SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
Commission File No. 0-19542
APPLE SOUTH, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
(State of Incorporation) (I.R.S. Employer
Identification No.)
Hancock at Washington
Madison, Georgia 30650
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (706) 342-4552
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, par value $.01 per share
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[X] -----------------------------
As of February 18, 1997, the aggregate market value of the common stock
of registrant held by non-affiliates of the registrant, as determined by the
last sales price, was $516,776,720.
As of February 18, 1997, the number of shares of common stock
outstanding was 38,279,757.
<PAGE>
PART I
Unless otherwise noted, the information in this Annual Report reflects
stock dividends of four-tenths of a share for each share outstanding on
September 10, 1991, one-half share for each share outstanding on November 2,
1992, one-half share for each share outstanding on January 29, 1993, one-half
share for each share outstanding on August 30, 1993, and one-half share for each
share outstanding on June 1, 1994. In November 1995, the Company acquired DF&R
Restaurants, Inc. ("DF&R") in a transaction accounted for as a pooling of
interests, and accordingly all financial and other information concerning the
Company set forth in this Annual Report includes DF&R for all periods unless
otherwise indicated. References in this Annual Report to the "Company" or "Apple
South" include Apple South, Inc., and its operating subsidiaries unless
otherwise indicated.
Item 1. Business
General
Apple South is a rapidly growing, multi-concept restaurant operating
company. Since its inception in 1986, Apple South has increased its
profitability and size through the efficient management of restaurant operations
and through a series of strategic restaurant openings and acquisitions. Over the
last five fiscal years, restaurant sales have increased at a compound annual
growth rate of 37%, and restaurant margins have increased from 12.2% in 1991 to
15.7% in 1996.
At December 29, 1996, Apple South operated 306 casual dining
restaurants, consisting of 231 casual dining restaurants operated under the name
"Applebee's Neighborhood Grill & Bar"; 63 "Don Pablo's" restaurants featuring
traditional Mexican and Tex-Mex dishes and 12 "Harrigan's" restaurants which
offer traditional classics such as mesquite-smoked prime rib, hickory-grilled
steaks and chicken. In addition, Apple South operates ten franchised Hardee's
fast-food hamburger restaurants which Apple South has a signed contract to sell.
For the year ended December 29, 1996, Apple South's restaurant sales were $546
million.
As a franchisee of Applebee's International, Inc. (the "Franchisor"),
the Company holds the exclusive development rights for Applebee's restaurants in
all or part of 22 states in the South, Mid-Atlantic and Midwest regions of the
United States. The Company opened its first Applebee's restaurant in Greenville,
South Carolina in 1986 and is currently the largest Applebee's operator. In
November 1995, the Company merged with DF&R Restaurants, Inc. ("DF&R"), which
operates Don Pablo's and Harrigan's restaurants on a proprietary basis. The Don
Pablo's restaurants are concentrated in Texas and the Midwest region, while
Harrigan's restaurants are located in Texas, Oklahoma and New Mexico.
Apple South's growth strategy includes expanding existing restaurant
concepts; acquiring new restaurant concepts; and leveraging Company-wide
expertise and resources across concepts to improve the effectiveness of existing
restaurants while maintaining concept integrity and individuality. This
multi-concept strategy allows the Company to reach a broad customer base through
specialized restaurant market segments. By operating restaurant concepts as
separate divisions, the Company protects each concept's individuality, but
allows each division to leverage the best practices of other divisions. Each
Apple South restaurant concept is established as an entrepreneurial operating
division and functions on a decentralized basis with individual recruiting,
training, marketing, accounting, and restaurant operations. Each division is
supported by various centralized functions such as human resources, finance,
treasury and capital formation.
Apple South expects to open a total of 60 restaurants in 1997, including at
least 34 in the Applebee's division and 25 in the Don Pablo's division.
Expansion efforts during the next few years will be focused on the development
of additional Applebee's restaurants in the Company's existing development
territories and Don Pablo's restaurants in the Midwest, Mid-Atlantic, Southeast
and Northeast. In 1996, the Company closed its Tomato Rumba's division and is
holding those assets for redeployment. The Company has a signed contract for the
sale of its Hardee's restaurants which it expects to complete in the first
quarter of 1997.
2
<PAGE>
APPLE SOUTH'S RESTAURANT CONCEPTS
Applebee's
The Applebee's concept was initiated in 1980 with the opening of the
first Applebee's restaurant in Atlanta, Georgia, by a predecessor of the
Franchisor. The Franchisor is a publicly held company headquartered in Overland
Park, Kansas. As of December 29, 1996, the Applebee's restaurant system
consisted of 819 restaurants in 45 states, Puerto Rico, Canada, the Caribbean
and Europe. Approximately 18% of these restaurants are operated by the
Franchisor, 28% by Apple South and the remainder by other franchisees. During
1996, a total of 163 new Applebee's restaurants were opened system-wide; 45 of
these were opened by the Company's Applebee's division.
The Company is an active participant in the Franchisor's Franchise
Business Council, which consists of seven representatives of the Applebee's
franchisees and three representatives of the Franchisor. The council
participates in regular meetings with management of the Franchisor and serves as
a mechanism for franchisees to obtain and exchange information regarding
operations, marketing, facilities and product development, and provides a forum
to discuss franchisee issues and concerns. Due to the number of Applebee's
restaurants operated by the Company's Applebee's division, the Company has the
right to continued representation on the council.
Concept. Applebee's restaurants are designed to appeal to a market niche
between the full-service and fast-food segments of the restaurant industry. The
restaurant's customer base consists primarily of the 21 to 54 year old age group
that grew up on fast-food, but now prefers a more sophisticated menu, the
availability of alcoholic beverages and a comfortable ambiance in addition to
the traditional qualities of fast-food restaurants, namely speed, value and
convenience. Each Applebee's restaurant is designed and marketed as a friendly
"neighborhood establishment" appealing to both families and adults, and
featuring table service dining and a selection of moderately priced,
high-quality food and beverage items.
Menu. Each Applebee's restaurant offers a diverse menu of traditional
and innovative dishes. Entrees include various international dishes, hamburgers
and sandwiches. Also included are a full range of appetizers, such as nachos and
Buffalo chicken wings, and soups, salads and desserts. Pursuant to requirements
of the Franchisor, approximately 60% of the selections on each Applebee's menu
consist of required national core items and approximately 40% of the selections
are chosen by the Company's Applebee's division from an approved list of
optional items. While the available menu items are revised by the Franchisor
every six months to reflect changes in customer tastes, these revisions are
typically limited. The Applebee's division actively participates in the search
for new menu items to replace slower-selling items. Alcoholic beverages are
available at each restaurant and represented approximately 14% of total sales in
1996. The cost of a typical meal at the Company's Applebee's restaurants,
including beverages, currently ranges from $5.75 to $7.25 per person for lunch
and $7.25 to $8.75 for dinner. Applebee's restaurants also offer a separate
lower priced children's menu.
Restaurant Layout. Restaurants in the Applebee's division usually
contain between 4,400 and 5,000 square feet of space in a free-standing brick
and glass building. Existing restaurants generally have 38 dining tables seating
approximately 150 customers, with a centrally located bar seating 18 additional
customers.
Unit Economics. During 1996, the average cost of developing and opening
an Applebee's restaurant was approximately $1.6 million, including land,
construction or improvement costs, fixtures and equipment, franchise fees, and
excluding approximately $45,000 to $80,000 in preopening expenses. Preopening
expenses consist principally of nonrecurring costs, such as hourly employee
recruiting, license fees, meals and lodging and travel. Preopening costs are
incurred in connection with opening each restaurant and are expensed during the
restaurant's first full month of operations. The cost of land for these
restaurants ranged from approximately $215,000 to $825,000.
3
<PAGE>
Expansion Strategy. In addition to development of its existing
territories, Apple South has expanded in recent years by acquiring other
Applebee's franchisees, thereby obtaining new development territories as well as
additional restaurants. Apple South intends to expand its Applebee's operations
during the next few years through the development of additional restaurants in
existing development territories. Under development agreements with the
Franchisor, the Company is required to open a specified number of Applebee's
restaurants in each development territory over specified intervals. Apple South
management believes that the Applebee's division's existing development
territory will support over 400 Applebee's restaurants and will accommodate
planned restaurant development for approximately four to six years. Apple South
does not expect to acquire any additional Applebee's development territory.
Management and Employees. A typical restaurant has a general manager and
three associate managers and employs approximately 65 people, approximately 45
of whom are part-time. Responsibility for the Applebee's division is organized
geographically with 21 regional directors of operations that report to one of
five regional vice presidents of operations, each of whom reports directly to
the Applebee's division president. Restaurant managers are eligible for monthly
bonuses based on the performance of their restaurants. Area supervisors,
regional directors, vice presidents and the president of operations are eligible
for quarterly bonuses based on the performance of their assigned restaurants and
Apple South.
Quality Control. General and associate managers are responsible for
assuring compliance with the operating procedures of the division and the
Franchisor. Compliance with these procedures is monitored by periodic on-site
visits and quarterly inspections by area supervisors, directors of operations
and representatives of the Franchisor. Additional inspections are made by the
divisional management and the Franchisor from time to time. Monthly ratings of
each restaurant are published internally to all management personnel.
Training. The Applebee's division places significant emphasis on the
proper training and continued development of its employees. Training programs
are provided for all hourly and management employees. The management training
program typically lasts 12 weeks, incorporates Franchisor training standards and
includes on-site instruction at geographically dispursed training restaurants.
When the Applebee's division opens a new restaurant, management positions are
usually staffed with personnel who have had previous experience in a management
position at another Applebee's restaurant. In addition, a highly experienced
opening team assists in opening the restaurant. Prior to opening, all staff
personnel undergo a week of intensive training conducted by the restaurant
opening team.
Purchasing. Apple South strives to obtain consistent quality items at
competitive prices from reliable sources for all of its divisions. The
Applebee's division must comply with the uniform recipe and ingredient
specifications provided by the Franchisor. However, the division can purchase
the necessary food and beverage inventories and restaurant supplies from
independent vendors approved by the Franchisor. Although the division currently
uses one distributor for substantially all of its food products, all food and
beverage products necessary to operate the restaurants are available on short
notice from alternative qualified suppliers. The Applebee's division has not
experienced any significant delays in receiving food and beverage inventories or
restaurant supplies.
Advertising and Marketing. Pursuant to the Company's franchise
agreements, each Applebee's restaurant contributes 1% of gross sales to the
Franchisor for a national advertising and marketing fund to benefit all
franchisees. The Franchisor uses this fund to develop advertising and sales
promotion materials and concepts. Each restaurant also contributes an additional
0.5% of gross sales primarily for the purchase of media in its markets. The
Applebee's division also is required to spend 1.5% of gross sales from each
restaurant on local advertising. The Company's franchise agreements provide that
the Franchisor may increase the required contribution to the national fund and
the required expenditure for local advertising; however, the increase may not
result in total required expenditures for advertising exceeding 5% of gross
sales. The Applebee's division's marketing personnel develop their own marketing
strategies and the division typically spends its advertising dollars on
television and radio.
4
<PAGE>
Restaurant Reporting. Financial controls are maintained through a
centralized, computerized accounting system. The Applebee's division has a
point-of-sale reporting system in each restaurant. The restaurant managers also
submit weekly sales reports, customer counts, and payroll data. Physical
inventories of all food, beverage, and supply items are taken at least twice
monthly. Operating results compared to prior periods and budgets are closely
monitored by both divisional and corporate personnel. Management believes that
its current systems are adequate to support planned expansion.
Franchise and Development Agreements. The Company's Applebee's division
operates its restaurants under individual franchise agreements that are part of
broader exclusive development agreements with the Franchisor. The separate
franchise agreements each provide the right to operate a specific Applebee's
restaurant for a period of twenty years, with an additional twenty-year renewal
option. Each development agreement grants exclusive rights to develop and
operate Applebee's restaurants within a defined geographic area, provided that a
certain number of restaurants are opened over scheduled intervals. At December
29, 1996, the Company was obligated to open 129 additional Applebee's
restaurants by the end of 2000, including 34 required to be opened by the end of
1997.
The development agreements prohibit the Company from owning or operating
other restaurants whose menus and methods of operation are similar to that
employed by Applebee's restaurants and which are located within the geographic
area covered by the development agreement during the term of, and for a period
of two years following the termination of, the development agreement. Under the
development agreements, the Franchisor must approve the site and the
architectural and engineering plans for each new Applebee's restaurant. The
Franchisor may terminate each development agreement if Apple South defaults in
its performance under such development agreement or under any franchise
agreement. Each franchise agreement prohibits Apple South from transferring a
franchise without the prior approval of the Franchisor. Generally, each new
franchise agreement requires an initial $30,000 franchise fee, a monthly royalty
fee of 4% of gross sales and a monthly advertising fee of 1.5% of gross sales,
in each case payable to the Franchisor. The Franchisor has the right to increase
the advertising fee up to an amount that would equal, when added to other
required expenditures for advertising, 5% of gross sales.
As the result of an agreement between Apple South and the Franchisor, it
is highly unlikely that the Franchisor will approve any transfers of development
territory to Apple South from another franchisee or directly grant Apple South
any new development territory. Apple South management believes that the
Applebee's division's existing development territories will accommodate planned
Applebee's restaurant development for approximately four to six years.
Don Pablo's
Apple South acquired 44 Don Pablo's restaurants as a result of its merger
with DF&R in November 1995. In 1996, the Company's Don Pablo's division opened
19 additional restaurants. Average weekly volumes for 1996 at Don Pablo's
restaurants open for all of 1995 and 1996 increased 8% over the prior year, with
significant gains resulting from television advertising instituted by Apple
South.
Concept. The first Don Pablo's was opened in Arlington, Texas in 1987.
Don Pablo's restaurants feature traditional Mexican and Tex-Mex dishes served in
a distinctive, festive dining atmosphere reminiscent of a Mexican village plaza.
Each restaurant is staffed with a highly experienced management team that is
visible in the dining area and interacts with both customers and the staff to
ensure attentive customer service and consistent food quality. Don Pablo's
offers items prepared fresh on-site using high-quality ingredients at relatively
low prices. The diverse menu, generous portions and attractive price/value
relationship appeal to a broad customer base.
Menu. Don Pablo's menu offers a wide variety of entrees, including
enchiladas and tacos served with various sauces and homemade salsa and
mesquite-grilled items such as fajitas, carne asada and chicken. The menu also
includes tortilla soup, a selection of salads, Mexican-style appetizers such as
quesadillas and unique desserts. During 1996, the cost of a typical meal,
including beverages, at Don Pablo's was $7.25 to $8.35 for lunch and
5
<PAGE>
$7.80 to $9.35 for dinner. In addition to its regular menu, Don Pablo's offers
13 lunch specials priced from $4.85 to $6.45 each. Don Pablo's also has a lower
priced children's menu. While Don Pablo's emphasizes its dining experience, it
also provides full bar service. Alcoholic beverage sales accounted for
approximately 20% of Don Pablo's total sales during 1996.
Restaurant Layout. Don Pablo's distinctive Mexican architecture and
interior decor provide a casual, fun dining atmosphere. The restaurants have an
open, spacious feel, created with the use of sky-lights and a Mexican village
plaza design, and are enhanced by an indoor fountain and the use of stucco,
brick and tile, as well as plants, signs and art work. Homemade tortillas cooked
in the dining area underscore Don Pablo's commitment to fresh, authentic Mexican
food. Don Pablo's utilizes both one and two-story building designs. The
two-story design features a balcony which provides seating for bar patrons and
dining customers waiting to be seated. The one-story design incorporates a
smaller bar adjacent to the dining area. Both designs use high ceiling
architecture and have similar dining capacities. Don Pablo's restaurants range
in size from 6,000 square feet to 9,900 square feet, with the average restaurant
containing approximately 8,000 square feet. Don Pablo's generally have dining
room seating for approximately 230 customers and bar seating for approximately
70 additional customers.
Unit Economics. During 1996, Apple South's average cost of developing and
opening a Don Pablo's restaurant was approximately $1.7 million, excluding land
costs and preopening expenses. The cost of land for these restaurants ranged
from approximately $860,000 to $1,550,000; preopening expenses were
approximately $55,000 to $115,000.
Expansion Strategy. The Company's Don Pablo's division believes that the
growing popularity of Mexican and Tex-Mex food and the relatively few Mexican
food restaurants in certain regions of the United States, combined with the
success of its Midwest and Mid-Atlantic restaurants, support the division's
commitment to continue developing Don Pablo's restaurants in targeted markets.
In 1997, new restaurants will be located principally in the Midwestern,
Mid-Atlantic and Southeastern regions of the United States. Where feasible, the
Don Pablo's division intends to cluster its restaurants in various markets to
achieve operating and advertising efficiencies. The number of restaurants
actually opened will vary depending upon, among other things, the division's
ability to locate suitable sites, the availability of financing and general
economic conditions.
Management and Employees. Management of the Don Pablo's division
currently is shared by 18 district and area managers who report to both the
Regional Vice President of Operations and the Vice President of Food Operations.
The division's current strategy is to have each area manager responsible for a
limited number of Don Pablo's restaurants, thus facilitating a focus on quality
of operations and unit profitability. The management staff of a typical
restaurant consists of one general manager, one kitchen manager and three
assistant managers. The Don Pablo's division spends considerable effort training
and developing its employees and encourages promotion from within. General
managers and kitchen managers are eligible to receive bonuses equal to a
percentage of their restaurant's sales, subject to operating within budgeted
costs.
Quality Control. All levels of management are responsible for ensuring
that Apple South's restaurants are operated in accordance with strict quality
standards. The Don Pablo's division employs a kitchen manager in each
restaurant, which allows each restaurant general manager to spend most of his
time in the dining area of the restaurant supervising his staff and providing
service to customers. Compliance with the division's quality standards is
monitored by periodic on-site visits and formal periodic inspections by the area
managers.
Training. The Don Pablo's division requires each employee to participate
in a formal training program. Management training generally lasts ten to 16
weeks and encompasses three general areas, including (i) all service positions;
(ii) management accounting, personnel management, and dining room and bar
operations; and (iii) kitchen management. When the division opens a new
restaurant, management positions are almost always staffed with personnel who
have had previous experience in a management position at another Don Pablo's
6
<PAGE>
restaurant. In addition, a highly experienced opening team assists in opening
the restaurant. Prior to opening, all staff personnel undergo a week of
intensive training conducted by the restaurant opening team.
Purchasing. Apple South strives to obtain consistent quality items at
competitive prices from reliable sources for all of its divisions. Apple South
continually researches and tests various products in an effort to maintain the
highest quality products and to be responsive to changing customer tastes.
Substantially all of the Don Pablo's division's purchasing needs are handled
through its divisional headquarters. Although the division currently uses one
distributor for substantially all of its food products other than produce, which
is purchased locally, all food and beverage products necessary to operate the
restaurants are available on short notice from alternative qualified suppliers.
The Don Pablo's division has not experienced any significant delays in receiving
its food and beverage inventories, restaurant supplies or equipment.
