<PAGE>
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 September 5, 1999
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 October 20, 1999, there were 39,392,675 shares of the registrant's Common
Stock outstanding.
<PAGE>
AFC ENTERPRISES, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART 1 FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations - For the Twelve and
Thirty-six Week Periods Ended September 5, 1999 and September 6, 1998..... 3
Condensed Consolidated Balance Sheets - September 5, 1999 and
December 27, 1998......................................................... 4
Condensed Consolidated Statements of Cash Flows - For the Thirty-six
Week Periods Ended September 5, 1999 and September 6, 1998 ............... 5
Notes to Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 12
PART 2 OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 26
(a) Exhibits..................................................... 26
(b) Current Reports on Form 8-K.................................. 26
SIGNATURE ........................................................................... 26
</TABLE>
<PAGE>
================================================================================
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AFC Enterprises, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
9/5/99 9/6/98 9/5/99 9/6/98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales.................................................... $ 129,923 $ 112,139 $ 386,809 $ 319,342
Revenues from franchising........................................... 18,428 15,085 51,980 42,084
Wholesale revenues.................................................. 11,271 10,534 33,144 20,664
Manufacturing revenues.............................................. 2,129 1,655 5,969 4,802
Other revenues...................................................... 2,176 2,038 6,292 6,162
--------- ---------- --------- ----------
Total revenues...................................................... 163,927 141,451 484,194 393,054
--------- ---------- --------- ----------
Costs and expenses:
Restaurant cost of sales............................................ 38,652 36,245 116,990 102,893
Restaurant operating expenses....................................... 67,124 57,246 198,190 159,466
Wholesale cost of sales............................................. 5,257 5,343 16,164 10,400
Wholesale operating expenses........................................ 3,095 2,302 8,622 4,518
Manufacturing cost of sales......................................... 1,096 1,246 3,440 3,799
General and administrative.......................................... 22,268 18,558 72,254 57,567
Depreciation and amortization....................................... 8,646 10,156 29,332 29,376
--------- ---------- --------- ----------
Total costs and expenses............................................ 146,138 131,096 444,992 368,019
--------- ---------- --------- ----------
Income from operations 17,789 10,355 39,202 25,035
Other expenses:
Interest, net....................................................... 7,856 7,067 23,466 20,182
--------- ---------- --------- ----------
Net income from continuing operations before income taxes............ 9,933 3,288 15,736 4,853
Income tax expense.................................................. 4,411 1,333 7,023 1,980
--------- ---------- --------- ----------
Net income from continuing operations................................ 5,522 1,955 8,713 2,873
Discontinued Operations:
Loss from operations of Chesapeake Bagel Bakery (net of income
tax benefit)........................................................ 556 228 451 842
Loss on sale of Chesapeake Bagel Bakery
(net of income tax benefit)......................................... 1,742 - 1,742 -
--------- ---------- --------- ----------
Net income........................................................... $ 3,224 $ 1,727 $ 6,520 $ 2,031
========= ========== ========= ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
================================================================================
3
<PAGE>
AFC Enterprises, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
9/5/99 12/27/98
- --------------------------------------------------------------------- ----------------------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents......................................... $ 14,297 $ 17,066
Accounts and current notes receivable, net........................ 18,880 16,728
Income taxes, current............................................. 1,577 3,327
Inventories....................................................... 16,062 13,182
Deferred income taxes............................................. 3,811 4,577
Prepaid expenses and other........................................ 2,268 2,344
----------- -----------
Total current assets....................................... 56,895 57,224
----------- -----------
Long-term assets:
Notes receivable, net............................................. 3,874 4,066
Deferred income taxes............................................. 2,199 4,416
Property and equipment, net....................................... 266,696 263,141
Other assets...................................................... 18,776 19,498
Intangible assets, net............................................ 203,823 208,120
----------- -----------
Total long-term assets..................................... 495,368 499,241
----------- -----------
Total assets.............................................. $ 552,263 $ 556,465
=========== ===========
Liabilities and Shareholders' Equity:
Current liabilities:
Accounts payable.................................................. $ 28,812 $ 40,579
Current portion of long-term debt and capital
lease obligations.............................................. 14,668 14,406
Bank overdrafts................................................... 10,768 6,248
Income taxes payable.............................................. 30 -
Short-term borrowings............................................. 13,479 7,000
Accrued expenses and other........................................ 27,436 23,047
----------- -----------
Total current liabilities.................................. 95,193 91,280
----------- -----------
Long-term liabilities:
Long-term debt, net of current portion............................ 78,118 87,744
Acquisition line of credit........................................ 68,000 68,000
10.25% Subordinated notes payable................................. 175,000 175,000
Capital lease obligations, net of current portion................. 5,181 8,561
Other liabilities................................................. 35,862 37,963
----------- -----------
Total long-term liabilities................................ 362,161 377,268
----------- -----------
Total liabilities......................................... 457,354 468,548
----------- -----------
Shareholders' equity:
Common stock...................................................... 394 392
Capital in excess of par value.................................... 152,576 151,632
Accumulated deficit............................................... (51,449) (57,969)
Notes receivable - officers....................................... (6,612) (6,138)
----------- -----------
Total shareholders' equity................................. 94,909 87,917
----------- -----------
Total liabilities and shareholders' equity................ $ 552,263 $ 556,465
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
Afc Enterprises, Inc.
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
36 Weeks Ended
9/5/99 9/6/98
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income.......................................................... $ 6,520 $ 2,031
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................................... 29,596 29,734
Deferred compensation.............................................. 772 1,833
Loss on asset dispositions and retirements......................... 4,995 289
Provision for deferred income taxes................................ 2,983 (2,108)
Other.............................................................. 1,572 1,496
(Increase) decrease in operating assets............................ (3,361) (13,124)
Increase (decrease) in operating liabilities....................... (13,695) (4,327)
---------- ----------
Total adjustments................................................. 22,862 13,793
---------- ----------
Net cash provided by operating activities........................... 29,382 15,824
---------- ----------
Cash flows provided by (used in) investing activities:
Proceeds from disposition of property and equipment................. 2,035 379
Investment in property and equipment................................ (33,008) (15,664)
Sale of CBB......................................................... 2,312 -
Investment in Pinetree goodwill..................................... (100) (23,783)
Investment in Pinetree property and equipment....................... - (19,586)
Investment in SCC goodwill.......................................... (858) (26,829)
Investment in SCC property and equipment............................ - (16,799)
Notes receivable additions.......................................... (2,147) (1,893)
Payments received on notes.......................................... 2,680 1,556
---------- ----------
Net cash used in investing activities............................... (29,086) (102,619)
---------- ----------
Cash flows provided by (used in) financing activities:
Principal payments of long-term debt, net........................... (8,225) (3,946)
Net borrowings under Acquisition line of credit..................... - 68,000
Proceeds from subordinated notes.................................... - -
Net borrowings under short-term revolver............................ 6,479 7,000
Principal payments for capital lease obligations.................... (5,573) (5,163)
Increase (decrease) in bank overdrafts, net......................... 4,520 (216)
Notes receivable - officers......................................... (181) -
Notes receivable - officers payments................................ 19 -
Notes receivable - officers interest................................ (240) (199)
Issuance of common stock............................................ 175 4
Debt issuance costs................................................. (39) (92)
---------- ----------
Net cash provided by (used in) financing activities................. (3,065) 65,388
---------- ----------
Net decrease in cash and cash equivalents........................... (2,769) (21,407)
Cash and cash equivalents at beginning of the period................ 17,066 32,964
---------- ----------
Cash and cash equivalents at end of the period...................... $ 14,297 $ 11,557
========== ==========
Supplemental Cash Flow Information:
Cash payments for income taxes ..................................... $ (468) $ 6,115
Cash payments for interest ......................................... 18,752 15,531
Noncash investing and financing activities:
Capital lease obligations incurred................................. 100 3,546
Issuance of common stock, options and warrants ....................... 814 25,497
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
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, Seattle Coffee Company, a
Washington corporation, and Cinnabon International, Inc., a Delaware
corporation. All significant intercompany balances and transactions are
eliminated in consolidation. The consolidated entity is referred to herein as
"AFC" or "the Company".
Nature of Operations and Basis of Presentation
AFC is primarily a multi-concept quick-service restaurant company. The
Company operates and franchises quick-service restaurants, bakeries and cafes
under the primary trade names of Popeyes Chicken & Biscuits ("Popeyes"), Churchs
Chicken ("Churchs"), Seattle Coffee Company ("SCC"), which operates and
franchises cafes under the "Seattle's Best" and "Torrefazione Italia" brands
(collectively "Seattle Coffee") and Cinnabon International, Inc. ("CII"), an
operator and franchisor of retail cinnamon roll bakeries under the trade name
("Cinnabon"). The Company also operates a manufacturing plant that produces
proprietary gas fryers and other custom-fabricated restaurant equipment for sale
to distributors and franchisees and used internally at Company-operated
restaurants.
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 1999 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 27, 1998, which are contained in the Company's Form
10-K, filed with the Securities and Exchange Commission on March 29, 1999 and
are incorporated herein by reference.
6
<PAGE>
2. Segment and Geographic Information
The Company operates exclusively in the food service and beverage industry.
Substantially all revenues result from the sale of menu products at restaurants,
bakeries and cafes operated by the Company, franchise royalty and fee income
earned from franchised restaurant, bakery and cafe operations and wholesale
revenues from the sale of coffee products. The Company's reportable segments are
based on specific products and services within the food service and beverage
industry. The Company combined Popeyes' and Churchs' domestic operations to form
its chicken segment. The Company previously aggregated the operations of
Chesapeake Bagel Bakery ("Chesapeake") and CII to form its bakery cafe segment,
however, with the sale of Chesapeake in the third quarter of 1999 (See Note 4),
the bakery segment only includes CII's operations. Chesapeake's operations have
been classified as discontinued operations in the accompanying financial
statements. The Company's coffee segment consists of SCC's domestic operations,
which includes wholesale operations. The international segment is comprised of
the Company's international franchised operations, which mainly consists of
Popeyes and Churchs international franchised restaurants.
The "other" segment includes the Company's manufacturing division,
Ultrafryer. The "corporate" component of operating income includes revenues from
1) interest income from notes receivable and rental revenue from leasing and
sub-leasing agreements with franchisees and third parties, less 2) corporate
general and administrative expenses.
<TABLE>
<CAPTION>
Revenues:
12 Weeks Ended 36 Weeks Ended
9/5/99 9/6/98 9/5/99 9/6/98
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Chicken................. $123,058 $118,422 $364,826 $342,648
Coffee.................. 17,396 16,598 49,741 32,414
Bakery cafe............. 16,767 - 50,024 -
International........... 2,655 2,753 8,043 7,100
Other................... 2,929 2,051 7,396 6,944
Inter-segment revenues.. (970) (396) (1,991) (2,143)
Corporate............... 2,092 2,023 6,155 6,091
-------- -------- -------- --------
Total Revenues........ $163,927 $141,451 $484,194 $393,054
======== ======== ======== ========
</TABLE>
Inter-segment revenues represent Ultrafryer sales to Company-operated
restaurants and SCC coffee sales to CII Company-operated bakeries. These
revenues are eliminated in consolidation.
7
<PAGE>
Operating Income (Loss):
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
9/5/99 9/6/98 9/5/99 9/6/98
------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Chicken...................... $24,687 $ 20,582 $ 71,664 $ 61,817
Coffee....................... 2,128 2,250 5,827 3,971
Bakery cafe.................. 1,721 - 4,247 -
International................ 1,288 1,658 3,591 3,969
Other........................ 349 343 908 1,003
Corporate.................... (3,248) (3,459) (16,298) (14,388)
------- -------- -------- --------
Total Operating
Income.................... $26,925 $ 21,374 $ 69,939 $ 56,372
------- -------- -------- --------
Adjustments to reconcile to
income from operations:
Depreciation and
amortization................ (8,646) (10,156) (29,332) (29,376)
Compensation expense
related to stock options.... (273) (611) (772) (1,833)
Gain/(loss) on fixed asset
write-offs................. (217) (252) (633) (128)
------- -------- -------- --------
Income from operations...... $17,789 $ 10,355 $ 39,202 $ 25,035
======= ======== ======== ========
</TABLE>
Operating income (loss) represents each segment's earnings before income
taxes, depreciation, amortization, non-cash items related to gains/losses on
asset dispositions and write-downs and compensation expense related to stock
option activity ("EBITDA" as defined by the Company).
Depreciation/Amortizataion:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
9/15/99 9/6/98 9/5/99 9/6/98
------- ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C>
Chicken................ $5,225 $6,557 $17,407 $15,855
Coffee................. 743 1,398 3,112 2,766
Bakery cafe............ 1,280 - 4,426 -
International.......... 248 29 610 50
Other.................. 53 65 179 190
Corporate.............. 1,097 2,107 3,598 10,515
------ ------- ------- -------
Total Depreciation/
Amortization.... $8,646 $10,156 $29,332 $29,376
====== ======= ======= =======
</TABLE>
There have been no material changes to the Company's total assets by
reportable segment at September 5, 1999 from the amounts disclosed in the
Company's consolidated financial statements for the fiscal year ended December
27, 1998.
3. CII Acquisition
On October 15, 1998, the Company acquired CII, the operator and franchisor
of 363 retail cinnamon roll bakeries operating in 39 states, Canada and Mexico.
Two hundred and eleven of the retail cinnamon roll bakeries were Company-
operated and were located within the United States. In connection with the
acquisition, which was accounted for as a purchase, CII became a wholly-owned
subsidiary of AFC through the merger of AFC Franchise Acquisition Corp. into CII
(the "Acquisition").
The Company acquired CII for $64.0 million in cash. The Company obtained
$44.7 million of the cash consideration from its 1997 Credit Facility as amended
and restated. The remaining $19.3 million cash consideration was funded with the
proceeds from the sale of approximately 2.8 million shares of AFC common stock
to certain "qualified" investors who were existing AFC shareholders and option
holders.
The Company accounted for this acquisition as a purchase in accordance with
APB 16. The allocation of the purchase price resulted in the Company recording
goodwill in the amount of approximately $43.7 million, which is being amortized
on a straight-line basis over a forty-
8
<PAGE>
year period. The Company is in the process of analyzing the fair values of the
tangible and intangible assets acquired from CII. During the second quarter, The
Company recorded a $3.6 million adjustment to the carrying value of certain
fixed assets, which correspondingly increased goodwill. The Company is
continuing its review of asset values and will complete this process in the
fourth quarter.
In connection with the CII acquisition, the Company has developed an exit
plan involving CII's corporate headquarters in Seattle, Washington. The exit
plan included severance, relocation and integration costs. The Company recorded
a liability of $1.1 million and accounted for the liability as a purchase price
adjustment, which increased goodwill.
The Company booked $0.5 million in liabilities in the second quarter mainly
due to pre-acquisition pending litigation and classified the transaction as a
purchase price adjustment, thereby increasing goodwill by that amount.
Overall, the Company is evaluating the fair value of all accounts acquired
from the CII acquisition and, based on this review, may record a final purchase
price adjustment in the fourth quarter.
Pro Forma Financial Information
The following unaudited pro forma results of operations for the twelve and
thirty-six weeks ended September 6, 1998 assumes the acquisition of CII occurred
as of the beginning of the period (in thousands).
<TABLE>
<CAPTION>
12 Weeks 36 Weeks
Ended Ended
9/6/98 9/6/98
-------- --------
<S> <C> <C>
Total revenues........................ $159,812 $446,994
======== ========
Net loss.............................. $ (207) $ (8,419)
======== ========
</TABLE>
The twelve weeks ended September 6, 1998 include CII's operations for the
three-month period ended September 27, 1998. The thirty-six weeks ended
September 6, 1998 include CII's operations for the nine-month period ended
September 27, 1998.
These pro forma results have been prepared for comparative purposes only
and include certain adjustments that result in (i) an increase in amortization
expense related to the recording of CII goodwill, (ii) an increase in interest
expense related to the Term Loan B debt used to partially fund the acquisition,
(iii) a decrease in interest expense related to CII debt that was paid off at
the time of the acquisition and (iv) a decrease in amortization expense related
to the write-off of CII's intangible assets at the time of the acquisition.
These results do not purport to be indicative of the results of operations which
actually would have resulted had the acquisition been in effect at the beginning
of the respective periods or of future results of operations of the consolidated
entities.
9
<PAGE>
4. Chesapeake Bagel Bakery Divestiture
On July 26, 1999, the Company entered into a definitive agreement to sell
its Chesapeake franchise rights and system to New World Coffee-Manhattan Bagel,
Inc. ("Buyer") for $3.8 million. The sale closed on August 30, 1999. The Company
received $2.3 million in cash with the remaining $1.5 million in a note
receivable from the Buyer. The existing outstanding receivables due to AFC from
Chesapeake franchisees prior to the sale remain on the Company's balance sheet.
The Company recorded a loss of $1.7 million after tax on the sale. The income
tax benefit applied to the loss on the sale was $1.4 million.
The results of Chesapeake have been classified as discontinued operations
in the accompanying financial statements. The following amounts relate to
Chesapeake's operations for the respective periods:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
9/5/99 9/6/98 9/5/99 9/5/98
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Total revenues................ $ 642 $ 989 $ 2,058 $ 2,880
Pre-tax loss from
operations.................. $ 1,010 $ 384 $ 820 $ 1,416
Income tax benefit............ (454) (156) (369) (574)
------- ------- ------- -------
Loss from
operations.................. $ 556 $ 228 $ 451 $ 842
======= ======= ======= =======
</TABLE>
5. Change in Accounting Estimate
Churchs and Popeyes
During the second quarter, the Company assessed the estimated useful lives
of its buildings, equipment and leasehold improvements at Churchs and Popeyes
Company-operated restaurant locations. The Company analyzed historical data
regarding restaurant operations, actual lives of restaurant properties and
property leasing arrangements. Churchs began operating in 1952 while Popeyes
initiated their operations in 1972. Based on this analysis, the Company revised
its estimated useful lives for certain fixed asset categories as follows:
1) Buildings - useful life range changed from 7-20 years to 5-35 years.
