument delivered to the Principal Shareholders
pursuant hereto or in connection herewith, or any nonfulfillment of
any covenant made by AFC contained herein or in any certificate,
document or instrument delivered to SCC pursuant hereto or in
connection herewith; and
ii. any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses including, without
limitation, legal fees and expenses, incident to any of the
foregoing or incurred in investigating or attempting to avoid the
same or to oppose the imposition thereof, or in enforcing this
indemnity.
b. Survival. The obligation to indemnify contained herein shall survive the
--------
Closing for a period of one (1) year; provided, however, that any Loss
arising from fraud or any intentional misrepresentations of AFC shall
survive the maximum period allowable pursuant to any applicable statute
of limitations.
c. Limitations. AFC's maximum liability for indemnification hereunder
-----------
(exclusive of its obligations to make payment of the Holdback Funds and
the Contingent Payment) shall not exceed the sum of Seven Million Six
Hundred Thousand Dollars ($7,600,000). Except for its obligations to
make payment of the Holdback Funds and Contingent Payment, AFC shall have
no liability (for indemnification or otherwise) until the total Losses
with respect to indemnifiable claims exceeds $100,000, and then only for
the amount by which such Losses exceeds $100,000.
14. NOTICE OF CLAIMS. Each party entitled to indemnification under Paragraph
----------------
12 or Paragraph 13 above (the "Indemnified Party") shall give notice to the
party required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual
49
<PAGE>
knowledge of any claim as to which indemnity may be sought, and shall permit the
Indemnifying Party to assume the defense of any such claim or any litigation
resulting therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or litigation, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld), and the
Indemnified Party may participate in such defense at such party's expense, and
provided further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Paragraph 14 unless the failure to give such notice is materially
prejudicial to an Indemnifying Party's ability to defend such action and
provided further, that the Indemnifying Party shall not assume the defense for
matters as to which there is a conflict of interest or separate and different
defenses. No Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
15. DISPUTE RESOLUTION.
------------------
a. Mediation. No party hereto shall commence an arbitration proceeding
---------
pursuant to the provisions of subparagraph b. below unless such party
shall first give a written notice (a "Dispute Notice") to the other party
or parties setting forth the nature of the dispute. The parties shall
attempt in good faith to resolve the dispute by mediation in Chicago,
Illinois under the Commercial Mediation Rules of the American Arbitration
Association in effect on the date of this Agreement. If the parties
cannot agree on the selection of a mediator within twenty (20) days after
delivery of the Dispute Notice, the mediator will be selected by the
presiding judge of the Cook County Superior Court. If the dispute has
not been resolved by mediation as provided above within sixty (60) days
after the delivery of the Dispute Notice, then the dispute shall be
determined by arbitration in accordance with the provisions of
subparagraph b. hereof.
b. Arbitration. Any controversy, claim or dispute of whatever nature
-----------
arising between the parties, including but not limited to those arising
out of or relating to this Agreement or the construction, interpretation,
performance, breach, termination, enforceability or validity of this
Agreement, whether such claim existed prior to or arises on or after the
date of this Agreement, including the determination of the scope of this
agreement to arbitrate (which is not settled through mediation as
provided in subparagraph a. above) shall be determined by arbitration
in Chicago, Illinois by one arbitrator in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and its
Supplementary Procedures for Large, Complex Disputes, except that (a)
every person named on all lists of potential arbitrators shall be a
neutral and impartial lawyer with excellent academic and professional
credentials (i) who is or has been practicing law as a partner in a
highly respected law firm for at least fifteen (15) years, specializing
in either general commercial litigation or general corporate and
commercial matters, with experience in the field of franchise law and
(ii) who has had experience, and is generally available to serve, as an
arbitrator, and (b) each party shall be entitled to strike on a
peremptory basis, for any reason or no reason, any or all of the names of
potential arbitrators on any list submitted to the parties by the AAA and
any person selected by the AAA to serve as an arbitrator by
administrative appointment. In the event the
50
<PAGE>
parties cannot agree on a mutually acceptable arbitrator from the one or
more lists submitted by the AAA within thirty (30) days after the AAA
transmits to the parties its first list of potential arbitrators, the
presiding judge of the Cook County Superior Court shall designate three
persons who, in his or her opinion, meet the criteria set forth herein,
which designees may include persons named on any list submitted by the
AAA. Each party shall be entitled to strike one of such three (3)
designees on a peremptory basis within ten (10) after its receipt of such
list of designees, indicating its order of preference with respect to the
remaining designees. If two (2) of such designees have been stricken by
the parties, the unstricken designee shall be the arbitrator. Otherwise,
the selection of the arbitrator shall be made by the AAA from the
remaining designees in accordance with their mutual order of preference,
or by random selection in the absence of a mutual order of preference.
The arbitrator shall base his or her award on applicable law and judicial
precedent and, unless all parties agree otherwise, shall include in such
award the findings of fact and conclusions of law upon which the award is
based. Judgment on the award rendered by the arbitrator may be entered in
any court having jurisdiction thereof.
c. Limited Judicial Review of Arbitration Award Notwithstanding the
--------------------------------------------
foregoing, upon the application by any party to a court for an order
confirming, modifying or vacating the award, the court shall have the
power to review whether, as a matter of law based on the findings of fact
determined by the arbitrator, the award should be confirmed, modified or
vacated in order to correct any errors of law made by the arbitrator. In
order to effectuate such judicial review limited to issues of law, the
parties agree (and shall so stipulate to the court) that the findings of
fact made by the arbitrator shall be binding on the parties and shall
serve as the facts to be submitted to and relied on by the court in
determining the extent to which the award should be confirmed, modified
or vacated.
d. Costs and Attorneys Fees. If any party fails to proceed with mediation
------------------------
or arbitration as provided herein or unsuccessfully seeks to stay such
mediation or arbitration, or fails to comply with any arbitration award,
or is unsuccessful in vacating or modifying the award pursuant to a
petition or application for judicial review, the other party shall be
entitled to be awarded costs, including reasonable attorneys' fees, paid
or incurred by such other party in successfully compelling such mediation
or arbitration or defending against the attempt to stay, vacate or modify
such mediation or arbitration award and/or successfully defending or
enforcing the award.
16. TERMINATION.
-----------
a. In addition to the other rights to terminate this Agreement set forth
above, this Agreement shall automatically terminate or may be terminated
prior to the Closing as hereinafter provided:
i. This Agreement may be terminated upon the written consent of all of
the parties hereto.
ii. This Agreement shall terminate if the Closing shall not have
occurred on or before the Closing Date.
51
<PAGE>
b. In the event of the termination of this Agreement pursuant to this
Paragraph 16 or as otherwise expressly provided herein, this Agreement
shall forthwith become void and have no effect and there shall be no
obligation or liability on the part of any party hereto or his or its
officers, directors, shareholders, heirs, legal representatives,
successor or assigns; provided, however, that nothing herein shall
-------- -------
relieve any party from liability for any breach hereof.
17. PUBLICITY. There shall be no public announcement or comments with
---------
respect to this Agreement or the transactions contemplated hereby, except as
mutually agreed by AFC and SCC; provided, however, that such announcements as
are required by law or governmental regulation may be made without mutual
agreement, and if time or circumstance makes prior consultation between the
parties impractical, unnecessary or otherwise not feasible, in such event, the
party making such announcement shall notify the other party as soon as
practicable thereafter.
18. PROFESSIONAL FEES/BROKERS. AFC shall be solely responsible for all
-------------------------
brokers fees, attorneys' fees, other professional fees and expenses incurred by
it in connection with the transactions contemplated by this Agreement and the
Principal Shareholders shall be responsible for all of such fees and expenses
incurred by them, SCC and the SCC Shareholders in connection with the
transactions contemplated by this Agreement and in connection with claims of
dissenting shareholders, if any.
19. BENEFIT. This Agreement shall be binding upon and inure to the benefit
-------
of the parties hereto and their respective heirs, administrators, executors,
assigns and successors.
20. NOTICES. Notice to be given to any party under this Agreement shall not
-------
be effective unless in writing and hand delivered or mailed by certified or
registered mail to the relevant party at the address stated below, or sent by
telex or telecopy to the party to be notified at the telex or facsimile number
stated below (with a copy mailed to the address stated below):
In the case of SCC:
Seattle Coffee Company
1321 Second Ave., Suite 201
Seattle, WA 98101
Attn: Larry McDonald
Fax No. (206) 442-2468
with copy to:
Hillis Clark Martin & Peterson, P.S.
1221 Second Ave., Suite 500
Seattle, WA 98101
Attn: Matthew P. Smith
Fax No.: (206) 623-7789
52
<PAGE>
In the case of the Principals Shareholders:
Larry McDonald
7204 North Mercer Way
Mercer Island, WA 98040
Fax No. (206) 232-0803
with copy to:
Hillis Clark Martin & Peterson, P.S.
1221 Second Ave., Suite 500
Seattle, WA 98101
Attn: Matthew P. Smith
Fax No.: (206) 623-7789
or in the case of AFC:
AFC Enterprises, Inc.
Six Concourse Parkway
Suite 1700
Atlanta, Georgia 30328
Attn: Samuel N. Frankel, Esq.
Fax No. 770-353-3060
with a copy to:
Cohen Pollock Merlin Axelrod & Tanenbaum, P.C.
2100 RiverEdge Parkway
Suite 300
Atlanta, Georgia 30328
Attn: H. Stephen Merlin, Esq.
Fax No. 770-858-1277
Notice by certified mail shall be deemed to be received three business days
after mailing of the same. All other notices shall be deemed to have been given
on the date of receipt thereof. Any party may change its address, or its telex
or telecopy number by giving notice of such change in the manner provided
herein.
21. GOVERNING LAW. Each party hereto expressly submits for himself and
-------------
itself, and any legal action or proceeding relating to this Agreement (to the
extent not prohibited by Paragraph 15 hereof) or for recognition and enforcement
of any judgment in respect hereof, to the exclusive jurisdiction of the courts
of the State of Georgia, the courts of the United States of America for the
Northern District of Georgia; and appellate courts from any thereof; consents
that any action or proceeding shall be brought in such courts and waives any
objection that it or he may now or hereafter have to the venue of any such
action or proceeding in any such court; and agrees that service of process of
any such action may be made, in addition to any method provided by law, in the
same manner as notices are to be given under this Agreement. This Agreement and
all rights, obligations and liabilities arising hereunder shall be construed and
53
<PAGE>
governed by the substantive law of the State of Georgia, without giving effect
to the principles of conflicts of law thereof.
22. CONSTRUCTION. In the event any parts of this Agreement are found to be
------------
void, the remaining provisions of this Agreement shall nevertheless be binding
with the same effect as though the void parts were deleted.
23. EXECUTION OF AGREEMENT. This Agreement may be executed in one or more
----------------------
counterparts, each of which shall constitute an original, but all together of
which shall constitute but a single document.
24. ENTIRE AGREEMENT. This Agreement, together with the written agreements
----------------
executed contemporaneously herewith, contain the entire Agreement of the parties
hereto, and no representations, warranties, covenants or agreements, not
embodied or incorporated herein, oral or otherwise, shall be of any force of
effect.
25. HEADINGS. The headings or titles of the paragraphs of this Agreement are
--------
for convenience only, are not a part of this Agreement and shall not be used as
an aid in the construction of any provision hereof.