Advertising and Marketing. Don Pablo's historical success has been
achieved with minimal expenditures on advertising and marketing, relying
primarily on the curb appeal of its buildings and customer word-of-mouth. In
1996, the Don Pablo's division devoted more resources to marketing efforts for
its restaurants, including first-time television campaigns and radio advertising
in certain core markets, which contributed to an 8% increase in annual sales for
those restaurants open for all of 1995 and 1996. Apple South expects the
increased marketing efforts in the Don Pablo's division to continue in 1997.
Restaurant Reporting. Financial controls are maintained through a
centralized accounting system. The Don Pablo's division has a proprietary
point-of-sale reporting system in each of its locations. The restaurant managers
prepare daily reports of cash, deposits, sales, sales mix, labor costs and
customer counts for Don Pablo's management. The restaurant managers also submit
weekly sales reports, customer counts and payroll data. Physical inventories of
all food, beverage and supply items are taken at least monthly. Operating
results compared to prior periods and budgets are closely monitored by both
divisional and corporate personnel. Management believes that its current systems
are adequate to support planned expansion.
Harrigan's
The Company strives to achieve a relaxed, informal atmosphere in its 12
Harrigan's restaurants with a warm, cozy dining environment. Harrigan's
restaurants range in size from 6,400 square feet to 9,000 square feet, and the
average restaurant is approximately 7,250 square feet. Harrigan's menu features
a variety of American food, including hickory-grilled steaks, chicken and
half-pound hamburgers. Harrigan's also offers mesquite-smoked prime rib and baby
back ribs, pasta dishes, soups, salads and seafood, as well as brunch and lunch
specials. Various signature items such as New Orleans potato casserole,
paper-thin french fried zucchini, distinctive cheese bread and specialty
desserts are also offered. During 1996, the cost of a typical meal at
Harrigan's, including beverages, was $8.00 to $8.75 for lunch and $10.70 to
$12.40 for dinner. Although Harrigan's offers full bar service, it emphasizes
its dining experience. Alcoholic beverage sales during 1996 accounted for
approximately 16% of Harrigan's total sales.
Harrigan's restaurants generally have dining room seating for
approximately 175 to 200 customers and bar seating for approximately 75
additional customers. Apple South plans to open one new Harrigan's in 1997.
Operationally, the Company's Harrigan's division is structured similarly to the
Don Pablo's division, with a district director of operations, area managers, and
one general manager, one kitchen manager and three assistant managers per
restaurant. Financial procedures and controls, training methods, purchasing
processes and various other aspects of operations previously developed by Apple
South for its Don Pablo's division are also applied to the Harrigan's division.
7
<PAGE>
PENDING ACQUISITIONS
McCormick & Schmick
In keeping with its multi-concept strategy, Apple South has entered into
an agreement to acquire McCormick & Schmick, one of the nation's largest
upper-end casual seafood restaurant groups. As of February 7, 1997, McCormick &
Schmick had 16 restaurants in Oregon, Washington, California, Colorado and the
District of Columbia. Apple South will pay $53 million for this acquisition, of
which approximately $50 million will be paid in cash and the remainder will be
paid in Apple South Common Stock. Apple South will assume approximately $15
million in debt in connection with the acquisition. Apple South expects to
complete this acquisition in the first quarter of 1997.
The first McCormick & Schmick restaurant was acquired in 1972 by
co-founders William McCormick and Doug Schmick. Both founders continue to manage
the restaurant group and will remain as senior management following the
acquisition by Apple South.
McCormick & Schmick restaurants offer fine, fresh seafood and outstanding
service in an elegant yet informal setting. The restaurants' master chefs
develop menu offerings which emphasize distinctive seafood and also feature
meat, poultry, salads and pasta. Menus vary daily based on fresh product
availability and price, and usually feature over 85 items. The restaurants serve
both lunch and dinner, with the cost of a typical meal, including beverages, of
$10.00 to $15.00 for lunch and $25.00 to $30.00 for dinner. The bar at each
restaurant features selections of premium liquors and an extensive wine list.
Sales of alcoholic beverages accounted for approximately 30% of McCormick &
Schmick's total sales during the year ended January 4, 1997.
The design of a McCormick & Schmick restaurant varies from a traditional
fish house design in a historic setting to a more contemporary dinner house and
brew pub concept. The restaurants have an elegant ambiance created through the
use of brass, rich wood, stained glass, linens and candlelight. McCormick &
Schmick restaurants range in size from 6,000 to 14,000 square feet with dining
capacities for 130 to 290 customers.
McCormick & Schmick restaurants are operated under the names "McCormick &
Schmick's," "McCormick," "McCormick's," "Jake's," "McCormick & Kuleto's" and
"Harborside." McCormick & Schmick intends to open two new restaurants in 1997.
Hops Grill & Bar
Apple South also has entered into an agreement to acquire Hops Grill &
Bar, which, as of February 7, 1997, operated 19 full-service, casual dining
restaurants featuring an on-premise microbrewery. The purchase price for Hops
Grill & Bar will be $31.5 million, which will be paid equally in cash and Apple
South Common Stock. In addition, Apple South will assume approximately $26.5
million of debt. Apple South expects to complete this acquisition in the first
quarter of 1997.
The first Hops Grill & Bar restaurant was opened in Clearwater, Florida
in 1989. Each restaurant offers a diverse menu of popular foods, freshly
prepared in a display kitchen with a strict commitment to quality. The
restaurants seek to heighten customers' sense of value by offering generous
portions at moderate prices. Hops Grill & Bar restaurants feature an
American-style menu that includes top choice steaks and prime rib, smoked baby
back ribs, fresh fish, chicken and pasta dishes, deluxe burgers and sandwiches,
hand-tossed salads with homemade dressings, appetizers, soups and desserts. The
menu offers separate selections for children. The cost of a typical meal,
including beverages, currently ranges from $6.00 to $9.00 per person for lunch
and $13.00 to $15.00 per person for dinner.
As a complement to its menu, each Hops Grill & Bar restaurant offers
lager-style beers and ales that are brewed on-premises. The restaurants utilize
their original recipes to brew four distinctive lager-style beers and ales:
Clearwater Light, Lightning Bold Gold, Hammerhead Red and A-1 Ale. An
observation microbrewery at each restaurant allows customers to view the entire
brewing process. The brewed beers are served in a frozen
8
<PAGE>
glass mug and, except for one non-alcoholic beer, are the only beers served.
Full bar service is also available at each restaurant. Sales of alcoholic
beverages accounted for approximately 18% of the total sales (with beer
constituting 10% of total sales) during 1996.
Hops Grill & Bar restaurants range in size from approximately 5,000 to
7,300 square feet. The on-premise brewing equipment is an integral aspect of the
design, enhancing the ambiance of the restaurant and creating a dramatic visual
effect. The observation microbreweries in the restaurants occupy from 450 to 750
square feet. The restaurant dining and bar areas seat from 160 to 240 customers.
The cost of developing and opening a Hops Grill & Bar restaurant averaged
approximately $1.4 million in 1996, excluding land costs and including
approximately $160,000 in microbrewery equipment.
An operating partner program is a key element of the Hops Grill & Bar
development strategy. Under this program, each operating partner acquires a 10%
interest in the restaurants developed within a specified geographic area. Each
operating partner is an experienced restaurant operator who can provide local
market knowledge and management. Five of the Hops Grill & Bar restaurants
currently have an operating partner whose interest will remain in place after
the acquisition by Apple South. Apple South expects that Hops Grill & Bar will
continue this program following the acquisition. Hops Grill & Bar intends to
open nine restaurants in 1997.
Other Concepts
Apple South operates ten Hardee's fast-food restaurants in northern and
central Florida as a franchisee of Hardee's Food Systems. In January 1997, Apple
South signed a contract for the sale of its Hardee's restaurants, which Apple
South expects to complete by the end of the first quarter of 1997. The Hardee's
division contributed less than 2% of sales in 1996.
In April 1995, Apple South changed the name of the Gianni's Little Italy
concept to Tomato Rumba's Pastaria Grill to avoid trademark conflicts in certain
markets. During 1995, all but three restaurants in this division were opened as,
or converted, to Tomato Rumba's. However, during 1996, the division did not meet
Apple South's expectations and all 21 restaurants were closed. Apple South
expects to redeploy those assets. The Tomato Rumba's division contributed less
than 1% of sales in 1996.
Governmental Regulation
Each of Apple South's restaurants is subject to licensing and regulation
by a number of governmental authorities, which include alcoholic beverage
control, and health, safety and fire agencies in the state or municipality in
which the restaurant is located. Difficulties or failures in obtaining the
required licenses or approvals could delay or prevent the opening of a new
restaurant in a particular area. If Apple South fails to maintain all required
state and local licenses permitting the sale of liquor by the drink at each of
it's Applebee's restaurant, then the Franchisor may terminate both the franchise
agreement pertaining to such restaurant and the development agreement pertaining
to the territory in which the restaurant is located.
In 1996, approximately 14% of Apple South's Applebee's sales, 20% of Don
Pablo's sales and 16% of Harrigan's sales were attributable to the sale of
alcoholic beverages. Alcoholic beverage control regulations require each of
Apple South's restaurants to apply to a state authority and, in certain
locations, county or municipal authorities for a license or permit to sell
alcoholic beverages on the premises and to provide service for extended hours
and on Sundays. Some of the counties in which Apple South has restaurants
prohibit the sale of alcoholic beverages on Sundays. Typically, licenses or
permits must be renewed annually and may be revoked or suspended for cause at
any time. Alcoholic beverage control regulations relate to numerous aspects of
the daily operations of Apple South's restaurants, including minimum age of
patrons and employees, hours of operation, advertising, wholesale purchasing,
inventory control and handling, storage and dispensing of alcoholic beverages.
Apple South may be subject in certain states to "dram-shop" statutes,
which generally provide a person injured by an intoxicated patron the right to
recover damages from an establishment that wrongfully served
9
<PAGE>
alcoholic beverages to the intoxicated person. Apple South carries liquor
liability coverage as part of its existing comprehensive general liability
insurance.
Apple South's restaurant operations are also subject to Federal and state
laws governing such matters as minimum wage, working conditions, overtime and
tip credits. Apple South does not expect a significant increase in payroll
expenses as a result of the recently-enacted minimum wage legislation, but is
uncertain of the repercussion, if any, on other expenses as vendors are impacted
by higher minimum wage standards.
Competition
The restaurant industry is highly competitive with respect to price,
service, location, and food type and quality, and competition is expected to
intensify. There are a few, well-established competitors with greater financial
and other resources than Apple South. Some of Apple South's competitors have
been in existence for a substantially longer period than Apple South and may be
better established in the markets where Apple South's restaurants are or may be
located. The restaurant business is often affected by changes in consumer
tastes, national, regional or local economic conditions, demographic trends,
traffic patterns, the availability and cost of suitable locations, and the type,
number and location of competing restaurants. Apple South experienced increased
competition in attracting and retaining qualified management level operating
personnel. In addition, factors such as inflation, increased food, labor and
benefits costs, and difficulty in attracting hourly employees may adversely
affect the restaurant industry in general and Apple South's restaurants in
particular.
Employees
As of December 29, 1996, Apple South employed approximately 22,000
persons in 22 states. Of those employees, approximately 350 held management or
administrative positions, 1,600 were involved in restaurant management, and the
remainder were engaged in the operation of Apple South's restaurants. Management
believes that Apple South's continued success will depend to a large degree on
its ability to attract and retain good management employees. While Apple South
will have to continually address a level of employee attrition normally expected
in the food-service industry, Apple South has taken steps to attract and keep
qualified management personnel through the implementation of a variety of
employee benefit plans, including an Employee Stock Ownership Plan, a 401(k)
Plan, and an incentive stock option plan for its key employees. None of Apple
South's employees is covered by a collective bargaining agreement. Apple South
considers its employee relations to be good.
10
<PAGE>
Item 2. Properties
The Company owns a renovated historic building in Madison, Georgia,
containing approximately 19,000 square feet of office space which is used as its
corporate headquarters and an adjoining new building containing approximately
41,000 square feet of office space which serves as its Applebee's division
operations center. The office for the Don Pablo's and Harrigan's divisions is
currently located in approximately 16,000 square feet of leased space in
Bedford, Texas, under a lease which terminates in May 1999, subject to the
Company's right to terminate the lease in 1997 by paying a specified termination
fee. The Company is currently building a new divisional facility which will
house the Don Pablo's and Harrigan's division operations center and is expected
to be complete by the third quarter of 1997. The Company believes that its
corporate headquarters is sufficient for its present needs. As of February 17,
1997, the Company owned 152 restaurant sites and buildings, owned 79 restaurant
buildings subject to ground leases, and leased 84 of its restaurant facilities.
Thirty of these leases contain purchase options.
In selecting sites, the Applebee's and Don Pablo's divisions attempt to
acquire prime locations in the market area to maximize both short- and long-term
revenues. Site selection is made by each division's development department,
subject to executive officer approval and the Franchisor's approval for
Applebee's restaurants. The Applebee's and Don Pablo's divisions primarily
target customers who are 21 to 54 years old and have a family annual income over
$25,000. A target market area should have a population base of at least 50,000.
Within the target market area the current divisions evaluate major retail and
office concentrations and major traffic arteries to determine focal points. Site
specific factors considered include visibility, ease of ingress and egress,
proximity to direct competition, accessibility to utilities, local zoning
regulations, laws regulating the sale of alcoholic beverages, and various other
factors. The restaurants are generally located in stand-alone buildings on major
arteries in an effort to provide high visibility and convenient access from both
residential and business areas.
11
<PAGE>
As of February 17, 1997, the Company operated 320 restaurants in the
following locations:
Applebee's Don Pablo's Harrigan's Hardee's Total
Florida 29 7 10 46
Virginia 38 6 44
Tennessee 39 39
South Carolina 34 34
Illinois 25 25
Texas 13 7 20
Wisconsin 19 19
Ohio 2 11 13
Kentucky 8 3 11
Mississippi 10 10
Indiana 1 9 10
Iowa 10 10
Maryland 8 1 9
Oklahoma 4 3 7
Georgia 5 5
Pennsylvania 1 3 4
West Virginia 4 4
North Carolina 3 3
Michigan 3 3
Minnesota 2 2
New Mexico 1 1
Arizona 1 1
- --------------------------------------------------------------------------------
Totals 236 63 11 10 320
================================================================================
Item 3. Legal Proceedings
The Company is not currently a party to, and no property of the Company
is the subject of, any material pending legal proceeding, other than ordinary
routine litigation incidental to its business.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of calendar year 1996.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's common stock is traded on the Nasdaq Stock Market (National
Market) under the symbol "APSO". A summary of the range of high and low sales
prices per share for the Company's common stock is presented below.
Stock Price Performance
Low High
1995
1st quarter $11.75 16.13
2nd quarter $14.50 19.50
3rd quarter $19.13 25.88
4th quarter $17.75 24.63
1996
1st quarter $17.13 24.50
2nd quarter $22.13 28.25
3rd quarter $13.00 27.25
4th quarter $11.38 15.00
As of February 17, 1997, there were approximately 20,000 shareholders of the
Company's common stock, based on the number of record holders and the estimated
number of individual participants represented by security position listings.
Dividends
The following table indicates cash dividends declared per share on the
Company's common stock for the following fiscal years, adjusted to give
retroactive effect to the Company's 1994 stock dividends (see Note 11 to the
consolidated financial statements):
Quarter Ended 1996 1995 1994
- -------------------------------------------------------------------------------
March 0.0060 0.0040 0.0027
June 0.0080 0.0060 0.0040
September 0.0080 0.0060 0.0040
December 0.0080 0.0060 0.0040
- -------------------------------------------------------------------------------
Total 0.0300 0.0220 0.0147
13
<PAGE>
Item 6. Selected Financial Data
<TABLE>
Five-year Summary of Selected Financial Data
Apple South, Inc.
(Dollars in thousands, except per share data)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
5-year Compound
Annual Growth Rate 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Restaurant sales:
Applebee's 39.8% $379,042 300,928 201,359 150,921 102,464
Don Pablo's 59.0% 133,261 88,820 57,192 31,132 17,039
Harrigan's -0.7% 21,991 22,781 23,021 23,044 23,183
Tomato Rumba's - 3,526 19,399 9,973 2,718 10
Hardee's 1.1% 8,202 8,262 9,014 9,940 8,663
- -----------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales 36.6% 546,022 440,190 300,559 217,755 151,359
- -----------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 34.1% 150,090 120,630 84,910 63,329 44,756
Payroll and benefits 37.2% 162,017 129,424 87,236 62,425 43,589
Depreciation and amortization 40.5% 22,509 17,662 11,119 7,483 4,932
Other operating expenses 34.5% 125,781 98,850 69,483 51,636 37,663
- -----------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 35.5% 460,397 366,566 252,748 184,873 130,940
- -----------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses 36.3% 26,329 22,298 15,359 11,584 7,917
Merger and asset revaluation charges - 27,700 9,997 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income 30.4% 31,596 41,329 32,452 21,298 12,502
- -----------------------------------------------------------------------------------------------------------------------------------
5.8% 9.4% 10.8% 9.8% 8.3%
Other income (expense):
Interest expense 32.2% (11,417) (6,189) (3,131) (2,205) (2,193)
Interest income -12.2% 69 638 789 590 184
Other, net - (2,024) (1,349) (150) (490) (606)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) 39.5% (13,372) (6,900) (2,492) (2,105) (2,615)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 25.5% 18,224 34,429 29,960 19,193 9,887
3.3% 7.8% 10.0% 8.8% 6.5%
Income taxes 25.8% 6,550 14,150 10,900 7,250 3,725
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 25.4% $11,674 20,279 19,060 11,943 6,162
====================================================================================================================================
2.1% 4.6% 6.3% 5.5% 4.1%
Earnings per common and
common equivalent share 11.9% $0.30 0.52 0.54 0.36 0.22
====================================================================================================================================
Weighted average common and common
equivalent shares outstanding 12.0% 39,369 38,880 35,444 33,395 27,806
====================================================================================================================================
Restaurants open at end of period:
Applebee's 36.9% 231 187 120 90 68
Don Pablo's 55.2% 63 44 33 17 9
Harrigan's - 12 12 12 12 12
Tomato Rumba's - 0 21 13 4 2
Hardee's - 10 10 10 10 10
Total 32.6% 316 274 188 133 101
Annual sales growth 36.6% 24.0% 46.5% 38.0% 43.9% 32.0%
Net earnings growth 25.4% -42.4% 6.4% 59.6% 93.8% 63.4%
Earnings per share growth 11.9% -43.1% -3.7% 50.0% 63.6% 29.4%
Working capital - ($15,494) (17,778) 2,200 6,175 (17,801)
Total assets 54.2% $457,827 369,138 226,087 137,201 74,337
Long-term obligations 68.4% $215,891 118,726 70,190 32,227 18,225
Shareholders' equity 54.0% $191,429 203,221 120,341 79,899 28,859
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
For an understanding of the significant factors that influenced Apple
South's performance during the past three fiscal years, the following discussion
should be read in conjunction with the consolidated financial statements
appearing elsewhere in this annual report.