2) Equipment - useful life range changed from 3-8 years to 3-15 years.
3) Leasehold improvements - the Company will continue to depreciate leasehold
improvements over the lesser of the lease term or the estimated useful life
of the asset, however, the lease term will include all lease option periods
under contract that management anticipates will be utilized. Previously,
the Company only considered the primary term of the lease in assessing the
life of a leasehold improvement.
10
<PAGE>
This change in accounting estimate resulted in a $2.1 million decrease in
depreciation expense for the third quarter, resulting in a $1.2 million after
tax increase in net income for the same period. For the thirty-six week period
ended September 5, 1999, depreciation expense decreased $4.2 million, resulting
in a $2.4 million after tax increase in net income for the same period.
Cinnabon and Seattle Coffee
During the third quarter, the Company assessed the estimated useful lives
of its equipment and leasehold improvements at Cinnabon and Seattle Coffee
bakery and cafe locations. The Company analyzed historical data regarding
operations and property leasing arrangements. Based on this analysis, the
Company revised its estimated useful lives for certain fixed asset categories as
follows:
1) Equipment - Cinnabon's equipment asset lives were changed from seven years
to eight years. Seattle Coffee equipment asset lives were all set at eight
years prior to the Company's analysis. Pursuant to the analysis, lives
either remained at eight years or were increased between ten to fifteen
years depending on the type of equipment asset.
2) Leasehold improvements - With respect to Seattle Coffee leasehold
improvements, the Company will continue to depreciate leasehold
improvements over the lesser of the lease term or the estimated useful life
of the asset, however, the lease term will include all lease option periods
under contract that management anticipates will be utilized. Previously,
the Company only considered the primary term of the lease in assessing the
life of a leasehold improvement.
This change in accounting estimate resulted in a $0.7 million decrease in
depreciation expense for the third quarter, resulting in a $0.4 million after
tax increase in net income for the same period.
6. Long-Term Bonus Plan
Effective January 1, 1999, the Company adopted a long-term bonus plan for
its current and future employees. The plan provides for the potential payout of
a bonus, in cash, AFC common stock or both, contingent upon one or both of the
following occurrences during a five-year period beginning on January 1, 1999 and
ending on December 31, 2003:
a) On the assumption that AFC's common stock is publicly traded, AFC's common
stock reaches an average stock price of $31 per share for a period of at
least twenty consecutive trading days, and /or,
b) AFC's earnings per share is $2.25 for any fiscal year ending on or before
December 31, 2003.
The amount of the bonus ranges from 110% to 10% of the individual employee's
base salary at the time either benchmark is met. The percentage is based upon
the individual employee's employment date within the period the bonus plan is in
effect. At September 5, 1999, the Company did not have a liability recorded in
its consolidated financial statements for the bonus payout. The Company will
record a liability for the bonus payout when the amount is both probable and
estimable.
11
<PAGE>
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
"Item 1. Business" section in the Company's Annual Report on Form 10-K.
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 and thirty-six week periods ended September 5, 1999 and
September 6, 1998.
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
------------------ --------------------
Sept. 5, Sept. 6, Sept. 5, Sept. 6,
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant sales......................... 79.3% 79.3% 79.9% 81.3%
Franchise revenues....................... 11.2 10.7 10.7 10.7
Wholesale revenues....................... 6.9 7.4 6.8 5.2
Manufacturing revenues................... 1.3 1.2 1.2 1.2
Other revenues........................... 1.3 1.4 1.4 1.6
Total revenues........................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Restaurant cost of sales (1)............. 29.8% 32.3% 30.2% 32.2%
Restaurant operating expenses (1)........ 51.7 51.0 51.2 49.9
Wholesale cost of sales (2).............. 46.0 50.5 48.9 50.5
Wholesale operating costs (2)............ 27.4 21.9 26.0 21.8
Manufacturing cost of sales (3).......... 52.4 76.5 56.7 79.2
General and administrative............... 13.6 13.2 14.9 14.7
Depreciation and amortization............ 5.2 7.2 6.1 7.5
Total costs and expenses.............. 89.1 92.7 91.9 93.6
Income from operations..................... 10.9 7.3 8.1 6.4
Interest expense, net...................... 4.8 5.0 4.9 5.1
Net income from continuing
operations before taxes................. 6.1 2.3 3.2 1.3
Income tax expense......................... (2.7) (0.9) (1.4) (0.5)
Net income from continuing operations...... 3.4 1.4 1.8 0.8
Discontinued operations, net of taxes (4).. 1.4 0.1 1.4 0.2
Net income................................. 2.0% 1.3% 0.4% 0.6%
</TABLE>
(1) Expressed as a percentage of restaurant sales by Company-operated
restaurants.
(2) Expressed as a percentage of wholesale revenues.
12
<PAGE>
(3) Expressed as a percentage of manufacturing revenues.
(4) Represents Chesapeake's operations.
Selected Financial Data
The following table sets forth certain financial information and other
restaurant, bakery, cafe, wholesale and manufacturing data relating to Company-
operated and franchised restaurants, bakeries, cafes (as reported to the Company
by franchisees), wholesale and manufacturing operations for the twelve week and
thirty-six week periods ended September 5, 1999 and September 6, 1998:
<TABLE>
<CAPTION>
12 Weeks Ended 36 Weeks Ended
----------------------------------- ------------------------------
Sept. 5, Sept. 6, % change Sept. 5, Sept. 6, % change
1999 1998 98-99 1999 1998 98-99
-------- -------- -------- -------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
EBITDA, as defined (1)........................ $ 26.9 $ 21.4 26.0% $ 69.9 $ 56.4 24.1%
EBITDA margin................................. 16.4% 15.1% N/A 14.4% 14.3% N/A
Capital Expenditures (2)...................... $ 13.7 $ 8.9 54.2% $ 32.4 $ 20.9 55.0%
Restaurant, bakery, cafe, wholesale and manufacturing data (unaudited):
Systemwide sales:
Popeyes..................................... $255.6 $229.4 11.4% $ 733.7 $ 646.6 13.5%
Churchs..................................... 192.4 178.8 7.6 560.2 522.5 7.2
Cinnabon (3)................................ 35.7 N/A N/A 99.7 N/A N/A
Seattle Coffee cafes (4).................... 7.8 7.4 5.5 20.5 14.2 N/A
Seattle Coffee wholesale (4)................ 11.3 10.5 7.0 33.1 20.7 N/A
Ultrafryer.................................. 2.1 1.7 28.7 6.0 4.8 24.3
Chesapeake (5).............................. 7.3 14.2 (48.4) 29.2 44.1 (33.7)
------ ------ -------- --------
Total...................................... $512.2 $442.0 15.9% $1,482.5 $1,252.9 18.3%
====== ====== ======== ========
Systemwide unit openings:
Popeyes..................................... 31 29 6.9% 87 138 (5) (37.0) %
Churchs..................................... 33 17 94.1 95 57 66.7
Cinnabon.................................... 8 N/A N/A 24 N/A N/A
Seattle Coffee.............................. 9 1 800.0 17 6 N/A
Chesapeake (6).............................. 2 - N/A 4 7 (42.9)
------ ------ -------- --------
Total...................................... 83 47 76.6% 227 208 9.1%
====== ====== ======== ========
Systemwide units open,
end of period:
Popeyes..................................... 1,348 1,252 7.7%
Churchs..................................... 1,475 1,386 6.4
Cinnabon.................................... 388 N/A N/A
Seattle Coffee.............................. 87 73 19.2
Chesapeake.................................. 2 116 (98.3)
-------- --------
Total...................................... 3,300 2,827 16.7%
======== ========
Systemwide percentage change in
comparable unit sales (3)
Popeyes domestic............................ 3.7% 3.0% 5.9% 4.7%
Churchs domestic............................ 0.6 4.9 1.3 5.1
Popeyes international....................... (5.5) (13.4) (5.0) (13.0)
Churchs international....................... (3.1) (1.7) (1.6) (4.7)
Seattle Coffee domestic (4)................. 4.8 - - -
</TABLE>
13
<PAGE>
(1) EBITDA is defined as income from operations plus depreciation and
amortization; adjusted for items related to gains/losses on asset
dispositions and writedowns and compensation expense related to stock
option activity (deferred compensation).
(2) Excludes fixed assets added in connection with the Cinnabon, Seattle Coffee
and Pinetree acquisitions and capital expenditures made to convert the
Pinetree restaurants to Popeyes Company-operated restaurants.
(3) Prior period sales figures for Cinnabon are not comparable since this
acquisition occurred during 1998.
(4) Prior year-to-date sales figures for Seattle Coffee are not comparable
since this acquisition occurred during 1998.
(5) Includes the conversion of 66 Hardees restaurants to Popeyes Company-
operated restaurants.
(6) Chesapeake systemwide sales and unit openings relate to activity prior to
the sale of the Chesapeake franchise system during the third quarter of
1999.
Chesapeake Bagel Divestiture
On July 26, 1999, the Company entered into a definitive agreement to sell
its Chesapeake franchise rights and system to New World Coffee-Manhattan Bagel,
Inc. for $3.8 million. The sale closed on August 30, 1999. As a result,
restaurant sales, franchise revenues, restaurant cost of sales, restaurant
operating expenses, general and administrative expenses and depreciation and
amortization related to Chesapeake's operations have been classified as
discontinued operations in our financial statements. Chesapeake's operations
were included in the bakery cafe segment prior to the sale. Accordingly, the
discussions that follow have been restated to reflect the continuing operations
of our remaining brands.
For the Twelve Weeks Ended September 5, 1999 and September 6, 1998
Disregarding Chesapeake's operations, certain items relating to prior periods
have been reclassified to conform with current presentation.
Revenues
Restaurant Sales. Restaurant sales increased 15.9% or $17.8 million over
the prior year, primarily due to sales generated by Company-operated Cinnabon
bakery cafes acquired during late 1998.
Chicken
Sales at Company-operated chicken restaurants grew 2.0% or $2.2 million
from the prior year. The sales increase was mainly due to a 15-unit increase in
Company-operated Churchs chicken restaurants open during the twelve weeks ended
September 5, 1999 versus the same period in 1998.
Bakery Cafe
The bakery cafe segment posted sales of $16.0 million in the third quarter
of 1999. All sales were generated from Cinnabon's operations. Since Cinnabon
was
14
<PAGE>
acquired during the fourth quarter of 1998, prior year third quarter results do
not exist for the sake of comparability.
Seattle Coffee
Company-operated cafe sales of $6.0 million in the third quarter of 1999
equaled sales recorded in prior year's third quarter. Although comparable sales
were up 4.8% during the third quarter of 1999, there were more cafes operating
in the third quarter of 1998 than in the third quarter of 1999.
Franchise Revenues. Franchise revenues increased $3.3 million or 21.9% from
the prior year.
Chicken
Domestic revenues from franchising for chicken restaurants increased $2.5
million or 20.1% from the prior year. Franchise royalty revenues increased $1.6
million or 13.7%. The increase in franchise royalty revenue was partly
attributable to a 135 unit increase in the average number of chicken franchised
restaurants open during the third quarter of 1999 when compared to the third
quarter of 1998. The remaining increase was due to an increase in comparable
sales for domestic franchised restaurants of 3.7% for the third quarter of 1999.
Franchise fee income for the third quarter of 1999 was up $0.9 million over the
prior year. The increase was due to 1) domestic franchised restaurant openings
of 35 units during the third quarter of 1999 surpassing openings in the third
quarter of 1998 by six units and 2) $0.5 million in franchise fees recognized as
revenue in the third quarter of 1999 resulting from a franchisee defaulting on
its development agreement.
Bakery Cafe
The bakery cafe segment recorded franchise revenues of $1.0 million in the
third quarter of 1999. All revenues were generated from Cinnabon's domestic
franchised operations. Since Cinnabon was acquired during the fourth quarter of
1998, prior year third quarter results do not exist for the sake of
comparability.
International
International franchise revenues declined $0.1 million or 4.7% from the
prior year. International franchise royalty revenue increased $0.4 million,
despite the fact that international comparable sales were down 3.9% during the
third quarter of 1999 compared to the third quarter of 1998. A 7.3% increase in
the average number of franchised international restaurants from the third
quarter of 1998 to the third quarter of 1999, led to the increase in
international franchise royalties for the quarter. International franchise fee
revenue for the third quarter of 1999 decreased $0.5 million compared to the
corresponding period in 1998. The decrease was due in part to the recognition
of $0.3
15
<PAGE>
million in franchise fee income on defaulted development agreements during the
third quarter of 1998.
Wholesale Revenues. The Company's wholesale revenues consist of sales of
premium brand coffee from its Seattle Coffee roasting and distribution
operations to food service retailers, supermarkets and its own coffee cafes.
Wholesale revenues increased $0.7 million or 7.0% in the third quarter of 1999
versus the third quarter of 1998. The increase was due to new wholesale
customers and sales growth from existing customers.
Operating Costs and Expenses
Restaurant Cost of Sales. Restaurant cost of sales for 1999 increased 6.9%
or $2.5 million from the prior year. The increase was primarily attributable to
the increase in restaurant sales. Expressed as a percentage of restaurant sales,
cost of sales were 29.8% for the twelve weeks ended September 5, 1999, versus
32.3% for the twelve weeks ended September 6, 1998. The decrease in this
percentage was primarily due to a decrease in poultry prices during the third
quarter of 1999 versus the corresponding period in 1998. Chicken purchases
account for approximately 40% of total restaurant cost of sales. The average
poultry price per pound for the quarter ended September 5, 1999 was $0.069 per
pound less than the average poultry price per pound during the comparable period
in 1998.
Restaurant Operating Expenses. Restaurant operating expenses for the twelve
weeks ended September 5, 1999 increased $9.9 million or 17.3% from the
corresponding period in 1998. The rise in restaurant sales during this time
period led to the increase in restaurant operating expenses. In addition, the
increase in the number of Company-operated restaurants also contributed to the
increase in expense. At the end of the third quarter of 1999, there were 943
Company-operated restaurants, bakeries and cafes open compared to 738 open at
the end of the third quarter of 1998.
Wholesale Cost of Sales. Wholesale cost of sales represent the cost of
coffee beans and the direct overhead used to roast and blend specialty coffee
blends within Seattle Coffee's operations. Wholesale cost of sales was $5.3
million in the third quarter of 1999, which equaled the comparable period in
1998. Although wholesale revenues increased in the third quarter of 1999
compared to the same period in 1998, cost of sales remained the same between
1999 and 1998 due to a decrease in the cost per pound for green coffee beans in
1999 versus 1998.
Wholesale Operating Expense. Wholesale operating expenses represent the
overhead incurred in connection with the distribution of specialty coffee blends
within Seattle Coffee's operations. Wholesale operating costs were $3.1 million
during the third quarter of 1999, which exceeded the prior year quarter by $0.8
million. The increase in
16
<PAGE>
wholesale revenues during the third quarter of 1999 versus 1998 resulted in the
increase in wholesale operating expenses for the same periods.
General and Administrative Expenses. General and administrative expenses
increased $3.7 million or 19.9% during the third quarter of 1999 compared to the
same period of a year ago. The addition of Cinnabon's operations accounted for
$1.9 million of the third quarter 1999 increase in general and administrative
expenses. Additionally, operational growth in the Company's chicken and
international segments led to added administrative expenses in the third quarter
when compared to the third quarter of 1998.
Depreciation and Amortization. Depreciation and amortization for the third
quarter of 1999 decreased $1.6 million from the prior year. The decline was
mainly due to changes made to certain fixed asset useful lives in the second and
third quarter of 1999. The Company analyzed the useful lives of buildings,
equipment and leasehold improvements and changed the estimated useful lives
related to certain asset types. The Company increased and decreased the
estimated useful lives of certain assets. In some cases the lives were not
adjusted based on the analysis performed by the Company. The net impact of the
change in lives resulted in a $2.8 million adjustment to reduce depreciation
expense in the third quarter of 1999. The $2.8 million decrease was offset by a
$1.2 million increase in depreciation and amortization due to growth in the
Company's tangible and intangible asset base during the 1999 third quarter
versus the 1998 third quarter.
Income from Operations. Income from operations for the third quarter of
1999 increased $7.4 million or 71.8% from the third quarter of 1998. Income from
operations for the chicken segment increased $5.5 million or 39.7%. Increases in
restaurant sales at Company-operated and domestic franchised chicken restaurants
led to higher restaurant operating profits and royalty income, respectively.
Cinnabon posted $0.4 million in income from operations for the third quarter of
1999, which contributed to the overall increase. Spurred by an increase in
wholesale coffee sales, Seattle Coffee posted a $0.5 million increase in income
from operations for the third quarter versus the same period in the prior year.
The remaining increase in income from operations stemmed from the Company's
ability to control corporate expenses and a $2.8 million adjustment to reduce
depreciation expense during the third quarter of 1999.
Net Interest Expense. Interest expense, net of capitalized interest, for
the twelve weeks ended September 5, 1999 was $7.9 million, compared to $7.1
million for the twelve weeks ended September 6, 1998. The $0.8 million increase
in interest expense was due to higher levels of average debt outstanding
primarily attributable to borrowings made under the Company's revolving loan
facility during 1999 and borrowings made under the new Tranche B term loan.
Loss from Discontinued Operations. The loss from discontinued operations
reflects the operating results of Chesapeake's operations as well as the loss on
the sale of Chesapeake. The loss from operations, net of income taxes, for the
third quarter ended
17
<PAGE>
September 5, 1999 was $0.6 million versus $0.2 million for the third quarter
ended September 6, 1998. The Company incurred a loss on the sale of Chesapeake
of $1.7 million, net of income taxes. The loss includes the write-off of the
Chesapeake intangible assets representing franchise rights and trademarks as
well as costs directly incurred to sell Chesapeake's franchised operations.