26. WAIVER. A waiver of any breach hereunder by any party hereto shall not
------
constitute a waiver by such party of any other breach or a waiver by such party
of the same breach on any other occasion; and, to be effective, any waiver
hereunder must be in writing.
IN WITNESS WHEREOF, the parties hereto have executed or caused this Agreement
to be executed and delivered their duly authorized officers, as of the day and
year first above written.
SCC:
SEATTLE COFFEE COMPANY
ATTEST:
By: /s/ Gayle Neal By: /s/ L.M.McDonald
----------------------------- ------------------------------
Its Secretary Its President
--------------- -----------------
PRINCIPAL SHAREHOLDERS:
/s/ Larry McDonald
----------------------------------
LARRY MCDONALD
/s/ Karen McDonald
---------------------------------
KAREN MCDONALD
54
<PAGE>
MICHELE MCCARTHY REVOCABLE
TRUST
BY: /s/ Michele R.McCathy, Trustee
-----------------------------
PATRICK MCDONALD LIVING
TRUST
BY: /s/ L. M. McDonald
-----------------------------
GAI FAMILY TRUST B
BY: /s/ Karen F. McDonald, Trustee
-----------------------------
GAI FAMILY TRUST C
BY: /s/ Karen F.McDonald, Trustee
------------------------------
/s/ James V. Stewart
---------------------------------
JAMES V. STEWART
---------------------------------
UMBERTO BIZZARRI
/s/ Frederick O.Paulsell, Jr.
---------------------------------
FREDERICK O. PAULSELL, JR
PINCO PALLINO, INC.
BY:
------------------------------
THE LAWRENCE MCDONALD CHARITABLE REMAINDER
UNITRUST
BY: /s/ L. M. McDonald
--------------------------------
Lawrence McDonald, Trustee
55
<PAGE>
THE KAREN MCDONALD CHARITABLE
REMAINDER UNITRUST
BY: /s/ Karen F. McDonald, Trustee
---------------------------------
Karen F. McDonald, Trustee
AFC:
ATTEST: AFC ENTERPRISES, INC.
By: /s/ ?????? By: /s/ ????????????
---------------------------- --------------------------------
Its Assistant Secretary Its Executive Vice President
----------------- ----------------
[CORPORATE SEAL]
MERGERCO
ATTEST: AFC ACQUISITION CORP.
By: By:
---------------------------- ---------------------------------
Its Assistant Secretary Its Exercutive Vice President
------------- -----------------
[CORPORATE SEAL]
56
<PAGE>
EXHIBIT LIST
------------
A Disclosure Statement
B Shareholders Agreement
DISCLOSURE STATEMENT SCHEDULE LIST
----------------------------------
1.c. Distribution Schedule Among SCC Shareholders
1.f.(2) SCC 1998 Business Plan
6.a. Foreign Qualifications of SCC
6.b. Foreign Qualifications of Best
6.c. Foreign Qualifications of Italia
6.f. SCC Capitalization
6.h. Financial Statements
6.i. Company-Owned Cafes
6.j. Other Premises
6.k. Liens and Encumbrances
6.k(1) Furniture, Fixtures and Equipment
6.k(2) Computer Assets
6.k(3) Operating Assets
6.k(4) Accounts Receivable
6.k(5) Premises Leases
6.k(6) Owned Premises
6.k(7) Machinery, Vehicle and Equipment Leases
6.l License Fees
6.m. Taxes
6.n. Premises Conditions
6.p. Potential Liens
6.q. Compliance with Laws
6.s. Actions and Proceedings
6.t.i. Marks
6.t.ii. Copyrights
6.t.iii. Trade Secrets and Trade Dress
6.t.v. Proprietary Right Assignments
6.t.vi. Proprietary Right Ownership Notices
6.t.vii. Unprotected Disclosures
6.t.viii. Proprietary Right Infringement Claims
6.t.ix Infringements and Dilutions
6.t.xii. Employee Proprietary Right Claims
6.u.i. Franchise Agreements
6.u.ii. Franchise Applications
6.u.iv. Franchise Agreement Defaults
6.u.ix. Required Policies
6.u.x. Application of Rebates
6.u.xi. Terminated Cafes
6.v.i. Development Agreements
6.v.ii. Development Agreement Applications
57
<PAGE>
6.v.iv. Development Agreement Defaults
6.w.i. Advertising Fund Assets
6.x. Regional Cooperatives
6.z. Contract Defaults
6.aa. Licenses
6.bb. Employees and Labor Matters
6.cc. Interest in Franchisees, Developers, Suppliers, Restaurants and
Competitors
6.dd. Benefit Plans
6.ee. Environmental Compliance
6.gg. Insurance
6.ii Brokers
6.ll. Suppliers
58
<PAGE>
Page 1
EXHIBIT 10.02
EXHIBIT A
---------
FORM OF DISCLOSURE STATEMENT
DISCLOSURE STATEMENT
--------------------
Delivered pursuant to that certain
AGREEMENT AND PLAN OF MERGER
AMONG
AFC ENTERPRISES, INC.
AND
AFC ACQUISITION CORP.
AND
SEATTLE COFFEE COMPANY
AND
THE PRINCIPAL SHAREHOLDERS OF SEATTLE COFFEE COMPANY
Dated as of January __, 1998
<PAGE>
Page 2
CERTIFICATION
-------------
The undersigned, Seattle Coffee Company ("SCC") and all of its principal
shareholders (the "Principal Shareholders"), hereby certify that the attached
Schedules are true, correct and complete as of the date hereof and that this
Disclosure Statement, upon execution by SCC and the Principal Shareholders, and
acceptance by AFC Enterprises, Inc. ("AFC") and AFC Acquisition Corp.
("MergerCo"), shall be attached to and become a part of the Agreement and Plan
of Merger, dated January 23, 1998, as amended, among SCC, the Principal
Shareholders, AFC and MergerCo.
This __ day of March, 1998.
SEATTLE COFFEE COMPANY
ATTEST:
By:______________________ By:____________________________________
Its ________ Secretary Its ____________ President
PRINCIPAL SHAREHOLDERS:
______________________________
LARRY MCDONALD
________________________________
KAREN MCDONALD
MICHELE MCCARTHY REVOCABLE TRUST
BY:________________________________
<PAGE>
Page 3
PATRICK MCDONALD LIVING TRUST
BY:________________________________
GAI FAMILY TRUST B
BY:________________________________
GAI FAMILY TRUST C
BY:_________________________________
____________________________________
JAMES V. STEWART
____________________________________
UMBERTO BIZZARRI
____________________________________
FREDERICK O. PAULSELL, JR
PINCO PALLINO, INC.
BY:_________________________________
<PAGE>
Page 4
The foregoing Disclosure Statement is accepted this __ day of March, 1998.
AFC ENTERPRISES, INC.
By:______________________
Title:_____________________
[CORPORATE SEAL]
AFC ACQUISITION CORP.
By:______________________
Title:_____________________
[CORPORATE SEAL]
<PAGE>
Page 1
EXHIBIT 10.03
STOCKHOLDERS AGREEMENT
by and among
FS EQUITY PARTNERS III, L.P.
FS EQUITY PARTNERS INTERNATIONAL, L.P.,
THE NEW STOCKHOLDERS IDENTIFIED HEREIN,
AND
AFC ENTERPRISES, INC.
March 18, 1998
<PAGE>
Page 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. Definitions.................................................... 1
2. Transfer of Shares by FS Stockholder; Rights of Inclusion...... 3
2.1 Right of Inclusion............................................. 3
2.2 Third-Party Offer.............................................. 3
2.3 Allocation of Included Shares.................................. 4
2.4 Consummation................................................... 5
2.5 Termination and Assignment..................................... 5
3. Obligation to Sell Securiti es................................. 6
3.1 Sale Obligation................................................ 6
3.2 Termination and Assignment..................................... 7
4. Restrictions on Transfers of Securities; Right of First Offer.. 7
4.1 Transfer Restrictions.......................................... 7
4.2 Right of First Offer by New Stockholders....................... 8
4.3 Termination and Assignment.....................................10
5. Registration Rights............................................10
6. Other Agreements...............................................10
7. Copy of Agreement..............................................10
8. Governing Law..................................................10
9. Representations and Warranties.................................11
10. Merger Tax Treatment...........................................11
11. Amendment and Waiver Successors................................11
12. Interpretation.................................................12
13. Notices........................................................12
14. Legends........................................................12
15. Further Assurances.............................................12
16. Injunctive Relief; Disputes....................................13
</TABLE>
<PAGE>
Page 3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
17. Severability...................................................13
18. Entire Agreement...............................................13
19. Counterparts...................................................13
SCHEDULE 1 New Stockholders.......................................S-1
SCHEDULE 2 Ownership of Company Common Stockby FS Stockholder
and New Stockholders...................................S-2
</TABLE>
<PAGE>
Page 4
STOCKHOLDERS AGREEMENT
THIS STOCKHOLDERS AGREEMENT (this "Agreement") is made and entered into as
of March 18, 1998 by and among AFC Enterprises, Inc., a Minnesota corporation
(the "Company"), FS Equity Partners III, L.P., a Delaware limited partnership
("FSEP III"), FS Equity Partners International, L.P., a Delaware limited
partnership ("FSEP International," and collectively with FSEP III, the "FS
Stockholder"), and the new stockholders of the Company, as listed on Schedule 1
attached hereto (the "New Stockholders").
RECITALS
A. On January 23, 1998, the Company, Seattle Coffee Company, a Washington
corporation ("SCC"), and the principal shareholders of SCC entered into an
Agreement and Plan of Merger (as amended, the "Merger Agreement") in which the
Company would acquire from the New Stockholders all of the capital stock of SCC
in exchange for a combination of cash and shares of common stock ("Common
Stock") of the Company and a wholly-owned subsidiary of the Company will merge
with SCC (the "Merger");
B. Pursuant to the terms of the Merger Agreement, each shareholder of SCC
may elect to receive the merger consideration in either cash or Common Stock;
C. The shareholders of SCC that intend to receive some or all of their
consideration in Common Stock, the FS Stockholder and the Company wish to enter
into the Agreement with respect to certain rights, obligations and restrictions
relating to the securities of the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Definitions. As used in this Agreement, the following
-----------
capitalized terms shall have the following meanings:
Affiliate or Associate: Such terms shall have the meanings given them
----------------------
pursuant to Rule 12b-2 of the General Rules and Regulations promulgated under
the Securities Exchange Act of 1934, as amended.
Board: The Board of Directors of the Company.
-----
Common Stock: The Common Stock, par value $.01 per share, of the
------------
Company.
<PAGE>
Page 5
Initial Shares: Shall mean the 20,970,814 shares of Common Stock
--------------
issued and outstanding on the date hereof and held beneficially and of record by
the Stockholders as follows:
<TABLE>
<CAPTION>
INITIAL SHARES OF
STOCKHOLDER COMMON STOCK
- -----------------------------------------------------------
<S> <C>
FS Equity Partners III, L.P. 18,259,483
FS Equity Partners International, L.P. 733,583
New Stockholders listed on Schedule 1 See Schedule 1
</TABLE>
New Stockholders: The former shareholders of SCC listed on Schedule 1
---------------- ----------
attached hereto who shall become stockholders of the Company pursuant to the
closing of the transactions contemplated in the SCC Merger Agreement.