Results of Operations
The following table sets forth, for the periods indicated, the percentages which
certain items of income and expense bear to total restaurant sales.
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------
Dec. 29, Dec. 31, Dec. 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant sales:
Applebee's 69.% 68.% 67.%
Don Pablo's 24.4 20.2 19.0
Harrigan's 4.0 5.2 7.7
Tomato Rumba's 0.7 4.4 3.3
Hardee's 1.5 1.9 3.0
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales 100.0 100.0 100.0
- ------------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 27.5 27.4 28.3
Payroll and benefits 29.7 29.4 29.0
Depreciation and amortization 4.1 4.0 3.7
Other operating expenses 23.0 22.5 23.1
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 84.3 83.3 84.1
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses 4.8 5.1 5.1
Merger and asset revaluation charges 5.1 2.2 --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 5.8 9.4 10.8
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense (2.1) (1.4) (1.0)
Interest income 0.0 0.1 0.2
Other, net (0.4) (0.3) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (2.5) (1.6) (0.8)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 3.3 7.8 10.0
Income taxes 1.2 3.2 3.7
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings 2.1% 4.6% 6.3%
====================================================================================================================================
</TABLE>
15
<PAGE>
Comparison of Historical Results - Fiscal Years 1996, 1995 and 1994
Sales
Restaurant sales for 1996 increased 24% to $546 million from $440 million
in 1995 primarily due to a full-year's sales from 67 Applebee's and 11 Don
Pablo's restaurants opened or acquired in 1995 and a partial-year's sales from
45 Applebee's and 19 Don Pablo's restaurants opened in 1996. This sales increase
was partially offset by the closure of 21 restaurants in the Tomato Rumba's
division and one Applebee's restaurant in 1996. For restaurants that were open
during all of 1995 and 1996, average weekly volumes from 1995 to 1996 decreased
3% at Applebee's and increased 8% at Don Pablo's. For that base group of 120
Applebee's restaurants, the comparison improved each quarter, ranging from a
decrease of 4% in the first quarter to a decrease of 1% in the fourth quarter.
Management believes that the sales increase at Don Pablo's restaurants is
primarily the result of television advertising, which was initiated during 1996.
Sales, primarily at the Applebee's division, were negatively impacted by
unseasonably severe weather in the first quarter and by hurricanes and the
Summer Olympics in the third quarter. Sales in the fourth quarter of 1996 were
negatively impacted by a shortened Christmas season and the December 29 period
cut-off which excluded New Year's Eve. Responding to lower average unit volumes,
higher management turnover and other factors precipitated by a cultural clash in
a Midwest acquisition completed in 1995 in the Applebee's division, the Company
increased staffing levels and added experienced multi-unit managers to enhance
operational leadership and to improve guest service in the Applebee's division
beginning in the third quarter of 1996. Sales trends for the division have
improved in late 1996 and early 1997.
Restaurant sales for 1995 increased 46% to $440 million from $301 million
in 1994 primarily due to a full-year's sales from 30 Applebee's, 16 Don Pablo's,
and ten Gianni's restaurants opened in 1994 and a partial-year's sales from 67
Applebee's, 11 Don Pablo's and nine Tomato Rumba's opened or acquired in 1995.
One Gianni's restaurant was closed in each of 1995 and 1994. For restaurants
that were open during all of 1994 and 1995, average weekly volumes from 1994 to
1995 remained constant at Applebee's and increased 1% at Don Pablo's.
In 1995, the Company increased restaurant sales and income from restaurant
operations (total restaurant sales less total restaurant operating expenses) by
accelerating its restaurant acquisition program. In March 1995, the Company
acquired certain assets including eight operating Applebee's restaurants and the
exclusive Applebee's development rights for most of Iowa, northwestern Illinois,
and contiguous areas in Wisconsin and Missouri for approximately $17 million in
cash (the "Iowa acquisition"). In June 1995, the Company acquired certain assets
including 18 operating Applebee's restaurants and the exclusive Applebee's
development rights for the Chicago metropolitan area, most of Wisconsin and
contiguous areas in Minnesota and Michigan from Marcus Restaurants, Inc. for
approximately $48 million (the "Marcus acquisition"). The results of operations
from the acquired restaurants are included in consolidated operating results
from the time of acquisition. In November 1995, Apple South merged with DF&R
Restaurants, Inc. ("DF&R") in a pooling- of- interests transaction. The merger
was effected through the exchange of 1.5 shares of Apple South common stock for
each share of DF&R common stock, which resulted in the issuance of approximately
9.3 million shares of Apple South common stock. 16
<PAGE>
Operating Expenses
Restaurant operating expenses as a percentage of sales increased to 84.3%
in 1996 from 83.3% in 1995 and 84.1% in 1994. The resulting 1996 decrease in
restaurant operating margins is principally due to (i) higher food and beverage
costs as a percentage of sales at Applebee's, (ii) lower average unit volumes in
the Applebee's division which reduced operating leverage on fixed costs and
(iii) an increase in labor costs in Applebee's related to the staffing
initiatives begun in the last half of the year. The increased labor costs are
expected to continue into 1997, although management anticipates that these
higher costs will be offset with average unit volume increases. These 1996
margin reductions were partially offset by (i) lower food and beverage costs as
a percentage of sales at Don Pablo's and Harrigan's, (ii) an increase in
operating leverage at Don Pablo's on fixed costs as a result of the higher
average unit volumes and (iii) lower preopening and training costs as a
percentage of sales.
Pursuant to the terms of a revised agreement with the Company's primary
food distributor for the Applebee's division, effective in July 1994, the
Company took advantage of early payment discounts and reduced days payable from
30 to 0 by January, 1995, which lowered food and beverage costs in that division
by 1.1% in 1995. Effective in April, 1996, new distribution supply contracts
were implemented for the Don Pablo's and Harrigan's divisions which resulted in
a decrease of food and beverage costs, as a percentage of sales, for those
divisions. These efforts were offset in 1996 by rising cheese, dairy and pork
prices, which affected all divisions. The combined effect of these factors was a
0.1% increase in food and beverage costs for the Company for 1996 compared to
1995. Management does not expect significant fluctuations in food and beverage
costs in 1997.
Preopening and training expenses as a percentage of sales decreased to 2.2%
in 1996 from 2.3% in 1995 and 2.7% in 1994 due to the expenses for the openings
being compared to a larger sales base. The number of openings as a percentage of
the number of restaurants open at the beginning of the year was 23%, 32% and 42%
for 1996, 1995 and 1994, respectively. The decrease from 2.7% in 1994 to 2.3% in
1995 primarily resulted from incremental sales increases from the 26 restaurants
acquired in 1995 which did not incur preopening and training costs that
generally arise from a new restaurant opening.
General and Administrative Expenses
General and administrative expenses as a percent of sales decreased to 4.8%
in 1996 as compared with 5.1% 1995 and 1994, primarily due to a reduced level of
management bonuses paid in 1996 and the allocation of relatively fixed corporate
management costs to a growing number of restaurants.
Merger and Asset Revaluation Charges
Merger and asset revaluation charges are non-recurring charges related to
organizational changes made in 1996 and 1995. In April 1995, the Company changed
the name of the Gianni's Little Italy concept to Tomato Rumba's Pastaria Grill
to avoid trademark conflicts in certain markets. During 1995, all but three
restaurants in this division were opened as, or converted to, Tomato Rumba's.
However, during 1996, the division was not meeting the Company's expectations
and
17
<PAGE>
all 21 restaurants were closed. Apple South expects to redeploy these assets.
Also during 1996, the Company accelerated its efforts to sell the Hardee's
division and these restaurants currently are under contract to be sold. Apple
South's decision regarding the Tomato Rumba's and Hardee's divisions prompted an
evaluation of the fair value of the assets in these divisions. Fair value of the
assets was determined in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of", by comparing expected future cash flows to
the carrying value of these assets. The resulting impairment, along with the
write-off of other specific assets and certain operating losses of these
divisions, totaled $27.7 million and is included in merger and asset revaluation
charges. In 1995, merger and revaluation charges included professional fees and
other costs related to the DF&R merger. Also in 1995, these expenses included
conversion costs such as decor and menu changes, the write-off of specific
assets and certain operating losses related to the Gianni's Little Italy
restaurants prior to conversion to Tomato Rumba's Pastaria Grill.
Interest and Other Expenses
Interest expense increased to $11.4 million in 1996 from $6.1 million in
1995 due to higher average borrowings combined with higher average interest
rates for the year. The average rate increase was principally due to the
issuance of $125 million of 9.75% senior notes. Interest expense was higher in
1995 than in 1994 due to higher average debt balances partially offset by lower
borrowing rates. The Company's weighted average interest rate on borrowings was
approximately 8.1% in 1996, 7.3% in 1995 and 8.0% in 1994. The higher debt
balances in all three years reflect the financing of the Company's restaurant
construction and acquisition program. Other expenses increased in 1996 compared
to 1995 primarily due to the full year of amortization of goodwill and other
intangible assets recorded as a part of the allocation of purchase price for the
Marcus and Iowa acquisitions in 1996 compared to a partial year in 1995. Other
expenses increased in 1995 compared with 1994 due to the partial year of
amortization of goodwill and other intangible assets related to the acquisitions
during 1995.
Income Tax Expense
Income tax expense as a percent of earnings before income taxes was 35.9%
in 1996, 41.1% in 1995, and 36.4% in 1994. The decrease in the effective tax
rate for 1996 compared with 1995 and the increase for 1995 compared with 1994 is
due to certain non-deductible costs associated with the DF&R merger in 1995.
Management does not expect any material change in the effective tax rate for
1997.
Net Earnings
Net earnings as a percentage of sales decreased to 2.1% in 1996 from 4.6%
in 1995 primarily as a result of asset revaluation charges (3.2% of sales, net
of tax), higher interest expense and goodwill amortization, and lower
restaurant-level margins in the Applebee's division, which were only partially
offset by improved margins in the Don Pablo's division and a decrease in general
and administrative expenses as a percentage of sales. Net earnings as a percent
of sales decreased to 4.6% in 1995 from 6.3% in 1994 primarily as a result of
merger and conversion expenses (1.9% of sales, net of tax), higher interest
expense and goodwill amortization which were only partially offset by improved
restaurant-level margins.
18
<PAGE>
Liquidity and Capital Resources
The Company's historical and projected future growth cause it to be a net
user of cash, even after a significant amount of expansion financing is
generated from operations. Principal financing sources in 1996 consisted of (i)
the issuance of senior notes ($125 million) and (ii) cash flow from operations
($65 million). The primary uses of funds consisted of (i) costs associated with
expansion, principally land, building and equipment associated with the
construction of new Applebee's and Don Pablo's restaurants ($125 million), (ii)
the purchase of 1,447,800 shares of treasury stock ($30 million), (iii)
repayment of long-term debt ($20 million), (iv) repayment of revolving credit
agreements ($11 million) and (v) additions to other assets ($7 million).
Since substantially all sales in the Company's restaurants are for cash and
accounts payable are generally due in 15 to 45 days, the Company is able to
operate with negative working capital.
The increases in accounts receivable, inventory, premises and equipment,
franchise costs, accounts payable and accrued liabilities are principally due to
the 64 restaurants opened during 1996. The increase in prepaid expenses and
other is primarily related to selected Tomato Rumba's sites and the Hardee's
restaurants that are currently being held for sale. The increase in other assets
is principally due to acquisition of property held for future expansion of the
Company's corporate facilities, deferred loan costs related to the issuance of
senior notes and the annual increase in cash surrender value on an officer's
life insurance policy. Further increases in current asset and liability accounts
are expected as the Company continues its restaurant development program.
The Company's 1996 capital expenditure program provided for the opening of
45 Applebee's and 19 Don Pablo's, as well as significant technological
improvements in the restaurants and the corporate office and ongoing
refurbishments of existing restaurants.
The Company expects to open 60 restaurants in 1997 and 84 in 1998. The
associated capital requirements will depend upon the mix between owned and
leased units. In the last three years, the Company has purchased 72% of its new
restaurant sites. The annual capital requirement for new construction is
expected to approximate $105 million to $115 million in 1997 and $145 million to
$155 million in 1998. In addition, purchase options on six of the Company's
existing operating leases become exercisable over the next two years. In order
to eliminate these high-cost leases and to continue to reduce occupancy costs,
the Company expects to exercise these options. The capital costs associated with
these purchase options, along with capital expenditures on existing restaurants
and new office facilities for the Don Pablo's and Harrigan's divisions in Texas,
bring the total capital requirements to approximately $130 million in 1997 and
$175 million in 1998.
At December 29, 1996, Apple South was obligated to open 129 additional
Applebee's restaurants by the end of the year 2000, including 34 required to be
opened in 1997. As of February 7, 1997, the Applebee's division had opened five
new restaurants and had another five under construction, while the Don Pablo's
division had another six under construction.
19
<PAGE>
In February, 1997, the Company entered into an agreement to acquire
McCormick & Schmick's,a restaurant company based in Oregon, for $53 million in
cash and stock and the assumption of approximately $15 million in debt. This
transaction, which will be accounted for as a purchase business combination, is
expected to close before the end of the first quarter of 1997. McCormick and
Schmick's is among the nation's largest upper-end casual seafood restaurant
chains, operating 16 restaurants in Oregon, Washington, California, Colorado and
Washington, D.C.
Also in February, 1997, the Company entered into an agreement to acquire
Hops Grill & Bar, a restaurant company based in Florida, for $31.5 million in
common stock and cash, and the assumption of approximately $26.5 million in
debt. This transaction, which will be accounted for as a purchase business
combination, is expected to close before the end of the first quarter of 1997.
Hops Grill & Bar consists of 19 restaurants that feature an on-premises
microbrewery. All but three of the Hops restaurants are located in Florida.
In 1996, the Company issued $125 million of registered 9.75% senior notes
due March, 2006, a portion of which was used to pay down the Company's unsecured
revolving bank credit facilities and to repay the $18 million remaining private
placement at par. Also, in 1996, the Company expanded its unsecured revolving
bank credit agreements from $120 million to $190 million with interest payable
at a margin above LIBOR or at prime. Approximately $90 million was outstanding
under these revolving bank credit agreements on December 29, 1996.
In February, 1997, the Company announced its intention to issue $100
million of term convertible securities, at a rate to be determined. Net proceeds
to the Company from the offering are expected to be approximately $96.5 million.
Management believes that the net proceeds of this offering, cash flow from
operations and remaining borrowings available under the existing credit
facilities will provide funding sufficient to enable Apple South to complete the
two pending acquisitions and to carry out expansion plans through the third
quarter of 1998.
The terms of the Company's revolving credit agreements include various
covenants, which among other things require the Company to maintain an adjusted
debt to total adjusted capital ratio of less than 65%. The Company is in
compliance with all provisions of these agreements. In 1996, the Company's net
financing, operating and investing activities increased the debt to total
capital ratio to 53% in 1996 from 38% in 1995.
During 1996, the Company announced that it may from time to time, depending
on market conditions, purchase up to two million shares of its common stock
through open market transactions to satisfy obligations under stock option and
employee stock ownership plans. As of December 29, 1996, the company had
purchased an aggregate 1,447,800 shares of its common stock for an aggregate
purchase price of $30 million (average price of $20.76 per share). The Company
does not intend to repurchase additional shares at this time.
Forward Looking Information
Management believes that inflation has not had a material effect on
earnings during the past several years. Inflationary increases in the cost of
labor, food and other operating costs could
20
<PAGE>
adversely affect the Company's restaurant operating margins. In the past,
however, the Company generally has been able to modify its operations to offset
increases in its operating costs.
The information contained herein includes certain forward looking
information regarding restaurant openings, operating margins, capital
requirements, cash flow from operations and assumptions regarding the
availability of new credit facilities. This forward looking information could be
affected by changes in monetary and fiscal policies, laws and regulations, and
social and economic conditions, such as inflation or a recession, increased
competition in the restaurant industry, the current trend towards "dining out"
and the amount, type and cost of financing available to the Company.
21
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Independent Auditors' Report...................................... 23
Consolidated Statement of Earnings................................ 24
Consolidated Balance Sheets....................................... 25
Consolidated Statements of Shareholders' Equity................... 26
Consolidated Statements of Cash Flows............................. 27
Notes to Consolidated Financial Statements........................ 28
22
<PAGE>
Independent Auditors' Report
The Board of Directors
Apple South, Inc.
We have audited the accompanying consolidated balance sheets of Apple South,
Inc. as of December 29, 1996 and December 31, 1995, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended December 29, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apple
South, Inc. at December 29, 1996 and December 31, 1995, and the consolidated
results of its operations and cash flows for each of the years in the three-year
period ended December 29, 1996 in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, in 1996 the
Company adopted the provisions of Statement of Financial Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
KPMG Peat Marwick LLP
Atlanta, Georgia
January 24, 1997
(Except for Note 15, as to which
the date is February 7, 1997)
23
<PAGE>
<TABLE>
Consolidated Statements of Earnings
Apple South, Inc.
(In thousands, except per share data)
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 31, Dec. 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restaurant sales:
Applebee's ................................................... $ 379,042 300,928 201,359
Don Pablo's .................................................. 133,261 88,820 57,192
Harrigan's ................................................... 21,991 22,781 23,021
Tomato Rumba's ............................................... 3,526 19,399 9,973
Hardee's ..................................................... 8,202 8,262 9,014
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant sales ................................. 546,022 440,190 300,559
- ------------------------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage ............................................ 150,090 120,630 84,910
Payroll and benefits ......................................... 162,017 129,424 87,236
Depreciation and amortization ................................ 22,509 17,662 11,119
Other operating expenses ..................................... 125,781 98,850 69,483
- ------------------------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses .................... 460,397 366,566 252,748
- ------------------------------------------------------------------------------------------------------------------------------------
General and administrative expenses .............................. 26,329 22,298 15,359
Merger and asset revaluation charges ............................. 27,700 9,997 --
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income ................................................. 31,596 41,329 32,452
- ------------------------------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest expense ............................................. (11,417) (6,189) (3,131)
Interest income .............................................. 69 638 789
Other, net ................................................... (2,024) (1,349) (150)
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense) ........................... (13,372) (6,900) (2,492)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes ..................................... 18,224 34,429 29,960
Income taxes ..................................................... 6,550 14,150 10,900
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings ..................................................... $ 11,674 20,279 19,060
====================================================================================================================================
Earnings per common and
common equivalent share ...................................... $ 0.30 0.52 0.54
====================================================================================================================================
Weighted average common and common
equivalent shares outstanding ................................ 39,369 38,880 35,444
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
Consolidated Balance Sheets
Apple South, Inc.