For the Thirty-six Weeks Ended September 5, 1999 and September 6, 1998
Disregarding Chesapeake's operations, certain items relating to prior periods
have been reclassified to conform with current presentation.
Revenues
Restaurant Sales. Restaurant sales were up 21.1% or $67.4 million over the
prior year, primarily due to sales generated by Company-operated Cinnabon bakery
cafes acquired during 1998 and increased sales in the chicken and coffee
segment.
Chicken
Sales at Company-operated chicken restaurants increased 5.2% or $16.0
million from the prior year. The increase was primarily attributable to sales
generated by Company-operated restaurants opened from September 7, 1998 to
September 5, 1999. The average number of Company-operated chicken restaurants
open during the thirty-six weeks ended September 6, 1998 was 653, while the
average number of Company-operated chicken restaurants open during the thirty-
six weeks ended September 5, 1999 was 669. The remaining sales increase was due
to an increase in comparable sales for Company-operated chicken restaurants open
for at least one year of 1.5% for the thirty-six weeks ended September 5, 1999.
Bakery Cafe
The bakery cafe segment posted sales of $47.3 million for the year-to-date
period ended September 5, 1999. All sales were generated from Cinnabon's
operations. Since Cinnabon was acquired during the fourth quarter of 1998,
corresponding prior year results do not exist for the sake of comparability.
Seattle Coffee
Seattle Coffee Company-operated cafes posted sales of $16.4 million for the
year-to-date period ended September 5, 1999, which exceeded prior year by $4.7
million. The increase in sales was attributable to the timing of the Seattle
Coffee acquisition. The Company acquired Seattle Coffee at the end of the first
quarter of 1998, therefore, prior year's sales do not represent a full thirty-
six week period.
18
<PAGE>
Franchise Revenues. Franchise revenues increased $9.9 million or 23.5% from
the prior year.
Chicken
Domestic revenues from franchising for chicken restaurants increased $6.2
million or 17.7% from the prior year. Franchise royalty revenues increased $4.7
million or 14.1%. The increase in franchise royalty revenue was partly
attributable to a 116 unit increase in the average number of franchised chicken
restaurants open during the thirty-six week period ended September 5, 1999 as
compared to the same period in 1998. The remaining increase was attributable to
an increase in comparable sales for domestic franchised restaurants of 4.7% for
the first three quarters of 1999. Franchise fee income for the thirty-six weeks
ended September 5, 1999 was up $1.5 million over the prior year. The increase
was due to domestic franchised openings of 138 units during this time frame in
1999 surpassing openings in the comparable period in 1998 by forty-eight units.
Bakery Cafe
The bakery cafe segment recorded franchise revenues of $2.7 million during
the thirty-six weeks ended September 5, 1999. All revenues were generated from
Cinnabon's domestic franchised operations. Since Cinnabon was acquired during
the fourth quarter of 1998, corresponding prior year results do not exist for
the sake of comparability.
International
International franchise revenues rose $0.8 million or 10.8% from the prior
year. International franchise royalty revenue increased $0.9 million, despite
the fact that international comparable sales decreased 2.9% during the first
three quarters of 1999 compared to the first three quarters of 1998. A 6.3%
increase in average open restaurants when comparing year-to-date 1999 to 1998
also contributed to the growth in royalty revenue. International franchise fee
income for the thirty-six week period ended September 5, 1999 remained the same
versus prior year.
Wholesale Revenues. Wholesale revenues of $33.1 million during the thirty-
six weeks ended September 5, 1999 surpassed prior year by $12.5 million. The
increase was attributable to the timing of the Seattle Coffee acquisition. The
Company acquired Seattle Coffee at the end of the first quarter of 1998,
therefore, prior year's wholesale revenues do not represent a full thirty-six
week period.
Operating Costs and Expenses
Restaurant Cost of Sales. Restaurant cost of sales for 1999 increased 13.7%
or $14.1 million from the prior year. The increase was primarily attributable to
the increase in restaurant sales. Expressed as a percentage of restaurant sales,
cost of sales were 30.2% for the thirty-six weeks ended September 5, 1999,
versus 32.2% for the thirty-six
19
<PAGE>
weeks ended September 6, 1998. The decrease in this percentage was primarily due
to a decrease in poultry prices year-to-date 1999 versus the corresponding
period in 1998. Chicken purchases account for approximately 40% of total
restaurant cost of sales. During 1999, the Company negotiated a decrease in the
price per pound for dark chicken meat under its cost plus pricing arrangements.
The reduction in price resulted in a corresponding reduction in the year-to-date
cost of sales percentage in 1999 versus 1998.
Restaurant Operating Expenses. Restaurant operating expenses for the year-
to-date period ended September 5, 1999 increased $38.8 million or 24.3% from the
corresponding period in 1998. The rise in restaurant sales during this time
period led to the increase in restaurant operating expenses. In addition, the
increase in the number of Company-operated restaurants also contributed to the
increase in expense. At the end of the third quarter of 1999, there were 943
Company-operated restaurants, bakeries and cafes open compared to 738 open at
the end of the third quarter of 1998.
Wholesale Cost of Sales. Wholesale cost of sales were $16.2 million in the
thirty-six week period ended September 5, 1999, which was $5.8 million higher
than the comparable period in 1998. The increase in cost of sales was
attributable to the timing of the Seattle Coffee acquisition. The Company
acquired Seattle Coffee at the end of the first quarter of 1998, therefore,
prior year's cost of sales do not represent a full thirty-six week period.
Wholesale Operating Expense. Wholesale operating costs were $8.6 million
for the year-to-date period ended September 5 1999, which exceeded prior year by
$4.1 million. The increase in cost of sales was attributable to the timing of
the Seattle Coffee acquisition. The Company acquired Seattle Coffee at the end
of the first quarter of 1998, therefore, prior year's wholesale operating
expenses do not represent a full thirty-six week period.
General and Administrative Expenses. General and administrative expenses
increased $14.7 million or 25.5% during the thirty-six weeks ended September 5,
1999 compared to the same period of a year ago. The addition of Cinnabon's
operations accounted for $5.6 million of the increase in general and
administrative expenses. Approximately $1.0 million of the increase in general
and administrative expenses was attributable to the timing of the Seattle Coffee
acquisition. The Company acquired Seattle Coffee at the end of the first
quarter of 1998, therefore, prior year's expenses do not represent a full
thirty-six week period regarding Seattle Coffee operations. Additionally,
operational growth in the Company's chicken and international segments resulted
in added administrative expenses in the thirty-six weeks ended September 5, 1999
when compared to the same period in 1998.
Depreciation and Amortization. Depreciation and amortization for the year-
to-date period ended September 5, 1999 decreased $0.1 million from the prior
year. The decline was mainly due to changes made to certain fixed asset useful
lives in the second and third quarter of 1999. The Company analyzed the useful
lives of buildings,
20
<PAGE>
equipment and leasehold improvements and changed the estimated useful lives
related to certain asset types. The Company increased and decreased the
estimated useful lives of certain assets. In some cases the lives were not
adjusted based on the analysis performed by the Company. The net impact of the
change in lives resulted in a $4.9 million year-to-date adjustment to reduce
depreciation expense in 1999. The $4.9 million decrease was offset by a $4.8
million increase in depreciation and amortization due to growth in the Company's
tangible and intangible asset base throughout 1999 third quarter versus the same
period in 1998.
Income from Operations. Income from operations for the year-to-date period
ended September 5, 1999 increased $14.2 million or 56.8% versus prior year.
Income from operations for the chicken segment increased $8.5 million or 18.6%.
Increases in restaurant sales at Company-operated and domestic franchised
chicken restaurants led to higher restaurant operating profits and royalty
income, respectively. Seattle Coffee posted a $1.4 million increase in income
from operations for the thirty-six weeks ended September 5, 1999 compared to the
same period in the prior year. Seattle Coffee's prior period did not consist of
a full thirty-six week period since the Company acquired Seattle Coffee at the
end of the first quarter of 1998. The remaining increase in income from
operations stemmed from the Company's ability to control corporate expenses and
a $4.9 million adjustment to reduce depreciation expense during the year-to-date
period ended September 5, 1999.
Net Interest Expense. Interest expense, net of capitalized interest, for
the thirty-six weeks ended September 5, 1999 was $23.5 million, compared to
$20.2 million for the thirty-six weeks ended September 6, 1998. The $3.3 million
increase in interest expense was due to higher levels of average debt
outstanding primarily attributable to borrowings made under the Company's
revolving loan facility during 1999 and borrowings made under the new Tranche B
term loan.
Loss from Discontinued Operations. The loss from discontinued operations
reflects the operating results of Chesapeake's operations as well as the loss on
the sale of Chesapeake. The loss from operations, net of income taxes, for the
year-to-date period ended September 5, 1999 was $0.5 million versus $0.8 million
for the comparable period in 1998. The Company incurred a loss on the sale of
Chesapeake of $1.7 million, net of income taxes. The loss includes the write-off
of the Chesapeake intangible assets representing franchise rights and trademarks
as well as costs directly incurred to sell Chesapeake's franchised operations.
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.
21
<PAGE>
Net cash provided by operating activities for the thirty-six weeks ended
September 5, 1999 and September 6, 1998 was $29.4 million and $15.8 million,
respectively. Available cash and cash equivalents, net of bank overdrafts, as of
September 5, 1999 was $3.5 million, compared to $2.1 million at September 6,
1998. The Company's working capital deficit as of September 5, 1999 and
September 6, 1998 was approximately $38.3 million and $33.4 million,
respectively.
For the thirty-six weeks ended September 5, 1999 the Company invested in
various capital projects totaling $32.4 million. During this period the Company
invested $18.0 million in new/reimaged restaurant locations and $6.8 million in
other capital assets to update, replace and extend the lives of restaurant
equipment and facilities and complete other projects. The Company spent the
remaining $7.6 million in capital expenditures on corporate and computer system
related initiatives. These 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 1997 Credit Facility and other sources of
liquidity, will be adequate to meet the Company's anticipated future
requirements for working capital, capital expenditures and scheduled principal
and interest payments under the Senior Subordinated Notes and the 1997 Credit
Facility. From time to time however, the Company may elect to seek additional
capital in either the debt or equity markets.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates on
debt and changes in commodity prices. In addition, a portion of the Company's
receivables are denominated in foreign currency, which exposes it to exchange
rate movements. Historically, the Company has not utilized hedging contracts to
manage its exposure to foreign currency rate fluctuations since the market risk
associated with international receivables was not determined to be significant.
However, during the first quarter of 1999 the Company entered into a foreign
currency hedging agreement with respect to the Korean Won.
The Company's net exposure to interest rate risk consists of its Senior
Subordinated Notes and borrowings under its 1997 Credit Facility.
The Senior Subordinated Notes bear interest at a fixed rate of 10.25%. The
aggregate balance outstanding under the Senior Subordinated Notes as of
September 5, 1999 was $175.0 million. From time to time, the Company may
repurchase some of the Senior Subordinated Notes on the open market. Should
interest rates increase or decrease, the estimated fair value of these notes
would decrease or increase, respectively. As of September 5, 1999, the fair
value of the Senior Subordinated Notes exceeded the
22
<PAGE>
carrying amount by approximately $7.0 million. As of September 5, 1999, the
Company has not repurchased any of its Senior Subordinated Notes.
The Company's 1997 Credit Facility has borrowings made pursuant to it that
bear interest rates that are benchmarked to U.S. and European short-term
interest rates. The balances outstanding under the 1997 Credit Facility as of
September 5, 1999 totaled $167.8 million. The impact on the Company's annual
results of operations of a hypothetical one-point interest rate change on the
outstanding balances under the 1997 Credit Facility would be approximately $1.7
million. This assumes no change in the volume or composition of the debt at
September 5, 1999.
The Company and its franchisees purchase certain commodities such as
chicken, potatoes, flour, cooking oil and coffee beans. These commodities are
generally purchased based upon market prices established with vendors. These
purchase arrangements may contain contractual features that limit the price paid
by establishing certain price floors or ceilings. The Company's and its
franchisees principal raw material is fresh chicken. The purchase of fresh
chicken accounts for almost half of the Company's restaurant cost of sales. In
order (i) to ensure favorable pricing for the Company's chicken purchases in the
future, (ii) to reduce volatility in chicken prices and (iii) to maintain an
adequate supply of fresh chicken, the Company has entered into two types of
chicken purchasing arrangements with its suppliers. The first of these contracts
is a grain-based "cost-plus" pricing arrangement that provides chicken prices
based upon the cost of feed grains, such as corn and soybean meal, plus certain
agreed upon non-feed and processing costs. The other contract contains price
provisions which limit the movement of prices up or down in any year and is
based on the industry benchmark price (referred to as "Georgia Dock"). Both
contracts have terms ranging from three to five years with provisions for
certain annual price adjustments as defined in the contracts.
SCC's principal raw material is green coffee beans. The supply and prices
of green coffee beans are volatile. Although most coffee beans trade in the
commodity market (the "C market"), coffee beans of the quality sought by Seattle
Coffee tends to trade on a negotiated basis at a premium above the C market
coffee pricing, depending upon the supply and demand at the time of purchase.
Availability and price can be affected by many factors in producing countries,
including weather and political and economic conditions. The Company typically
enters into supply contracts to purchase a pre-determined quantity of green
coffee beans at a fixed price per pound. These contracts usually cover periods
up to a year as negotiated with the individual supplier.
Year 2000
The Company relies to a large extent on computer technology to carry out
its day-to-day operations. The Company is currently working to resolve the
potential impact of the Year 2000 on the processing of date-sensitive
information by the Company's information technology ("IT") systems and non-IT
systems that are reliant on computer technology. The Year 2000 problem is the
result of computer programs being written
23
<PAGE>
using two digits (rather than four) to define the applicable year. Any of the
Company's programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This problem could result in a
system failure or miscalculations causing disruptions of operations, including,
but not limited to, a temporary inability to process transactions or engage in
normal business activities.
The Company has adopted a Year 2000 plan that includes five phases. These
phases are: 1) inventory 2) assess 3) remediate 4) test and 5) maintain.
Although the pace of the work varies among IT and non-IT systems and the phases
are often conducted in parallel, the inventory, assess and remediation phases
have been completed as of October 15, 1999. Under the Company's current plan,
testing of IT systems is complete for all core systems except financial systems.
Preliminary financial systems testing indicates no expected problems, and
testing is scheduled to be completed by November 30, 1999. The Company
anticipates the timely completion of this compliance assessment, which should
mitigate the Year 2000 issue.
To date, the Company has incurred approximately $0.8 million in Year 2000
costs. These costs are primarily related to fees paid to outside consultants to
develop a Year 2000 strategy, test core systems, develop a contingency planning
approach and assist with project administration. The Company estimates that the
total costs of addressing the Year 2000 issue will approximate $0.9 million,
including the amount that has already been expended. These costs will be funded
through operating cash flows.
Based upon its compliance assessment, the Company does not expect the Year
2000 problem, including the cost of making the Company's IT and non-IT systems
Year 2000 compliant, to have a material adverse impact on the Company's
financial position or results of operations in future periods. The cost and time
estimates for the Company's Year 2000 project are based on its best estimates.
There can be no assurance that these estimates will be achieved or that planned
results will be achieved. The inability of the Company to resolve all potential
Year 2000 problems in a timely manner could have a material adverse impact on
the Company.
During August 1994, an outsourcing agreement between the Company and IBM
Global Services ("IGS") was executed to, among other things, enhance and upgrade
the Company's corporate and restaurant hardware and software computer systems.
During the process of upgrading its systems, which was substantially complete as
of the end of third quarter of 1999, the Company established procedures to
ensure that its new IT systems were Year 2000 compliant. The Company believes
that a significant portion of the potential Year 2000 issues were resolved with
the completion of its IT system upgrades made in connection with the IGS
contract.
Under the Company's Franchise Awareness Program and Vendor/Supplier Letter
Program, the Company has distributed over 1,800 readiness request letters and
has initiated communications with its significant suppliers and vendors and its
franchisee community in an effort to determine the extent to which the Company's
business is vulnerable to the failure by these third parties to remediate their
Year 2000 problems. This letter effort was substantially complete as of the end
of the third quarter 1999. While the Company has not been informed of any
material risks
24
<PAGE>
associated with the Year 2000 problem with respect to these entities, there can
be no assurance that the IT and non-IT systems of these third parties will be
Year 2000 compliant on a timely basis. The inability of these third parties to
remediate their Year 2000 problems could have a material adverse impact on the
Company's financial position and results of operations.
The Company has not yet ascertained what the impact would be on the
Company's financial position and results of operations in the event of failure
of the Company's or third parties' IT and non-IT systems due to the Year 2000
issue. To mitigate the risk, the Company began developing a contingency plan in
the fourth quarter of 1998 designed to allow continued operations in the event
that such failures should occur. Contingency plan development was substantially
complete as of the end of the third quarter 1999, and plan rollout has begun.
These plans address Company, franchise, roasting and manufacturing operations as
well as financial and support functions.
In general, the Company's contingency plans focus on supply chain, staffing
and unit readiness, as well as technology dependent processes. Supply chain
contingencies include increasing stock levels of raw materials and finished
goods inventories for both coffee roasting and Ultrafryer manufacturing
operations. Additionally, all restaurants, bakeries and cafes will increase unit
inventories by 10% for core food and paper items the week of December 27, 1999.
Staffing and unit readiness contingencies include readiness, closing and
opening checklists for unit operators and multi-unit managers. Additionally,
several communication alternatives have been specified to include phone trees
and Y2K specific voice mail messages. If telecommunications are not available,
the unit and multi-unit managers have been given opening decision guidelines to
determine appropriate action, and communication to designated resources is to
occur as soon as phone service is restored.