Permitted Transferee: Subject to Section 4.1, Permitted Transferee
--------------------
shall mean an Affiliate of a Stockholder or, with respect to any Stockholder who
is an individual, (i) such Stockholder's spouse or issue, (ii) a trust for their
or the Stockholder's benefit or, (iii) provided that the requirements of Section
4.3 are satisfied, a charitable remainder trust ("CRT") in which the sole
trustee is the Stockholder or Stockholder's spouse or issue, and the beneficiary
is an organization that qualifies for income, gift or estate tax charitable
deduction ("Charitable Organization") under the Internal Revenue Code of 1986,
as amended.
Person: Any individual, corporation, entity, partnership, joint
------
venture, association, joint-stock company, trust, unincorporated organization or
other entity.
Public Offering: A public offering of shares of Voting Securities of
---------------
the Company registered under the Securities Act, but shall not include an
offering registered on Form S-4 or Form S-8 (or any substitute form that is
adopted by the SEC), or an offering of Voting Securities in connection with a
sale of debt securities of the Company. The term "Initial Public Offering"
shall mean an underwritten Public Offering of Voting Securities which results in
gross proceeds to the Company in excess of $25 million from the sale of Voting
Securities.
SEC: The Securities and Exchange Commission.
---
Securities: Shall mean (i) Voting Securities, (ii) all rights,
----------
options, warrants to purchase such Voting Securities or the securities described
in the following clause and (iii) all other securities or capital stock of any
type whatsoever, including, without limitation, (A) preferred stock, debt
securities and securities that are, or may become, convertible into or
exchangeable for, or that entitle the holder to purchase, Voting Securities, (B)
preferred stock and (C) debt securities. The term Securities shall include all
Securities now owned or hereafter acquired by any of the Stockholders.
<PAGE>
Page 6
Securities Act: The Securities Act of 1933, as amended.
--------------
Stockholders: The FS Stockholder and the New Stockholders.
------------
Subsidiary: With respect to any Person, a corporation or other entity
----------
of which shares of stock or other ownership interests having ordinary voting
power to elect a majority of the directors of such corporation, or other Persons
performing similar functions for such entity, are owned, directly or indirectly,
by such Person.
Voting Securities: All Securities of the Company which possess
-----------------
general voting power to elect members of the Board; provided that Voting
Securities shall not include any options or warrants to purchase Voting
Securities.
2. Transfer of Shares by FS Stockholder; Rights of Inclusion.
---------------------------------------------------------
2.1 Right of Inclusion. The FS Stockholder agrees not to sell
------------------
all or any portion of the shares of Common Stock it holds to any Person
(individually, a "Third Party" and, collectively, "Third Parties") unless each
of the New Stockholders is given an opportunity to sell to the Third Party such
number of shares of Common Stock owned by such New Stockholder as is determined
in accordance with Subsection 2.3 of this Section 2; provided, however, that the
-------- -------
New Stockholders shall have no rights pursuant to this Section 2 with respect to
sales or other transfers by the FS Stockholder of Common Stock to any Permitted
Transferee of the FS Stockholder; and provided further, that the rights of such
-------- --------
New Stockholders pursuant to this Section 2 are subject to Section 10 of this
Agreement.
2.2 Third-Party Offer. Prior to the consummation of any sale of
-----------------
all or any portion of the shares of Common Stock held by the FS Stockholder to a
Third Party, the FS Stockholder shall cause each bona fide offer from such Third
Party to purchase such shares from the FS Stockholder (a "Third-Party Offer") to
be reduced to writing and shall send written notice of such Third-Party Offer
(the "Initial Offer Notice") to each of the New Stockholders. Each Third-Party
Offer shall include an offer to purchase shares of Common Stock from the New
Stockholders in the amounts determined in accordance with Subsection 2.3 of this
Section 2, at the same time, at the same price and on the same terms as the sale
by the FS Stockholder to the Third Party, and according to the terms and
conditions of this Agreement. The Initial Offer Notice shall be accompanied by
a true copy of the Third-Party Offer. If such New Stockholder desires to accept
the offer contained in the Initial Offer Notice, such New Stockholder shall
furnish written notice to the FS Stockholder, within 20 days after its receipt
of the Initial Offer Notice, indicating such New Stockholder's irrevocable
acceptance of the offer included in the Initial Offer Notice and setting forth
the maximum number of shares of Common Stock such New Stockholder agrees to sell
to the Third Party (the "Acceptance Notice"). If such New Stockholder does not
furnish an Acceptance Notice to the FS Stockholder in accordance with these
provisions by the end of such 20-day period, such New Stockholder shall be
deemed to have irrevocably rejected the offer contained in the Initial Offer
Notice. All shares of Common Stock set
<PAGE>
Page 7
forth in the Acceptance Notices of the New Stockholders together with the shares
of Common Stock proposed to be sold by the FS Stockholder to the Third Party are
referred to collectively as "All Offered Shares." Within three days after the
date on which the Third Party informs the FS Stockholder of the total number of
shares of Common Stock which such Third Party has agreed to purchase in
accordance with the terms specified in the Initial Offer Notice, the FS
Stockholder shall send written notice (the "Final Notice") to the participating
New Stockholders setting forth the number of shares of Common Stock each New
Stockholder shall sell to the Third Party as determined in accordance with
Subsection 2.3 of this Section 2, which number shall not exceed the maximum
number specified by such New Stockholder in its Acceptance Notice. Within five
days after the date of the Final Notice (or such shorter period as may
reasonably be requested by the FS Stockholder to facilitate the sale), each
participating New Stockholder shall furnish to the FS Stockholder (i) a written
undertaking to deliver, upon the consummation of the sale of Common Stock to the
Third Party as indicated in the Final Notice, the certificates representing the
shares of Common Stock held by such New Stockholder which will be transferred
pursuant to such Third-Party Offer (such shares shall be referred to herein as
the "Included Shares") and (ii) a limited power-of-attorney authorizing the FS
Stockholder to transfer the Included Shares pursuant to the terms of such Third-
Party Offer. Each New Stockholder shall be required to make representations and
warranties in connection with such transfer only with respect to its own
authority to transfer and its title to the shares of Common Stock transferred.
In any such transaction the Company will cooperate with all Stockholders to
facilitate the transaction.
2.3 Allocation of Included Shares. The maximum number of shares
-----------------------------
of Common Stock that may be sold by FSEP III, FSEP International and each New
Stockholder and all other holders of Common Stock who have rights to participate
in sales of Common Stock by the FS Stockholder pursuant to written agreements by
and between the FS Stockholder and any such holder (the "Other Tag-Along Rights
Holders") in any sale governed by this Section 2 shall be (i) All Offered Shares
in the event the Third Party has agreed to purchase All Offered Shares and all
shares of Common Stock that the Other Tag-Along Rights Holders who have elected
to participate in such sale seek to include in such sale or (ii) such number of
shares of Common Stock equal to the product of (a) the total number of shares of
Common Stock which the Third Party has agreed to purchase times (b) a fraction,
the numerator of which is the total number of shares of Common Stock owned by
FSEP III, FSEP International, a New Stockholder or each Other Tag-Along Rights
Holder who has elected to participate in such sale, as the case may be, on the
date of the Final Notice and the denominator of which is the total number of
shares of Common Stock owned on the date of the Final Notice by FSEP III, FSEP
International, the New Stockholders and the Other Tag-Along Rights Holders who
have elected to participate in such sale; provided, however, that, in the event
-------- -------
FSEP III, FSEP International, the New Stockholders or any Other Tag-Along Rights
Holder elects to sell a number of shares of Common Stock which is less than the
number of shares such holder could sell pursuant to clause (ii) above, the
shares of Common Stock that the others of such holders can sell in such
transaction shall be increased by an aggregate amount equal to the number
<PAGE>
Page 8
of shares which any of FSEP III, FSEP International, the New Stockholders or any
Other Tag-Along Rights Holder could have sold in such transaction but chose not
to sell, and any such increase shall be allocated among such other holders on a
pro rata basis based upon the total number of shares of Common Stock owned on
the date of the Final Notice by such other holders.
2.4 Consummation. The FS Stockholder shall have 180 days from
------------
the date of the Final Notice in which to sell to the Third Party the shares of
Common Stock owned by the FS Stockholder and the Included Shares of the New
Stockholders on terms which are not materially less favorable to the sellers of
shares of Common Stock than those specified in the applicable Initial Offer
Notice; provided, however, that in the event there is a decrease in the price to
-------- -------
be paid by the Third Party for the shares of Common Stock to be sold from the
price set forth in the Initial Offer Notice, which decrease is acceptable to the
FS Stockholder, or other material change in terms which are less favorable to
the FS Stockholder, but which are acceptable to the FS Stockholder, the FS
Stockholder shall notify the participating New Stockholders of such decrease or
change in terms, and each of the participating New Stockholders shall have five
business days from the date of receipt of the notice of such decrease or change
in terms to reduce the number of shares of Common Stock it will sell to such
Third Party as previously indicated in the applicable Acceptance Notice and the
number of shares that all other participating stockholders (including Other Tag-
Along Rights Holders) may transfer shall be increased in accordance with the
provisions of Section 2.3. The FS Stockholder shall act as agent for the New
Stockholders in connection with such sale and shall cause to be remitted to each
New Stockholder the total sales price of the Included Shares of such New
Stockholder sold pursuant thereto, which consideration shall be in the same form
as the consideration received by the FS Stockholder and as specified in the
applicable Initial Offer Notice, net of the New Stockholder's respective pro
rata portion (based on the number of shares of Common Stock sold) of the
reasonable, out-of-pocket expenses incurred by the FS Stockholder in connection
with such sale (not including, however, any transaction fee charged by the FS
Stockholder or its Affiliates). The FS Stockholder shall furnish, or shall
cause to be furnished, such other evidence of the completion and time of
completion of such sale and the terms thereof as may be reasonably requested by
the New Stockholder including, without limitation, evidence of the expenses
incurred by the FS Stockholder in connection with such sale. If and to the
extent that, at the end of 180 days following the date of the Final Notice, the
FS Stockholder has not completed the sale contemplated thereby, the FS
Stockholder shall return to each participating New Stockholder all certificates
representing the Included Shares and all powers-of-attorney which a New
Stockholder may have transmitted pursuant to the terms hereof.
2.5 Termination and Assignment. The obligations of the FS
--------------------------
Stockholder pursuant to the provisions of this Section 2 shall terminate upon
the consummation of an Initial Public Offering. The rights granted to the New
Stockholders under this Section 2 shall not be assignable except to a Permitted
Transferee in accordance with Section 4.1, provided that the Permitted
Transferee executes a written undertaking to be and become bound by this
Agreement in the same manner and to the
<PAGE>
Page 9
same extent as such New Stockholder.
3. Obligation to Sell Securities.
-----------------------------
3.1 Sale Obligation. If the FS Stockholder finds a buyer for
---------------
all of the shares of Common Stock held by the FS Stockholder (whether such sale
is by way of purchase, merger or other form of transaction), upon the request of
the FS Stockholder, each of the New Stockholders shall sell all or any portion
of the Securities beneficially owned by such New Stockholder to such third-party
buyer pursuant to the terms and conditions negotiated by the FS Stockholder.