(In thousands, except share data)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Dec. 29, Dec. 31,
1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,923 4,806
Short-term investments 52 377
Accounts receivable 4,568 3,506
Inventories 6,364 5,416
Prepaid expenses and other 9,780 5,282
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 24,687 19,387
Premises and equipment, net 380,523 303,077
Franchise costs, net 5,880 4,920
Goodwill, net 36,351 38,375
Other assets 10,386 3,379
- -----------------------------------------------------------------------------------------------------------------------------------
$ 457,827 369,138
===================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 16,688 13,489
Accrued liabilities 22,887 20,282
Current installments of long-term debt 286 3,207
Income taxes 320 187
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 40,181 37,165
Long-term debt 215,891 118,726
Deferred income taxes 10,326 10,026
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 266,398 165,917
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized 75,000,000 shares;
39,124,925 issued in 1996 and 39,079,261 issued in 1995 391 391
Additional paid-in capital 132,976 142,355
Retained earnings 70,981 60,475
Treasury stock, at cost; 677,508 shares in 1996 (12,919) -
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 191,429 203,221
- -----------------------------------------------------------------------------------------------------------------------------------
$ 457,827 369,138
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity
Apple South, Inc.
(In thousands, except per share amounts)
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Shareholders'
Shares Amount Capital Earnings Stock Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 32,768 $327 $57,287 $22,285 - $79,899
Net earnings - - - 19,060 - 19,060
Sale of common stock 1,133 11 19,084 - - 19,095
Common stock issued to ESOP 23 1 394 - - 395
Exercise of options 376 4 770 - - 774
Tax effect of exercise of options by employees - - 1,637 - - 1,637
Cash dividends ($0.015 per share) - - - (364) - (364)
Distributions made by acquired
companies prior to merger - - - (223) - (223)
Pro forma income tax adjustment - - - 68 - 68
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 34,300 343 79,172 40,826 - 120,341
Net earnings - - - 20,279 - 20,279
Sale of common stock 4,076 41 57,307 - - 57,348
Common stock issued to ESOP 56 - 665 - - 665
Exercise of options 647 7 1,798 - - 1,805
Tax effect of exercise of options by employees - - 3,413 - - 3,413
Cash dividends ($0.022 per share) - - - (630) - (630)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 39,079 391 142,355 60,475 - 203,221
Net earnings - - - 11,674 - 11,674
Purchase of common stock - - - - ($30,048) (30,048)
Common stock issued to ESOP - - (21) - 271 250
Exercise of options 46 - (13,893) - 16,858 2,965
Tax effect of exercise of options by employees - - 4,535 - - 4,535
Cash dividends ($0.030 per share) - - - (1,168) - (1,168)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 1996 39,125 $391 $132,976 $70,981 ($12,919) $191,429
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
Apple South, Inc.
(In thousands)
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,674 20,279 19,060
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 26,250 19,946 11,119
Pro forma income tax adjustment -- -- 68
Deferred income taxes 300 5,050 2,907
Loss on disposal of premises and equipment 107 97 185
Asset revaluation charges 27,700 -- --
(Increase) in assets:
Accounts receivable (1,062) (1,601) (1,119)
Inventories (1,488) (1,435) (1,030)
Prepaid expenses and other (1,837) (1,403) (2,035)
Increase (decrease) in liabilities:
Accounts payable 3,199 2,394 3,694
Accrued liabilities (4,958) 7,527 2,933
Income taxes 4,668 2,241 1,709
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 64,553 53,095 37,491
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (124,623) (124,066) (99,391)
Assets acquired for cash in business combinations -- (52,059) --
Proceeds from sale of land and equipment 429 2,209 3,930
Decrease in short-term investments, net 325 2,480 5,299
Additions to franchise costs (1,302) (1,205) (909)
Additions to other assets (6,508) (1,795) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (131,679) (174,436) (91,071)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements (11,000) 56,000 44,500
Proceeds from issuance of long-term debt 125,000 -- --
Principal payments on long-term debt (19,756) (9,628) (5,668)
Proceeds from issuance of common stock 3,215 59,818 20,264
Dividends declared and paid (1,168) (630) (364)
Distributions of acquired companies prior to merger -- -- (223)
Purchase of treasury stock (30,048) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 66,243 105,560 58,509
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents during the period (883) (15,781) 4,929
Cash and cash equivalents at the beginning of the period 4,806 20,587 15,658
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 3,923 4,806 20,587
===================================================================================================================================
Supplemental disclosures:
Interest paid $ 10,728 6,878 3,139
Income taxes paid 1,415 6,859 6,180
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Apple South, Inc., including its wholly owned subsidiaries (the "Company"),
is a multi-concept restaurant company and is the largest operator of Applebee's
Neighborhood Grill and Bar restaurants. At December 29, 1996, the Company
operated 231 Applebee's, 63 Don Pablo's Mexican restaurants, 12 Harrigan's
restaurants, and 10 Hardee's. The Company operates its Applebee's and Hardee's
restaurants under franchise agreements, whereas the Don Pablo's and Harrigan's
are proprietary concepts of the Company.
Basis of Presentation - The consolidated financial statements, which
contain certain amounts based upon management's best estimates, include the
accounts of Apple South, Inc. and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year - Effective January 1, 1995, the Company changed its fiscal
year from December 31 to a 52 or 53-week year ending on the Sunday closest to
December 31. Accordingly, the financial statements presented ended on December
29, 1996, December 31, 1995 and December 31, 1994. All general references to
years relate to fiscal years unless otherwise noted.
Cash Equivalents - Cash equivalents include all highly liquid investments,
which have original maturities of three months or less.
Short-term Investments - Short-term investments, which have original
maturities of greater than three months, are stated at cost plus accrued
interest, which approximates market value.
Inventories - Inventories consist primarily of food, beverages and supplies
and are stated at the lower of cost (using the first-in, first-out method) or
market.
Premises and Equipment - Premises and equipment are stated at cost.
Depreciation of premises and equipment is calculated using the straight-line
method over the estimated useful lives of the related assets, which approximates
25 years for buildings and seven years for equipment. Leasehold improvements are
depreciated using the straight-line method over the shorter of the lease term or
the estimated useful life of the asset.
Franchise Costs - The costs related to the acquisition of franchises are
amortized over their estimated useful lives, principally 20 years, using the
straight-line method. Accumulated amortization of franchise costs amounted to
$1.6 million at December 29, 1996 and $1.2 million at December 31, 1995. The
franchise agreements for the Applebee's restaurants also require royalty fees
equal to 4% of sales and advertising fees equal to 1 1/2% of sales. The
franchise agreements for the Hardee's restaurants require royalty fees of 3 1/2%
of sales and an advertising fee which approximates 1/2% of sales. Such fees are
expensed as incurred. Total royalty and advertising fees paid under franchise
agreements were $21.4 million in 1996, $16.9
28
<PAGE>
million in 1995, and $11.4 million in 1994.
Development Costs - Certain direct and indirect costs are capitalized in
conjunction with acquiring and developing new restaurants sites and amortized
over the life of the related building. Development costs were capitalized as
follows: $4.0 million in 1996, $3.0 million in 1995 and $1.8 million in 1994.
Preopening Costs - Preopening costs are incurred before a restaurant is
opened and consist primarily of wages and salaries, hourly employee recruiting,
license fees, meals, lodging and travel plus the cost of hiring and training the
management teams. Preopening costs are expensed in the first full month of a
restaurant's operations.
Advertising - The Company generally expenses advertising over the period
covered by the related promotions. Total advertising expense included in other
operating expenses was $13.2 million in 1996, $9.1 million in 1995 and $5.7
million in 1994, in addition to amounts paid to franchisors.
Goodwill - Goodwill represents the excess of cost over fair value of assets
acquired and is being amortized over 20 years using the straight-line method.
The Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operations. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. Accumulated amortization of
goodwill amounted to $3.5 million at December 29, 1996 and $ 1.5 million at
December 31, 1995.
Stock-Based Compensation - Stock-based compensation is determined using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock (Note 9).
Earnings Per Share - Earnings per share are computed based on the weighted
average number of common and common equivalent shares outstanding. The weighted
average number of shares and per share data have been retroactively adjusted to
give effect to various stock splits, effected as stock dividends (Note 11). The
difference between primary and fully diluted earnings per share was not
significant in any period presented.
Interest Rate Contracts - Interest rate hedge transactions are used to
manage interest rate exposure. The differentials to be paid or received under
these contracts, designated as hedges, are recognized in income over the life of
the contract as adjustments to interest expense.
Income Taxes - Apple Tenn-Flo, L.P. ("ATF") was acquired by the Company in
April 1994 (Note 2) in a transaction accounted for as a pooling of interests.
Prior to the merger, ATF was a limited partnership and as such, the individual
partners of ATF and not the partnership were responsible for Federal and state
income taxes.
29
<PAGE>
The accompanying consolidated statements of earnings reflect provisions for
income taxes on a pro forma basis for the period prior to the ATF acquisition as
if the Company were liable for Federal and state income taxes on ATF's earnings
at a 38% statutory rate. The consolidated statements of shareholders' equity
reflect adjustments to eliminate the pro forma income taxes attributed to ATF's
earnings since such taxes were the direct responsibility of ATF's partners.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts.
Reclassifications - Certain accounts have been reclassified in the 1995 and
1994 financial statements to conform with the 1996 classifications.
Note 2 - Business Combinations and Conversions
In July, 1996, the Company closed its six remaining Tomato Rumba's
restaurants and dissolved the operating division, after having closed 12 Tomato
Rumba's and 3 Gianni's restaurants in March, 1996. During 1996, the Company also
accelerated efforts to sell its ten Hardee's restaurants, which are under
contract and expected to be sold in early 1997. These decisions, combined with
the implementation of Statement of Financial Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of",
resulted in an asset revaluation charge of $27.7 million which consisted
primarily of the asset impairment loss and included certain operating losses
related to those divisions. Fair value of the assets in the Tomato Rumba's and
Hardee's divisions was determined by comparing expected future cash flows to the
carrying amount of these assets. Assets related to Hardee's and certain Tomato
Rumba's locations held for sale totaling $6.0 million are in other current
assets at December 29, 1996.
On November 17, 1995, the Company exchanged 9.3 million newly issued shares
of its common stock for all of the outstanding shares of DF&R Restaurants, Inc.
(DF&R). DF&R operated 56 full-service, casual dining restaurants, including 44
Mexican restaurants operating under the name Don Pablo's and 12 Harrigan's
restaurants specializing in mesquite-smoked prime rib and hickory-grilled
steaks.
The exchange of shares was accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements have been
restated to include the accounts and operations of the acquired entity for all
periods presented. Adjustments have been made to conform DF&R's reporting
periods and accounting policies. The only conforming accounting policy
adjustment made to DF&R's financial statements was to expense rather than
capitalize and amortize preopening expenses. As a result of this accounting
policy adjustment, DF&R's net earnings for the years ending December 31 were
reduced as follows: $29,000 in 1995 and $236,000 in 1994.
Merger and conversion expenses in 1995 are non-recurring costs related to
the merger with DF&R Restaurants, Inc. and the conversion of Gianni's Little
Italy restaurants to Tomato Rumba's Pastaria Grill in 1995. These expenses
primarily include investment banking fees,
30
<PAGE>
accounting and legal fees, printing costs and other costs related to the DF&R
merger, as well as conversion costs which include decor and menu changes and the
write-off of specific assets and certain operating losses related to the
Gianni's Little Italy restaurants prior to conversion.
In June 1995, the Company acquired certain assets of Marcus Restaurants,
Inc., another operator of Applebee's restaurants, in a transaction accounted for
under the purchase method for approximately $48 million. Approximately $16
million of the purchase price was funded by the proceeds from the sale of
900,000 shares of common stock, approximately $13 million of the purchase price
was financed as an operating lease through the Company's leveraged lease
agreement (Note 5) and the remaining $19 million was financed from borrowings
under the Company's revolving credit agreements. The assets acquired included 18
operating Applebee's restaurants, two Applebee's restaurants under construction
and the exclusive development rights to Applebee's territories in the Chicago
metropolitan area, most of Wisconsin, and certain contiguous counties in
Minnesota and Michigan. The excess of cost over fair value of assets acquired
was $27 million in this acquisition.
In March 1995, the Company acquired certain assets of another operator of
Applebee's restaurants, TUG, Inc., in a transaction accounted for under the
purchase method for approximately $17 million in cash. These assets included
eight operating Applebee's restaurants, the buildings in which two of the
restaurants are located, subject to ground leases, and the exclusive development
rights to Applebee's territory for most of Iowa, northwestern Illinois and
contiguous counties in Wisconsin and Missouri. The excess of cost over fair
value of assets acquired was $12 million in this acquisition.
In April 1994, the Company exchanged approximately 1 million newly issued
shares of its common stock for all the partnership interests in ATF. ATF
operated nine Applebee's restaurants, had one additional Applebee's restaurant
under construction and held exclusive development rights for additional
Applebee's restaurants in eastern Tennessee and a number of contiguous counties
in adjoining states. The exchange of shares was accounted for as a pooling of
interests, and accordingly, the accompanying consolidated financial statements
have been restated to include the accounts and operations of the acquired
entities for all periods presented. Results of operations for the ATF
restaurants prior to acquisition were not significant to the Company's
consolidated results of operations for the year ended December 31, 1994.
Note 3 - Premises and Equipment
A summary of premises and equipment at December 29, 1996 and December 31,
1995 follows (amounts in thousands):
1996 1995
Land ......................................... $ 80,912 53,314
Buildings .................................... 212,477 160,196
Equipment .................................... 123,391 101,819
Leasehold improvements ....................... 24,092 19,622
Construction in progress ..................... 16,639 21,376
Total premises and equipment ................. 457,511 356,327
Less accumulated depreciation
and amortization .......................... 76,988 53,250
Premises and equipment, net .................. $380,523 303,077
Note 4 - Long-Term Debt
Long-term debt at December 29, 1996 and December 31, 1995 consists of the
following (amounts in thousands):
1996 1995
Senior notes, unsecured, with interest at
9.75%, payable semi-annually; due in 2006 ........ $125,000 --
Revolving credit agreements, unsecured, with
variable rate interest (6.6% at December 29);
due in 1998 ...................................... 89,500 100,500
Term loan, unsecured, with interest at 7.3%;
paid in 1996 ..................................... -- 18,000
Other ................................................ 1,677 3,433
Total long-term debt ................................. 216,177 121,933
Less current installments ............................ 286 3,207
Long-term debt, excluding
current installments ............................... $215,891 118,726
31
<PAGE>
Based on the borrowing rates currently available to the Company for loans
with similar terms and average maturities, the fair value of long-term debt
approximates the book value recorded.
The aggregate annual maturities of long-term debt for the years subsequent
to December 29, 1996 are as follows: 1997 - $.3 million; 1998 - $89.7 million;
1999 - $.2 million; 2000 - $.2 million; 2001 - $.2 million; and thereafter-
$125.6 million.
Terms of the Company's senior notes and revolving credit agreements include
various provisions which, among other things, require the Company to (I)
maintain defined net worth and coverage ratios, (ii) limit the incurrence of
certain liens or encumbrances in excess of defined amounts and (iii) maintain
defined leverage ratios. The Company was in compliance with the provisions of
these agreements at December 29, 1996.
The Company has an interest rate swap agreement outstanding with a
commercial bank with a $75 million contract amount under which the Company pays
an average of certain foreign LIBOR-based variable rates of 6.5% at December 29,
1996 and receives a U.S. LIBOR-based variable rate of 7.0% at December 29, 1996.
This swap, which is accounted for as a hedge, is to reduce exposure to the
effects of changes in U.S. interest rates through June, 1999.
At December 29, 1996, the Company had revolving credit agreements
aggregating $190 million, of which $100.5 million was unused and available.
Note 5 - Leases
The Company has various leases for restaurant land, buildings, equipment
and office facilities. Land and building lease terms range from 10 to 20 years,
with renewal options ranging from five to 20 years. Equipment lease terms
generally range from four to eight years. In the normal course of business, some
leases are expected to be renewed or replaced by leases on other properties. In
other instances, the Company expects to exercise purchase options as and when
available in accordance with lease terms. Future minimum lease payments do not
include amounts payable by the Company for maintenance costs, real estate taxes,
insurance, etc., or contingent rentals payable based on a percentage of sales in
excess of stipulated amounts for restaurant facilities.
In 1995, the Company entered into a $30 million leveraged lease agreement.
This lease financing is structured as a series of individual operating leases
for financial reporting purposes, with lease rates approximately the same as the
borrowing rates available under the Company's revolving credit agreements.
During 1995, the entire $30 million commitment was utilized for the development
and acquisition of restaurants. These properties can later be purchased at their
original cost, renewed in three year increments, or sold to an unrelated party
with a Company guarantee of the $30 million residual value.
Future minimum lease payments under noncancelable operating leases at
December 29, 1996 are as follows (amounts in thousands):
1997 $ 15,594
1998 15,478
1999 15,178
2000 14,450
2001 13,719
Later years 73,235
Total minimum lease payments $147,654
Total rental expense related to cancelable and noncancelable operating
leases was $15.6 million in 1996, $13.6 million in 1995 and $10.3 million in
1994 including contingent rentals of $.9 million in 1996 and 1995, and $1.0
million in 1994.
32
<PAGE>
Note 6 - Accrued Liabilities
A summary of accrued liabilities at December 29, 1996 and December 31, 1995
follows (amounts in thousands):
1996 1995
Payroll and related benefits ................... $ 8,624 $ 9,776
Insurance ...................................... 3,110 2,442
Property taxes ................................. 3,039 1,674
Franchisor fees ................................ 2,115 1,852
Other .......................................... 5,999 4,538
$22,887 $20,282
Note 7 - Income Taxes
The components of the provision for income taxes for the years ended
December 29, 1996 and December 31, 1995 and 1994 are as follows (amounts in
thousands):
Current Deferred Total
1996:
Federal $5,200 250 5,450
State 1,050 50 1,100
- --------------------------------------------------------------------------------
Total $6,250 300 6,550
================================================================================
1995:
Federal $7,300 4,450 11,750
State 1,800 600 2,400
- --------------------------------------------------------------------------------
Total $9,100 5,050 14,150
================================================================================
1994:
Federal $6,835 2,165 9,000
State 1,500 400 1,900
- --------------------------------------------------------------------------------
Total $8,335 2,565 10,900
================================================================================
A reconciliation of the Federal statutory income tax rate to the effective
income tax rate (both historical and pro forma) applied to earnings before
income taxes in the accompanying consolidated statements of earnings for the
years ended December 29, 1996 and December 31, 1995 and 1994 follows:
1996 1995 1994
Tax at Federal statutory rate ................. 35.0% 35.0% 35.0%
Increase (decrease)in taxes due to:
Rate differential ....................... (0.7) - (0.3)
State income tax, net of
Federal benefit ...................... 4.0 4.0 4.0
FICA tip and targeted
jobs tax credits ..................... (2.2) (3.3) (3.0)
Nondeductible merger and conversion expenses .. - 5.1 -
Other, net .................................... (0.2) 0.3 0.7
Effective tax rate ............................ 35.9% 41.1% 36.4%
Temporary differences between the financial statement carrying amounts and
tax bases of assets and liabilities give rise to deferred income tax
liabilities. At December 29, 1996, $17.2 million of deferred income tax
liability relates to building and equipment depreciation, offset by a deferred
tax asset of $6.5 million related to the asset revaluation. Other temporary
differences are not significant. At December 31, 1995, substantially all of the
deferred income tax liability relates to building and equipment depreciation.