Technology dependent process contingencies include pre and post January 1,
2000, system checks as well as manual transaction processing procedures for
restaurant and franchise accounting. Additionally, IT resources will be staffed
throughout the weekend to monitor system performance and correct any unforeseen
problems if they arise. This monitoring includes local and wide area networks,
servers, databases, applications, desktops and laptops.
Impact of Inflation
The Company believes that, over time, it has generally been able to pass
along inflationary increases in its costs through increased prices of its menu
items. Accordingly, the effects of inflation on the Company's net income
historically have not been, nor are such effects expected to be, materially
adverse. Due to competitive pressures, however, increases in prices of menu
items often lag inflationary increases in costs.
Seasonality
The Company has historically experienced the strongest operating results at
Popeyes and Churchs restaurants during the summer months while operating results
have been somewhat lower during the winter season. Cinnabon and Seattle Coffee
have traditionally experienced the strongest operating results during the
Christmas holiday shopping season between Thanksgiving and Christmas. Certain
holidays and inclement winter weather reduce the volume of consumer traffic at
quick-service restaurants and may impair the ability of certain restaurants to
conduct regular operations for short periods of time.
25
<PAGE>
PART 2. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are included herewith:
10.88 Asset Purchase Agreement between CBB Acquisition Corp, New
World Coffee-Manhattan Bagel, Inc. and AFC Enterprises,
Inc., dated July 26, 1999 ("CBB Asset Purchase
Agreement").
10.89 First Amendment to the CBB Asset Purchase Agreement, dated
August 27, 1999.
27.1 Financial Data Schedule
(b) Current Reports on Form 8-K
None.
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: October 20, 1999 By: /s/ Gerald J. Wilkins
----------------------
Gerald J. Wilkins
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE>
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CBB ACQUISITION CORP.
AND
AFC ENTERPRISES, INC.
<PAGE>
ASSET PURCHASE AGREEMENT
AGREEMENT ("Agreement"), made as of the 26th day of July, 1999, by and
among CBB ACQUISITION CORP., a New Jersey corporation having offices located at
246 Industrial Way West, Eatontown, New Jersey 07724 ("Purchaser"), NEW WORLD
COFFEE-MANHATTAN BAGEL, INC., ("New World"), a Delaware corporation, having
offices located at 246 Industrial Way West, Eatontown, New Jersey 07724
("Guarantor"), and AFC ENTERPRISES, INC., a Minnesota corporation having offices
located at Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328 ("Seller").
WITNESSETH:
WHEREAS, Seller is engaged in the business of franchising and operating
certain retail bagel stores ("CBB Stores") under the names "Chesapeake Bagel
Bakery" and all derivatives thereof, including without limitation "Chesapeake
Bakery Cafe," "Chesapeake Bagels, Bakery and Cafe;" "Chesapeake Bagel Bakery and
Deli" and "Bagel Bakery" (the "Business"); and
WHEREAS, Purchaser desires to purchase from Seller and Seller desires to
sell to Purchaser all of the assets of the Business, upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties hereinafter contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS; ASSUMPTION OF LIABILITIES
------------------------------------------------------
1.1 Purchase and Sale of Assets. Subject to and upon the terms and
---------------------------
conditions set forth in this Agreement, Seller shall sell, assign, transfer,
convey and deliver to Purchaser and Purchaser shall purchase from Seller, at the
Closing (as hereinafter defined), all of the following properties, assets,
rights and business of Seller used exclusively in the operation of the Business,
wherever located and whether or not reflected on the books and records of Seller
(all of such assets, properties, rights and business being hereinafter sometimes
collectively referred to herein as the "Purchased Assets"):
(a) all of Seller's right, title and interest in and claims and
rights under all franchise agreements (the "Scheduled Franchise Agreements")
between Seller or its predecessor, The American Bagel Company ("ABC") and the
Chesapeake Bagel Bakery franchisees (the "CBB Franchisees") for the operation of
the CBB Stores listed on Schedule 1.1(a);
<PAGE>
(b) all of Seller's right, title and interest in any franchise
agreements entered into by Seller or ABC for CBB Stores, other than the
Scheduled Franchise Agreements (the "Additional Franchise Agreements"),
including without limitation those listed on Schedule 1.1(b). The Parties
acknowledge that the Additional Franchise Agreements include franchise
agreements that have been terminated by Seller or may have been terminated ABC
and to the best of Seller's knowledge, a list of those CBB Stores that have not
de-identified as a CBB Franchisee.
(c) all of Seller's right, title and interest in any agreement (a
"Development Agreement") pursuant to which Seller or ABC has granted to any
person or entity the right to develop a CBB Store, including without limitation
the Development Agreements listed on Schedule 1.1(c);
(d) all sums receivable which are incurred as of the Closing date
from CBB Franchisees related to the Business including accounts receivable and
notes receivable (the "Transferred Receivables");
(e) all of Seller's interest in, and claims and rights under the
agreements and contracts listed on Schedule 1.1(e), to the extent assignable
(the "Vendor Agreements"), (hereinafter the Scheduled Franchise Agreements, the
Additional Franchise Agreements, the Development Agreements and the Vendor
Agreements shall be collectively referred to as the "Transferred Agreements")
and any and all prepayments, or deposits, as of the date of Closing, associated
with the Transferred Agreements, which were paid to or by Seller;
(f) all of the intellectual property (the "Intellectual Property")
listed on Schedule 1.1(f);
(g) all material books, records and documents of Seller, related
exclusively to the Business and all of Seller's right, title and interest
therein including accounting records and correspondence files, plans and
specifications for existing and prototype CBB Stores, equipment specifications,
construction costs, vendor lists, lead/prospect lists, CAD disks, logged
materials and computer data in paper - hard copy and computer data files, when
available;
(h) all permits, licenses, orders, consents and approvals of any
governmental or regulatory authority related to the operation of the Business as
listed on Schedule 1.1(h);
(i) all existing and prospective business relationships, reputation,
and other intangibles which may be characterized as "good will" or "going
concern value" of the Business including, without limitation, the name
"Chesapeake Bagel Bakery" and all derivatives thereof;
(j) all causes of action, claims and rights of recovery or setoff of
every kind or character arising out of or attributable to any of the Purchased
Assets on or prior to the Closing Date (hereinafter defined), irrespective of
the date on which any such cause of action, claim or right may arise or accrue;
and
2
<PAGE>
(k) all sums paid by CBB Franchisees to Seller for deposit in the
Advertising Fund maintained by Seller for CBB Franchisees, less only bona fide
expenditures for advertising and related expenses, which are consistent with the
Franchise Agreements and the normal course of business of Seller, and an
accounting of the Advertising Fund, an aged accounts receivable for the
Adverting Fund and a list of all unpaid bills and a list of all outstanding
financial commitments not billed by vendors or suppliers (the "Ad Fund
Liabilities").
(l) Notwithstanding the foregoing, Seller shall retain any claim or
defense (except for any economic benefits arising after the Closing under the
Transferred Agreements and the Transferred Receivables, which shall remain with
Purchaser) arising out of or related to the Transferred Agreements for actions
brought against Seller.
1.2 Limited Assumption of Liabilities. Purchaser shall not assume any
---------------------------------
liabilities of Seller other than Seller's obligations under the Transferred
Agreements arising from and after the Closing Date and the Ad Fund Liabilities.
Except for such liabilities of Seller as are specifically assumed by Purchaser
under the immediately preceding sentence, Purchaser has not assumed or
undertaken, and is not assuming or undertaking, to discharge or perform, any
obligation or liability of Seller, all of which obligations and liabilities
Seller hereby shall fully discharge, pay and/or satisfy in the ordinary course.
Without limiting the generality of the foregoing, Purchaser shall not be deemed
to have assumed, nor shall Purchaser assume, any liability based upon or arising
out of any tortious or wrongful actions of Seller or any liability for the
payment of (i) any liability or obligation of Seller arising out of or in
connection with the negotiation and preparation of this Agreement and the
consummation and the performance of the transactions contemplated hereby
including, without limitation, any tax liability so arising; (ii) any liability
or obligation of Seller for any foreign, federal, state, county or local taxes,
or any interest or penalties thereon, accrued for, applicable to or arising from
any period ending on or prior to the date of Closing; (iii) any salary, wage,
benefit, bonus, vacation pay, sick leave, insurance, employment tax or similar
liability of Seller to any employee, officer, director or other person or entity
allocable to services performed on or prior to the date hereof; or (iv) any
contributions to any pension, employee benefit or profit sharing plan of Seller
for the benefit of any of Seller's employees, officers or directors.
ARTICLE 2
PURCHASE PRICE AND TERMS OF PAYMENT
-----------------------------------
2.1 Purchase Price. In consideration of the sale, assignment, transfer,
--------------
conveyance and delivery of the Purchased Assets by Seller to Purchaser, and in
reliance upon the representations, warranties, covenants and agreements made
herein by Seller to Purchaser, Purchaser agrees to pay Seller at Closing and
Seller agrees to accept from Purchaser in full payment thereof, the sum of Four
Million Eight Hundred Thousand ($4,800,000) Dollars (the "Purchase Price")
subject to Purchase Price Adjustments set forth in Section 2.5 below, payable as
follows:
3
<PAGE>
(a) Two Million Four Hundred Thousand ($2,400,000) Dollars (less the
sum of $500,000 referred to in Section 2.2 and less the downpayment of $150,000
referred to in Article 2A) by wire transfer;
(b) Five Hundred Thousand ($500,000) Dollars by delivery to Seller at
Closing of a non-negotiable promissory note in the form annexed hereto as
Exhibit 2.1(b) (the "Holdback Note"); and
(c) One Million Nine Hundred Thousand ($1,900,000) Dollars by
delivery to Seller at Closing of a promissory note in the form annexed hereto as
Exhibit 2.1(c) (the "Balance Note") (the "Balance Note" and the "Holdback Note,"
shall hereinafter be sometimes collectively referred to as the "Promissory
Notes").
2.2 Holdback. Purchaser and Seller agree to use all reasonable efforts to
--------
obtain written commitments from not less than thirty-five (35) CBB Stores to
convert to a Manhattan Bagel Store, a New World Coffee and Bagel Store or other
store operated pursuant to a license or franchise agreement with Purchaser, New
World or any of their Affiliates (an "Affiliated Store") (For purposes of this
Agreement, "Affiliate" of a party means any natural person, corporation,
business trust, joint venture, association, company, firm, partnership, or other
entity or government or governmental authority which, directly or indirectly,
controls, is controlled by or is under common control with such party)or to
purchase frozen bagel dough manufactured by, at the direction of, or pursuant to
recipes owned by Purchaser, New World or any of their Affiliates, ("Manhattan
Bagel Frozen Bagel Dough") from Purchaser or Purchaser's designated Affiliates
or distributors, on an on-going basis (a "Conversion") on terms comparable to
those provided to Affiliated Stores. Notwithstanding the foregoing, a Conversion
will not include a purchase of Manhattan Bagel Frozen Bagel Dough from a
franchisee of Manhattan Bagel, New World or its Affiliates, unless authorized by
Manhattan Bagel, New World or its Affiliates. At Closing, the parties agree that
Purchaser shall pay into escrow, pursuant to the terms and conditions of a
certain escrow agreement, substantially in the form annexed hereto as Exhibit
2.2, to be executed at Closing (the "Escrow Agreement"), an amount equal to Five
Hundred Thousand ($500,000) Dollars in cash. In addition to said Five Hundred
Thousand ($500,000) Dollars in cash, the Five Hundred Thousand ($500,000)
Dollars payable as principal pursuant to the Holdback Note, together, with all
interest accrued on such principal amount from the date of Closing through the
date of such payment, shall be subject to this Section 2.2. The said $1,000,000,
and the interest accrued thereon, is referred to as the "Holdback."
The Holdback shall be reduced by one-thirty fifth (1/35)
proportionately for each CBB Store that effects a Conversion which occurs
between Closing and the second anniversary of Closing (the "Measurement Date").
Conversion shall be deemed to have occurred when a CBB Store shall have
converted to an Affiliated Store or purchased Manhattan Bagel Frozen Bagel Dough
from Purchaser or Purchaser's designated Affiliates or distributors or suppliers
of Manhattan Bagel Frozen Bagel Dough for a period of thirty (30) days unless
Purchaser notifies Seller prior to the purchase of Manhattan Bagel Frozen Bagel
Dough by any CBB Franchisee, that such CBB Franchisee is purchasing Manhattan
Bagel Frozen Bagel Dough on a test basis (which test basis may continue up to
sixty (60) days), in which event the conversion shall be
4
<PAGE>
deemed to have occurred on the first day following the end of the test period if
the CBB Franchisee continues to purchase Manhattan Bagel Frozen Bagel Dough. The
reduction of the Holdback shall be allocated one-half to the cash held in escrow
and one-half to the Holdback Note. The principal of the Holdback Note shall be
reduced accordingly on or about the Measurement Date, and a new promissory note
with substantially the same terms and conditions contained in the Holdback Note
shall be executed by Purchaser (the "Reduced Holdback Note"). The Reduced
Holdback Note shall provide for reduced principal and interest payments based
upon the amortization over the term of the Holdback Note of the reduced
principal balance. Simultaneously with the execution of the Reduced Holdback
Note, Seller shall deliver to Purchaser the original executed Holdback Note
marked canceled. Accordingly, interest shall accrue and be paid on the new
principal balance as stated in the Reduced Holdback Note. Any payments
theretofore made shall be credited to interest with the balance credited to
principal payments next due under the Reduced Holdback Note. At the Measurement
Date, any cash then retained in escrow in accordance with the foregoing shall be
paid to Purchaser or its assigns.
Purchaser shall promptly provide or cause its distributor of Manhattan
Bagel Frozen Bagel Dough, Marriott Distribution Services ("Marriott"), to
provide to Seller, in writing, information on Manhattan Bagel Frozen Bagel Dough
delivered to any CBB Franchisee which continues for a period of thirty (30) days
commencing after Closing or one (1) day after any test period ("Delivery
Information"). The Delivery Information shall consist of the CBB Franchisee
name, address, delivery dates and quantity and dollar amounts of the delivered
Manhattan Bagel Frozen Bagel Dough. After the expiration of the thirty day
period (unless a test notice is in effect), neither Purchaser nor Marriott shall
provide further information to Seller regarding that CBB Franchisee.
Additionally, Purchaser shall provide Seller with information regarding a
conversion of a CBB Store to an Affiliated Store, promptly after the conversion
occurs. Seller and its representatives shall also have the right to audit the
books and records of Purchaser at all reasonable times with respect to sales of
Manhattan Bagel Frozen Bagel Dough to CBB Franchisees or other conversion and
Purchaser shall secure for Seller and its representatives the right, for the
sole purpose to determine Manhattan Bagel Frozen Bagel Dough purchases, or other
conversions, to inspect the restaurant of any such CBB Franchisee upon
reasonable notice.
2.3 Security, Guaranty. As security for the performance of the
------------------
Purchaser's obligations under the Promissory Notes, Purchaser shall grant Seller
a junior lien and security interest in and to the Purchased Assets pursuant to
the terms and conditions of a certain security agreement in the form annexed
hereto as Exhibit 2.3(A). (the "Security Agreement"). In addition, New World
shall guaranty the obligations of Purchaser under this Agreement, the Promissory
Notes and all other Agreements annexed hereto or executed pursuant hereto (such
Promissory Notes and other agreements collectively referred to as the "Operative
Agreements") in the form annexed hereto as Exhibit 2.3(B) (the "New World
Guaranty").
2.4 Allocation of Purchase Price. The Parties agree that the Purchase
----------------------------
Price shall be allocated among Purchased Assets in conformance with the
provisions of Section 1060 of the Internal Revenue Code, as amended (the "Code")
by Purchaser as set forth on Schedule 2.4. The Parties agree to report the
allocation of the Purchase Price in Code Form 8594 and, where
5
<PAGE>
required, in their respective Federal and State income tax returns in accordance
with Schedule 2.4.
2.5 Purchase Price Adjustment.
-------------------------
(a) Adjustment for Closed Stores. The cash portion of the Purchase
----------------------------
Price and the Balance Note (and each payment thereunder) shall be adjusted
proportionately at Closing for any of the seventy-six (76) CBB Stores listed on
Schedule 1.1(a) which closes subsequent to the execution of this Agreement and
prior to Closing (a "Closed Store"). The purchase price will be reduced by
multiplying five times the royalties received from such store for the previous
twelve (12) months prior to the execution of this Agreement ("Closed Store
Adjustment"). If a Closed Store reopens as an Affiliated Store within six months
after the Closing date and remains open for one (1) year thereafter ("Open
Period"), Purchaser shall promptly forward to Seller after the expiration of the
Open Period the Closed Store Adjustment.
(b) Adjustment for Collection of Transferred Accounts Receivable. In
------------------------------------------------------------
the event that the accounts receivable net of reserves that are reasonable with
respect to past CBB experience as of the Closing Date (the "Closing Accounts
Receivable") is less than Two Hundred Thousand ($200,000) Dollars (the
"Represented Accounts Receivable"), the cash portion of the Purchase Price shall
be adjusted in the amount of the difference between the Represented Accounts
Receivable and the Closing Accounts Receivable ("Accounts Receivable
Difference").
ARTICLE 2A
DOWNPAYMENT
-----------
Concurrently with the execution of this Agreement, Purchaser shall pay
Seller's Attorney One Hundred Fifty Thousand ($150,000) Dollars by wire transfer
(the "Downpayment"), to be held in escrow by Cohen Pollock Merlin Axelrod &
Tanenbaum, P.C., as escrow agent ("Escrowee").