All holders of each class of Securities shall receive the same form and amount
of consideration for such Securities. Any Security that is convertible into
Common Stock shall be purchased on an "as converted" basis. Any series of
preferred stock that is not convertible into Common Stock shall be purchased for
its stated liquidation preference plus accrued and unpaid dividends. Any debt
Security which is not convertible into Common Stock shall be purchased at its
outstanding principal amount plus accrued and unpaid interest, plus any
prepayment or redemption premium set forth in the instruments governing such
Security. The exercise price (if any) of a Security shall be deducted from the
consideration to be received; provided however that if the exercise price of
such Security is greater than the consideration to be received, such Security
shall be canceled without any payment to its holder. Each of the New
Stockholders agrees to such sale and to execute such agreements, powers of
attorney, voting proxies or other documents and instruments as may be necessary
to consummate such sale; provided that no New Stockholder shall be obligated to
make any representations and warranties with respect to such sale other than
with respect to its own authority to transfer and its title to the Securities
transferred. Each of the New Stockholders further agrees to timely take such
other actions as the FS Stockholder may reasonably request to enforce its
obligation to sell its Securities, and otherwise as necessary in connection with
the approval of the consummation of such sale, including voting all Securities
in favor of such sale. Each New Stockholder shall pay its pro rata portion
(based on the total value of the consideration received by such New Stockholder
compared to the aggregate consideration received by all New Stockholders in the
transaction) of the reasonable out-of-pocket expenses incurred by the FS
Stockholder in connection with a sale consummated pursuant to this Section 3
(not including, however any transaction fee charged by the FS Stockholder or its
Affiliates). Notwithstanding the foregoing provisions of this Section 3, no New
Stockholder shall have any obligation to sell Securities in connection with any
sale by the FS Stockholder of all of its shares of Common Stock unless, prior to
the consummation of such sale, (i) the Board determines that the consideration
to be received by the New Stockholders in such sale for their shares of Common
Stock is not less than the aggregate fair market value of the shares of Common
Stock held by the New Stockholders and (ii) the Company shall have obtained a
fairness opinion from an investment banking firm that such a sale is fair, from
a financial point of view, to the holders of Common Stock.
3.2 Termination and Assignment. The obligations of the New
--------------------------
Stockholders pursuant to this Section 3 shall be binding on any transferee of
Securities
<PAGE>
Page 10
held by a New Stockholder, and each New Stockholder shall obtain and deliver to
the FS Stockholder a written commitment to be bound by such provisions from each
such transferee prior to any transfer. The obligations of each Stockholder
pursuant to this Section 3, and the obligations of any such transferee, shall
terminate upon the consummation of an Initial Public Offering. The rights of FS
Stockholder under this Section 3 shall not be assignable and shall terminate in
the event that the FS Stockholder holds a number of shares of Common Stock which
represents less than 33-1/3% of the total number of shares of Common Stock
outstanding at any time (with FSEP III and FSEP International considered
collectively for this purpose).
4. Restrictions on Transfers of Securities; Right of First Offer.
-------------------------------------------------------------
4.1 Transfer Restrictions. Notwithstanding any other provision
---------------------
of this Agreement, including (without limitation) the provisions of Exhibit A,
no New Stockholder shall (i) pledge, hypothecate or encumber any Securities;
(ii) sell, assign, transfer, or otherwise dispose of or convey ("Transfer") any
Securities, or any right, title or interest therein, except in compliance with
the Securities Act and all applicable state securities laws or (iii) Transfer
any Securities, or any right, title or interest therein except for sales of
Securities expressly permitted by and in compliance with this Agreement,
including (without limitation) Subsection 4.2 and Section 10. Any attempt to
Transfer, pledge, hypothecate or encumber Securities, or any right, title or
interest therein, not in compliance with this Agreement shall be null and void,
and the Company shall not give effect to any such attempted transaction or
Transfer. Any Securities Transferred pursuant to the terms and requirements of
this Agreement shall be Transferred free and clear of all mortgages, liens,
pledges, charges and security interests or encumbrances, or any obligations or
liabilities in connection therewith. Each New Stockholder, on the execution and
delivery of this Agreement, agrees that such New Stockholder will not Transfer
any Securities prior to delivery to the Company of an opinion of counsel in form
and substance satisfactory to the Company with respect to compliance with the
Securities Act, or until a registration statement with respect to such
Securities under the Securities Act has become effective. All transferees of
Securities will be bound by this Agreement in the same manner and to the same
extent as the transferor and prior to any Transfer must deliver to the Company
and the Stockholders a written undertaking to be and become so bound. Upon
completion of any Transfer in compliance with this Agreement, the transferee
shall become a Stockholder and entitled to the rights hereunder which may be
duly and validly assigned to such transferee. A New Stockholder may transfer
Securities to a Permitted Transferee provided that such transferee executes a
written undertaking to be and becomes bound by this Agreement in the same manner
and to the same extent as the transferring New Stockholder; and provided
further, that prior to the consummation of any transaction in which a Permitted
Transferee ceases to be an Affiliate of such New Stockholder, such Permitted
Transferee shall reconvey all Securities to the transferring New Stockholder and
the Securities will remain subject to this Agreement. A Permitted Transferee
may not subsequently transfer the Securities, except transfers of Securities
back to the transferring New Stockholder.
<PAGE>
Page 11
4.2 Right of First Offer by New Stockholders. Subject to
----------------------------------------
Sections 4.1 and 10 of this Agreement, each of the New Stockholders hereby
agrees not to Transfer any of the Securities held by them to any Person (other
than a Permitted Transferee) unless certain other Stockholders are given the
right to acquire such Securities pursuant to the provisions of this Subsection
4.2. If any of the New Stockholders receives an offer from any person to
acquire any Securities, or decides to solicit or cause to be solicited a
proposal or proposals to acquire Securities, such New Stockholder (the "Offering
Stockholder") shall first give all other New Stockholders (each, an "Offeree,"
and together, the "Offerees"), the Company and the FS Stockholder written notice
(the "Stockholder Notice") of such intention, which notice shall include a term
sheet stating, among other material terms, the minimum cash sales price (the
"Target Price") that the Offering Stockholder would entertain for the Securities
to be sold (the "Offered Securities"). Each of the Offerees shall have the
right for a period of 30 days following the delivery of the Stockholder Notice
(the "Acceptance Period") to accept the offer to purchase all but not less than
all of its respective Offeree Pro Rata Share (as defined below) of the Offered
Securities at the Target Price and upon the other terms provided with the
Stockholder Notice; provided that all and not less than all of the Offered
Securities are purchased. Each Offeree that has elected to purchase its Offeree
Pro Rata Share of the Offered Securities will have the right to purchase all or
any part of the unsubscribed portion of the Offered Securities up to its pro
rata share of such unsubscribed portion (determined in accordance with the
number of shares of Voting Securities owned by the parties that elect to
purchase such unsubscribed for portion). Each Offeree shall exercise its rights
under this Subsection 4.2 by delivering to the Offering Stockholder written
notice of its election prior to 5:00 p.m. Los Angeles time on the final day of
the Acceptance Period. On the first business day following the termination of
the Acceptance Period, the Company shall notify all Offerees that have exercised
their rights hereunder of the amount of any unsubscribed portion of the Offered
Securities, and such Offerees shall have five business days to accept the offer
to purchase their pro rata share of such unsubscribed portion. If some portion
of the Offered Securities remains unsubscribed following such five business day
period, the Offering Stockholder shall send the Stockholder Notice to the FS
Stockholder, and the FS Stockholder shall have the right for a period of 35
days following the termination of the five business day period ("the Second
Acceptance Period") to accept the offer to purchase all or any part of the
unsubscribed portion of the Offered Securities ("Unsubscribed Offered
Securities"). The FS Stockholder shall exercise its rights under this Subsection
4.2 by delivering to the Offering Stockholder written notice of its election
prior to 5:00 p.m. Los Angeles time on the final day of the Second Acceptance
Period. If it elects to purchase Unsubscribed Offered Securities, the FS
Stockholder shall be deemed to be an "Offeree" for the purposes of this
Subsection 4.2. If an Offeree exercises its rights under this Subsection 4.2,
the sale of such Securities shall be consummated within 30 days of the final day
of the Acceptance Period or, if applicable, the Second Acceptance Period (the
"Purchase Period"). If the Offerees do not elect to purchase such Securities on
such terms or fail to consummate a purchase of such Securities within the
Purchase Period, the Offering Stockholder shall have the right to consummate the
sale of such Securities for a sales price equal to or greater than the Target
Price and on terms no more favorable to the purchaser than specified in the
Stockholder Notice for a period of
<PAGE>
Page 12
90 days (the "Consummation Period") after the expiration of the Acceptance
Period or, if applicable, the Second Acceptance Period or the Purchase Period.
If the Offering Stockholder does not complete such sale, transfer or conveyance
within the Consummation Period, the Offering Stockholder shall not have the
right to sell, transfer or convey any of such Securities without again complying
with this Subsection 4.2. In the event the Offering Stockholder intends to sell
Securities for consideration other than cash, the Offering Stockholder shall
notify the Offerees and the FS Stockholder of the terms of such non-cash
consideration. The Offerees may elect within ten days of such notice to have the
fair market value of such non-cash consideration determined, with the parties
jointly selecting an investment banking firm to resolve any dispute regarding
the fair market value of such non-cash consideration; in the absence of
agreement on such firm, Goldman, Sachs & Co. shall determine such fair market
value. The Offeree and the FS Stockholder shall be immediately notified of this
fair market value determination. If the sum of the fair market value of the non-
cash consideration and the cash consideration (in the case of a sale that is
partially for cash) is less than the cash price offered to the Offerees pursuant
to this Subsection 4.2, the Offerees may, within 10 days of the determination of
the fair market value of the non-cash consideration, elect to purchase the
Securities proposed to be sold for an amount equal to the sum of (i) the fair
market value of the non-cash consideration and (ii) the cash consideration, if
any. If some portion of the Offered Securities remains unsubscribed following
such 10-day period, the Offering Stockholder shall send notice of the amount of
unsubscribed Offered Securities to the FS Stockholder. The FS Stockholder shall
then have an additional 15 days to elect to purchase such unsubscribed Offered
Securities. Such purchase must be consummated within 15 days of such election to
purchase (including, if applicable, the FS Stockholder's election). For purposes
of this Subsection 4.2, "Offeree Pro Rata Share" shall mean a fraction (i) the
numerator of which is the total number of shares of Voting Securities then held
by a New Stockholder and (ii) the denominator of which is the total number of
shares of Voting Securities then held by all New Stockholders entitled to
receive the right of first offer. If the Offering Stockholder receives a written
offer for such Securities at any time during the Consummation Period which is
acceptable to the Offering Stockholder but is less than the Target Price or is
upon terms less favorable to the Offering Stockholder than the terms provided to
the Offerees in the Stockholder Notice (the "Below Target Price Offer"), the
Offering Stockholder shall promptly deliver a copy of such written offer to the
Offerees. During the 15-day period following delivery of such written offer, the
Offerees shall have the right to accept the offer to purchase the Securities
offered on the terms reflected in such written offer. Each Offeree shall, if it
so desires, exercise such right by delivery to the Offering Stockholder written
notice of its election to purchase all but not less than all of its Offeree Pro
Rata Share of the Offered Securities prior to 5:00 p.m. Los Angeles time on the
final day of such additional 15 day period and the sale of such Securities shall
be consummated within 30 days of the delivery of such written notice. Any
unsubscribed portion of the Offered Securities shall be offered to the Offerees
and, if applicable, the FS Stockholder, in the manner provided above. If the
Offerees do not elect to accept the offer to purchase the Offered Securities on
such terms or fail to consummate the purchase of the Offered Securities within
30 days of the date of the Offerees' acceptance of the Below Target Price Offer,
the Offering Stockholder shall have 90 days to consummate the sale of the
Offered Securities at a price and upon terms that are not less favorable to the
Offering Stockholder than the price and terms specified in the written offer
delivered to the Offerees. In the event a Below Target Price Offer involves any
non-cash consideration, the procedures for valuing such non-cash consideration
set forth in Subsection 4.2 above shall be utilized to determine the fair market
value of such non-cash consideration.