The provision for income taxes reflects pro forma amounts for the
additional tax expense attributable to ATF's earnings as if the Company were
liable for Federal and state income taxes rather than individual partners. Pro
forma taxes of $68,000 for the period prior to the ATF acquisition date in 1994
have been calculated as currently payable using a 38% statutory rate.
33
<PAGE>
Note 8 - Interest Expense
The following is a summary of interest cost incurred and interest cost
capitalized as a component of the cost of construction in progress for the years
ended December 29, 1996 and December 31, 1995 and 1994 (amounts in thousands):
1996 1995 1994
Interest cost capitalized ............ $ 1,572 1,074 673
Interest cost expensed ............... 11,417 6,189 3,131
Total ................................ $12,989 7,263 3,804
Note 9 - Stock Option Plans
The Company's 1988 stock option plan (the "Stock Option Plan") and the 1993
and 1995 Stock Incentive Plans (the "Stock Incentive Plans") provide for the
granting of nonqualified and incentive options for up to 1,974,375 shares,
450,000 shares and 1,200,000 shares, respectively, of common stock of the
Company to key officers, directors and employees. Generally, options awarded
under the Company's Stock Option Plan and Stock Incentive Plans are granted at
prices which equate to fair market value on the date of the grant, are
exercisable over three to 10 years, and expire 10 years subsequent to award.
The 1992 DF&R Stock Option Plan (the "DF&R Option Plan") provides for the
granting of 1,000,000 shares of the Company's common stock to key officers,
directors and employees. Options awarded under the DF&R Option Plan prior to the
merger were adjusted based on the exchange ratio of 1.5 shares of DF&R common
stock for each share of the Company's common stock. Options awarded under the
DF&R Option Plan are generally granted at prices which equate to fair market
value on the date of grant. With limited exceptions, all options are generally
exercisable beginning one year from the date of grant with annual vesting
periods and terminate not later than five years from the date of grant.
Management does not anticipate granting any additional options under the DF&R
Option Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock option plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had compensation cost for the Company's
stock option plans been determined based upon the fair value methodology
prescribed under Statement of Financial Accounting Standards No. 123 ("SFAS
123"), "Accounting for Stock-Based Compensation," the Company's 1996 net
earnings and earnings per share would have been reduced by approximately $2.1
million, or approximately $.05 per share. The effects of either recognizing or
disclosing compensation cost under SFAS 123 may not be representative of the
effects on reported net earnings for future years. The fair value of the options
granted during 1996 is estimated as $10.01 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield .25%, volatility of 41%, risk-free interest rate of 6.0%, and an expected
life of 6.7 years.
34
<PAGE>
As of December 29, 1996, options to purchase 470,135 shares were
exercisable at a weighted average exercise price of $9.85. Further information
relating to total options is as follows:
Average
Shares Price
Outstanding at December 31, 1993 2,012,137 $ 2.27
Granted in 1994 348,787 15.73
Exercised in 1994 (376,088) 2.06
Canceled in 1994 (1,500) 15.17
Outstanding at December 31, 1994 1,983,336 5.13
Granted in 1995 1,479,382 19.90
Exercised in 1995 (646,184) 2.80
Canceled in 1995 (25,861) 15.51
Outstanding at December 31, 1995 2,790,673 13.44
Granted in 1996 726,587 19.72
Exercised in 1996 (779,198) 3.25
Canceled in 1996 (243,870) 21.48
Outstanding at December 29, 1996 2,494,192 $ 17.66
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -------------------------- -------------------- ------------------- --------------- -------------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 5.00 197,718 1.0 $ 2.28 162,534 $ 2.23
$ 5.01 - $10.00 43,663 0.6 7.60 36,875 7.50
$10.01 - $15.00 406,119 8.2 12.89 109,723 13.15
$15.01 - $20.00 923,138 6.9 18.68 161,003 15.83
$20.01 - $25.00 678,486 8.9 21.39 - -
$25.01 - $30.00 245,068 9.1 25.57 - -
-------------------- --------------------
2,494,192 470,135
==================== ====================
</TABLE>
Note 10 - Employee Benefit Plans
The Company has a noncontributory Employee Stock Ownership Plan (the
"Plan") covering substantially all full-time employees. In accordance with the
terms of the Plan, the Company may make contributions to the Plan in amounts as
determined by the Board of Directors.
Participants become 20% vested in their accounts after three years of
service, escalating 20% each year thereafter until they are fully vested.
Contributions expense was approximately $300,000 in 1996, $250,000 in 1995 and
$650,000 in 1994.
35
<PAGE>
The Company has established the Apple South, Inc. Profit Sharing Plan and
Trust in accordance with Section 401(k) of the Internal Revenue Code, which
allows eligible participating employees to defer receipt of a portion of their
compensation and contribute such amount to one or more investment funds.
Employee contributions are matched by the Company dollar for dollar for the
first 2% of the employee's income deferred. Company matching funds vest at the
rate of 20% each year, beginning after three years of service. Company
contributions were $422,000 in 1996, $300,000 in 1995 and $200,000 in 1994.
Note 11 - Shareholders' Equity
In 1996, the Board of Directors authorized the purchase of up to two
million shares of its common stock through open market transactions to satisfy
obligations under stock option and employee stock ownership plans. As of
December 29, 1996, the Company had purchased an aggregate 1,447,800 shares of
its common stock under these programs at an average price of $20.76 per share.
Pursuant to a direct placement of common stock on June 30, 1995, the
Company sold 900,000 shares at $18.50. Pursuant to a registered public offering
on March 3, 1995, the Company sold 3,162,500 shares of common stock at $13.75.
After deducting expenses of these offerings, proceeds to the Company amounted to
approximately $16 million in the June offering and $41 million in the March
offering.
On May 19, 1994, the Company's Board of Directors declared a three-for-two
common stock split, effected in the form of a stock dividend to shareholders of
record on June 1, 1994. Accordingly, shareholders' equity, the weighted average
common and common equivalent shares outstanding, and earnings and dividends per
share have been retroactively adjusted.
Note 12 - Commitments
In connection with obtaining the consent of Applebee's International, Inc.,
the franchisor of Applebee's restaurants (the "Franchisor"), to the transfer of
the Marcus Applebee's restaurants and the exclusive development rights to
Applebee's territories in Wisconsin and the Chicago area, the Company agreed to
establish new annual development schedules through the year 2000 with the
Franchisor for the acquired Wisconsin and Chicago area territories and for the
Company's other existing Applebee's territories.
At December 29, 1996, the Company was obligated to open 129 additional
Applebee's restaurants by the end of 2000, including 34 required to be opened by
the end of 1997. If the Company opens fewer restaurants than required by the
development schedule in any development territory and does not open the
designated number of restaurants within the applicable cure period, the
Franchisor has the right to terminate the Company's development rights in the
territory where the deficiency occurs and in the acquired Chicago and Wisconsin
development territories. In addition, the Franchisor would be entitled to
collect a 4% royalty based on the Company's average restaurant sales with
respect to each restaurant not opened in accordance with the development
schedule.
Under the Company's insurance programs, coverage is obtained for
significant exposures as well as those risks required to be insured by law or
contract. It is the Company's preference to retain a significant portion of
certain expected losses related primarily to workers' compensation, physical
loss to property, and comprehensive general liability. Provisions for losses
expected under these programs are recorded based upon the Company's estimates of
the aggregate liability for claims incurred.
The Company is contingently liable for letters of credit and a guarantee of
the indebtedness of others aggregating approximately $11.2 million. The Company
does not expect circumstances to arise that would result in the disbursion of
funds under these guarantees.
Note 13- Related Party Transactions
In 1994, prior to its acquisition, ATF paid related parties rent expense of
$313,000 and management fees of $279,000.
36
<PAGE>
Note 14 - Quarterly Financial Data (unaudited)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
1996:
Restaurant sales $126,333 136,945 139,796 142,948 546,022
Net earnings (loss) $ (5,487) 9,777 1,188 6,196 11,674
Earnings (loss) per
share $ (0.14) 0.25 0.03 0.16 0.30
1995:
Restaurant sales $ 91,064 108,131 118,992 122,003 440,190
Net earnings $ 5,396 7,417 6,474 992 20,279
Earnings per
share $ 0.15 0.19 0.16 0.02 0.52
Note 15 - Subsequent Events
In January, 1997, the Company entered into an agreement to sell its 10
Hardee's restaurants for approximately $2.5 million. The transaction is expected
to be completed during the first quarter of 1997. The Hardee's division was not
a significant division of the Company, contributing less than 2% of sales in
1996.
In February, 1997, the Company entered into separate agreements to acquire
McCormick & Schmick's, an Oregon-based restaurant company, and Hops Grill & Bar,
a Florida-based restaurant company. The purchase price for McCormick &
Schmick's, which has 16 existing restaurants, is $53 million in cash and stock,
plus the assumption of approximately $15 million in debt. The purchase price for
Hops Grill & Bar, which has 18 existing restaurants, is $31.5 million in cash
and stock plus the assumption of approximately $26.5 million in debt. These
transactions will be accounted for as purchase business combinations in 1997.
In February, 1997, the Company announced its intention to issue $100
million of term convertible securities, at a rate to be determined. Net proceeds
to the Company from the offering are expected to be approximately $96.5 million
and are expected to fund the pending acquisitions of McCormick & Schmick's and
Hops Grill and Bar, including retirement of acquired company debt.
37
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Part III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
Tom E. DuPree, Jr. founded the Company and has been Chairman of the Board
of Directors and Chief Executive Officer of the Company since its formation in
1987. Mr. DuPree has been actively involved in developing and managing
restaurants since 1978. He is a graduate of Georgia Institute of Technology and
holds a Master's degree in Accounting from Georgia State University. Mr. DuPree
is 44 years old.
John G. McLeod, Jr. has served as Senior Vice President of Human Resources
since 1992, Vice President of Human Resources from 1987 to 1992, and a director
and Secretary of the Company since its formation in 1987. From 1983 to 1987, Mr.
McLeod was the Personnel Director of a predecessor of the Company. Mr. McLeod is
a graduate of Wofford College. Mr. McLeod is 53 years old.
David P. Frazier has served as a director of the Company since its merger
with DF&R Restaurants, Inc. (the "DF&R merger") in November 1995. Mr. Frazier is
the Company's Chief Concept Officer and Chairman of DF&R Restaurants,
Inc.("DF&R"), a wholly-owned subsidiary of the Company. From 1979 to 1996, Mr.
Frazier was President, Chief Executive Officer, and a director of DF&R, which he
co-founded. Mr. Frazier has worked in the restaurant industry for more than 30
years. He is a graduate of Texas Tech University and is 49 years old.
John L. Moorhead became a director of the Company in January 1997. Mr.
Moorhead joined Best Foods in 1992 in his current position, Vice President of
Business Management and Marketing Services. Prior to joining Best Foods, he was
with PepsiCo, Inc. from 1979 to 1991 and last served as Vice President of
Marketing Services for the Pepsi-Cola Company, a division of Pepsico, Inc. Prior
to establishing Pepsi-Cola's Marketing Services Group, Mr. Moorhead had served
as Vice President of Marketing for the Taco Bell Worldwide Division, Marketing
Director at Frito Lay and within the brand management system at General Mills.
Mr. Moorhead is 54 years old.
Marc D. Redus has served as a director of the Company since the DF&R
merger with the Company in November 1995. Mr. Redus is an Executive Vice
President of the Company and Secretary for DF&R. From 1979 to 1996 Mr. Redus was
Secretary and a director for DF&R, which he co-founded in 1979. Prior to that
time, Mr. Redus worked in the restaurant industry for five years. He is 43 years
old.
James W. Rowe became a director of the Company in March 1992. He also
serves as Chairman of the Audit Committee and as a member of the Compensation
Committee. Mr. Rowe is a former Vice Chairman of the Executive Committee of The
Great Atlantic & Pacific Tea Company, Inc., from which he retired in 1993. He is
73 years old.
Dr. Ruth G. Shaw became a director of the Company in May 1996. Dr. Shaw is
Senior Vice President of Corporate Resources and Chief Administrative Officer
for Duke Power Company. She was named Senior Vice President in 1994 after
joining Duke Power in 1992 as Vice President of Corporate Communications. Prior
to joining Duke Power, she was President of Charlotte's Central Piedmont
Community College from 1986 to 1992. Dr. Shaw is 49 years old.
Thomas R. Williams became a director of the Company in December 1991. He
also serves as Chairman of the Compensation Committee and as a member of the
Audit Committee. Mr. Williams is President of The Wales Group, Inc., a closely
held corporation engaged in investments. He is a former Chairman of the Board of
First Wachovia Corporation, from which he retired in 1987. Mr. Williams is a
director of American Software, Inc., BellSouth Corporation, ConAgra, Inc.,
Georgia Power Company, and National Life Insurance Company of Vermont and a
trustee of The Fidelity Group of Mutual Funds. Mr. Williams is 67 years old.
38
<PAGE>
S. Kirk Kinsell was elected to the position of President and Chief
Operating Officer in January 1997. Before joining Apple South, Mr. Kinsell had
been President of the Franchise Division of ITT Sheraton, where he created the
Four Points Hotels by ITT Sheraton concept. Prior to joining ITT Sheraton, Mr.
Kinsell served as Senior Vice President for Holiday Inn Worldwide. From 1980 to
1988, Mr. Kinsell was a partner with Trammell Crow Company. He earned a Master's
degree from Cornell University and a Bachelor's degree from the University of
California. Mr. Kinsell is 42 years old.
Erich J. Booth has served as the Chief Financial Officer and Treasurer of
the Company since 1991. Before joining the Company, Mr. Booth had been Vice
President of Finance of Dun & Bradstreet Software (formerly Management Science
America, Inc.) since 1989. From 1984 to 1989, he served as Vice President and
Chief Financial Officer of Ward White USA Holding, Inc., a diversified specialty
retailer. Mr. Booth, a Certified Public Accountant, worked from 1973 to 1984 for
Peat, Marwick, Mitchell & Co. He is a graduate of the University of North
Carolina at Greensboro. He is 48 years old.
39
<PAGE>
Item 11. Executive Compensation
The following table summarizes the compensation paid or accrued by the
Company for services rendered during the years indicated to the Chief Executive
Officer and the four most highly compensated executive officers, other than the
Chief Executive Officer. The Company did not grant any restricted stock awards
or stock appreciation rights or make any long-term incentive plan payouts during
the years indicated.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term
Compensation
Securities All Other
Annual Compensation Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) Options(#) ($)(1)
<S> <C> <C> <C> <C> <C>
Tom E. DuPree Jr 1996 285,577 81,750 -- 122,218
Chairman and Chief Execuive Officer 1995 7,368 -- 199,701 51,934
1994 268,569 155,000 -- --
John G. McLeod, Jr 1996 100,000 64,890 -- 2,000
Senior Vice President, Human Resources 1995 100,000 22,500 -- 1,291
and Secretary 1994 98,914 45,000 -- 5,101
Erich J. Booth 1996 160,000 69,525 10,125 3,706
Chief Financial Officer and Treasurer 1995 160,000 20,000 64,750 4,167
1994 120,892 60,000 -- 6,130
David P. Frazier (2) 1996 160,000 81,667 -- 706
Chief Concept Officer 1995 160,000 16,000 6,000 --
Marc D. Redus (3) 1996 160,000 101,667 -- 706
Executive Vice President 1995 160,000 16,000 6,000 --
Michael W. Evans (4) 1996 120,467 142,758 22,781 88,831
Former President and 1995 207,000 51,750 154,437 1,291
Chief Operating Officer 1994 199,767 120,000 -- 6,213
</TABLE>
(1) Except for Mr. DuPree and Mr. Evans, the amounts shown in this
column consist of contributions by the Company to its 401(k) savings plan
on behalf of the named executive officers, and the fair market value of
shares of Common Stock allocated to the executive officer's account
pursuant to the Company's Employee Stock Ownership Plan and Trust ("ESOP").
Amounts shown for 1996 include for Mr. McLeod $2,000 of matching
contributions to the 401(k) plan and for Mr. Booth $3,000 of matching
contributions to the 401(k) plan and $706 allocated to the ESOP, for Mr.
Frazier $706 allocated to the ESOP; and for Mr. Redus $706 allocated to the
ESOP. Mr. DuPree does not participate in either the ESOP or the 401(k)
plan. The amount shown in this column for Mr. DuPree includes $122,218
reflecting the current dollar value of the benefit to Mr. DuPree of the
unreimbursed portion of the premiums paid by the Company with respect to a
split-dollar insurance agreement (See "Certain Relationships and Related
Transactions" below for a description of such agreement), which benefit was
determined by calculating the time value of money (using the Company's 1996
weighted average borrowing rate of 7.5%) of the unreimbursed portion of the
premiums paid by the Company for the period ended December 29, 1996. The
amount shown in this column for Mr. Evans consists of $706 allocated to the
ESOP and $88,125 in severance payments.
(2) Mr. Frazier became an executive officer upon the merger between the Company
and DF&R in November 1995. Compensation shown is for services performed for
the entire fiscal year including the period prior to the merger.
(3) Mr. Redus became an executive officer upon the merger between the Company
and DF&R in November 1995. Compensation shown is for services performed for
the entire fiscal year including the period prior to the merger
(4) Mr. Evans resigned as of July 22, 1996.
40
<PAGE>
The following table sets forth information concerning options granted
during the fiscal year ended December 31, 1996, under the Company's Stock Option
Plan to the executives named in the Summary Compensation Table.
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
Potential Realizable
Individual Grants(1) Value at Assumed
Percentage of Annual Rates of Stock
Number of Total Options Exercise or Price Appreciation for
Securities underlying Granted to Base Price Expiration Option Term
Name Options Granted Employees in 1996 ($ / share) Date 5%($) 10%($)
---- --------------- ----------------- ----------- ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Erich J. Booth 10,125 1.4% 21.69 12/31/05 138,112 350,004
Michael W. Evans 22,781 3.1% 21.69 12/31/05 310,749 787,500
</TABLE>
The following table sets forth information concerning the options
exercised during 1996 and the value of unexercised options as of December 31,
1996 held by the executives named in the Summary Compensation Table. No stock
appreciation rights were outstanding during 1996.
<TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<CAPTION>
Number of Shares
Shares Underlying Unexercised Value of Unexercised
Acquired Options at In-the-Money Options
on Value December 31, 1996(#) at December 31, 1996($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Tom E. DuPree, Jr -- -- -- / 199,716 -- / --
John G.McLeod, Jr . . . . . . 250,000 4,694,660 -- -- / --
Erich J. Booth .. . . . . . . . 40,000 417,200 500 / 85,000 5,466 / 110,688
David P. Frazier . . . . . . . -- -- 10,400 / 1,600 3,652 / 1,328
Marc D. Redus . . . . . . . . -- -- 10,400 / 1,600 3,652 / 1,328
Michael W. Evans . . . . . . . 200,987 3,548,240 68,344 / 200,000 753,893 / 251,297
</TABLE>
Comparison of Five-Year
Cumulative Shareholder Return
The following graph compares the cumulative total shareholder return on
the Company's Common Stock with the cumulative total return of the Standard and
Poor's 500 Stock Index, Nation's Restaurant News Stock Index, for a period of
five years comencing December 31, 1991 and ending December 31, 1996. The graph
assumes that $100 was invested on December 31, 1991, in Company Common Stock,
Standard and Poor's 500 Stock Index and the Nations Restaurant News Peer Index.
Data Points for Graph:
Apple South S&P 500 Nation's Restaurant News (1)
Dec. 91 98 111 112
Dec. 92 278 120 140
Dec. 93 605 132 153
Dec. 94 573 134 164
Dec. 95 930 184 230
Dec. 96 585 226 233
(1)Does not reflect dividend reinvestment, which management of the Company
believes to be immaterial.
41
<PAGE>
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors is charged with
the responsibility of periodically reviewing and making recommendations to the
Board concerning the salaries, bonus programs, stock options, benefits and other
components of compensation for all officers with individual base salaries of
$100,000 or more. All members of the Committee are independent directors.
The primary components of executive compensation are base salary, cash
bonus and long-term incentives in the form of stock options.
The Committee considers both internal and external factors as bases for
determining executive compensation. External factors include compensation survey
data relating to salary, bonus, long-term incentives and total compensation
programs for executives in companies of similar size, growth and industry, as
well as general surveys of executive compensation nationally. Internal factors
affecting targeted total compensation include Company performance measures,
length of service and individual job performance. Based on these factors,
weighted subjectively by the Committee, total compensation for 1996 was targeted
at approximately the third quartile of the range for each position.
Total compensation was then divided between salary and bonus. The
Committee's objective is to target bonus as a meaningful percentage of total
compensation (30%-50%) while remaining competitive within the industry. To
qualify for bonus, the Company's quarterly earnings per share must meet or
exceed the highest prevailing quarterly earnings estimate, at the end of the
prior year as published by financial analysts that actively follow the Company.
Bonus earned and paid to executives in 1996 are shown in the Summary
Compensation Table.
The compensation for the Chief Executive Officer for 1996 was determined in
accordance with the foregoing policy. As the long term component of executive
compensation, the Company grants options to purchase Common Stock of the Company
in the future at the market value of the stock on the date of grant. Option
terms are for a period of up to ten years with vesting schedules generally
averaging six years. The Committee believes that the Company's executive
officers should acquire substantial equity ownership, either through stock
options or direct stock ownership, as a means of integrating management
decisions with the long-term interests of the shareholders. Based on the fact
that some officers either had no current options or had become fully vested in
past options and to accomplish the goals as stated above, the following grants
were made to officers and directors of the Company in 1996: Michael W. Evans,
Former President and Chief Operating Officer, 22,781 shares; and Erich J. Booth,
Chief Financial Officer, 10,125 shares. These option grants were made at an
option price equal to the market value of the stock on the date of grant and are
vested over a period of ten years with 50% becoming purchasable during the
second half of the option term. At February 5, 1997, the executive officers
beneficially owned or held the right to acquire stock representing 9,915,217 of
the Company's outstanding shares, 8,841,610 of which are beneficially owned by
the Chief Executive Officer.
Report submitted Febraury 5, 1997.
By: Thomas R. Williams
James W. Rowe
42
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of February 18, 1997 by
(i) each person known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each director and executive officer of the Company
and (iii) all executive officers and directors of the Company as a group.
Shares Beneficially
Owned (1)(2)
Name Number Percent
---- ------ -------
Tom E. DuPree, Jr. (3) 8,841,610 22.6%
Marc D. Redus (4) 459,453 1.2%
David P. Frazier (5) 421,392 1.1%
John G. McLeod, Jr. (6) 353,400 *
Erich J. Booth (7) 53,345 *
Thomas R. Williams (8) 52,143 *
James W. Rowe (9) 41,625 *
Michael W. Evans (10) 14,021 *
Ruth G. Shaw 1,000 *
State of Wisconsin Investment Board(11) 3,125,500 8.0%
FMR Corp.(12) 3,331,000 8.5%
All directors and executive officers
as a group (9 persons) (13) 9,915,217 25.3%
Mr. DuPree, the Wisconsin Investment Board and FMR Corp. are the only
shareholders known by the Company to be the beneficial owners of more than 5% of
the Company's Common Stock. Mr. DuPree's address is Hancock at Washington,
Madison, Georgia 30650. The address of the Wisconsin Investment Board is P.O.
Box 7842, Madison, Wisconsin 53707. The address of FMR Corp.is 82 Devonshire
Street, Boston, Massachusetts 02109.
*Less than one percent.
(1) The named shareholders have sole voting and investing power with
respect to all shares shown as being beneficially owned by them except with
respect to the shares owned by the Company's Employee Stock Ownership Plan and
Trust ("ESOP"). Each participant in the ESOP has the right to direct voting of
all shares allocated to his account on all matters. Power to direct the
investment of shares held by the ESOP presently rests with the Company's
Employee Benefit Committee, whose members are Messrs. DuPree, Evans and McLeod;
however, each participant in the ESOP may elect to direct the investment of 25%
of shares allocated to his account.
(2) Except as indicated below, does not include shares issuable upon
exercise of stock options.
(3) Includes 681,701 shares held by The DuPree Foundation, 473,377 held by
Madison Investment Partnership, 57,150 shares held by the Thomas E. DuPree III
Trust and 114,285 shares held by the DuPree Family Trust. Mr. DuPree's wife is
the sole trustee of these foundations and trusts. Includes 276,045 shares held
by the ESOP which are allocated to other employees and for which Mr. DuPree has
shared investment power. See Footnote (1) above. Mr. DuPree is the Chairman of
the Board of Directors and Chief Executive Officer of the Company.
(4) Includes 10,400 shares which Mr. Redus has the right to acquire within
60 days upon the exercise of stock options at an average exercise price of
$15.07 per share. Mr. Redus is a director and Senior Vice President of the
Company.
(5) Includes 10,400 shares which Mr. Frazier has the right to acquire
within 60 days upon the exercise of stock options at an average exercise price
of $15.07 per share. Mr. Frazier is a director and the President - DF&R division
of the Company.
(6) Includes 11,185 shares held by the ESOP which are vested and allocated
to Mr. McLeod and 264,860 shares held by the ESOP which are allocated to other
employees and for which Mr. McLeod has shared investment power. See Footnote (1)
above. Mr. McLeod is a director, the Senior Vice President - Human Resources and
the Secretary of the Company.
43
<PAGE>
(7) Includes 600 shares held by the ESOP which are vested and allocated to
Mr. Booth, but does not include 249 shares held by ESOP which are unvested. Mr.
Booth is Chief Financial Officer and Treasurer of the Company.
(8) Includes 50,625 shares which Mr. Williams has the right to acquire
within 60 days upon the exercise of stock options at a price of $2.17 per share.
Mr. Williams is a director of the Company.
(9) Includes 32,000 shares held by Rowe Family Investments, L.P. Mr. Rowe
is a director of the Company.
(10) Includes 14,021 shares held by ESOP which are vested and allocated
to Mr. Evans.
(11) Based on a Form 13G dated January 21, 1997, filed by State of
Wisconsin Investment Board.
(12) Based on a Form 13G dated February 14, 1997, filed by FMR Corp.
(13) Includes 20,800 shares which the officers and directors have the right
to acquire within 60 days upon the exercise of stock options at an average
exercise price of $15.07 per share, 25,912 shares held by the ESOP which are
vested and allocated to directors and executive officers, and 250,133 shares
held by the ESOP which are unvested or allocated to other employees. See
Footnote (1) above.
Item 13. Certain Relationships and Related Transactions
In March 1995, the Company entered into a Split Dollar Insurance Agreement (the
"Agreement") with The DuPree Insurance Trust (the "Trust") whereby the Company
agreed to make premium payments on certain life insurance policies of which the
Trust is the owner and beneficiary. These policies provide a total of $50
million in death proceeds payable upon death of the survivor of Tom E. DuPree,
Jr., the Chairman of the Board and Chief Executive Officer of the Company, and
his wife. The devisees under the wills of Mr. DuPree and his wife are the
beneficiaries of the Trust.
The Trust has agreed to reimburse the Company on an annual basis for
that portion of the premiums which equals the current value of the economic
benefit, as defined by the Internal Revenue Service, attributable to the life
insurance protection provided. The premiums due under the policies total
$850,000 per year. Reimbursements for the current value of the economic benefit
attributable to the life insurance provided in 1996 totaled $1,622. There were
no reimbursements due to the Company from the Trust at December 31, 1996.
The Company or the Trust can cancel the Agreement at any time. Upon
cancellation, the Trust is obligated to repay the Company an amount equal to the
lesser of either the cash surrender value of the policies or the total amount of
unreimbursed premiums paid by the Company. Upon receipt of the death proceeds
under the policies, the Trust is required to repay the Company for all
unreimbursed premium payments. The policies have been assigned to the Company to
secure the repayment obligations of the Trust.
44
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements.
2. Financial Statement Schedules
None.
(b) Reports on Form 8-K
None.
(c) Exhibits
2.1 Stock Purchase Agreement among the Company, the owners of the
partnership interests in Apple Tenn- Flo, L.P., et al. dated
March 18, 1994.(4)
2.2 Asset Purchase Agreement among the Company, TUG, Inc., et al.
dated February 1, 1995.(6)
2.3 Asset Purchase Agreement among Apple South, Inc. And Marcus
Restaurants, Inc. Et al, datedApril 12, 1995.(8)
2.4 Agreement and Plan of Merger, dated August 15, 1995, by and among
the Company, SALSA Acquisition Corp., and DF&R Restaurants,
Inc.(9)
3.1 Form of Amended and Restated Articles of Incorporation of the
Company, as amended August 1, 1995.(8)
4.1 See Exhibits 3.1 for provisions in the Company's Amended and
Restated Articles of Incorporation and Bylaws defining the rights
of holders of the Company's Common Stock. (1)
4.2 Indenture dated May 1, 1996, between the Company and SunTrust
Bank, Atlanta, as Trustee. (10)
10.1 Apple South, Inc. 1988 Stock Option Plan.(1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988
Stock Option Plan.(1) (11)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board
of Directors.(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement
executed between the Company and each of its executive
officers.(1)
10.5 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
South Carolina.(1) (11)
45
<PAGE>
10.6 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
West Palm Beach, Ft. Myers and Sarasota A.D.I.(1) (11)
10.7 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Tennessee/Mississippi A.D.I.(1) (11)
10.8 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Nashville, Tennessee A.D.I. and Bowling Green, Kentucky A.D.I.(1)
(11)
10.9 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Virginia, West Virginia, Washington, D.C., and Louisville,
Kentucky.(1) (11)
10.10 Standard Form Applebee's Neighborhood Grill & Bar Franchise
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc.(5) (11)
10.11 Foodservice Distribution Agreement between PYA/Monarch, Inc. and
the Company.(1)
10.12 Apple South, Inc. Employee Stock Ownership Plan and Trust.(1)
(11)
10.13 Apple South, Inc. Profit Sharing Plan and Trust.(1) (11)
10.14 Amendment No. 2 to the Apple South, Inc. Employee Stock
Ownership Plan and Trust, dated November 22, 1993. (3)
10.15 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., pertaining to Jacksonville, Florida
A.D.I.(2) (11)
10.16 Amendment to Development Agreement dated January 10, 1992,
Second Amendment and Supplement to Development Agreement dated
May 14, 1993, and Third Amendment to Development Agreement dated
January 26, 1994, amending the Standard Form Applebee's
Neighborhood Grill & Bar Development Agreement among the Company,
Tom E. DuPree, Jr. and Applebee's International, Inc., as amended
and supplemented, pertaining to South Carolina.(3)
10.17 Third Amendment to Development Agreement dated January 10, 1992,
and Fourth Amendment to Development Agreement dated January 26,
1994, amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement among the Company, Tom E. DuPree, Jr.
and Applebee's International, Inc., as amended and supplemented,
pertaining to West Palm Beach, Ft. Meyers and Sarasota A.D.I.(3)
10.18 Second Amendment to Development Agreement dated January 10,
1992, and Third Amendment to Development Agreement dated January
26, 1994, amending the Standard Form Applebee's Neighborhood
Grill & Bar Development Agreement among the Company, Tom E.
DuPree, Jr. and Applebee's International, Inc., as amended and
supplemented, pertaining to Tennessee/Mississippi A.D.I. (3)
10.19 Amendment to Development Agreement dated January 10, 1992, and
its Second Amendment to Development Agreement dated January 26,
1994, amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement among the Company, Tom E. DuPree, Jr.
and Applebee's International, Inc., as amended and supplemented,
pertaining to Nashville, Tennessee A.D.I. and Bowling Green,
Kentucky A.D.I. (3)
46
<PAGE>
10.20 Second Amendment to Development Agreement dated January 10,
1992, and Third Amendment to Development Agreement dated January
26, 1994, amending the Standard Form Applebee's Neighborhood
Grill & Bar Development Agreement among the Company, Tom E.
DuPree, Jr. and Applebee's International, Inc., as amended and
supplemented, pertaining to Virginia, West Virginia, Washington,
D.C., and Louisville, Kentucky. (3)
10.21 Amendment to Development Agreement dated January 26, 1994,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement among the Company, Tom E. DuPree, Jr. and
Applebee's International, Inc., pertaining to Jacksonville,
Florida A.D.I. (3)
10.22 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993.(3)
10.23 Amended form of Stock Option Agreement under the Apple South,
Inc. 1988 Stock Option Plan.(3)
10.24 Apple South, Inc. 1993 Stock Incentive Plan.(3)
10.25 Form of Stock Option Agreement under the Apple South, Inc. 1993
Stock Incentive Plan. (3)
10.26 Second Supplement to Development Agreement dated July 27, 1994,
between the Company and Applebee's International, Inc.,
pertaining to Chattanooga, Tennessee A.D.I., Knoxville, Tennessee
A.D.I. and Bristol-Kingsport-Johnson City: Tri-Cities A.D.I.(5)
(11)
10.27 Universal Agreement dated June 30, 1995, by and between the
Company and Applebee's International, Inc. amending the Standard
Form Development Agreements appearing as Exhibits 10.5 through
10.9, 10.15, and 10.28 through 10.30.
10.28 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement, dated April 25, 1995, by and between the Company and
Applebee's International, Inc., pertaining to the Cedar Rapids,
and Des Moines, Iowa A.D.I.s, the Rockford, Illinois A.D.I. and
portions of the Davenport-Rock Island- Moline: Quad City A.D.I.;
the Sioux City, Iowa A.D.I.; the Peoria-Bloomington, Illinois,
A.D.I.; and the Rochester-Mason City-Austin A.D.I. (11)
10.29 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement, dated June 30, 1995, by and between the Company and
Applebee's International, Inc., pertaining to a portion of the
Chicago, Illinois A.D.I.
10.30 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement dated December 29, 1989 by and between Marcus
Restaurants, Inc. And Applebee's International, Inc. pertaining
to the Milwaukee, Madison, LaCrosse-Eau Claire,
Wausau-Rhinelander, and Green Bay-Appleton, Wisconsin A.D.I.s.
(11)
10.31 Consent and Release Agreement by and among the company, Marcus
Restaurants, Inc. and Applebee's International, Inc. dated June
30, 1995 pertaining to the development and franchise rights in
the Milwaukee, Madison, LaCrosse-Eau Claire, Wausau-Rhinelander,
and Green Bay-Appleton, Wisconsin A.D.I.s. (11)
10.32 Amendment to Development Agreement dated June 30, 1995 by and
between the Company and Applebee's International, pertaining to
market areas in portion of Illinois, Iowa, Missouri and
Wisconsin.(11)
10.33 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
pertaining to the Milwaukee, Madison, LaCrosse-Eau Claire,
Wausau- Rhinelander and Green Bay-Appleton, Wisconsin A.D.I.s.
(11)
47
<PAGE>
10.34 Fifth Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the West Palm Beach, Ft.
Myers and Sarasota A.D.I. (11)
10.35 Fourth Amendment to Development Agreement dated June 30, 1995
and Third Amendment to Development Agreement dated February 24,
1995 by and between the Company and Applebee's International,
Inc., amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement pertaining to the South Carolina
market. (11)
10.36 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Chattanooga A.D.I., the
Knoxville A.D.I. and the Bristol- Kingsport-Johnson City:
Tri-Cities A.D.I.(11)
10.37 Fourth Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Tennessee/Mississippi
A.D.I. (11)
10.38 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Jacksonville, Florida
A.D.I. (11)
10.39 Fifth Amendment to Development Agreement dated June 30, 1995 and
Fourth Amendment to Development Agreement dated February 24,
1995, by and between the Company and Applebee's International,
Inc., amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement pertaining to Virginia, West Virginia,
Washington, D.C. and Louisville, Kentucky. (11)
10.40 Third Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Nashville, Tennessee
A.D.I. and the Bowling Green, Kentucky A.D.I. (11)
10.41 $30 Million Amended and Restated Participation Agreement Between
Apple South, Inc., DR Holdings, L.P., Trust Company Bank,
Southtrust Bank of Georgia, N.A., Life Insurance Company of
Georgia, and Columbine Life Insurance Company.(7)
10.42 Lease and Development Agreement Between DR Holdings, L.P. and
Apple South, Inc.(7)
10.43 $165 Million Credit Agreement among Apple South, Inc.; Wachovia
Bank of Georgia, National Association; Crestar Bank; Trust
Company Bank; Banque Paribas; and Bank of America Illinois, dated
February 27, 1996. (11)
10.44 $20 Million Loan Agreement among Apple South, Inc. And Branch
Banking and Trust Company of South Carolina, dated November 1,
1995.(9)
10.45 $165 Million Credit Agreement Dated as of February 27, 1996.
(12)
10.46 $25 Million Debt Agreement Dated September 30, 1996.
13.1 Annual Report to Shareholders for the fiscal year ended December
31, 1995
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
48
<PAGE>
(1) Incorporated by reference to the corresponding exhibit number filed
with the Company's Registration Statement on Form S-1, File No. 33-42662.
(2) Incorporated by reference to the corresponding exhibit number filed
with the Company's Registration Statement on Form S-1, File No. 33-58378.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1993.
(4) Incorporated by reference to Exhibit 2.1 filed with the Company's
Report on Form 8-K dated April 12, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(6) Incorporated by reference to Exhibit 10.30 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended April 2, 1995
(8) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended July 2, 1995
(9) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended October 1, 1995
(10) Incorporated by reference to the Company's registration statement on
Form S-3, File No. 333-02958.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(12) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 31, 1996.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
APPLE SOUTH, INC.
By: /s/ Tom E. DuPree, Jr.