2A.1 Downpayment in Escrow:
---------------------
(a) Escrowee shall hold the Downpayment in escrow in a segregated
bank account at Wachovia Bank, N.A. (the "Bank") until Closing or sooner
termination of this Agreement and shall pay over or apply the Downpayment in
accordance with the terms of this paragraph. Escrowee shall hold the Downpayment
in an interest-bearing account for the benefit of the parties. If interest is
held for the benefit of the parties, it shall be paid to the party entitled to
the Downpayment and the party receiving the interest shall pay any income taxes
thereon. The Federal Identification numbers of the parties shall be furnished to
Escrowee upon request.
(b) At Closing, the Downpayment shall be paid by Escrowee to Seller.
If for any reason Closing does not occur and either party gives Notice (as
defined in paragraph 10.5) to Escrowee demanding payment of the Downpayment,
Escrowee shall give prompt Notice to the other party of such demand, If Escrowee
does not receive Notice of objection from such other
6
<PAGE>
party to the proposed payment within 10 business days after the giving of such
Notice, Escrowee is hereby authorized and directed to make such payment. If
Escrowee does receive such Notice of objection within such 10 day period or if
for any other reason Escrowee in good faith shall elect not to make such
payment, Escrowee shall continue to hold such amount until otherwise directed by
Notice from the parties to this Agreement or a final, nonappealable judgment,
order or decree of a court.
(c) If Escrowee at any time, in its sole discretion, deems it
necessary or advisable to relinquish custody of the escrowed funds, it may do so
by delivering the same to any other escrow agent mutually agreeable to Purchaser
and Seller, and if no such escrow agent shall be selected, then Escrowee may do
so by delivering the escrowed funds (i) to any bank or trust company or First
American Title Insurance Company ("First American") located in the State of
Georgia, which is willing to act as escrow agent hereunder in place and instead
of Escrowee or (ii) to the clerk or other proper officer of a court of competent
jurisdiction as may be permitted under the terms and conditions of this
Agreement and by law within the State of Georgia. Seller and Purchaser shall pay
the fee of any such bank or trust company, or First American, or court officer
equally. Upon such delivery, Escrowee shall be discharged from any and all
responsibility or liability with respect to the Escrowed Funds except as herein
provided.
(d) The parties acknowledge that, Escrowee is holding the Downpayment
solely as a stakeholder at their request and for their convenience and that
Escrowee shall not be liable to either party for any act or omission on its part
unless taken or suffered in bad faith or in willful disregard of this contract
on the part of Escrowee. Seller and Purchaser jointly and severally agree to
defend, indemnify and hold Escrowee harmless from and against all costs, claims
and expenses (including reasonable attorneys' fees) incurred in connection with
the performance of Escrowee's duties hereunder, except with respect to actions
or omissions taken or suffered by Escrowee in bad faith or in willful disregard
of this Agreement on the part of Escrowee. Seller and Purchaser shall equally
reimburse Escrowee for its reasonable costs and expenses incurred in performing
its obligations hereunder.
(e) Escrowee may act or refrain from acting in respect of any matter
referred to herein in full reliance upon and with the advice of counsel which
may be selected by it (including any member of its firm) and shall be fully
protected in so acting or refraining from action upon the advice of such
counsel.
(f) Escrowee acknowledges receipt of the Downpayment and Escrowee's
agreement to the provisions of this paragraph by signing in the place indicated
on the signature page of this Agreement.
(g) Notwithstanding the foregoing, Escrowee or any member of its firm
shall be permitted to act as counsel for Seller in any dispute as to the
disbursement of the Downpayment or any other dispute between the parties whether
or not Escrowee is in possession of the Downpayment and continues to act as
Escrowee.
(h) Notwithstanding the foregoing, the provisions provided in this
7
<PAGE>
Article 2A.1 shall not apply and the Escrowee shall within one (1) business day
following receipt of evidence of such termination and satisfaction of any
requirements of the Bank, deliver to Purchaser the Downpayment plus any accrued
interest, without setoff or reduction to the escrowed funds, if the Agreement is
terminated pursuant to the provisions of paragraph 2A.2(a) and (b).
2A.2 Entitlement to Downpayment
--------------------------
(a) If Purchaser is not satisfied with its due diligence findings, in
its sole discretion, it may terminate this Agreement by delivering written
notice of termination to Seller on or before August 13, 1999. If Purchaser fails
to deliver such notice, the due diligence condition to Closing shall be deemed
satisfied and Purchaser shall be deemed to have waived any right to terminate
this Agreement based upon its due diligence findings.
(b) Unless otherwise provided for in this Agreement, Seller shall
prepare all Schedules required herein other than Schedule 2.4, which shall be
prepared by Purchaser and delivered to Seller on or before July 30, 1999 and
deliver such Schedules to Purchaser, together with true and correct copies of
any documents required to be attached thereto, on or before July 30, 1999.
Additionally, all Exhibits which are to be annexed to this Agreement and
executed at Closing shall be prepared by Purchaser or Seller, as agreed to by
the parties, and delivered to the other by July 30, 1999. Purchaser and Seller
shall examine each such Schedule and related documents and Exhibits delivered to
it, and on or before August 6, 1999, the recipient of such Schedule, related
documents or Exhibits shall notify the other party of any questions or comments,
it may have with respect thereto. All Schedules and Exhibits (as revised) must
be accepted and agreed to by Purchaser, New World and Seller not later than
August 13, 1999. At such time as the Schedules and Exhibits have been accepted
by all parties, Purchaser, New World, Seller and Purchaser shall execute and
deliver a Disclosure Statement in form and substance agreeable to Purchaser and
Seller (the "Disclosure Statement"), together with all Schedules and Exhibits
referred to therein (as approved by Purchaser) and upon such execution and
delivery, the Disclosure Statement and all Schedules and the Exhibits shall be
attached to and be made a part of this Agreement. In the event the Disclosure
Statement is not executed and delivered by Purchaser, New World and Seller and
the Schedules and Exhibits are not approved by Purchaser and Seller by August
13, 1999, this Agreement shall automatically terminate.
(c) The Downpayment will be applied as follows:
(i) In the event this Agreement is terminated pursuant to
paragraphs (a) and (b) of this Section 2A.2, Purchaser shall be entitled to an
immediate refund of the Downpayment.
(ii) If the Agreement does not terminate pursuant to paragraphs
(a) and (b) of this Section 2A.2 and the Closing occurs, the Downpayment shall
be applied towards the purchase price cash due at Closing.
(iii) If Seller refuses to close for any reason (other than a
material breach
8
<PAGE>
by Purchaser of this Agreement) or if Seller materially breaches this Agreement
and Purchaser declines to close, Purchaser shall be entitled to the return of
the Downpayment.
(iv) If Purchaser refuses to close on August 31, 1999 or another
date mutually agreed to between Seller and Purchaser and Seller is not in
material breach of this Agreement, Seller's sole remedy shall be to receive and
retain the Downpayment as liquidated damages, it being agreed that Seller's
damages in case of Purchaser's default might be impossible to ascertain and that
the Downpayment constitutes a fair and reasonable amount of damages under the
circumstances and is not a penalty.
ARTICLE 3
CLOSING
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3.1 Closing. The closing of the transactions hereunder (the "Closing")
-------
shall take place at the offices of Ruskin, Moscou, Evans & Faltischek, P.C., 641
Lexington Avenue, New York, NY 10022 on or before August 31, 1999. The day on
which the Closing actually takes place is herein sometimes referred to as the
"Closing Date."
3.2 Additional Covenants of Seller.
------------------------------
(a) For the period commencing upon the execution of this Agreement
and continuing until Closing (the "Due Diligence Period"), Seller covenants and
agrees that it will continue to conduct the business and operations of the
Business in the ordinary course as currently conducted and will not enter into
any contracts or agreements outside of the ordinary course of business and will
take no actions or forbear from taking actions which could result in a breach of
Seller's representations, warranties and covenants set forth herein. Without
limiting the generality of the foregoing, Seller shall adhere to the following
procedures with respect to Franchise Agreements. If to the Knowledge of Seller,
a CBB Franchisee is in material default of a Franchise Agreement (the "CBB
Material Default") and Seller desires to send a default and/or termination
notice to such CBB Franchisee, Seller shall promptly notify Purchaser of the CBB
Material Default. Notice of a CBB Material Default shall include the name, and
address of the CBB Franchisee, as well as any individual obligors to the
Franchise Agreement and the principal contacts of that CBB Franchisee. Seller
shall further reference the specific provisions of the Franchise Agreement,
under which the CBB Franchisee is in default and provide a copy of the
applicable Franchise Agreement. Seller shall provide copies to Purchaser within
five (5) days of receipt or transmittal thereof, of all correspondence and
documents related to the CBB default. Seller shall allow Purchaser to consult
with the CBB Franchisee to resolve the CBB Material Default, and shall take no
action for a period of at least thirty (30) days to allow such consultation to
proceed. Seller shall have a good faith obligation to consider any remedial
proposal, which results from such consultation before terminating the Franchise
Agreement.
(b) Seller covenants and agrees that it will provide Purchaser and
Purchaser's representatives with full access to Seller's books and records
related exclusively to the Business
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and all other documents related exclusively to the Business which Purchaser may
reasonably request to allow Purchaser to perform its due diligence.
(c) Seller covenants and agrees to provide to Purchaser on a weekly
basis commencing from the execution of this Agreement and continuing until
Closing, with a copy of (i) a CBB Partners In Good Standing Report, in the form
attached to Schedule 5.9 hereof, for the Scheduled Franchise Agreements (the
"Good Standing Report") for the previous week and (ii) a Transferred Receivables
Report for the Scheduled Franchise Agreements and the Additional Franchise
Agreements in the form included in Schedule 5.7 reflecting royalty, Ad Fund and
note payments more than thirty (30) days past due as of the last day of the
previous week (a "Transferred Receivables Report") and (iii) a report reflecting
sales reported by CBB Franchisees or estimated by Seller for the previous week,
on a store by store basis and the royalties payable with respect to such
reported or estimated sales and any cash collected from the CBB Franchisees for
the previous week on a store by store basis.
(d) Seller covenants and agrees that it will provide Purchaser and
Purchaser's representatives with full access to Seller's employees named on a
list delivered by Seller to Purchaser on this same date, who are involved in and
have knowledge of matters related to the CBB Franchisees for the purpose of
evaluating and negotiating with such employees for employment by Purchaser
following the Closing, subject to the restrictive covenant set forth in Section
8(c).
(e) Seller will permit Purchaser to interview the CBB Franchisees
after an announcement, in manner and substance acceptable to Seller and
Purchaser, respecting the transaction contemplated hereby has been made to the
CBB Franchisees, which will be made within one (1) business day after the date
this Agreement is executed, subject to the restrictive covenant set forth in
Section 8(c).
(f) Seller shall have in its Advertising Fund, as of the Closing, all
sums theretofore paid by CBB Franchisees to Seller for deposit in the
Advertising Fund, less only bona fide expenditures for advertising and related
expenses which are consistent with the Franchise Agreements and the normal
course of business of Seller and a detailed accounting of the same shall be
provided to Purchaser.
(g) Seller shall deliver to Purchaser by July 30, 1999, at the
address provided in paragraph 10.5 legible copies of the Scheduled Franchise
Agreements, and the Vendor Agreements. Seller shall deliver to Purchaser by
August 2, 1999, at the address provided in paragraph 10.5 legible copies of the
Additional Franchise Agreements, to the extent available. All of the Purchased
Assets will be made available to Purchaser during Purchaser's due diligence
investigation.
3.3 Conditions to Closing of Purchaser. The obligation of Purchaser to
----------------------------------
purchase the Purchased Assets is subject to the satisfaction of each of the
following conditions, any of which may be waived by Purchaser:
10
<PAGE>
(a) All representations and warranties made by Seller pursuant to
this Agreement shall be true and correct in all material respects when made and
remain in all material respects true and correct as of the Closing Date.
(b) Seller shall have performed or observed all covenants, agreements
and obligations in all material respects at or before the Closing and all
documents or instruments required to be delivered by Seller to the Purchaser at
or prior to Closing shall have been delivered.
(c) Purchaser shall have received a certificate dated the Closing
Date signed by Seller to the effect that the conditions specified in (a) and (b)
above have been satisfied.
(d) Seller shall have received the written consent of its lenders and
the holders of any debt instruments issued by Seller, if required.
(e) Except as set forth on Schedule 5.21, no litigation has been
commenced or threatened relating to the transactions contemplated hereby, the
effect of which would be materially adverse to the Business.
(f) The Purchased Assets shall be free and clear of all mortgages,
pledges, liens, security interests, claims and/or encumbrances of every
description.
3.4 Conditions to Closing of Seller. The obligations of Seller to sell the
-------------------------------
Purchased Assets is subject to the satisfaction of each of the following
conditions, any of which may be waived by Seller:
(a) All representations and warranties made by Purchaser pursuant to
this Agreement shall be true and correct in all material respects when made and
remain in all material respects true and correct as of the Closing Date.
(b) Purchaser shall have performed or observed all covenants,
agreements and obligations in all material respects at or before the Closing and
all documents or instruments required to be delivered by Purchaser to Seller at
or prior to Closing shall have been delivered.
(c) Seller shall have received a certificate dated the Closing Date
signed by Purchaser to the effect that the conditions specified in (a) and (b)
above have been satisfied.
(d) No litigation has been commenced or threatened relating to the
transactions contemplated hereby, the effect of which would be materially
adverse to Seller.
(e) Purchaser shall have received the written consent of its lenders
and the holders of any debt instruments issued by Purchaser, if required.
3.5 Joinder of New World. New World is a party to this Agreement only with
--------------------
respect to Articles 2(A), Sections 4.2(f) and (j), Section 6.2 and Articles 7,
and 8 and Section 10.16.
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<PAGE>
ARTICLE 4
OBLIGATIONS AT CLOSING
----------------------
4.1 Obligations of Seller at Closing. At Closing, Seller shall deliver to
--------------------------------
Purchaser the following:
(a) a Bill of Sale, duly executed by Seller's authorized officer,
together with such other documents of conveyance, assignment and transfer, all
in form and substance satisfactory to Purchaser and its counsel, as shall be
required to vest in Purchaser good and marketable title to the Purchased Assets
free and clear of all liens, encumbrances and claims of every description;
(b) assignments to Purchaser of the Transferred Agreements, in form
and substance reasonably satisfactory to Purchaser and its counsel, together
with all required consents to such assignments;
(c) all material documents (including, without limitation, the
Transferred Agreements), files, Good Standing Reports and Transferred Receivable
Reports, disks containing computer records, paper copies of all such data, and
other data and documents pertaining primarily or exclusively to the Business
including, without limitation, accounting books and records of Seller, relating
exclusively to the Purchased Assets;
(d) trademark and copyright assignments in statutory form;
(e) assignments of all trademarks included in the Intellectual
Property in such form as is required for recordation by the United States Patent
and Trademark Office;
(f) a certificate of good standing of Seller issued by the Secretary
of State of Minnesota and dated within thirty days of the Closing Date;
(g) a certificate, dated the Closing Date, of the Secretary or
Assistant Secretary of Seller certifying the resolutions adopted by the Board of
Directors of Seller approving the execution and delivery of this Agreement and
the consummation of the transactions contemplated under this Agreement;
(h) an opinion of counsel for Seller dated the Closing Date, in form
annexed hereto as Exhibit 4.1(i);
(i) the Escrow Agreement, duly executed by Seller;
(j) the Security Agreement, duly executed by Seller; and
(k) Intentionally Omitted;
---------------------
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(l) the certificate required by section 3.3(c);
(m) a Franchise Agreement in the form currently used by Seller for
CBB Franchisees, permitting Seller to operate a Chesapeake Bagel Bakery
Restaurant, in the manner currently operated by Seller at the Perimeter Village
Shopping Center (the "Perimeter Store") in Atlanta, Georgia and in Waldorf,
Maryland (the "Waldorf Store"); provided, however, that in no event shall Seller
be required to make an initial franchise\license fee payment, but shall be
responsible for all other payments and obligations of a CBB Franchisee.
Notwithstanding the foregoing, Seller shall have the right to close the Waldorf
Store and/or the Perimeter Store and terminate the Franchise Agreement, upon
written notice to Purchaser, within nine (9) months following the Closing,
without monetary penalty, but subject to those provisions which survive a
termination of a Franchise Agreement including but not limited to restrictive
covenants contained in the Franchise Agreement.
(n) any and all such other documents, agreements, certificates and
instruments required to be executed and/or delivered by Seller to Purchaser, and
all payments (if any) required to be made, pursuant to the terms and provisions
of this Agreement.
4.2 Obligations of Purchaser at Closing. At Closing, Purchaser shall
-----------------------------------
deliver to Seller the following:
(a) One Million Nine Hundred Thousand ($1,900,000) Dollars less the
deposit previously paid as per Article 2A of this Agreement by wire transfer to
Seller and Five Hundred Thousand ($500,000) Dollars by wire transfer to the
Escrow Agent in the Escrow Agreement;
(b) the Promissory Notes duly executed by Purchaser;
(c) the Escrow Agreement, duly executed by Purchaser;
(d) the Security Agreement, duly executed by Purchaser;
(e) a certificate, dated the Closing Date, of the Secretary of
Purchaser certifying the resolutions adopted by the Board of Directors of
Purchaser approving the execution and delivery of this Agreement and the
consummation of the transactions contemplated under this Agreement;
(f) a certificate, dated the Closing Date, of the Secretary of New
World certifying the resolutions adopted by the Board of Directors of New World
approving the execution of the Guaranty and this Agreement;
(g) an opinion of counsel for Purchaser dated the Closing Date, in
the form annexed hereto as Schedule 4.2(g);
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<PAGE>
(h) any and all such other documents, agreements, certificates and
instruments required to be executed and/or delivered by Purchaser, and all
payments required to be made, pursuant to the terms and provisions of this
Agreement;
(i) appropriate UCC-1 Financing Statements duly executed by
Purchaser;
(j) the New World Guaranty, duly executed by New World;
(k) an assumption of the obligations of Seller under the Transferred
Agreements and the Ad Fund Liabilities duly executed by Purchaser;
(l) certificates of good standing of Purchaser and New World, issued
by the Secretaries of State of their respective states of incorporation and
dated within thirty days of the Closing Date;
(m) any and all such other documents, agreements, certificates and
instruments required to be executed and/or delivered by Purchaser to Seller, and
all payments (if any) required to be made, pursuant to the terms and provisions
of this Agreement.