4.3 Charitable Organization. A CRT shall only be deemed to be a
-----------------------
"Permitted Transferee" under the terms of this Agreement if:
(a) The Stockholder, or Stockholder's spouse or issue (the "Trustee"),
and the Charitable Organization that is the beneficiary of such CRT makes the
following applicable representations, warranties and covenants:
(1) The Trustee is the sole trustee of the CRT, and represents and
warrants that, (i) under the terms of the CRT, the Trustee has the requisite
power and authority to bind the CRT to this
<PAGE>
Page 13
Agreement and (ii) upon its execution, this Agreement is enforceable against the
CRT in accordance with its terms; such Trustee also covenants to be personally
liable for all loss, damages, liabilities or deficiencies incurred by the
Company or its subsidiaries or any other Stockholders as a result of any breach
of this Agreement committed by the Trustee or the CRT;
(2) The Charitable Organization beneficiary represents and warrants
that it has full right, title and authority to enter into this Agreement, that
it has the power and authority to execute this Agreement and to perform the
obligations and duties set forth herein, and, upon its execution and delivery,
this Agreement shall be enforceable against the Charitable Organization in
accordance with its terms and that this Agreement shall constitute a valid and
binding obligation of such Charitable Organization in accordance with its terms;
(b) Upon formation of the CRT, such Charitable Organization executes
this Agreement which shall become effective immediately upon any receipt of the
Securities by the Charitable Organization in accordance with the terms of this
Agreement; and
(c) The terms of the CRT provide that the Charitable Organization
beneficiary may only receive the Securities held by the CRT upon the death of
the Stockholder (or Stockholder's spouse or issue, if applicable);
Further, neither the CRT nor the Charitable Organization beneficiary
may Transfer any Securities received under any circumstance prior to the
termination of this Section 4 to any party other than the Trustee.
4.4 Termination and Assignment. The obligations of a Stockholder
--------------------------
pursuant to this Section 4 shall terminate upon an Initial Public Offering. The
rights granted to Stockholders under Subsection 4.2 shall not be assignable
except to Permitted Transferees. Any transferee of Securities from a Stockholder
other than a purchaser of shares from a Stockholder after the Stockholder has
duly complied with its obligations under this Section 4 with respect to such
sale, shall be bound by the provisions of this Section 4 and such Stockholder
shall obtain and deliver to each other Stockholder a written commitment to be
bound by such provisions from each such transferee prior to any transfer.
5. Registration Rights. Each Stockholder shall be entitled to
-------------------
certain "piggy-back" registration rights with respect to future public offerings
of Common Stock by Company and to certain demand registration rights (the
"Registration Rights"). The terms of the Registration Rights are set forth in
Exhibit A attached hereto. The rights granted to Stockholders under this
Section 5 shall not be assignable except to a Permitted Transferee. The rights
granted to Stockholders under this Section 5 are subject to the provisions of
Section 10 of this Agreement.
6. Other Agreements. The Company shall not consummate any material
----------------
transaction with a Stockholder or any Affiliate of a Stockholder other than
transactions on terms that are no less favorable to the Company than could have
been obtained with a person that is not a stockholder (as determined in the good
faith judgment of the Board) and other than indemnification of any of Company's
officers or directors whether pursuant to any indemnity agreement or applicable
law.
7. Copy of Agreement. A copy of this Agreement and all amendments
-----------------
hereto shall be filed with the Secretary of Company and shall be kept at the
principal executive offices of Company.
<PAGE>
Page 14
8. Governing Law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the State of Minnesota without
regard to the conflicts of laws rules thereof.
9. Representations and Warranties. Each Stockholder represents and
------------------------------
warrants (a) that such Stockholder has full power, capacity, right and
authority, and any requisite approvals or consents to enter into and perform
this Agreement; (b) that this Agreement and the performance of its obligations
hereunder have been duly authorized, executed and delivered by such Stockholder
and is a valid and binding agreement, enforceable against such Stockholder in
accordance with its terms; (c) that such Stockholder owns beneficially and of
record the shares of Common Stock set forth opposite its name on Schedule 2
hereto, free and clear of any lien, claim, charge, option, security interest,
restriction or encumbrance and (d) that such Stockholder does not own
beneficially or of record any other securities or rights, options or warrants to
purchase any securities of the Company.
10. Merger Tax Treatment. Notwithstanding any provision to the
--------------------
contrary, each New Stockholder represents, warrants and agrees that such New
Stockholder (i) has no plan or intention to engage in a sale, exchange,
transfer, distribution, redemption, or reduction in any way of such New
Stockholder's Common Stock or risk of ownership by short sale or otherwise, or
other disposition, directly or indirectly (such actions being collectively
referred to herein as a "Sale") of any of such New Stockholder's Common Stock as
of the effective date hereof; (ii) will not engage in a Sale of such New
Stockholder's Common Stock for a period of one (1) year after the effective date
hereof unless the Company can obtain, at such Stockholder's expense, a written
opinion from the tax advisors of the Company, in form and substance reasonably
satisfactory to the Company, to the effect that the proposed Sale will not cause
the Merger to fail to qualify for tax-free treatment under the provisions of
section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code") (whether under section 368(a)(2)(D) or 368(a)(2)(E) of the Code); (iii)
except as provided in the Merger Agreement, has paid his own expenses in
connection with the Merger, (iv) did not sell any common stock of SCC in
contemplation of the Merger; and (v) will take such further actions consistent
with the terms of this Agreement and applicable law, as may be reasonably
necessary to cause the Merger to be treated as a tax-free reorganization under
the provisions of sections 368(a)(1)(A) of the Code (taking into account section
368(a)(2)(D) or 368(a)(2)(E) of the Code, as the case may be), including,
without limitation, preparing appropriate tax returns, filings and reports
consistent with the treatment of the Merger as such reorganization. Each New
Stockholder acknowledges that except as provided in this Agreement, each New
Stockholder has unrestricted rights of ownership in the Common Stock and each
New Stockholder's ability to retain their Common Stock is not limited in any
way.
11. Amendment and Waiver; Successors. This Agreement may be amended,
--------------------------------
modified or supplemented, and compliance with any provision hereof may be
waived, only with the written consent of the FS Stockholder and those other New
<PAGE>
Page 15
Stockholders then holding a majority of the shares of Voting Securities then
held by such New Stockholders, and any amendment, modification, supplement or
waiver so consented to in writing shall be binding upon the parties hereto and
their successors and permitted transferees and assigns; provided that any
amendment that materially and adversely affects the rights of any Stockholder
hereunder shall require the consent of each Stockholder so affected. This
Agreement shall be binding on the parties hereto and, their successors,
transferees, assigns, heirs and personal representatives; provided however, that
unless expressly permitted herein, this Agreement under the rights granted
hereunder shall not be assignable without the written consent of all of the
parties hereto, which consent may be withheld in each such party's sole
discretion.
12. Interpretation. The headings of the Sections contained in this
--------------
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not affect the meaning or interpretation of this
Agreement.
13. Notices. All notices and other communications provided for or
-------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if delivered personally or delivered by telecopier (with receipt
confirmed), on the date of such delivery or transmission, or three (3) days
after deposit in the mail, by registered or certified mail (return receipt
requested) postage prepaid (i) if to Company, at AFC Enterprises, Inc., Six
Concourse Parkway Suite 1700, Atlanta, Georgia 30328, Attention: Samuel N.
Frankel, Esq., (ii) if to the FS Stockholder, at Freeman Spogli & Co.
Incorporated, 11100 Santa Monica Boulevard, Suite 1900, Los Angeles, California
90025, Attention: William M. Wardlaw, telecopier: (310) 444-1870, and (iii) if
to any of the New Stockholders, the address specified by such New Stockholder's
name in Schedule 1 attached hereto (or at such other address or telecopier
number for any party as shall be specified by like notice provided that notices
of a change of address or telecopier number shall be effective only upon receipt
thereof).
14. Legends. All certificates evidencing Securities which are issued
-------
to any of the Stockholders shall be legended as follows (in addition to any
other legend required to be placed thereon):
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RESTRICTIONS AND OBLIGATIONS WITH RESPECT TO THE TRANSFER,
PLEDGE, HYPOTHECATION AND VOTING THEREOF AS SET FORTH IN THAT CERTAIN
STOCKHOLDERS AGREEMENT DATED AS OF MARCH 18, 1998, AS AMENDED, WHICH
MAY BE REVIEWED AT THE PRINCIPAL PLACE OF BUSINESS OF THE CORPORATION
AND A COPY OF WHICH MAY BE OBTAINED FROM THE CORPORATION WITHOUT
CHARGE UPON WRITTEN REQUEST THEREFOR."
15. Further Assurances. The Stockholders shall exercise, or cause to
------------------
be exercised, voting rights with respect to Voting Securities held of record or
beneficially owned by them in a manner so that, and shall otherwise take any
necessary actions in
<PAGE>
Page 16
order that, the covenants and understandings of the parties set forth in this
Agreement shall be implemented. Each party hereto agrees to perform any further
acts and execute and deliver any documents which may be reasonably necessary to
carry out the intent of this Agreement and to make appropriate changes to the
procedures set forth herein to implement such rights to the extent necessary to
conform to the Minnesota Business Corporation Act or other applicable law. Each
party hereto further agrees not to take any action violating the intent and
purpose of this Agreement. The Company covenants and agrees that it will act in
good faith to preserve for each of the Stockholders the benefits of this
Agreement and that it will take no voluntary action to impair the benefit hereof
or to avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder or to deny to any of the Stockholders any
of the benefits or protections contemplated hereby.
16. Injunctive Relief; Disputes. It is acknowledged that it will be
---------------------------
impossible to measure in money the damages that would be suffered if the parties
hereto fail to comply with any of the obligations herein imposed on them and
that, in the event of any such failure, an aggrieved party hereto will be
irreparably damaged and will not have an adequate remedy at law. Any such party
shall, therefore, be entitled to injunctive relief, including specific
performance, to enforce such obligations, and if any action should be brought in
equity to enforce any of the provisions of this Agreement, none of the parties
hereto shall raise the defense that there is an adequate remedy at law. In the
event of any dispute among the parties arising out of this Agreement, the
prevailing party shall be entitled to recover from the non-prevailing party the
reasonable expenses of the prevailing party, including, without limitation,
reasonable attorneys' fees.
17. Severability. If any term or other provision of this Agreement
------------
is invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect to the maximum extent permitted by applicable
law. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that
this Agreement be enforced as originally contemplated to the greatest extent
possible.