Tom E. DuPree, Jr.
Chief Executive Officer and
Chairman of the Board
February 19, 1997
Atlanta, Georgia
50
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Tom E. DuPree, Jr. Chairman of the Board of February 19, 1997
- ---------------------- Directors and Chief Executive
Tom E. DuPree, Jr. Officer (principal executive officer)
/s/ S. Kirk Kinsell President and Chief Operating February 19, 1997
- ---------------------- Officer
S. Kirk Kinsell
/s/ John G. McLeod, Jr. Director, Senior Vice President February 19, 1997
- ----------------------- - Human Resources, and Secretary
John G. McLeod, Jr.
/s/ Erich J. Booth Chief Financial Officer and February 19, 1997
- ------------------ Treasurer (principal financial
Erich J. Booth and accounting officer)
/s/ David P. Frazier Chief Concept Officer and February 19, 1997
- -------------------- Director
David P. Frazier
/s/ Marc D. Redus Director and Executive Vice February 19, 1997
- ----------------- President
Marc D. Redus
/s/ Thomas R. Williams Director February 19, 1997
- ----------------------
Thomas R. Williams
/s/ James W. Rowe Director February 19, 1997
- -----------------
James W. Rowe
/s/ Dr. Ruth G. Shaw Director February 19, 1997
- --------------------
Dr. Ruth G. Shaw
/s/ John L. Moorhead Director February 19, 1997
--------------------
John L. Moorhead
51
<PAGE>
Exhibit Index
Exhibit
Number
2.1 Stock Purchase Agreement among the Company, the owners of the
partnership interests in Apple Tenn- Flo, L.P., et al. dated
March 18, 1994.(4)
2.2 Asset Purchase Agreement among the Company, TUG, Inc., et al.
dated February 1, 1995.(6)
2.3 Asset Purchase Agreement among Apple South, Inc. And Marcus
Restaurants, Inc. Et al, datedApril 12, 1995.(8)
2.4 Agreement and Plan of Merger, dated August 15, 1995, by and among
the Company, SALSA Acquisition Corp., and DF&R Restaurants,
Inc.(9)
3.1 Form of Amended and Restated Articles of Incorporation of the
Company, as amended August 1, 1995.(8)
4.1 See Exhibits 3.1 for provisions in the Company's Amended and
Restated Articles of Incorporation and Bylaws defining the rights
of holders of the Company's Common Stock. (1)
4.2 Indenture dated May 1, 1996, between the Company and SunTrust
Bank, Atlanta, as Trustee. (10)
10.1 Apple South, Inc. 1988 Stock Option Plan.(1)
10.2 Form of Stock Option Agreement under the Apple South, Inc. 1988
Stock Option Plan.(1) (11)
10.3 Form of Apple South, Inc. Director's Indemnification Agreement
executed by and between the Company and each member of its Board
of Directors.(1)
10.4 Form of Apple South, Inc. Officer's Indemnification Agreement
executed between the Company and each of its executive
officers.(1)
10.5 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
South Carolina.(1) (11)
52
<PAGE>
10.6 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
West Palm Beach, Ft. Myers and Sarasota A.D.I.(1) (11)
10.7 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Tennessee/Mississippi A.D.I.(1) (11)
10.8 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Nashville, Tennessee A.D.I. and Bowling Green, Kentucky A.D.I.(1)
(11)
10.9 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., as amended and supplemented, pertaining to
Virginia, West Virginia, Washington, D.C., and Louisville,
Kentucky.(1) (11)
10.10 Standard Form Applebee's Neighborhood Grill & Bar Franchise
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc.(5) (11)
10.11 Foodservice Distribution Agreement between PYA/Monarch, Inc. and
the Company.(1)
10.12 Apple South, Inc. Employee Stock Ownership Plan and Trust.(1)
(11)
10.13 Apple South, Inc. Profit Sharing Plan and Trust.(1) (11)
10.14 Amendment No. 2 to the Apple South, Inc. Employee Stock
Ownership Plan and Trust, dated November 22, 1993. (3)
10.15 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement among the Company, Tom E. DuPree, Jr. and Applebee's
International, Inc., pertaining to Jacksonville, Florida
A.D.I.(2) (11)
10.16 Amendment to Development Agreement dated January 10, 1992,
Second Amendment and Supplement to Development Agreement dated
May 14, 1993, and Third Amendment to Development Agreement dated
January 26, 1994, amending the Standard Form Applebee's
Neighborhood Grill & Bar Development Agreement among the Company,
Tom E. DuPree, Jr. and Applebee's International, Inc., as amended
and supplemented, pertaining to South Carolina.(3)
10.17 Third Amendment to Development Agreement dated January 10, 1992,
and Fourth Amendment to Development Agreement dated January 26,
1994, amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement among the Company, Tom E. DuPree, Jr.
and Applebee's International, Inc., as amended and supplemented,
pertaining to West Palm Beach, Ft. Meyers and Sarasota A.D.I.(3)
10.18 Second Amendment to Development Agreement dated January 10,
1992, and Third Amendment to Development Agreement dated January
26, 1994, amending the Standard Form Applebee's Neighborhood
Grill & Bar Development Agreement among the Company, Tom E.
DuPree, Jr. and Applebee's International, Inc., as amended and
supplemented, pertaining to Tennessee/Mississippi A.D.I. (3)
10.19 Amendment to Development Agreement dated January 10, 1992, and
its Second Amendment to Development Agreement dated January 26,
1994, amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement among the Company, Tom E. DuPree, Jr.
and Applebee's International, Inc., as amended and supplemented,
pertaining to Nashville, Tennessee A.D.I. and Bowling Green,
Kentucky A.D.I. (3)
53
<PAGE>
10.20 Second Amendment to Development Agreement dated January 10,
1992, and Third Amendment to Development Agreement dated January
26, 1994, amending the Standard Form Applebee's Neighborhood
Grill & Bar Development Agreement among the Company, Tom E.
DuPree, Jr. and Applebee's International, Inc., as amended and
supplemented, pertaining to Virginia, West Virginia, Washington,
D.C., and Louisville, Kentucky. (3)
10.21 Amendment to Development Agreement dated January 26, 1994,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement among the Company, Tom E. DuPree, Jr. and
Applebee's International, Inc., pertaining to Jacksonville,
Florida A.D.I. (3)
10.22 Apple South, Inc. [Restated] Profit Sharing Plan and Trust dated
October 26, 1993.(3)
10.23 Amended form of Stock Option Agreement under the Apple South,
Inc. 1988 Stock Option Plan.(3)
10.24 Apple South, Inc. 1993 Stock Incentive Plan.(3)
10.25 Form of Stock Option Agreement under the Apple South, Inc. 1993
Stock Incentive Plan. (3)
10.26 Second Supplement to Development Agreement dated July 27, 1994,
between the Company and Applebee's International, Inc.,
pertaining to Chattanooga, Tennessee A.D.I., Knoxville, Tennessee
A.D.I. and Bristol-Kingsport-Johnson City: Tri-Cities A.D.I.(5)
(11)
10.27 Universal Agreement dated June 30, 1995, by and between the
Company and Applebee's International, Inc. amending the Standard
Form Development Agreements appearing as Exhibits 10.5 through
10.9, 10.15, and 10.28 through 10.30.
10.28 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement, dated April 25, 1995, by and between the Company and
Applebee's International, Inc., pertaining to the Cedar Rapids,
and Des Moines, Iowa A.D.I.s, the Rockford, Illinois A.D.I. and
portions of the Davenport-Rock Island- Moline: Quad City A.D.I.;
the Sioux City, Iowa A.D.I.; the Peoria-Bloomington, Illinois,
A.D.I.; and the Rochester-Mason City-Austin A.D.I. (11)
10.29 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement, dated June 30, 1995, by and between the Company and
Applebee's International, Inc., pertaining to a portion of the
Chicago, Illinois A.D.I.
10.30 Standard Form Applebee's Neighborhood Grill & Bar Development
Agreement dated December 29, 1989 by and between Marcus
Restaurants, Inc. And Applebee's International, Inc. pertaining
to the Milwaukee, Madison, LaCrosse-Eau Claire,
Wausau-Rhinelander, and Green Bay-Appleton, Wisconsin A.D.I.s.
(11)
10.31 Consent and Release Agreement by and among the company, Marcus
Restaurants, Inc. and Applebee's International, Inc. dated June
30, 1995 pertaining to the development and franchise rights in
the Milwaukee, Madison, LaCrosse-Eau Claire, Wausau-Rhinelander,
and Green Bay-Appleton, Wisconsin A.D.I.s. (11)
10.32 Amendment to Development Agreement dated June 30, 1995 by and
between the Company and Applebee's International, pertaining to
market areas in portion of Illinois, Iowa, Missouri and
Wisconsin.(11)
10.33 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
pertaining to the Milwaukee, Madison, LaCrosse-Eau Claire,
Wausau- Rhinelander and Green Bay-Appleton, Wisconsin A.D.I.s.
(11)
54
<PAGE>
10.34 Fifth Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the West Palm Beach, Ft.
Myers and Sarasota A.D.I. (11)
10.35 Fourth Amendment to Development Agreement dated June 30, 1995
and Third Amendment to Development Agreement dated February 24,
1995 by and between the Company and Applebee's International,
Inc., amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement pertaining to the South Carolina
market. (11)
10.36 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Chattanooga A.D.I., the
Knoxville A.D.I. and the Bristol- Kingsport-Johnson City:
Tri-Cities A.D.I.(11)
10.37 Fourth Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Tennessee/Mississippi
A.D.I. (11)
10.38 Second Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Jacksonville, Florida
A.D.I. (11)
10.39 Fifth Amendment to Development Agreement dated June 30, 1995 and
Fourth Amendment to Development Agreement dated February 24,
1995, by and between the Company and Applebee's International,
Inc., amending the Standard Form Applebee's Neighborhood Grill &
Bar Development Agreement pertaining to Virginia, West Virginia,
Washington, D.C. and Louisville, Kentucky. (11)
10.40 Third Amendment to Development Agreement dated June 30, 1995 by
and between the Company and Applebee's International, Inc.,
amending the Standard Form Applebee's Neighborhood Grill & Bar
Development Agreement pertaining to the Nashville, Tennessee
A.D.I. and the Bowling Green, Kentucky A.D.I. (11)
10.41 $30 Million Amended and Restated Participation Agreement Between
Apple South, Inc., DR Holdings, L.P., Trust Company Bank,
Southtrust Bank of Georgia, N.A., Life Insurance Company of
Georgia, and Columbine Life Insurance Company.(7)
10.42 Lease and Development Agreement Between DR Holdings, L.P. and
Apple South, Inc.(7)
10.43 $165 Million Credit Agreement among Apple South, Inc.; Wachovia
Bank of Georgia, National Association; Crestar Bank; Trust
Company Bank; Banque Paribas; and Bank of America Illinois, dated
February 27, 1996. (11)
10.44 $20 Million Loan Agreement among Apple South, Inc. And Branch
Banking and Trust Company of South Carolina, dated November 1,
1995.(9)
10.45 $165 Million Credit Agreement Dated as of February 27, 1996.
(12)
10.46 $25 Million Debt Agreement Dated September 30, 1996.
13.1 Annual Report to Shareholders for the fiscal year ended December
31, 1995
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
55
<PAGE>
(1) Incorporated by reference to the corresponding exhibit number filed
with the Company's Registration Statement on Form S-1, File No. 33-42662.
(2) Incorporated by reference to the corresponding exhibit number filed
with the Company's Registration Statement on Form S-1, File No. 33-58378.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for its fiscal year ended December 31, 1993.
(4) Incorporated by reference to Exhibit 2.1 filed with the Company's
Report on Form 8-K dated April 12, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.
(6) Incorporated by reference to Exhibit 10.30 filed with the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(7) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended April 2, 1995
(8) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended July 2, 1995
(9) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended October 1, 1995
(10) Incorporated by reference to the Company's registration statement on
Form S-3, File No. 333-02958.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995.
(12) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for its fiscal quarter ended March 31, 1996.
56
<PAGE>
Exhibit 10.46
$25,000,000
CREDIT AGREEMENT
DATED AS OF
SEPTEMBER 30, 1996
BETWEEN
APPLE SOUTH, INC.,
AS BORROWER
AND
FIRST UNION NATIONAL BANK OF GEORGIA
AS LENDER
<PAGE>
Table of Contents
ARTICLE 1. DEFINITIONS .....................................................1
SECTION 1.1.Definitions.......................................................1
"Adjusted Capitalization"...................................1
"Adjusted Funded Debt"......................................1
"Adjusted Funded Debt/Adjusted Capitalization Ratio"........1
"Adjusted LIBOR Rate,"......................................1
"Affiliate".................................................1
"Agreement".................................................2
"Assignee"..................................................2
"Authority".................................................2
"Bank" ...................................................2
"Bank's Address"............................................2
"Base Rate".................................................2
"Base Rate Loan"............................................2
"BB&T" ...................................................2
"BB&T Agreement"............................................2
"Borrower"..................................................2
"Borrowing".................................................2
"Capital Stock".............................................3
"Capitalized Lease Obligations".............................3
"CERCLA" ...................................................3
"CERCLIS"...................................................3
"Change of Law".............................................3
"Closing Certificate".......................................3
"Closing Date"..............................................3
"Code" ...................................................3
"Commitment"................................................3
"Compliance Certificate"....................................3
"Consolidated Net Income,"..................................3
"Consolidated Subsidiary"...................................3
"Controlled Group"..........................................3
"Default"...................................................4
"Default Rate"..............................................4
"Dollars" or "$"............................................4
"Domestic Business Day".....................................4
"DR Holdings Lease".........................................4
"Environmental Authorizations"..............................4
"Environmental Authority"...................................4
"Environmental Judgments and Orders"........................4
"Environmental Liabilities".................................4
"Environmental Notices".....................................4
i
<PAGE>
"Environmental Proceedings".................................5
"Environmental Releases"....................................5
"Environmental Requirements"................................5
"ERISA" ...................................................5
"Euro-Dollar Business Day"..................................5
"Euro-Dollar Rate,".........................................5
"Euro-Dollar Rate Loan".....................................5
"Euro-Dollar Reserve Percentage"............................5
"Event of Default"..........................................5
"Federal Funds Rate"........................................5
"Fiscal Quarter"............................................6
"Fiscal Year"...............................................6
"Fixed Charge Coverage Ratio"...............................6
"Franchise Rights"..........................................6
"GAAP" ...................................................6
"Guarantee" or "Guaranty"...................................6
"Hazardous Materials".......................................6
"Interest Period"...........................................7
"Lending Office"............................................7
"LIBOR Rate"................................................7
"Lien" ...................................................7
"Loan Documents"............................................8
"Margin Stock"..............................................8
"Material Adverse Effect"...................................8
"Monthly Interest Period"...................................8
"Multiemployer Plan"........................................8
"Note" ...................................................8
"Notice of Borrowing".......................................8
"Participant"...............................................8
"PBGC" ...................................................8
"Person" ...................................................8
"Plan" ...................................................8
"Prime Rate"................................................9
"Properties"................................................9
"Purchase Money Liens"......................................9
"Redeemable Preferred Stock"................................9
"Regulation D"..............................................9
"Regulation G"..............................................9
"Regulation T"..............................................9
"Regulation U"..............................................9
"Regulation X"..............................................9
"Revolving Loan"............................................10
"Sale-Leaseback Transaction"................................10
"Senior Note Indenture".....................................10
"Senior Notes"..............................................10
ii
<PAGE>
"Solvent"...................................................10
"Stockholders' Equity"......................................10
"Subsidiary"................................................10
"Synthetic Lease"...........................................10
"Termination Date"..........................................10
"Third Parties".............................................11
"Total Funded Debt".........................................11
"Transferee"................................................11
"Unfunded Vested Liabilities"...............................11
"Unused Commitment".........................................11
"Voluntary Store Closing"...................................11
"Wachovia"..................................................11
"Wachovia Credit Agreement".................................11
SECTION 1.2.Accounting Terms and Determinations......................12
SECTION 1.3.References...............................................12
SECTION 1.4.Use of Defined Terms.....................................12
SECTION 1.5.Terminology..............................................12
ARTICLE 2.THE CREDIT ........................................................12
SECTION 2.1. Commitment to Lend......................................12
SECTION 2.2. Method of Borrowing ....................................13
2.2.1. Notice to Bank........................................13
2.2.2. When Revolving Loans Made.............................13
2.2.3. Application of Certain Proceeds.......................13
2.2.4. No Borrowing Upon Default.............................13
SECTION 2.3. Note....................................................13
2.3.1. Single Note...........................................13
2.3.2. Endorsement to Note...................................13
SECTION 2.4. Maturity of Revolving Loans.............................14
SECTION 2.5. Interest Rates..........................................14
2.5.1. Base Rate Loans......................................14
2.5.2. Euro-Dollar Rate Loans...............................14
2.5.3. Bank to Determine....................................14
2.5.4. Savings Clause.......................................15
SECTION 2.6. Closing Fee.............................................15
SECTION 2.7. Termination or Reduction of Commitment..................15
2.7.1. Termination of Commitments...........................15
2.7.2. Mandatory Reduction and Reinstatement of Commitment..15
SECTION 2.8. Optional Prepayments...................................15
SECTION 2.9. Mandatory Prepayments..................................16
SECTION 2.10. General Provisions as to Payments......................16
2.10.1. Timing...............................................16
2.10.2. Next Banking Day.....................................16
SECTION 2.11. Computation of Interest................................16
iii
<PAGE>
ARTICLE 3. CONDITIONS TO BORROWINGS ........................................16
SECTION 3.1. Conditions to First Borrowing..........................16
3.1.1. This Agreement.......................................16
3.1.2. Note.................................................17
3.1.3. Opinion..............................................17
3.1.4. Closing Certificate..................................17
3.1.5. Other Documents......................................17
3.1.6. Borrowing Notice.....................................17
SECTION 3.2. Conditions to All Borrowings...........................17
3.2.1. Notice...............................................17
3.2.2. No Default...........................................17
3.2.3. Truth of Representations.............................17
3.2.4. Not Overadvance......................................17
ARTICLE 4. REPRESENTATIONS AND WARRANTIES....................................18
SECTION 4.1. Corporate Existence and Power..........................18
SECTION 4.2. Corporate and Governmental Authorization:
No Contravention....................................18
SECTION 4.3. Binding Effect.........................................18
SECTION 4.4. Financial Information: No Material Adverse Effect......19
SECTION 4.5. No Litigation..........................................19
SECTION 4.6. Compliance with Laws Generally; Compliance with ERISA..19
SECTION 4.7. Taxes..................................................20
SECTION 4.8. Subsidiaries...........................................20
SECTION 4.9. Not a Holding Company, Public Utility, Investment Company
Investment Adviser..................................20
SECTION 4.10. Ownership of Property; Liens...........................20
SECTION 4.11. No Default.............................................20
SECTION 4.12. Full Disclosure........................................20
SECTION 4.13. Environmental Matters..................................21
SECTION 4.14. Capital Stock..........................................21
SECTION 4.15. Margin Stock...........................................21
SECTION 4.16. Solvency...............................................22
SECTION 4.17. Possession of Franchises, Licenses, Etc................22
SECTION 4.18. Insurance..............................................22
ARTICLE 5. COVENANTS .......................................................22
SECTION 5.1. Information............................................22
5.1.1. Annual Audit.........................................22
5.1.2. Interim Statements...................................23
5.1.3. Compliance Certificates..............................23
5.1.4. Default Notice.......................................23
5.1.5. Proxy................................................23
5.1.6. Registration Statements..............................23
5.1.7. ERISA Notices........................................23
iv
<PAGE>
5.1.8. Wachovia Agreement; BB& T Agreement; Senior Notes.....24
5.1.9. Other Reports.........................................24
SECTION 5.2. Inspection of Property, Books and Records..............24
SECTION 5.3. Adjusted Funded Debt/Adjusted Capitalization Ratio.....24
SECTION 5.4. Minimum Shareholders' Equity...........................24
SECTION 5.5. Fixed Charge Coverage Ratio............................24
SECTION 5.6. Negative Pledge........................................24
SECTION 5.7. Maintenance of Existence...............................25
SECTION 5.8. Dissolution............................................26
SECTION 5.9. Consolidation, Mergers, and Sales of Assets; Sale-
Leaseback Transactions...............................26
5.9.1. Consolidation, Mergers, and Sales of Assets..........26
5.9.2. Sale-Leaseback Transactions..........................26
SECTION 5.10. Use of Proceeds........................................26
SECTION 5.11. Compliance with Laws; Payment of Taxes.................27
SECTION 5.12. Insurance..............................................27
SECTION 5.13. Change is Fiscal Year..................................27
SECTION 5.14. Maintenance of Property................................27
SECTION 5.15. Environmental Notices..................................27
SECTION 5.16. Environmental Matters..................................27
SECTION 5.17. Environmental Releases.................................28
SECTION 5.18. Investments............................................28
(i) Current Assets.......................................28
(ii) Capital Expenditures.................................28
(iii) Franchise Fees.......................................28
(iv) Escrow Deposits......................................28
(v) Bank Accounts........................................28
(vi) Surplus Cash.........................................29
(vii) Subsidiaries.........................................29
(viii) Travel Advances......................................29
(ix) Special Life Insurance Program.......................29
(x) Applebee's Franchisees...............................29
(xi) Other Restaurant Concepts............................30
(xii) Other Investments Generally..........................30
SECTION 5.19. Subsidiary Debt........................................30
ARTICLE 6. DEFAULTS ........................................................30
SECTION 6.1. Events of Default.......................................30
6.1.1. Non-Payment..........................................30
6.1.2. Failure to Observe Certain Covenants.................31
6.1.3. Failure to Observe Covenants Generally...............31
6.1.4. Misrepresentation....................................31
6.1.5. Cross-Default........................................31
6.1.6. Voluntary Bankruptcy.................................31
6.1.7. Involuntary Bankruptcy...............................32
v
<PAGE>
6.1.8. ERISA................................................32
6.1.9. Judgments............................................32
6.1.10. Tax Liens...........................................32
6.1.11. Change of Control...................................32
6.1.12. Loss of Franchise Rights............................33
6.1.13. BB&T Agreement......................................33
6.1.14. Material Adverse Effect.............................33
ARTICLE 7. CHANGE IN CIRCUMSTANCES; COMPENSATION ...........................33
SECTION 7.1. Basis for Determining Interest Rate Inadequate .........33
SECTION 7.2. Illegality..............................................34
SECTION 7.3. Increased Cost and Reduced Return.......................34
7.3.1. Change of Law........................................34
7.3.2. Capital Adequacy.....................................35
7.3.3. Notice of Determination..............................35
7.3.4. Assignees Covered....................................35
SECTION 7.4. Base Rate Loans Substituted for Affected Euro-Dollar Rate
Loans................................................35
SECTION 7.5. Compensation............................................36
ARTICLE 8. MISCELLANEOUS ...................................................36
SECTION 8.1. Notices.................................................36
SECTION 8.2. No Waivers..............................................36
SECTION 8.3. Expenses; Documentary Taxes.............................37
SECTION 8.4. Indemnification.........................................37
SECTION 8.5. Amendments and Waivers..................................37
SECTION 8.6. Successors and Assigns..................................37
8.6.1. No Assignment by Borrower.............................37
8.6.2. Participation.........................................38
8.6.3. Assignments...........................................38
8.6.4. Disclosures...........................................38
8.6.5. Status of Transferee..................................38
SECTION 8.7. Confidentiality.........................................38
SECTION 8.8. GEORGIA LAW.............................................39
SECTION 8.9. Interpretation..........................................39
SECTION 8.10.CONSENT TO JURISDICTION.................................39
SECTION 8.11.Counterparts............................................40
SECTION 8.12.Survival................................................40
SECTION 8.13.Entire Agreement: Amendment; Severability...............40
SECTION 8.14.TIME OF THE ESSENCE.....................................40
SECTION 8.15.Bank Not a Joint Venturer...............................40
EXHIBITS
EXHIBIT A Form of Notice of Borrowing
vi
EXHIBIT B Form of Compliance Certificate
SCHEDULES
SCHEDULE 4.8 Existing Subsidiaries
SCHEDULE 5.6 Existing Permitted Liens
vii
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of September 30, 1996, is made between
APPLE SOUTH, INC., as Borrower; and FIRST UNION NATIONAL BANK OF GEORGIA, as
Lender.