(n) a certificate duly executed by Purchaser and New World,
certifying that they have no actual knowledge of Seller's breach of any
representation or warranty contained in this Agreement in the form of Exhibit
4.2(n) attached hereto.
(o) the certificate required by Section 3.4(c).
4.3 Further Assurances. At any time and from time to time after the
------------------
Closing, at Purchaser's request and without further consideration, Seller will
execute and deliver such other instruments of sale, transfer, conveyance,
assignment and delivery and take such action as Purchaser may reasonably deem
necessary or desirable in order to more effectively transfer, convey, assign and
deliver to Purchaser and to confirm Purchaser's title to, all of the Purchased
Assets, to put Purchaser in actual possession and operating control thereof and
to assist Purchaser in exercising all rights with respect thereto.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller represents and warrants to Purchaser as follows:
5.1 Organization and Good Standing of Seller. Seller is a corporation duly
----------------------------------------
organized, validly existing and in good standing under the laws of the State of
Minnesota. Seller has all requisite corporate power and authority, licenses,
permits and franchises to own, lease and operate its properties and assets and
to carry on the Business as currently conducted. Seller is qualified and in good
standing to do business as a foreign corporation in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it
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<PAGE>
makes such qualification necessary, except where the failure to so qualify would
not have a material adverse effect on the Business or the Purchased Assets.
5.2 Authorization of Agreement and Enforceability. Seller has full
---------------------------------------------
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly and validly
authorized, executed and delivered by Seller and (assuming the valid execution
and delivery of the Agreement by Purchaser) constitutes a legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with its
terms. Each of the Operative Agreements has been duly and validly authorized and
upon the execution and delivery thereof, will be duly and validly authorized,
executed and delivered by Seller (and assuming the valid execution and delivery
of the Operative Agreement by Purchaser) will constitute a legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with its
terms.
5.3 Effect of Agreement. Neither the execution, delivery and performance
-------------------
of this Agreement by Seller, nor the consummation by Seller of the transactions
contemplated hereby will (a) conflict with or result in a breach of any
provision of Seller's Certificate of Incorporation or By-laws, (b) constitute or
result in the breach of, conflict with or give rise to a right of forfeiture,
termination, cancellation or acceleration with respect to, any term, condition
or provision of, any note, bond, mortgage, indenture, license or other contract
or obligation to which Seller is a party or by which it or any of the Purchased
Assets may be bound, including, but not limited to, the Transferred Agreements,
except for such conflicts, breaches or defaults as to which written waivers or
consents have been obtained, or will be obtained prior to Closing, or (c)
violate in any material respect any law, statute, regulation, judgment, order,
writ, injunction, or decree applicable to Seller, the Business or any of the
Purchased Assets.
5.4 Government and Other Consents. Except as set forth on Schedule 5.4, no
-----------------------------
consent, order, authorization, qualification, or approval of, or exemption by,
or filing with any governmental, public, or regulatory body or authority is
required in connection with the execution, delivery and performance by Seller of
this Agreement.
5.5 Books and Records. All financial, business and accounting books,
-----------------
ledgers, accounts and official and other records relating to the Business
("Business Records") have been made available to Purchaser and its
representatives. Such Business Records prepared by Seller, Seller's Affiliates,
employees, directors, officers, agents or representatives ("Seller's
Representatives") have been substantially, properly and accurately kept and are
complete in all material respects, and there are no material inaccuracies or
discrepancies of any kind contained or reflected therein. No representation or
warranty is made as to the completeness or accuracy of any reports, books, or
other records prepared by ABC or any other third party other than a Seller
Representative ("Third Party Reports") or any information in Seller's books and
records which is based upon any such Third Party Reports, except that Seller
represents that its Business Records accurately reflect any information
contained in the Third Party Reports provided to Seller.
5.6 Financial Statements. Attached to Schedule 5.6 are copies of Seller's
--------------------
(i) statement of cash flow for sales and royalties collected, all on a store by
store basis, for the
15
<PAGE>
fiscal years ending in December, 1997 and December, 1998, and for six four week
periods ending in June, 1998 and June, 1999; and (ii) and on a store by store
basis, an accounting of the Advertising Fund, an aged accounts receivable for
the Advertising Fund for the Scheduled Franchise Agreements; and a list of all
outstanding unpaid bills and all outstanding financial commitments not billed by
vendors or suppliers, as of July 20, 1999 (collectively, the "Financial
Statements"). The Financial Statements correctly and completely reflect Seller's
books and records, and are accurate and complete in all material respects for
the periods indicated and the available cash in the Advertising Fund account is
sufficient to cover all outstanding bills and commitments. The Financial
Statements with respect to sales figures are accurate and complete in all
material respects for the periods indicated, assuming the sales figures received
by Seller from the CBB Franchisees are accurate and assuming any Third Party
Reports relied on for the preparation of the Financial Statements are accurate.
Seller does not make any representations as to the accuracy of the sales figures
prepared by the CBB Franchisees or information provided in any Third Party
Reports.
5.7 Receivables. All of the Transferred Receivables listed in Schedule
-----------
5.7, result from the sale of inventory, and services in the ordinary course of
business and are net of reserves that are reasonable with respect to past CBB
experience. Except for any amounts owed by the parties to any bankruptcy
proceeding described in Schedule 5.21, Seller has no knowledge that such
Transferred Receivables are not collectible in the full amount thereof in the
ordinary course of business, but Seller does not warrant the collectability
thereof.
5.8 Title to Properties; Encumbrances. Other than as set forth on
---------------------------------
Schedule 5.8, Seller does not own any real property or have any lease or other
interest in real property related exclusively to the Business. Except as set
forth on Schedule 5.8, Seller has good title to all of the Purchased Assets.
Except as set forth on Schedule 5.8, none of the Purchased Assets is subject to
any mortgage, pledge, lien, security interest, encumbrance or charge of any
kind. Except as set forth on Schedule 5.8, Seller does not use exclusively in
the Business any assets owned by a shareholder or Affiliate of Seller.
5.9 Agreements. Schedules 1.1(a) and 1.1(e) contain an accurate and
----------
complete list of the Scheduled Franchise Agreements and the Vendor Agreements.
Except as set forth on Schedule 5.9, each agreement set forth in Schedules
1.1(a) and 1.1(e) is in full force and effect; with respect to the Scheduled
Franchise Agreements, there are no payments more than thirty (30) days past due
as of July 19, 1999, and Seller has not issued a default notice which has not
been cured as of the date of this Agreement. Included in Schedule 5.9 is a true
and correct copy of the Good Standing Report as of July 22, 1999.
5.10 Business Practices. Seller has not, with respect to the Business,
------------------
made, offered or agreed to offer anything of value to any government official,
political party or candidate for government office nor have any of them taken
any action which would be in violation of the Foreign Corrupt Practices Act of
1977 or any anti-boycott or export laws.
5.11 Employees, Etc. Schedule 5.11 is a complete and accurate list of the
--------------
name of each employee of Seller whom Seller utilizes on a full-time basis in the
conduct and operation of
16
<PAGE>
the Business who received any form of compensation from Seller since January 1,
1999, and all compensation received by any such person since such date, and any
accruals for or commitment or agreement by Seller to pay compensation. Except as
set forth on Schedule 5.11, none of such persons has, in writing or to the
knowledge of Seller verbally, threatened, informed or otherwise indicated to
Seller or any officer or director of Seller that he or she plans to cancel or
otherwise terminate his or her relationship with Seller.
5.12 Employment Arrangements. Seller does not have any obligation,
-----------------------
contingent or otherwise, applicable to any employee listed on Schedule 5.11
under any employment agreement, collective bargaining or other labor agreement,
any agreement containing severance or termination pay arrangements, deferred
compensation agreement, retainer or consulting arrangement, pension or
retirement plan, bonus or profit-sharing plan, stock option or purchase plan or
other employee contract or non-terminable (whether with or without penalty)
arrangement, group, life, health, medical or hospitalization insurance plan or
program or other employee or fringe benefit plan, including vacation plans or
programs and sick leave plans or programs, or other agreement relating to the
persons listed on Schedule 5.11, other than those set forth on Schedule 5.12.
Seller has performed all of its material obligations required to be performed by
it under all such agreements, plans and arrangements, if any, and to the
knowledge of Seller, no party thereto is in breach of or in default or arrears
in any respect under any of the provisions thereof.
5.13 Employee Relations. All references to employees in this Section 5.13
------------------
shall apply only to those employees listed on Schedule 5.11. Seller is in
compliance in all material respects with all Federal, state or other applicable
laws, domestic or foreign, respecting employment and employment practices, terms
and conditions of employment and wages and hours, and has not and is not engaged
in any unfair labor practice. No unfair labor practice complaint against Seller
is pending before the National Labor Relations Board or is threatened. No labor
strike, picket, dispute, slowdown, stoppage or other labor trouble has ever
occurred or is pending or, to the knowledge of Seller, threatened against or
involving Seller. To the knowledge of Seller, no union representation question
exists respecting the employees. No grievance or any arbitration proceeding is
pending and, to the knowledge of Seller, no such claim has been asserted or is
threatened. No collective bargaining agreement is currently being negotiated by
Seller. Except as disclosed on Schedule 5.13, no claim of discrimination or
harassment is pending or, to the knowledge of Seller, threatened before the
Equal Employment Opportunity Commission, or any other judicial or administrative
body or agency.
5.14 Contracts and Commitments. Schedule 5.14 sets forth all of the
-------------------------
following contracts and commitments and obligations of, or which relate to, the
Business, written or otherwise, to which Seller is a party or by or to which it
or its assets or properties are bound or subject (although such Schedule 5.14
excludes the Transferred Agreements):
(a) all contracts and other agreements containing covenants of Seller
not to compete related to the Business or with any person in any geographical
area (or not to solicit or accept any business) or covenants of any other person
other than terminated CBB Franchisees
17
<PAGE>
not to compete with Seller in the Business or in any geographical area (or not
to solicit or accept any business);
(b) all purchase orders, contracts and commitments for the purchase
or sale of any goods or services to or by Seller or any Affiliate of Seller
related to the Business including, but not limited to, any required coffee
purchases by a CBB Franchisee from Seller or an Affiliate of Seller, except for
those orders, contracts and commitments which are less than $10,000 in amount or
which cannot be cancelled at will by Seller without penalty or premium; and
(c) all contracts, commitments and other agreements with distributors
or suppliers for the sharing of fees, the rebating of charges or other similar
arrangements;
(d) all contracts, commitments and other agreements containing
obligations or liabilities of any kind to any Affiliate of Seller;
5.15 Operation of Business. Except for modifications thereto arising in
---------------------
the ordinary course of business, Seller has conducted the Business substantially
in accordance with the Chesapeake Bagels, Bakery & Cafe, Revised Business Plan,
dated December 5, 1998, a copy of which is annexed hereto as part of Schedule
5.15. Except as set forth on Schedule 5.15, since January 1, 1999, Seller has
not done any of the following with respect to the Business:
(a) for those employees listed in Schedule 5.11, entered into or
amended any employment agreement, entered into or amended any agreement with any
labor union or association representing any employee, adopted, entered into, or
amended any employee benefit plan, or made any change in the actuarial methods
or assumptions used in funding any defined benefit pension plan, or made any
change in the assumption or factors used in determining benefit equivalencies
thereunder;
(b) gave or agreed to give any special payment terms or arrangements
related to Scheduled Franchise Agreements which were not consistent with prior
practice or which were outside the ordinary course of business;
(c) sent, or to the knowledge of Seller received any written
information threatening to terminate or failing to renew any of the Scheduled
Franchise Agreements or Vendor Agreements; or
(d) except in the ordinary course of business, entered into any other
material contract, agreement or transaction related to the Business.
5.16 Intentionally Omitted.
----------------------
5.17 Compliance with ERISA.
---------------------
18
<PAGE>
(a) Schedule 5.17 sets forth a complete and correct list of all
"employee pension benefit plans" and "employee benefit plans" as defined
respectively in Sections 3(2) and 3(3) of ERISA, including "multiemployer plans"
as defined in Section 3(37) of ERISA, and any other pension, profit sharing,
retirement, deferred compensation, vacation, severance, disability,
hospitalization, medical insurance or other employee benefit plan or program, if
any, which Seller or any other entity which constitutes part of a "controlled
group" (within the meaning of Section 4001(b) of ERISA and/or Sections 414(b),
(c), (m) or (o) of the Code and the Treasury Regulations issued thereunder)
which Seller maintains or to which Seller has any present or future obligation
to contribute relating to employees of the Business listed on Schedule
5.11(collectively, the "Seller Plans").
(b) Seller is in compliance in all material respects with the
requirements prescribed by any and all statutes, orders, governmental rules or
regulations applicable to the Seller Plans and all reports and disclosures
relating to the Seller Plans required to be filed with or furnished to
governmental agencies, participants or beneficiaries prior to the date of this
Agreement have been filed in accordance with applicable law.
(c) Seller, as of the date of this Agreement, has not completely or
partially withdrawn from any "multiemployer plan" within the meaning of the
Multiemployer Pension Plan Amendments Act of 1990. Seller has not suffered a
seventy (70%) percent decline in "contribution base units" (within the meaning
of ERISA Section 4205(b)(1)(A)) in any plan year beginning after 1979.
(d) There are no actions, audits, suits or claims pending (other than
routine claims for benefits) or threatened, against any of the Seller Plans or
any fiduciary of any of the Seller Plans or against the assets of any of the
Seller Plans.
(e) The consummation of the transactions contemplated hereby will not
accelerate any liability under any of the benefit plans because of an
acceleration of any rights or benefits to which employees may be entitled
thereunder.
5.18 Tax Matters. Seller has duly and timely filed all federal, state,
-----------
local and other tax and information returns required to be filed by it with
regard to any income, sales, use, gross receipts, property, employment and other
taxes, charges, levies or other assessments related to the Business or the
Purchased Assets, or has filed for appropriate extensions of time to file same
and has duly paid in full or made adequate provision for all taxes and other
charges shown as due on such returns or which otherwise have been accrued or
have become due prior to the date hereof whether or not shown on any such
return. Seller has received no notice of any claim or claims for additional
taxes, which are claimed to be due from it by Federal, state, local or foreign
taxing authorities in connection with such reports or returns. There are no
liens for Federal, state, local or foreign taxes, assessments or government
charges or levies upon any of the Business or the Purchased Assets.
5.19 Intellectual Property. Schedule 1.1(d) contains a list of all
---------------------
Intellectual Property of the Seller, which is owned, licensed, utilized or
useful in the Business together with
19
<PAGE>
registration numbers and applications therefor. Seller is the owner of such
registrations and applications free and clear of all liens, other than those,
which shall be removed at Closing. Seller has not received any notice that the
validity of the Intellectual Property or Seller's interest therein is being
challenged by any third party, and except as set forth in Schedule 5.19, to
Seller's knowledge, no third party is infringing any of the Intellectual
Property. There are no restrictions on the transfer of the Intellectual Property
pursuant to this Agreement, except for liens, which will be released at Closing.
Seller has not heretofore granted any licenses or conveyed any other rights or
interests to any of the Intellectual Property, except as expressly set forth in
the Transferred Agreements and as security for loans, which security interest
shall be released at Closing. Except as set forth on Schedule 5.19, to the
knowledge of Seller, the operation of the Business as currently conducted does
not nor does the Intellectual Property, to the knowledge of Seller, infringe
upon any trademarks or other intellectual property rights of any third party.
5.20 Permits, Licenses, Compliance with Laws. Seller has all permits,
---------------------------------------
licenses, orders, consents and approvals of federal, state, local or foreign
governmental or regulatory bodies that are required in order to permit Seller to
carry on the Business as currently conducted. Schedule 1.1(h) sets forth a
correct and complete list of all such permits, licenses, orders and approvals,
all of which are in full force and effect, and Seller has not received a notice
threatening suspension or cancellation of any of them, and to Seller's
knowledge, no cause exists for such suspension or cancellation. To Seller's
knowledge, the Business has been and is being conducted in accordance and in
material compliance with all applicable federal, state, local or foreign laws,
codes, ordinances, rules and regulations. All disclosure documents utilized by
Seller in the conduct of the Business are accurate and complete in all material
respects, have received requisite approval of governmental authorities and have
been properly delivered by Seller to CBB Franchisees.
5.21 Litigation. Except as set forth in Schedule 5.21, there is no claim,
----------
action, suit, proceeding, arbitration, investigation or inquiry pending or to
Seller's knowledge threatened before any Federal, state, local, or other court
or governmental, administrative, or self-regulatory body or agency, or any
private arbitration tribunal relating to the Business, any of the Purchased
Assets or the transactions contemplated by this Agreement; nor, to Seller's
knowledge, is there any basis for any such claim, action, suit, proceeding,
arbitration, investigation or inquiry. To Seller's knowledge, Seller is not in
material default under any order, license, regulation or demand of any federal,
state or local, or other court or governmental, administrative or self-
regulatory body or agency, which relates to the Business.
5.22 CBB Franchisees. Except as set forth on Schedule 5.22, to Seller's
---------------
Knowledge, as of the date of this Agreement, there exists no material default by
any CBB Franchisee under any material agreement to which it is a party other
than the Transferred Agreements.