18. Entire Agreement. This Agreement (and Exhibits hereto), together
----------------
with the Company's Articles of Incorporation and Bylaws as in effect on the date
hereof constitute the entire agreement and understanding among the parties
pertaining to the subject matter hereof and supersede any and all prior
agreements, whether written or oral, relating hereto.
19. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
<PAGE>
Page 17
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
FS EQUITY PARTNERS III, L.P., a Delaware limited partnership
By: FS Capital Partners, L.P.
Its: General Partners
By: FS Holdings, Inc.
By:
Its:
FS EQUITY PARTNERS INTERNATIONAL, L.P., a Delaware limited partnership
By: FS&Co. International, L.P.
Its: General Partners
By: FS International Holdings Limited
Its: General Partner
By:
Its:
AFC ENTERPRISES, INC.
By:
Its:
<PAGE>
Page 18
The undersigned, a former shareholder of Seattle Coffee Company, a Washington
corporation ("SCC"), hereby accepts the terms and conditions of the Stockholders
Agreement dated as of March 18, 1998, and acknowledges that such acceptance is a
condition to the acquisition of the common stock of AFC Enterprises, Inc.
("AFC") by the undersigned in connection with the Merger between a wholly-owned
subsidiary of AFC and SCC pursuant to the Agreement and Plan of Merger dated as
of January 23, 1998 by and among AFC, AFC Acquisition Corp., SCC and the
principal shareholders of SCC listed therein.
Shareholder Name Number of SCC shares held: ____
____________________________
(Please Print)
Signature: Number of AFC shares received: _____
______________________________
Title:
(If the signatory is signing on behalf
of a corporation, partnership, trust or
other similar entity)
<PAGE>
Page 19
SPOUSAL CONSENT
---------------
I acknowledge that I am the spouse of _______________________, a
stockholder of AFC Enterprises, Inc., a Minnesota corporation (the "Company"),
who signed the attached Stockholders Agreement, dated as of March 18, 1998 (the
"Stockholders Agreement"), which relates to the shares of the outstanding
capital stock of the Company. I have read the Stockholders Agreement and know
its contents. I am aware that by its provisions, transfer of shares of the
Company's capital stock are restricted and that my spouse agrees to sell and to
refrain from selling shares of the Company's capital stock, including any
community property or other interest that I may have or acquire therein, under
certain circumstances specified therein. I hereby approve of the provisions of
the Stockholders Agreement and agree to be bound thereby.
Dated: As of March 18, 1998
Signature of Spouse: ______________________________
Name of Spouse: ______________________________
<PAGE>
Page 20
SCHEDULE 1
NEW STOCKHOLDERS
<TABLE>
<CAPTION>
Shares of AFC
Name and Address Common Stock/1/
- ---------------------------------- ---------------
<S> <C>
Douglas D. Adkins 7988
c/o Capstan Partners
1301 Fifth Ave. #2830
Seattle, WA 98101
Douglas D. Adkins, UTMA Custodian 598
For Blakely MacP. Adkins
c/o Capstan Partners
1301 Fifth Ave #2830
Seattle, WA 98101
Douglas D. Adkins, UTMA Custodian
For Caitlin K.M. Adkins 598
c/o Capstan Partners
1301 Fifth Ave #2830
Seattle, WA 98101
Henry Gai Family Trust B 72,468
Attn: Karen F. McDonald
7204 N. Mercer Way
Mercer Island, WA 98109
Henry Gai Family Trust C 72,468
Attn: Karen F. McDonald
7204 N. Mercer Way
Mercer Island, WA 98109
Mario Gelmini 10,544
2522 - 32nd Ave W #209
Seattle, WA 98199
Margaret Jacobson-Sive 3,845
6 Byron St
Boston, MA 02108
Philip L. Johnson 23,965
4801 Harbor Lane
Everett, WA 98203
</TABLE>
<PAGE>
Page 21
<TABLE>
<CAPTION>
Shares of AFC
Name and Address Common Stock/1/
- ---------------------------------- ---------------
<S> <C>
Edward B. Kibble 3,435
c/o Kibble & Prentice, Inc.
600 Stewart St #1000
Seattle, WA 98101
Peter Larson 2,051
9925 S.W. 206 C.
Vashon, WA 98070
Pasquale Madeddu 9,482
4900 SE Willow St
Milwaukee, OR 97222
Michele McCarthy Revocable Trust 147,201
Attn: Michele McCarthy
2268 - 66th Ave SE
Mercer Island, WA 98040
Patrick McCarthy 14,704
2268 - 66th Ave SE
Mercer Island, WA 98040
Karen F. McDonald 196,313
7204 N Mercer Way
Mercer Island, WA 98040
Lawrence McDonald 145,649
7204 N Mercer Way
Mercer Island, WA 98040
Patrick McDonald Living Trust 228,080
Attn: Larry McDonald
7204 N. Mercer Way
Mercer Island, WA 98040
Tim O'Hara 1,275
3503 NE 47th St
Seattle, WA 98105
William Orr 2,635
141 Sunnyside Ave
Mill Valley, CA 94941
</TABLE>
<PAGE>
Page 22
<TABLE>
<CAPTION>
Shares of AFC
Name and Address Common Stock/1/
- ---------------------------------- ---------------
<S> <C>
David M. Paulsell 2,278
6826 - 18th Ave. N.E.
Seattle, WA 98115
Frederick O. Paulsell III 3,418
2908 Montlake Blvd. E.
Seattle, WA 98112
Frederick O. Paulsell, Jr. 239,042
Olympic Capital Partners
1325 Fourth Ave. #1900
Seattle, WA 98101
Northwestern Trust Co., Trustee 64,335
IRA Account
FBO Frederick O. Paulsell, Jr.
1201 Third Avenue, 20th Floor
Seattle, WA 98101
Frederick O. Paulsell, Jr. Trust 6,656
Attn: Frederick O. Paulsell, Jr.
c/o Olympic Capital Partners
1325 Fourth Ave. #1900
Seattle, WA 98101
Leigh A. Paulsell 2,278
NE 1060 Duncan Lane
Pullman, WA 99163
Michael L. Paulsell 3,195
1038 Washington Place East
Seattle, WA 98112
Pinco Pallino, Inc. 178,868
Attn: Dawn Zervas
4727 - 36th Ave SW
Seattle, WA 98126-2715
Thomas L. Reid 17,415
3620 - 204th Pl NE
Redmond, WA 98053
</TABLE>
<PAGE>
Page 23
<TABLE>
<CAPTION>
Shares of AFC
Name and Address Common Stock/1/
- ---------------------------------- ---------------
<S> <C>
Smith Barney, Inc., as IRA Custodian 2,655
FBO Thomas L. Reid
500 - 108th Ave NE, #1900
Bellevue, WA 98004
William J. Rex 6,656
c/o Prudential Securities, Inc.
1201 Third Ave. #3500
Seattle, WA 98101
Craig Russell 894
9312 - 178th Place NE #4
Redmond, WA 98052
Dave Stewart 4,821
13030 - 32nd St. S.E.
Snohomish, WA 98290-9740
James V. Stewart 385,885
22430 - 98th Ave SW
Vashon, WA 98070
Julie Straus 238
3818 E. Mercer Way
Mercer Island, WA 98040
Paul C. Suzman 24,760
2017 Parkside Drive E.
Seattle, WA 98112
Dave Wickberg 3,812
2704 -39th Ave SW
Seattle, WA 98116
Dawn Zervas 87,243
4727 - 36th Ave SW
Seattle, WA 98126-2715
</TABLE>
- ---------------
/1/ The shares reflected in this column include AFC Shares issued as part of the
Net Closing Payment and the Holdback Funds but do not include any AFC Shares
that may become issuable as a part of the Contingent Payment. In the event
such additional AFC Shares shall be earned pursuant to the Contingent
Payment, such AFC Shares shall be subject to all of the terms and conditions
of this Agreement.
<PAGE>
Page 24
SCHEDULE 2
OWNERSHIP OF COMPANY COMMON STOCK
BY THE FS STOCKHOLDER AND THE NEW STOCKHOLDERS
<TABLE>
<CAPTION>
STOCKHOLDER COMMON STOCK
- ------------------------------------------ ---------------
<S> <C>
FS Equity Partners III, L.P. 18,259,483
FS Equity Partners International, L.P. 733,583
New Stockholders 1,977,748/1/
</TABLE>
- -------------
/1/ See footnote 1.
<PAGE>
Page 1
EXHIBIT 10.04
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
-----------------------------------------------
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER is made and entered
into as of the ____ day of February, 1998, by and among SEATTLE COFFEE COMPANY,
a Washington corporation ("SCC"); LARRY MCDONALD, KAREN MCDONALD, THE LAWRENCE
MCDONALD CHARITABLE REMAINDER UNITRUST, THE KAREN F. MCDONALD CHARITABLE
REMAINDER UNITRUST, MICHELE MCCARTHY REVOCABLE TRUST, PATRICK MCDONALD LIVING
TRUST, GAI FAMILY TRUST B, GAI FAMILY TRUST C, JAMES V. STEWART, PINCO PALLINO,
INC., UMBERTO BIZZARRI and FREDERICK O. PAULSELL, JR. (hereinafter, sometimes
referred to, individually, as a "Principal Shareholder" and, collectively, as
the "Principal Shareholders"); AFC ENTERPRISES, INC., a Minnesota corporation
("AFC"), and AFC ACQUISITION CORP., a Georgia Corporation ("MergerCo").
RECITALS
A. The parties hereto have previously entered into an Agreement and Plan
of Merger dated January 23, 1998 (the "Merger Agreement").
B. The parties have agreed to enter into an amendment to the Merger
Agreement in the event that certain requirements of the Internal Revenue Code of
1986, as amended (the "Code"), are satisfied and the transactions contemplated
under the Merger Agreement can be effected as a tax-free reorganization.
C. Based upon information provided to AFC and MergerCo by SCC, such
conditions have been satisfied and the parties hereto desire to amend said
Merger Agreement as hereinafter set forth,
AMENDMENT
In consideration of the mutual covenants and conditions hereinafter set
forth, and other good and valuable consideration, the receipt, sufficiency and
adequacy of which are hereby acknowledged, AFC, SCC, MergerCo and the
Principal Shareholders hereby mutually agree as follows:
1. Recital C. is hereby amended so that, as amended, it shall read as
follows:
C. The parties hereto desire to effect a merger of SCC into MergerCo
(the "Merger") pursuant to which (i) AFC will own all of the issued and
outstanding shares of capital stock of the Surviving Corporation (as
hereinafter defined) (on a fully diluted and as converted basis); and (ii)
the shareholders of SCC will acquire cash, stock and rights to acquire
stock of AFC, all on the terms and conditions set forth in this Agreement.
The Merger is intended to comply with the provisions of Section
368(a)(1)(A) of the Internal Revenue Code.
2. Section 1.a.(1) through 1.a.(6) of the Merger Agreement are amended so
that, as amended, they shall read as follows:
(1) Surviving Corporation. Upon the terms and subject to the
---------------------
conditions hereof, at the Effective Time (as defined in Paragraph 1.a(2)
below), SCC shall be merged with and into MergerCo and the separate
existence of SCC shall
<PAGE>
Page 2
thereupon cease, and MergerCo shall continue as the surviving corporation
in the Merger (hereinafter sometimes called the "Surviving Corporation")
under the laws of the State of Georgia under the name set forth in the
Certificate of Incorporation of the Surviving Corporation.