5.23 Intentionally Omitted.
---------------------
5.24 Broker. No broker, finder, agent or other intermediary has acted on
------
behalf of Seller or otherwise assisted in bringing about the transactions
contemplated by this Agreement
20
<PAGE>
and no broker, finder, agent or other intermediary is entitled to any commission
or finder's fee in respect thereof based in any way on agreements,
understandings or arrangements with or the conduct of Seller.
5.25 Material Information; Full Disclosure. To Seller's knowledge, this
-------------------------------------
Agreement and any other certificate, document, agreement or information
furnished (including, without limitation, any schedule hereto) or to be
furnished pursuant to this Agreement by Seller to Purchaser do not contain and
will not contain any untrue statement of a material fact or omit or will omit to
state a material fact required to be stated herein or therein or necessary to
make the statements herein or therein not misleading. Except as set forth in
Schedule 5.25, there is no fact, development or threatened development which has
not been disclosed to Purchaser in writing which adversely affects or, so far as
Seller can now foresee, may adversely affect, the business, operations, assets,
properties, prospects or condition (financial or otherwise) of Seller.
5.26 Knowledge of Seller. Whenever used herein, the term "Knowledge of
-------------------
Seller" or to "Seller's knowledge" or other references to the knowledge of
Seller shall mean the actual knowledge of Mark Rinna, Gregg Kaplan, Milton
Castillo, Charles Hyslop and Sam Frankel.
5.27 Knowledge of Purchaser. Whenever used herein, the term "Knowledge of
----------------------
Purchaser" or to "Purchaser's Knowledge" or other references to the knowledge of
Purchaser, shall mean the actual knowledge of Sanford Nacht, R. Ramin Kamfar,
Michael Lubitz, and Jerold E. Novack.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser represents and warrants to Seller as follows:
6.1 Organization and Good Standing of Purchaser. Purchaser is a
-------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of New Jersey. Purchaser has all requisite corporate power and
authority to make the representations, warranties and agreements made hereunder,
to own, lease and operate its properties and assets and to carry on its business
as currently conducted, to execute and deliver this Agreement and to perform its
obligations under this Agreement.
6.2 Authorization of Agreement and Enforceability. Purchaser and New
---------------------------------------------
World represent and warrant that Purchaser and New World have full corporate
power and authority to execute and deliver this Agreement and the Operative
Agreements and to perform their respective obligations hereunder and thereunder.
This Agreement has been duly and validly authorized, executed and delivered by
Purchaser and New World (assuming the valid execution and delivery of the
Agreement by Seller) constitutes a legal, valid and binding obligation of
Purchaser and New World, enforceable against Purchaser and New World in
accordance with its terms. Each of the Operative Agreements has been duly and
validly authorized by Purchaser and New World and upon the execution and
delivery thereof at Closing, will constitute a legal, valid
21
<PAGE>
and binding obligation of Purchaser or New World, as the case may be,
enforceable against Purchaser or New World in accordance with its terms.
6.3 Effect of Agreement. Neither the execution, delivery and performance
-------------------
of this Agreement by Purchaser, nor the consummation by Purchaser of the
transactions contemplated hereby will (a) conflict with or result in a breach of
any provision of Purchaser's Certificate of Incorporation or By-Laws, (b)
constitute or result in the breach of, conflict with or give rise to a right of
termination, cancellation or acceleration with respect to, any term, condition
or provision of, any note, bond, mortgage, indenture, license or other contract
or obligation to which Purchaser is a party or by which it or any of its
properties or assets may be bound, except for such conflicts, breaches or
defaults as to which written waivers or consents have been obtained, or (c)
violate any law, statute, regulation, judgment, order, writ, injunction, or
decree applicable to Purchaser or any of its properties or assets.
6.4 Government and Other Consents. No consent, order, authorization,
-----------------------------
qualification, or approval of, or exemption by, or filing with any governmental,
public, or regulatory body or authority is required in connection with the
execution, delivery and performance by Purchaser of this Agreement.
6.5 Broker. No broker, finder, agent or other intermediary has acted on
------
behalf of Purchaser or otherwise assisted in bringing about the transactions
contemplated by this Agreement and no broker, finder, agent or other
intermediary is entitled to any commission or finder's fee in respect thereof
based in any way on agreements, understandings or arrangements with or the
conduct of Purchaser.
ARTICLE 7
INDEMNIFICATION
---------------
7.1 Indemnification by Seller. (a) Seller hereby agrees that,
-------------------------
notwithstanding the Closing and the sale of the Purchased Assets provided for
herein, Seller will indemnify and hold Purchaser (and any assignee) harmless
from, against and in respect of any damages for and all claims, losses,
liability, cost or expenses, (including, without limitation, reasonable
attorneys' fees and other costs and expenses incident to any suit, action or
proceeding) suffered or incurred by Purchaser by reason of: (i) any inaccuracy
in any representation or the breach of any warranty made by Seller herein or in
any Operative Agreement, (ii) any failure of Seller to duly perform or observe
any term, provision, covenant, agreement, or condition herein or in any
Operative Agreement on the part of Seller to be performed or observed, and (iii)
any liability or obligation accruing with respect to the Purchased Assets or the
conduct of the Business at any time prior to the Closing.
7.2 Indemnification by Purchaser. Purchaser and New World hereby jointly
----------------------------
and severally agree to indemnify and hold Seller and any assignee harmless from,
against and in respect of any and all claims, losses, liability, damages, costs
or expenses (including, without limitation, reasonable attorneys' fees and other
costs and expenses incident to any suit, action or
22
<PAGE>
proceeding) suffered or incurred by Seller by reason of (i) any inaccuracy in
any representation or the breach of any warranty made by Purchaser or New World
herein or in any Operative Agreement; (ii) any failure of Purchaser or New World
to duly perform or observe any term, provision, covenant, agreement, or
condition herein or in any Operative Agreement on the part of Purchaser or New
World to be performed or observed; and (iii) any liability or obligation
accruing with respect to the Purchased Assets or the conduct of the Business at
any time subsequent to the Closing.
7.3 Limitation of Liability. None of the Parties shall assert any claim
-----------------------
for indemnification under Sections 7.1 or 7.2 until the aggregate amount of all
claims of such party against the other party under this Agreement, exceeds Fifty
Thousand ($50,000) Dollars provided, however, that once the claims exceed such
Fifty Thousand ($50,000) Dollars, the indemnifying party shall be liable for all
valid claims, in excess of such Fifty Thousand ($50,000) Dollars. The Parties'
aggregate liability to each other under this Section 7 shall be limited to the
Purchase Price as reduced in accordance herewith; provided, however, that no
such limit shall apply if the claim arose out of, resulted from, or related to,
directly or indirectly the fraud of the respective Party.
7.4 Right of Set-off. In addition to any remedies available to Purchaser,
----------------
Purchaser shall have a right to set-off against any obligation of Purchaser to
Seller under this Agreement, including without limitation, any payment due after
the Closing Date pursuant to the Promissory Note; or the Escrow Agreement. If
any claim for indemnification is pending at a time when a payment is to be made
to Seller under the Promissory Notes and/or the Escrow Agreement, Purchaser may
deposit an amount equal to the amount of such claim with First American Title
Company as Escrow Agent, and pursuant to the terms of the Escrow Agreement
("Dispute Trust") until the claim is resolved as set forth herein. Seller and
Purchaser shall equally bear all costs and expenses associated with, related to,
or arising out of the Dispute Trust. If Purchaser has claims (including a claim
or claims which are not subject to the Cap) in the aggregate in excess of the
Purchase Price limit set forth in paragraph 7.3 (the "Cap"), Purchaser shall
first exercise its right of set-off prior to seeking cash payments from Seller.
Notwithstanding the foregoing, in no event shall Purchaser waive its rights to
seek equitable relief.
7.5 No Waiver. No failure or delay on the part of either party in
---------
exercising any right, power or remedy under this Agreement, or available to such
party at law or in equity shall operate as a wavier of such right, power or
remedy, nor shall any single or partial exercise of any such right, power or
remedy preclude any or further exercise thereof or the exercise of any other
right, power or remedy available to such party. Subject to the limitations of
Section 7.3, the remedies provided in this Agreement are cumulative and not
exclusive of any remedies available to any Party at law or equity.
7.6 Third Party Claims.
------------------
23
<PAGE>
(a) In case of the assertion in writing of any claim initiated or
asserted by any person, firm, governmental authority or corporation other than
Purchaser or any Affiliate of Purchaser (a "Third Party Claim") or the
commencement of any litigation asserting a Third Party Claim which may give rise
to any indemnification obligation of Seller to Purchaser under the provisions of
this Article 7, Purchaser shall give notice thereof as provided hereunder as
promptly as practicable after Purchaser's receipt of such written assertion or
the commencement of such litigation. Seller may at its sole cost and expense,
upon written notice given to Purchaser within fifteen (15) days after its
receipt of Purchaser's notice under this Section 7.6, assume the defense, of any
such Third Party Claim or litigation. If Seller assumes the defense of any such
claim or litigation, the obligations of Seller hereunder as to such claim or
litigation shall include taking all steps it reasonably deems necessary in the
defense or settlement thereof and to holding Purchaser harmless from and against
any and all losses, liabilities, expenses and damages, and Purchaser shall make
available to Seller such books and records in Purchaser's possession as Seller
may reasonably require in connection with such defense. Except with the express
prior written consent of Purchaser, Seller shall not consent to the settlement
or entry of any judgment arising from any such claim or litigation which in each
case does not include as an unconditional term thereof the giving by the
claimant or plaintiff, as the case may be, to Purchaser of an unconditional
release from all liability in respect thereof. Purchaser shall be entitled to be
consulted about (but not control) the defense of, and receive copies of all
pleadings and other material papers in connection with, any such claim or
litigation. If Seller does not assume the defense of any such claim or
litigation, Purchaser may defend the same in such manner as it may deem
appropriate, in the exercise of its reasonable business judgment, provided,
however, that Purchaser shall not settle any such claim or litigation or consent
to the entry of any judgment without the prior written consent of Seller which
Seller shall not unreasonably withhold, and Seller will promptly reimburse
Purchaser in accordance with the provisions of this Section 7.6, provided that
Purchaser provide Seller with copies of all pleadings and other material
documents in connection with any such claim or litigation and that Seller is
consulted about (albeit not in control of) such litigation. Purchaser may defend
any Third Party Claim to which Purchaser may have a defense or counterclaim
which Seller is not entitled to assert to the extent necessary to assert and
maintain such defense or counterclaim provided that Purchaser provide Seller
with copies of all pleadings and other material documents in connection with any
such claim or litigation and that Seller is consulted about (albeit not in
control of) such litigation.
(b) In case of the assertion in writing of any Third Party Claim or
the commencement of any litigation asserting a Third Party Claim which may give
rise to any obligation of Purchaser to Seller under the provisions of this
Article 7, Seller shall have the same rights, duties and obligations of
Purchaser as set forth under Section 7.6 and Purchaser shall have the same
right, duties and obligations of Seller as set forth in Section 7.6.
(c) No party may make a claim for indemnification under Article 7
hereof later than the second anniversary of the Closing Date; provided, however,
that any claim for indemnification made before such second anniversary shall
survive until such time as such claim has been settled or finally adjudicated.
24
<PAGE>
7.7 Exclusive Nature of Remedies. Except for the remedy of specific
----------------------------
performance and other equitable remedies and except to the extent that any party
has engaged in fraud, the rights and remedies provided in this Article 7 will be
the exclusive rights or remedies available to the person to be indemnified with
respect to claims against either party to this Agreement or any of its
Affiliates, shareholders, officers, directors, employees and agents against
which indemnification is authorized or provided in this Article 7. This
limitation shall apply notwithstanding that any claims are asserted by a cause
of action or legal theory other than breach of contract.
ARTICLE 8
RESTRICTIVE COVENANTS
---------------------
(a) Seller acknowledges and recognizes the highly competitive nature
of the Business and the value to the Purchaser of the Business and the Purchased
Assets, which include, among other things, confidential business information and
goodwill associated with existing business relationships acquired from Seller,
which are material to the Business and the Purchased Assets. Accordingly, Seller
agrees that: for a period of five (5) years from the date of this Agreement (the
"Non-Compete Period"), Seller shall not, without the prior written consent of
the Purchaser, directly or indirectly, within the United States, participate in,
engage in or have a financial interest or management position or other interest
in any business, firm, corporation or other entity that engages in a Competing
Business. A "Competing Business" means any business which derives twelve (12%)
percent or more of its annual sales revenues from the wholesale or retail sale
of bagel products (i.e., bagels and cream cheese).
(b) During the Non-Compete Period, Seller nor any of its Affiliates
shall not (i) induce or attempt to induce any employee of Purchaser listed on
Schedule 5.11 and engaged by Purchaser on the Closing Date to leave the employ
of the Purchaser or its Affiliates; or (ii) induce, or attempt to induce, any
CBB Franchisee listed on Schedule 1.1(a) to cease doing business with Purchaser
and/or New World.
(c) Purchaser and New World agree that if either party terminates
this Agreement for any reason whatsoever, neither Purchaser, New World, nor any
of their Affiliates shall (i) induce or attempt to induce any employee of Seller
listed in Schedule 5.11 to leave the employ of the Seller; or (ii) induce or
attempt to induce any CBB Franchisee to cease doing business with Seller, for a
period of two (2) years from the date this Agreement is terminated
(d) Purchaser and New World agree to keep confidential all such
information, which has been disclosed to or discovered by it hereunder except as
required by law or court order. Purchaser and New World further agree that
neither they nor any of their Affiliates shall use any such information in any
manner or for any purpose whatsoever, except for purposes of determining, during
the due diligence period ending on August 13, 1999, whether they desire to
consummate the transactions contemplated hereby.
25
<PAGE>
(e) Seller agrees to also keep confidential all such information,
which has been disclosed to Seller regarding Purchaser, New World, any
Affiliates of Purchaser and New World hereunder except as required by law or
court order. Seller further agrees that neither it nor any of its Affiliates
shall use any such information in any manner or for any purpose whatsoever,
except for purposes of determining, during the due diligence period ending on
August 13, 1999, whether they desire to consummate the transactions contemplated
hereby.
ARTICLE 9
TERMINATION
-----------
9.1 Default. If any party is in breach of its obligations hereunder, and
-------
the other party, if not in breach, gives notice thereof, setting forth the
breach in reasonable detail, and if the breaching party fails to cure such
breach within twenty (20) days after receipt of such notice, the non-breaching
party may terminate this Agreement at any time thereafter and before such breach
is cured by giving a notice of termination, subject to the provisions set forth
in Article 2A of this Agreement.
9.2 Conditions to Closing. If the Closing has not occurred by August 31,
---------------------
1999, either party may terminate this Agreement at any time thereafter, by
giving a notice of termination to the other party in accordance with section
10.5, and subject to the provisions set forth in Article 2A of this Agreement.
9.3 Effect. Upon termination, this Agreement shall become null and void
------
except for Section 8(c), 8(d), 8(e) and Article 2A.
ARTICLE 10
GENERAL
-------
10.1 Expenses. Purchaser and Seller shall pay their own respective counsel,
--------
accountants and other advisors' fees and expenses arising in connection with the
negotiation and preparation of this Agreement and the consummation of the
transactions contemplated hereby.
10.2 Sales, Transfer and Documentary Taxes, etc. Seller shall pay all
------------------------------------------
sales, transfer and documentary taxes, if any, due as a result of the sale of
the Purchased Assets to Purchaser and all other fees relating to the transfer of
the Purchased Assets to Purchaser.
10.3 Survival of Representations and Warranties. Each of the Parties
------------------------------------------
covenants and agrees that all of the representations warranties, covenants, and
agreements set forth in this Agreement shall survive the Closing for two (2)
years after the Closing and shall not be merged into any instruments of transfer
or other documents delivered by any of the Parties at Closing or at any other
time. Notwithstanding the foregoing, each of the covenants and conditions
contained in Article 8 of this Agreement shall survive the Closing, until the
expiration of its term set forth therein.
26
<PAGE>
10.4 No Third Party Beneficiaries. Nothing in this Agreement, expressed or
----------------------------
implied, is intended to confer on any person other than the Parties or their
respective heirs, successors and assigns any rights, remedies, obligations, or
other liabilities under or by reason of this Agreement.
10.5 Notices. All notices permitted or required under this Agreement shall
-------
be in writing and shall be either (a) delivered by personal service, (b)
delivered by courier service, or (c) telecopied and confirmed immediately in
writing by a copy mailed by registered or certified mail, postage prepaid,
return receipt requested, to the parties hereto at their addresses set forth
below or at such other addresses which may be designated in writing by the
parties:
If to Seller to: AFC Enterprises, Inc.
Six Concourse Parkway, Suite 1700
Atlanta, GA 30328
Attention: Charles Hyslop and Lisa P. Morse, Esq.
Telecopier No.: (770) 353-3394
(770) 353-3060
With a copy to: Cohen Pollock Merlin Axelrod & Tannenbaum, P.C.
2100 Riveredge Parkway
Atlanta, GA 30328
Attention: Pepi Friedman, Esq.
Telecopier No.: (770) 858-1277
If to Purchaser to: CBB Acquisition Corp.
246 Industrial Way West
Eatontown, NJ 07724
Attention: R. Ramin Kamfar, Chief Executive Officer
Telecopier No.: (732) 544-4503
With a copy to: Ruskin, Moscou, Evans & Faltischek, P.C.
170 Old Country Road
Mineola, NY 11501
Attention: Stuart M. Sieger, Esq.
Telecopier No.: (516) 663-6647
Such notices shall be effective upon receipt in the case of personal or courier
service or telecopier delivery.
10.6 Entire Agreement. This Agreement (including the Exhibits and Schedules
----------------
hereto) supersedes all prior agreements and understandings, oral and written,
between the parties with respect to the subject matter, and this Agreement
constitutes the entire agreement of the parties.
27
<PAGE>
10.7 Headings. The article, section and other headings contained in this
--------
Agreement and the Schedules are for reference purposes only and shall not be
deemed to be a part of this Agreement or the Schedules or to affect the meaning
or interpretation of this Agreement or the Schedules.
10.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which, when executed, shall be deemed to be an original,
and all of which together shall be deemed to be one and the same instrument.
Execution and delivery of this Agreement may be made by facsimile transmission
in such counterparts and the signatures thereon shall be deemed original.
10.9 Governing Law. This Agreement shall be construed as to both validity
-------------
and performance and governed by and enforced in accordance with the laws of the
State of New York, without giving effect to the choice of law principles. The
other Operative Agreements shall be construed as to both validity and
performance and governed by and enforced in accordance with the laws of the
State of Georgia, without giving effect to the choice of law principles.
10.10 Severability. If any term, covenant, condition, or provision of this
------------
Agreement or the application thereof to any circumstance shall be invalid or
unenforceable to any extent, the remaining terms, covenants, conditions, and
provisions of this Agreement shall not be affected and each remaining term,
covenant, condition, and provision of this Agreement shall be valid and shall be
enforceable to the fullest extend permitted by law. If any provision of this
Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only as broad as is enforceable.
10.11 Amendments. This Agreement may not be modified or changed except by
----------
an instrument or instruments in writing signed by all Parties.
10.12 Assignment. None of the Parties shall assign its rights or
----------
obligations under this Agreement without the prior written consent of the other
Parties, except that Purchaser may assign this Agreement to any Affiliate of
Purchaser without the consent of Seller.
10.13 Successors and Assigns. The covenants, agreements, and conditions
----------------------
contained or granted shall be binding upon and shall inure to the benefit of
Purchaser and Seller and their respective heirs, successors and permitted
assigns.
10.14 No Joint Venture. The Parties, by entering into this Agreement and
----------------
consummating the transactions contemplated in this Agreement, shall not be and
shall not be considered a partner or joint venturer of one another.
10.15 Construction of Agreement. This Agreement was negotiated at arm's
-------------------------
length by the Parties and their respective counsel. This Agreement shall not be
construed as having been "drafted" by any one Party and shall not be construed
against any Party as a drafting party.
28
<PAGE>
10.16 Remedies. Any actions hereunder or the Operative Agreements shall be
--------
brought only in the Federal or State Courts sitting in the State of New York,
County of New York or in the State of Georgia, County of Fulton, or in the
Federal District Court for the Northern District of Georgia, and the parties
consent to the exclusive jurisdiction of such courts. The party prevailing shall
be entitled to recover its reasonable legal fees and expenses from the party not
prevailing.
10.17 Reimbursements. Seller and Purchaser shall each pay an amount equal
--------------
to half of all the reasonable costs and expenses incurred by the CBB Franchisees
associated with the meetings which shall be scheduled by Seller and Purchaser at
mutually agreeable dates and time, prior to Closing, including, but not limited
to travel, meals and accommodation expenses. Seller shall pay the travel
expenses and Purchaser shall pay for the meals and accommodation expenses of the
CBB Franchisees. Both Seller and Purchaser shall promptly forward to the other
party receipts for the expenses paid by each party. The parties shall promptly
calculate the expenses incurred by each and determine which party paid for more
expenses (the "Owed Party"), and the Owed Party shall be promptly reimbursed by
the other party for the amount the Owed Party paid above its fifty-percent share
owed. This provision shall survive termination of this Agreement.
29
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Asset Purchase
Agreement as of the date first written above.
CBB ACQUISITION CORP.
By:________________________________
, President
AFC ENTERPRISES, INC.
By:________________________________
Name:
Title:
NEW WORLD COFFEE-MANHATTAN BAGEL, INC.
By:________________________________
R. Ramin Kamfar, Chief Executive
Officer
Escrowee is made a party to this Agreement for the sole purpose of agreeing
to be bound by the provision of Section 2.A.1 hereof.
COHEN POLLOCK MERLIN AXELROD &
TANENBAUM, P.C.
By:________________________________
Pepi Friedman, Vice-President
30
<PAGE>
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
BY AND BETWEEN
CBB ACQUISITION CORP.,
NEW WORLD COFFEE-MANHATTAN BAGEL, INC.,
AND
AFC ENTERPRISES, INC.
THIS FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT is made this 27th day of
August, 1999, effective as of the 13th day of August, 1999, by and among CBB
ACQUISITION CORP., a New Jersey corporation having offices located at 246
Industrial Way West, Eatontown, New Jersey 07724 ("Purchaser"), NEW WORLD
COFFEE- MANHATTAN BAGEL, INC., ("New World"), a Delaware corporation, having
offices located at 246 Industrial Way West, Eatontown, New Jersey 07724
("Guarantor"), and AFC ENTERPRISES, INC., a Minnesota corporation having offices
located at Six Concourse Parkway, Suite 1700, Atlanta, Georgia 30328 ("Seller").
RECITALS
A. On July 26, 1999, the parties hereto entered into an Asset Purchase
Agreement (the "Asset Purchase Agreement") pursuant to which Seller agreed to
sell and Purchaser agreed to purchase the Purchased Assets. Capitalized terms
used herein and not otherwise defined herein shall have the meanings ascribed to
them under the Asset Purchase Agreement.
B. The parties desire to make certain amendments to the Asset Purchase
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties hereinafter contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. The Asset Purchase Agreement is hereby amended by deleting Section
1.1(d) in its entirety and substituting therefor the following:
"(d) all of Seller's right, title and interest under the promissory
notes listed on Schedule 1.1(d) (the "Transferred Receivables"). The
parties acknowledge and agree that, notwithstanding anything herein to
the contrary, Seller shall retain all right, title and interest in all
accounts receivable, other than the Transferred Receivables, which are
incurred as of the Closing date from CBB Franchisees (the "Retained
Receivables"). In addition, Seller shall be entitled to retain copies
of all books, records and documents relating to the Retained
Receivables;"
<PAGE>
2. The Asset Purchase Agreement is hereby further amended by deleting
Section 1.1(l) in its entirety and substituting therefor the following:
"(l) Notwithstanding the foregoing, Seller shall retain any claim or
defense (except for any economic benefit arising after the Closing
under the Transferred Agreements and the Transferred Receivables, which
shall remain with Purchaser) arising out of or related to (i) the
Transferred Agreements for actions brought against Seller; or (ii) the
Retained Receivables."
3. The Asset Purchase Agreement is hereby further amended by deleting
Section 2.1 in its entirety and substituting therefor the following:
"2.1 Purchase Price. In consideration of the sale, assignment,
--------------
transfer, conveyance and delivery of the Purchased Assets by Seller to
Purchaser, and in reliance upon the representations, warranties, covenants
and agreements made herein by Seller to Purchaser, Purchaser agrees to pay
Seller at Closing and Seller agrees to accept from Purchaser in full
payment thereof, the sum of Three Million Nine Hundred Thousand
($3,900,000) Dollars (the "Purchase Price") subject to Purchase Price
Adjustments set forth in Section 2.5 below, payable as follows:
(a) Two Million Four Hundred Thousand ($2,400,000) Dollars
(less the Downpayment referred to in Article 2A and accrued interest
thereon which shall be paid by Escrowee to Seller at the Closing) by wire
transfer; and
(b) One Million Five Hundred Five Thousand ($1,500,000)
Dollars by delivery to Seller at Closing of a promissory note in the form
annexed to the Disclosure Statement as Exhibit 2.1(b) (the "Balance Note"
or the "Promissory Note"). Reference herein to the Promissory Notes shall
be deemed to refer to the Promissory Note.
4. The Asset Purchase Agreement is hereby further amended by deleting
Section 2.2 ("Holdback") in its entirety.
5. The Asset Purchase Agreement is hereby further amended by adding to the
end of Section 2.3 thereof, the following:
"At the Closing, Seller and Purchaser shall execute a Subordination
Agreement in the form attached to the Disclosure Statement as Exhibit
2.3(C) (the "Subordination Agreement")."
6. The Asset Purchase Agreement is hereby further amended by deleting
Section 2.5(b)("Adjustment for Collection of Transferred Accounts Receivable")
in its entirety.
7. The Asset Purchase Agreement is hereby amended by changing the date
"August 13, 1999" in Sections 2A.2(a), 2A.2(b), 8(d) and 8(e) to "12:00 p.m.
Eastern Daylight Savings Time on August 27, 1999."
8. The Asset Purchase Agreement is hereby further amended by deleting
Section 2.A.1(h) in its entirety and substituting the following in lieu thereof:
2
<PAGE>
"(h) Notwithstanding the foregoing, the provisions provided in this
Article 2A.1 shall not apply and the Escrowee shall, within one (1)
business day following receipt of evidence of such termination and
satisfaction of any requirements of the Bank, deliver to the Purchaser, by
check or wire transfer, One Hundred Thousand Dollars of the Downpayment
(the "Refundable Portion of the Downpayment"), plus any accrued interest
thereon, and shall deliver to Seller, by check or wire transfer, the
remaining Fifty Thousand Dollars ($50,000) of the Downpayment (the
"Nonrefundable Portion of the Downpayment"), plus any accrued interest
thereon, without offset or reduction with respect to both payments, if the
Agreement is terminated pursuant to the provisions of 2A.2(a) and (b).
9. The Asset Purchase Agreement is hereby further amended by deleting
Section 2.A.2(c) in its entirety and substituting the following in lieu thereof:
"(c) The Downpayment will be applied as follows:
(i) In the event this Agreement is terminated pursuant to paragraphs (a)
and (b) of this Section 2A.2, or if Purchaser terminates this Agreement by
delivery of written notice to Seller on or before 5:00 p.m. Eastern
Daylight Savings Time on August 31, 1999 by reason of any CBB Franchisee
Litigation (hereinafter defined), Purchaser shall be entitled to an
immediate refund of the Refundable Portion of the Downpayment, together
with accrued interest thereon, and Seller shall be entitled to immediate
payment of the Nonrefundable Portion of the Downpayment, together with
accrued interest thereon. As used herein "CBB Franchisee Litigation" shall
mean a legal proceeding commenced by any CBB Franchisee against any party
to this Agreement on or before August 31, 1999, seeking to prevent the
consummation of the transaction contemplated hereby or to materially modify
the terms of such transaction.
(ii) If the Agreement does not terminate pursuant to paragraphs (a) and
(b) of this Section 2A.2 or by reason of any CBB Franchisee Litigation and
the Closing occurs, the entire Downpayment, together with any accrued
interest thereon, shall be applied towards the purchase price cash due at
Closing.
(iii) If Seller refuses to close for any reason (other than a material
breach by Purchaser of this Agreement) or if Seller materially breaches this
Agreement and Purchaser declines to close, Purchaser shall be entitled to the
return of the entire Downpayment, together with any accrued interest thereon.
(iv) If Purchaser refuses to close by August 31, 1999 or another date
mutually agreed to between Seller and Purchaser and Seller is not in
material breach of this Agreement, Seller's sole remedy shall be to receive
and retain the entire Downpayment, together with any accrued interest
thereon, as liquidated damages, it being agreed that Seller's damages in
case of Purchaser's default might be impossible to ascertain and that the
Downpayment constitutes a fair and reasonable amount of damages under the
circumstances and is not a penalty."
3
<PAGE>
10. The Asset Purchase Agreement is hereby further amended by deleting
Section 3.2(c)(ii) in its entirety and inserting the following in lieu thereof:
"(ii) a receivables report for the Transferred Receivables in the
form of Schedule 1.1(d) reflecting payments on the Transferred Receivables
more than thirty (30) days past due as of the last day of the previous week
and a receivables report for the Scheduled Franchise Agreements and the
Additional Franchise Agreements in the form included in Schedule 3.2(c)
reflecting royalty and Ad Fund payments more than thirty (30) days past due
as of the last day of the previous week."
11. The Asset Purchase Agreement is hereby further amended by changing the
reference to "Exhibit 4.1(i)" in Section 4.1(h) to "Exhibit 4.1(h)."
12. The Asset Purchase Agreement is hereby further amended by deleting
Section 4.1(i) in its entirety and substituting therefor the following:
"(i) the Subordination Agreement, duly executed by Seller;"
13. The Asset Purchase Agreement is hereby further amended by deleting
Section 4.1(k) in its entirety and substituting therefor the following:
"(k) a Consent to Purchaser's Collateral Assignment of the Asset
Purchase Agreement in the form attached to the Disclosure Statement as
Exhibit 4.1(k), duly executed by Seller;"
14. The Asset Purchase Agreement is hereby further amended by deleting
Section 4.2(a) in its entirety and substituting the following in lieu thereof:
"(a) Two Million Four Hundred Thousand ($2,400,000) Dollars, less
the Downpayment and accrued interest thereon, by wire transfer to Seller;".
15. The Asset Purchase Agreement is hereby further amended by changing the
reference to "Schedule 4.2(g)" in Section 4.2(g) to "Exhibit 4.2(g)".
16. The Asset Purchase Agreement is hereby further amended by deleting
Section 5.6 in its entirety and substituting the following in lieu thereof:
5.6 Financial Statements. Attached hereto as Schedule 5.6 are
--------------------
copies of Seller's (i) statement of cash flow for sales and royalties
collected, all on a store by store basis, for the fiscal years ending in
December, 1997 and December, 1998, and for six 4 week periods ending in
June, 1998 and June, 1999; and (ii) on a store by store basis, an
accounting of the Advertising Fund, an aged accounts receivable for the
Advertising Fund for the Scheduled Franchise Agreements; and a list of all
outstanding unpaid bills and all outstanding financial commitments not
billed by vendors or suppliers, as of August 20, 1999 (the "Outstanding Ad
Fund Obligations") (hereinafter the statements and accountings attached
hereto as Schedule 5.6 and described in the foregoing clauses (i) and (ii)
are collectively referred to as the "Financial Statements"). The Financial
Statements correctly and completely reflect Seller's books and records, and
are accurate and complete in all material respects for the periods
indicated. The
4
<PAGE>
Financial Statements with respect to sales figures are accurate and
complete in all material respects for the periods indicated, assuming the
sales figures received by Seller from the CBB Franchisees are accurate and
assuming any Third Party Reports relied on for the preparation of the
Financial Statements are accurate. Seller does not make any representations
as to the accuracy of the sales figures prepared by the CBB Franchisees.
Notwithstanding anything herein to the contrary, in the event that the
Outstanding Ad Fund Obligations exceed the sum of the cash in the
Advertising Fund as of the date of Closing plus all amounts collected by
the Advertising Fund between the date of Closing and October 31, 1999,
Purchaser may, at its option, offset the excess from the next payment due
under the Promissory Note or invoice Seller for the amount of the excess,
which invoice shall be payable in full within thirty (30) days following
Seller's receipt thereof.
17. The Asset Purchase Agreement is hereby further amended by deleting
Section 5.7 in its entirety and substituting the following in lieu thereof:
"5.7 Receivables. All of the Transferred Receivables result from the
-----------
sale of inventory, and services in the ordinary course of business. Except
for any amounts owed by the parties to any bankruptcy proceeding described
in Schedule 5.21, Seller has no knowledge that such Transferred Receivables
are not collectible in the full amount thereof in the ordinary course of
business, but Seller does not warrant the collectability thereof. "
18. The Asset Purchase Agreement is hereby further amended by adding to
the end of Section 5.14 thereof the following:
"At the request of Purchaser, Seller shall use commercially reasonable
efforts to obtain the agreements of the vendors listed in Schedule 5.14(b)
to continue to supply the CBB Franchisees under the current terms and
conditions of the Agreements listed in Schedule 5.14(b). In no event shall
"commercially reasonable efforts" be construed to require Seller to make
any payments to such vendors or any other party in order to obtain such
agreements."
19. The Asset Purchase Agreement is hereby further amended by changing the
word "and" in Sections 5.26 and 5.27 to "or" so that the definition of
"Knowledge" in such Sections shall be construed to mean the actual knowledge of
any one of the persons designated therein.
20. This Amendment may be executed in any number of counterparts, each of
which, when executed, shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument. Execution and
delivery of this Amendment may be made by facsimile transmission in such
counterparts and the signatures thereon shall be deemed original.
21. Except as herein amended, the Asset Purchase Agreement shall remain in
full force and effect and is hereby ratified and confirmed.
5
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to
Asset Purchase Agreement as of the date first written above.
CBB ACQUISITION CORP.
By:________________________________
R. Ramin Kamfar, President
AFC ENTERPRISES, INC.
By:________________________________
Name:
Title:
NEW WORLD COFFEE-MANHATTAN
BAGEL, INC.
By:_________________________________
R. Ramin Kamfar, Chief Executive
Officer
Escrowee is made a party to this Amendment for the sole purpose of agreeing
to be bound by the amendments to Section 2.A.1 of the Asset Purchase Agreement.
COHEN POLLOCK MERLIN AXELROD &
TANENBAUM, P.C.
By:________________________________
Pepi Friedman, Vice-President
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
STATEMENTS FOR THE THIRTY-SIX WEEK PERIOD ENDED SEPTEMBER 5, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> SEP-05-1999
<CASH> 14,297
<SECURITIES> 0
<RECEIVABLES> 28,423
<ALLOWANCES> 5,669
<INVENTORY> 16,062
<CURRENT-ASSETS> 56,895
<PP&E> 401,159
<DEPRECIATION> 134,463
<TOTAL-ASSETS> 552,263
<CURRENT-LIABILITIES> 95,193
<BONDS> 340,967
0
0
<COMMON> 394
<OTHER-SE> 94,515
<TOTAL-LIABILITY-AND-EQUITY> 552,263
<SALES> 386,809
<TOTAL-REVENUES> 484,194
<CGS> 116,990
<TOTAL-COSTS> 444,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 532
<INTEREST-EXPENSE> 23,466
<INCOME-PRETAX> 15,736
<INCOME-TAX> 7,023
<INCOME-CONTINUING> 8,713
<DISCONTINUED> 2,193
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,520
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