(2) Effective Time of the Merger. As soon as practicable on the
----------------------------
Closing Date (as hereinafter defined), AFC and the Principal Shareholders
shall cause a Certificate of Merger to be filed with the office of the
Secretary of State of the State of Washington (the "Washington Certificate
of Merger") in accordance with the provisions of the Washington Business
Corporations Act (the "Washington Merger Law"), and shall cause a
Certificate of Merger to be filed with the office of the Secretary of State
of Georgia (the "Georgia Certificate of Merger") in accordance with the
provisions of the Georgia Business Corporation Code, as amended (the
"Georgia Merger Law"). When used in this Merger Agreement, the term
"Effective Time" shall mean the time at which the Washington Certificate of
Merger is accepted for filing by the Secretary of State of the State of
Washington and the Georgia Certificate of Merger is accepted for filing
with the Secretary of State of Georgia or such other time as shall be
agreed to by SCC and MergerCo and specified in each of the Certificates of
Merger.
(3) Effect of the Merger. The Merger shall, from and after the
--------------------
Effective Time, have all the effects provided by the Georgia Merger Law.
(4) Certificate of Incorporation. The Certificate of Incorporation
----------------------------
of MergerCo as in effect immediately prior to the Effective Time shall be
the Certificate of Incorporation of the Surviving Corporation after the
Effective Time, until thereafter changed or amended as provided therein or
by applicable law.
(5) Bylaws. The Bylaws of MergerCo as in effect immediately prior
to the Effective Time shall be the Bylaws of the Surviving Corporation,
until thereafter changed or amended as provided therein or by applicable
law.
(6) Board of Directors. The current directors and officers of
------------------
MergerCo immediately prior to the Effective Time shall continue to serve
for the period commencing as of the Effective Time and continuing until the
earlier of their respective resignations or removals or the times that
their respective successors are duly elected or appointed and qualified.
3. Section 1.b.(2)(1)(a) of the Merger Agreement is amended so that,
as amended, it shall read as follows:
(a) the holders of SCC Acquisition Rights (the "SCC Acquisition Rights
Holders") representing, on the date hereof, no less than eighty
percent (80%) of the SCC Shares subject thereto shall convert such
SCC Acquisition Rights into AFC Acquisition Rights as set forth
herein. The SCC Acquisition Rights consist of either options to
acquire SCC Shares (the "SCC Options") or warrants to acquire SCC
Shares (the "SCC Warrants"), a full and complete list of which is
set forth in Schedule 6.f. hereof. At closing, AFC shall convert
------------
SCC Options and SCC Warrants representing no less
<PAGE>
Page 3
than eighty percent (80%) of the SCC Shares subject thereto, as of the
date hereof, to an option to acquire AFC Shares (the "AFC Option") or a
warrant to acquire AFC Shares (the "AFC Warrant") equal in value, as of the
Effective Time, to the value of the SCC Option or SCC Warrant, as of the
Effective Time (the "Acquisition Rights Portion of the Purchase Price").
The AFC Options and AFC Warrants shall be exercisable upon substantially
the same terms and conditions as the SCC Options and the SCC Warrants
exchanged therefor and such other terms and conditions as shall be
reasonably required by AFC, including without limitation an agreement to
execute a shareholders agreement in substantially the form of that
contemplated by Paragraph 4 hereof upon acquisition of any AFC Shares.
For purposes of determining the number of AFC Shares subject to each AFC
Option and AFC Warrant, the value of the AFC Shares (the "AFC Per Share
Value") shall be determined in accordance with the terms of Paragraph
1.b(4). The value of each SCC Option and each SCC Warrant to be exchanged
hereunder shall be determined by (i) multiplying the SCC Option Per Share
Value (hereinafter defined) times the number of SCC Shares subject to such
SCC Option, and (ii) multiplying the SCC Warrant Per Share Value
(hereinafter defined) times the number of SCC Shares subject to such SCC
Warrant. The total value of the SCC Options (the "SCC Options Value") and
the SCC Warrants (the "SCC Warrants Value") shall be the aggregate value of
all the SCC Options and the aggregate value of all the SCC Warrants.
The SCC Option Per Share Value shall be the sum of the Net Closing Payment
plus the aggregate amount payable as exercise price under all SCC Options
and all SCC Warrants (the "Exercise Consideration"), divided by the sum of
(i) the number of SCC Shares issued and outstanding and owned by the SCC
Shareholders immediately prior to the Effective Time, plus (ii) the number
of SCC Shares subject to the SCC Options and SCC Warrants granted and
outstanding immediately prior to the Effective Time (i.e. all SCC Shares on
a fully diluted basis, which Shares shall sometimes be referred to herein
as the "Aggregate Number of SCC Shares"), less the per share exercise price
of the applicable SCC Option. The SCC Warrant Per Share Value shall be the
Net Closing Payment plus the Exercise Consideration divided by the
Aggregate Number of SCC Shares, less the per share exercise price of the
applicable SCC Warrant.
The SCC Per Share Value shall be the Net Closing Payment less the sum of
(i) the SCC Options Value; plus (ii) the SCC Warrants Value, divided by the
number of SCC Shares issued and outstanding owned by the SCC Shareholders
immediately prior to the Effective Time. The number of AFC Shares to be
subject to each AFC Option and AFC Warrant issued pursuant hereto shall be
determined by dividing the total value of each SCC Option and SCC Warrant
being exchanged by the AFC Per Share Value. AFC shall have the right to
pay, in cash, to the SCC Acquisition Rights Holder, the value of any
fractional AFC Share
<PAGE>
Page 4
resulting from the exchange described herein. In the event that the SCC
Acquisition Rights Holders cannot determine among themselves which SCC
Acquisition Rights will be converted to AFC Acquisition Rights for purposes
of the eighty percent (80%) requirement hereunder, then and in such event,
eighty percent (80%) of each SCC Option and SCC Warrant shall be converted
to an AFC Option and AFC Warrant as provided herein. In the event that it
is determined, in the reasonable opinion of counsel to SCC, that the SCC
Warrants cannot be converted into AFC Warrants as contemplated herein on a
tax-free basis to the SCC Warrantholders, then the requirements of this
subparagraph shall not apply to the SCC Warrants and the SCC Warrantholders
may elect to receive cash or AFC Shares equal to the value of their SCC
Warrants in the same manner as the SCC Shareholders.
The computation of the SCC Option Per Share Value, the SCC Warrant Per
Share Value and the SCC Per Share Value is illustrated on Exhibit A to this
Amendment.
4. Sections 1.b.(2)(2) and (2)(3) are hereby amended so that, as amended,
they shall read as follows:
(2) Each SCC Shareholder and each SCC Acquisition Rights Holders shall
be entitled to that portion of the Holdback Funds determined by multiplying
the number of SCC Shares owned by the applicable SCC Shareholder (or the
number of SCC Shares subject to the applicable SCC Acquisition Rights
Holder's SCC Options or SCC Warrants) by the Holdback Fund Per Share Value,
determined as hereinafter provided. The Holdback Fund Per Share Value
shall be determined by dividing the Holdback Funds by the Aggregate SCC
Shares. The Holdback Funds shall be payable in the same ratio of cash, AFC
Shares and AFC Acquisition Rights, as the Net Closing Payment payable to
the SCC Shareholders and SCC Acquisition Rights Holders pursuant to
subparagraphs (a), (b) and (c) above and as reflected on Schedule 1.c. (the
-------------
ratio of cash, AFC Shares and AFC Acquisition Rights is hereinafter
referred to as the "Net Closing Payment Ratio").
(3) the Contingent Payment, if any, shall be paid, as provided in
Paragraph 1.(f)(2) below, to the SCC Shareholders and the SCC Acquisition
Rights Holders in the same proportion as the Holdback Funds and in the same
ratio of cash, AFC Shares and AFC Acquisition Rights as the Net Closing
Payment Ratio.
5. Section 1.b. (2) (4) of the Merger Agreement is amended so that, as
amended, it shall read as follows:
(4) The amounts withheld pursuant to subparagraphs b.2(ii) and
b.2(iii) above, if any, shall be paid by AFC or the Surviving Corporation
at Closing in satisfaction of the obligations referred to in such
subparagraphs.
6. Section 1.b.(3) of the Merger Agreement is amended so that, as
amended, it
<PAGE>
Page 5
shall read as follows:
(3) After the Effective Time, AFC shall own one hundred percent (100%)
of the issued and outstanding stock of the Surviving Corporation.
7. Section 1.b.(4)(c) of the Merger Agreement is amended so that, as
amended, it shall read as follows:
(c) Add to the difference the amount of AFC's cash and cash
equivalents (including the aggregate exercise price of all
outstanding rights to acquire AFC Shares) as of the Closing Date;
8. Section 1.f.(1) is hereby amended so that, as amended, it shall read as
follows:
(1) Deferred Payment. Except as provided below, at the expiration of
----------------
the twelve (12) consecutive month period following the Closing
Date (the "Holdback Period"), the Surviving Corporation or AFC
(through a loan or capital contribution to the Surviving
Corporation), shall pay to, and deposit with, the Funding Agent,
in proportion to the Net Closing Payment Ratio, cash, AFC Shares
and AFC Acquisition Rights, with an aggregate value, equal to
Three Million Five Hundred Ninety Thousand Dollars ($3,590,000)
plus interest on such amount payable, in one (1) installment at
the end of the Holdback Period, at the rate of 5.7% per annum
compounded monthly from the Effective Date through the last day
of the Holdback Period (the aggregate of such amounts being
hereinafter referred to as the "Holdback Funds"). Anything in
this Agreement to the contrary notwithstanding, the AFC Share
portion of the Holdback Funds and the AFC Share portion of the
interest payment due thereon shall be deposited with the Escrow
Agent at Closing and shall be held pursuant to the terms of the
Escrow Agreement. The Holdback Funds will be retained by the
Funding Agent in escrow for a period of two (2) years following
the Holdback Period (the "Escrow Period") to secure the
continuing obligations of the Principal Shareholders for
indemnification as described in Paragraph 12 below. The
Principal Shareholders, AFC and the Funding Agent shall, prior to
Closing, enter into an Escrow Agreement setting forth the terms
and conditions of such escrow and providing, inter alia, for the
----- ----
payment of all interest on the escrowed funds, pro rata, to the
--- ----
SCC Shareholders and SCC Acquisition Rights Holders during the
term thereof based upon their relative shares of the cash portion
of the Holdback Funds as set forth on Schedule 1.c..
-------------
9. Sections 1.f.(2)(b) and 1.f.(2)(c) are hereby amended so that, as
amended, they shall read as follows:
(b) Determination of EBITDA. As used herein "EBITDA" shall mean the
-----------------------
earnings of SCC (and, after Closing, the Surviving Corporation) and the
Subsidiaries on a consolidated basis before deductions or offset for
interest expense, taxes, depreciation and amortization, as determined by
the accountant regularly servicing the Surviving Corporation at the end of
the Determination Year (the "SCC Accountant") in accordance with generally
<PAGE>
Page 6
accepted accounting principals ("GAAP") consistently applied with respect
to prior periods. Such determination shall be exclusive of Extraordinary
Business Expenses incurred by SCC (and, after Closing, the Surviving
Corporation), including, but not limited to, any amounts paid by SCC (or,
after Closing, the Surviving Corporation) (i) under Section 4.e., and (ii)
in satisfaction of all or part of the WC Line of Credit after Closing, and
shall be adjusted for non-cash items related to gains/losses on asset
dispositions and writedowns, compensation expense related to stock option
activity (deferred compensation), any executive compensation awards payable
in stock of SCC or, after Closing, AFC and non-cash officer notes
receivable related to executive compensation awards. The term
"Extraordinary Business Expenses" shall mean any expense or liability
incurred by the Surviving Corporation, after Closing, as a result of this
transaction or as a result of material variances in the 1998 Business Plan
(attached hereto as Schedule 1.f(2)) incurred at AFC's request or
----------------
direction. AFC shall cause the SCC Accountant to prepare and deliver to AFC
and the SCC Shareholder Representative, on or before the last day of the
Holdback Period, a statement of SCC's EBITDA for the Determination Year,
together with the work papers reflecting the computation thereof
(collectively the "EBITDA Statement"). If the actual EBITDA for the
Determination Year equals or exceeds the Minimum EBITDA, then AFC shall, on
or before the last day of the Holdback Period, pay the applicable
Contingent Payment (i.e. $1,900,000 if the Minimum EBITDA is achieved or
$3,800,000 if the Target EBITDA is achieved, as the case may be) to the
Funding Agent to be disbursed in accordance with Schedule 1.c.
-------------
(c) AFC Negative Covenant. AFC shall not take any action or require
---------------------
the Surviving Corporation to take any action not included in, or
contemplated by, SCC's 1998 Business Plan attached hereto as
Schedule 1.f(2) that materially adversely impacts SCC's and the
---------------
Surviving Corporation's ability to achieve the Minimum EBITDA or
Target EBITDA. In the event the Principal Shareholders become
aware of any action taken or required by AFC in violation of this
covenant, the Principal Shareholders shall deliver to AFC written
notice of such adverse action. If AFC fails or refuses to cure
or take material steps to commence to cure such adverse action
within fifteen (15) days after such notice, such adverse action
shall become an "Alleged Default Event". If SCC and the
Surviving Corporation fail to accomplish the Minimum or Target
EBITDA and such failure was caused by the Alleged Default Event
or an adverse action by AFC with respect to which a Principal
Shareholder was not aware, then the Contingent Payment shall
become due and payable, subject to AFC's right to dispute as
hereinafter set forth, as if the Minimum or Target EBITDA had
been achieved. If AFC disputes the contention of the Principal
Shareholders regarding the effect of such adverse action or
Alleged Default Event, such dispute shall be resolved in
accordance with the dispute resolution procedure described in
Paragraph 1.f(2)(d); provided, however, that the prevailing party
in such dispute shall be entitled to recover from the non-
prevailing party all of the fees, costs and expenses (including
reasonable attorney's fees) incurred by such party in
<PAGE>
Page 7
connection with such dispute.
10. Section 2.b of the Merger Agreement is hereby amended so that, as
amended, it shall read as follows:
b. Schedules. Unless otherwise provided for in this Agreement, SCC and
---------
the Principal Shareholders shall prepare final Schedules to the
Disclosure Statement (the "Schedules") required herein and deliver all
such Schedules to AFC, together with true and correct copies of any
documents required to be attached thereto, on or before the ___
business day following the date of execution of this Amendment. AFC
shall examine each such final Schedule and related documents, and
within ___ (__) business days following AFC's receipt thereof, AFC
shall notify SCC whether AFC accepts or rejects such Schedule and
related documents. In the event AFC and SCC and the Principal
Shareholders are unable to agree with respect to a material issue on
any Schedule within ___ (__) business days following SCC's receipt of
notice of AFC's rejection thereof, AFC shall either agree in writing
within two (2) business days thereafter to accept such Schedule as
submitted by SCC and proceed with the transactions contemplated
hereunder or this Agreement shall terminate. SCC and AFC acknowledge
that the time period for AFC to provide its written objections to the
Schedules already delivered shall not commence to run until AFC
receives written notice from SCC that the Schedules, as delivered, are
final and complete.
11. Section 3 of the Merger Agreement is hereby amended so that, as
amended, it shall read as follows:
3. CLOSING. The closing of the transactions contemplated by this
-------
Agreement (the "Closing") shall take place on or before March 17, 1998 (the
"Closing Date"). The parties agree to use their reasonable efforts and to act
in good faith to satisfy all conditions to Closing and consummate the
transaction at the earliest possible date. The Closing shall be held at the
offices of Cohen Pollock Merlin Axelrod & Tanenbaum, P.C. in Atlanta, Georgia,
at 10:00 a.m. on the Closing Date.
12. Section 4.d. of the Merger Agreement is hereby amended so that, as
amended, it shall read as follows:
d. Severance Pay. AFC shall cause the Surviving Corporation,
-------------
immediately following Closing, to implement a severance pay policy for employees
of the Surviving Corporation and the Subsidiaries which is substantially the
same as the severance pay policy in effect for the employees of AFC. All
employees of the Surviving Corporation or the Subsidiaries shall receive service
credit under such plan for their time employed by SCC and the Subsidiaries prior
to the Effective Time of the Merger. The payment of any severance pay by the
Surviving Corporation or the Subsidiaries after Closing shall not be considered
an Extraordinary Expense for purposes of computing SCC's EBITDA.
13. [Reserved]
14. References to SCC in the Merger Agreement which, in the context used,
are, in fact, references to the Surviving Corporation shall be read accordingly.
<PAGE>
Page 8
15. Section 6.t.iv. of the Merger Agreement is hereby amended by changing
the reference to "Schedule 6.t.i.,ii, or iii" as it appears therein to "Schedule
-------------------------- --------
6.t.i.,ii, iii or iv".
- --------------------
16. Section 6.y..i. of the Merger Agreement is hereby amended by changing
the reference to "Schedule 6.u.i." as it appears therein to "Schedule 6.y.i".
--------------- --------------
17. Subsections a. and b. of Section 9 of the Merger Agreement are hereby
amended by changing the date February 21, 1998 as it appears therein to March
10, 1998. In addition, there shall be added to Section 9 of the Merger
Agreement the following subsection:
s. Tax Opinion. AFC shall have received the letters of opinion
-----------
required to be delivered pursuant to Section 1.g. in form and substance
satisfactory to AFC.
18. The preamble to Section 12.a. of the Merger Agreement is hereby
amended so that, as amended, it shall read as follows:
a. General. The Principal Shareholders, jointly and severally,
-------
hereby agree to indemnify, defend and hold harmless AFC, the Surviving
Corporation, SCC and the Subsidiaries on demand, from and against any and all
loss, liability, claim cost, damage or deficiency, including interest,
penalties, and reasonable attorneys' fees, (herein, collectively referred to as
a "Loss") arising out of or due to:
19. The amendment shall be effective as of the date hereof; provided,
however, that if, after this Amendment is executed, AFC is unable to obtain a
favorable opinion from Arthur Andersen, LLP, acceptable to AFC, that the
transaction will qualify as a tax-free reorganization as contemplated hereunder,
AFC shall have the option to terminate this Amendment and cause the consummation
of the Merger on the terms and conditions of the Merger Agreement in effect
prior to the execution of this Amendment. In such event and notwithstanding the
termination of this Amendment, the provisions of Paragraphs 3, 4, 5, 7, 10, 11,
13, 17 (except the additon of subsection s.) and 18 of this Amendment shall
survive such termination and remain in full force and effect. The Principal
Shareholders agree that so long as there is no material adverse effect on the
Principal Shareholders, they will take such actions, and cause SCC and the
Subsidiaries to take such actions, as AFC may reasonably request in connection
with the structuring of the transaction as a tax-free reorganization and in
connection with any tax elections or other transactions designed to mitigate the
adverse consequences to AFC, the Surviving Corporation or SCC of the failure of
the Merger to qualify as tax-free.
18. Except as amended hereby, the Merger Agreement is ratified, approved
and confirmed as originally executed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed or caused this
Agreement to be executed and delivered their duly authorized officers, as of the
day and year first above written.
SCC:
ATTEST: SEATTLE COFFEE COMPANY
By:______________________ By:_______________________________
<PAGE>
Page 9
Its ________ Secretary Its ____________ President
PRINCIPAL SHAREHOLDERS:
______________________________
LARRY MCDONALD
________________________________
KAREN MCDONALD
MICHELE MCCARTHY REVOCABLE TRUST
BY:________________________________
PATRICK MCDONALD LIVING TRUST
BY:________________________________
GAI FAMILY TRUST B
BY:________________________________
GAI FAMILY TRUST C
BY:_________________________________
____________________________________
JAMES V. STEWART
____________________________________
UMBERTO BIZZARRI
____________________________________
FREDERICK O. PAULSELL, JR
PINCO PALLINO, INC.
<PAGE>
Page 10
BY:_________________________________
THE LAWRENCE MCDONALD CHARITABLE
REMAINDER UNITRUST
BY:__________________________________
Lawrence McDonald, Trustee
THE KAREN MCDONALD CHARITABLE REMAINDER UNITRUST
BY:__________________________________
Karen F. McDonald, Trustee
AFC:
ATTEST: AFC ENTERPRISES, INC.
By:______________________ By:____________________________________
Its ________ Secretary Its ____________ President
[CORPORATE SEAL]
MERGERCO
ATTEST: AFC ACQUISITION CORP.
By:______________________ By:____________________________________
Its ________ Secretary Its ____________ President
[CORPORATE SEAL]
<PAGE>
Page 11
Exhibit A
---------
Assume a Net Closing Payment of $50,000,000. There are 5,211,260 SCC Shares
issued and outstanding and 1,286,100 SCC Shares subject to Options and Warrants.
Assume the aggregate exercise price of all SCC Options and Warrants equals
$5,032,561 at an exercise price of $3.91 per share. The per share value of an
SCC Warrant or Option would be $4.56 per share
[(50,000,000+5,032,561)/(5,211,260+1,286,100))-$3.91). The option and warrants
would be valued at $4.56 times 1,286,100 or $5,867,483. The actual per share
value and the aggregate value will differ for individual SCC Acquisition Rights
Holders depending upon the actual exercise price of each option or warrant.
The SCC Shares are valued by subtracting from the Net Closing Payment the
value of the SCC Options and Warrants and dividing the result by the SCC Shares
issued and outstanding. This results in a value of $8.47 per share
[($50,000,000-5,867,483)/5,211,260)].
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE TWELVE WEEK PERIOD ENDED MARCH 22, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-22-1998
<CASH> 23,855
<SECURITIES> 0
<RECEIVABLES> 23,110
<ALLOWANCES> 5,007
<INVENTORY> 10,837
<CURRENT-ASSETS> 52,764
<PP&E> 324,219
<DEPRECIATION> 92,405
<TOTAL-ASSETS> 487,151
<CURRENT-LIABILITIES> 83,859
<BONDS> 303,173
0
0
<COMMON> 363
<OTHER-SE> 74,398
<TOTAL-LIABILITY-AND-EQUITY> 487,151
<SALES> 97,027
<TOTAL-REVENUES> 114,247
<CGS> 30,941
<TOTAL-COSTS> 77,112
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 276
<INTEREST-EXPENSE> 6,066
<INCOME-PRETAX> 128
<INCOME-TAX> 55
<INCOME-CONTINUING> 73
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