The parties hereto agree as follows:
ARTICLE 1. DEFINITIONS
SECTION 1.1. Definitions.
The terms as defined in this Section 1.1 shall for all purposes of this
Agreement and any amendment hereto (except as herein otherwise expressly
provided or unless the context otherwise requires), have the meanings set forth
herein:
"Adjusted Capitalization" shall be equal to the sum at any date of: (i)
Adjusted Funded Debt; plus (ii) Stockholders' Equity.
"Adjusted Funded Debt" shall mean and include the sum (without
duplication) of the following, at any date, for the Borrower and its
Consolidated Subsidiaries on a consolidated basis: (i) Total Funded Debt; plus
(ii) the present value (discounted at ten percent (10%) per annum) of the
minimum amount of noncancellable operating lease payments owing by Borrower and
such Subsidiaries at such date (excluding, however, for this purpose, any such
lease payments owing under the DR Holdings Lease); plus (iii) the present value
(discounted at ten percent (10%) per annum) of the total payments of "Rent"
owing by the Borrower under the DR Holdings Lease for the entire remaining
"Lease Term" (inclusive of the original term and all renewal terms, whether or
not then effective), with the terms "Rent" and "Lease Term" as used hereinabove
having the meanings given to such terms in the DR Holdings Lease; plus (iv) all
Redeemable Preferred Stock.
"Adjusted Funded Debt/Adjusted Capitalization Ratio" shall mean the
ratio which (i) the Adjusted Funded Debt of the Borrower and its Consolidated
Subsidiaries at any date bears to (ii) the Adjusted Capitalization of the
Borrower and its Consolidated Subsidiaries at such date.
"Adjusted LIBOR Rate," applicable to any Monthly Interest Period, means
that interest rate per annum determined by the Bank to be equal to the quotient
obtained (rounded upwards, if necessary, to the next higher 1/100th of 1%) by
dividing (i) the applicable LIBOR Rate for such Monthly Interest Period by (ii)
1.00 minus the then applicable Euro-Dollar Reserve Percentage (if any).
1
<PAGE>
"Affiliate" means, as to any Person (i) any other Person that directly,
or indirectly through one or more intermediaries, controls such Person (a
"Controlling Person"), (ii) any other Person which is controlled by or is under
common control with such Person or a Controlling Person, or (iii) any other
Person of which such Person owns, directly or indirectly, twenty percent (20%)
or more of the common stock or equivalent equity interests. As used herein, the
term "control" means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
"Agreement" means this Credit Agreement, together with all amendments
and modifications hereto.
"Assignee" has the meaning set forth in Section 8.6.3.
"Authority" has the meaning set forth in Section 7.2.
"Bank" means First Union National Bank of Georgia, a national banking
association organized under the laws of the United States of America, and its
successors and permitted assigns.
"Bank's Address" means the address of the Bank referred to or specified in
Section 8.1.
"Base Rate" means for any Base Rate Loan for any day, the rate per
annum equal to the higher as of such day of (i) the Prime Rate, and (ii)
one-half of one percent (1/2%) per annum above the Federal Funds Rate. For
purposes of determining the Base Rate for any day, changes in the Prime Rate or
the Federal Funds Rate, as the case may be, shall be effective on the date of
each such change.
"Base Rate Loan" means a Revolving Loan made at the Base Rate pursuant
to Section 2.1.
"BB&T" means Branch Banking and Trust Company.
"BB&T Agreement" means the credit agreement, dated as of November 1,
1995, between the Borrower and BB&T.
"Borrower" means Apple South, Inc., a Georgia corporation, and its
successors and permitted assigns.
"Borrowing" means a borrowing hereunder consisting of a Revolving Loan
made to the Borrower by the Bank pursuant to Article II. A Borrowing is a "Base
Rate Borrowing" if such Revolving Loan is a Base Rate Loan or a "Euro-Dollar
Rate Borrowing" if such Revolving Loan is a Euro-Dollar Rate Loan.
251094.7/ 383. 840
2
<PAGE>
"Capital Stock" means any nonredeemable capital stock of the Borrower
or any Consolidated Subsidiary (to the extent issued to a Person other than the
Borrower), whether common or preferred.
"Capitalized Lease Obligations" shall mean those liabilities of the
Borrower and its Consolidated Subsidiaries under any leases that are required to
be capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such liabilities shall be the capitalized amount of such liabilities
as determined in accordance with GAAP.
"CERCLA" means the Comprehensive Environmental Response Compensation and
Liability Act, 42 U.S.C. ss. 9601 et seq. and its implementing regulations and
amendments.
"CERCLIS" means the Comprehensive Environmental Response Compensation
and Liability Inventory System established pursuant to CERCLA.
"Change of Law" shall have the meaning set forth in Section 7.2.
"Closing Certificate" has the meaning set forth in Section 3.1.4.
"Closing Date" means the date of this Agreement, as first inscribed
hereinabove.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code.
"Commitment" means $25,000,000, as such amount is subject to reduction
as provided in Section 2.7.
"Compliance Certificate" has the meaning set forth in Section 5.1.3.
"Consolidated Net Income," for any period, means the net income of the
Borrower and its Consolidated Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP, excluding, however, (i) any
extraordinary items and (ii) any equity interest of the Borrower or any
Consolidated Subsidiary in the unremitted earnings of any Person which is
not a Subsidiary, in each case as likewise determined on a consolidated
basis in accordance with GAAP.
"Consolidated Subsidiary" means at any date any Subsidiary or other
entity the accounts of which, in accordance with GAAP, would be
consolidated with those of the Borrower in its consolidated financial
statements as of such date.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
251094.7/ 383. 840
3
<PAGE>
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Default Rate" means, with respect to any Revolving Loan, on any day,
the sum of two percent (2%) per annum in excess of the interest rate otherwise
then or thereafter payable on such Revolving Loan, but, in any event, not less
than two percent (2%) per annum in excess of the Base Rate.
"Dollars" or "$" means dollars in lawful currency of the United States
of America.
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks are not required to be open for business in
the State of Georgia.
"DR Holdings Lease" shall mean the Lease and Development Agreement,
dated as of March 2, 1995, between DR Holdings, L.P., as lessor, and the
Borrower, as lessee, together with Appendix "A" thereto and each "Lease
Supplement" thereto (as defined therein), all "Operative Documents" (as also
defined therein) and all amendments and modifications thereto made from time to
time hereafter.
"Environmental Authorizations" means all licenses, permits, orders,
approvals, notices, registrations or other legal prerequisites for conducting
the business of the Borrower or any Subsidiary required by any Environmental
Requirement.
"Environmental Authority" means any foreign, federal, state, local or
regional government that exercises any form of jurisdiction or authority under
any Environmental Requirement.
"Environmental Judgments and Orders" means all judgments, decrees or
orders arising from or in any way associated with any Environmental
Requirements, whether or not entered upon consent or pursuant to written
agreements with an Environmental Authority or any other entity, arising from or
in any way associated with any Environmental Requirement, whether or not
incorporated in a judgment, decree or order.
"Environmental Liabilities" means any liabilities whether accrued,
contingent or otherwise, arising from and in any way associated with any
Environmental Requirements.
"Environmental Notices" means notice from any Environmental Authority
or by any other Person, of possible or alleged noncompliance with or liability
under any Environmental Requirement, including, without limitation any
complaints, citations, demands or requests from any Environmental Authority or
from any other Person for correction of any violation of any Environmental
Requirement or any investigations concerning any violation of any Environmental
Requirement.
251094.7/ 383. 840
4
<PAGE>
"Environmental Proceedings" means any judicial or administrative
proceedings arising from or in any way associated with any Environmental
Requirement.
"Environmental Releases" means "releases" as defined in CERCLA or under
any applicable state or local environmental law or regulation.
"Environmental Requirements" means any legal requirement relating to
health, safety or the environment and applicable to the Borrower, any Subsidiary
or any Property, including, but not limited to, any such requirement under
CERCLA or similar state legislation and all federal, state and local laws,
ordinances, regulations, orders, writs, decrees and common law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law. Any reference to any provision
of ERISA shall also be deemed to be a reference to any successor provision or
provisions thereof.
"Euro-Dollar Business Day" means any Domestic Business Day in which
dealings in Dollar deposits are carried out in the London interbank Euro-Dollar
market.
"Euro-Dollar Rate," applicable to any Monthly Interest Period, means
that interest rate per annum equal to the sum of (i) the Adjusted LIBOR Rate for
such Monthly Interest Period, plus (ii) nine-tenths of one percent (.90%). Each
such Euro-Dollar Rate shall remain in effect for the applicable Monthly Interest
Period and shall be adjusted to a new Euro-Dollar Rate as of the first day of
the next Monthly Interest Period.
"Euro-Dollar Rate Loan" means a Revolving Loan made at the Euro-Dollar
Rate pursuant to Section 2.1.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor), for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Rate Loans is determined or any category of
extensions of credit or other assets which includes loans by a non-United States
office of the Bank to United States residents). The Adjusted LIBOR Rate shall be
adjusted automatically on and as of the effective date of any change in the
Euro-Dollar Reserve Percentage.
"Event of Default" has the meaning set forth in Section 6.1.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if the day for which
251094.7/ 383. 840
5
<PAGE>
such rate is to be determined is not a Domestic Business Day, the Federal Funds
Rate for such day shall be such rate on such transactions on the next preceding
Domestic Business Day as so published on the next succeeding Domestic Business
Day, and (ii) if such rate is not so published for any day, the Federal Funds
Rate for such day shall be the average rate charged to the Bank on such day on
such transactions, as determined by the Bank.
"Fiscal Quarter" means any fiscal quarter of the Borrower.
"Fiscal Year" means any fiscal year of the Borrower.
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, the
ratio which (A) the sum of Consolidated Net Income for such period plus interest
expense, provision for taxes and operating lease expense of the Borrower and its
Consolidated Subsidiaries for such period, bears to (B) the sum of interest
expense and operating lease expense of the Borrower and its Consolidated
Subsidiaries for the same such period, all as determined under GAAP.
"Franchise Rights" shall mean all rights, privileges and interests of
the Borrower and its Consolidated Subsidiaries to own, operate and develop
franchised restaurants as a franchisee, whether now or hereafter existing, and
whether with respect to the operation of any "Applebee's" restaurants, any
"Hardee's" restaurants or otherwise.
"GAAP" means generally accepted accounting principles applied on a
basis consistent with those which, in accordance with Section 1.2, are to be
used in making the calculations for purposes of determining compliance with the
terms of this Agreement.
"Guarantee" or "Guaranty" by any Person means any obligation,
contingent or otherwise, of such Person directly or indirectly guaranteeing any
debt or other obligation of any other Person and, without limiting the
generality of the foregoing, any obligation, direct or indirect, contingent or
otherwise, of such Person (i) to secure, purchase or pay (or advance or supply
funds for the purchase or payment of) such debt or other obligation (whether
arising by virtue of partnership arrangements, by agreement to keep-well, to
purchase assets, goods, securities or services, to provide collateral security
to take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for the purpose of assuring in any other manner the obligee of
such debt or other obligation of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part), provided that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The terms "Guarantee" or "Guaranty" used as a verb
has a corresponding meaning.
"Hazardous Materials" includes, without limitation, (a) solid or
hazardous waste, as defined in the Resource Conservation and Recovery Act of
1980, 42 U.S.C. ss. 6901 et seq. and its implementing regulations and
amendments, or in any applicable state or local law or regulation, (b)
"hazardous substance," "pollutant," or "contaminant" as defined in CERCLA, or in
applicable state or local law or regulation, (c) gasoline, or any other
petroleum product or by-product, including, crude oil or any fraction thereof,
(d) toxic substances, as defined in the Toxic Substances Control Act of 1976, or
in any applicable state or local law or
251094.7/ 383. 840
6
<PAGE>
regulation, and (e) insecticides, fungicides, or rodenticides, as defined in the
Federal Insecticide, Fungicide, and Rodenticide Act of 1975, or in any
applicable state or local law or regulation, as each such Act, statute or
regulation may be amended from time to time.
"Interest Period" means with respect to each Borrowing, the period
commencing on the date of such Borrowing and ending on the date on which such
Borrowing is fully paid or converted to a Borrowing of a different type;
provided that:
(a) any Interest Period (other than an Interest Period
determined pursuant to paragraph (b) below) which would otherwise end
on a day which is not a Domestic Business Day shall be extended to the
next succeeding Domestic Business Day;
(b) any Interest Period which begins before the Termination
Date and would otherwise end after the Termination Date shall end on
the Termination Date.
"Lending Office" means the Bank's office located at its address set
forth on the signature page hereof or such other office in the United States as
the Bank may hereafter designate as its Lending Office by notice to the
Borrower.
"LIBOR Rate" means, for any Euro-Dollar Rate Loan for each Monthly
Interest Period, the rate per annum determined on the basis of the offered rate
for deposits in Dollars of amounts equal or comparable to the principal amount
of such Euro-Dollar Rate Loan offered for a term comparable to such Monthly
Interest Period, which rate appears on the display designated as page "3750" of
the Telerate Service (or such other page as may replace page 3750 of that
service or such other service or services as may be nominated by the British
Banker's Association for the purpose of displaying London interbank offered
rates for U.S. dollar deposits), determined as of 10:00 A.M., New York City
time, on the first day of such Monthly Interest Period, provided that (i) if
more than one such offered rate appears on such page, the "LIBOR Rate" will be
the arithmetic average (rounded upward, if necessary, to the next higher 1/100th
of 1%) of such offered rates; (ii) if no such offered rates appear on such page,
the "LIBOR Rate" for such Monthly Interest Period will be the arithmetic average
(rounded upward, if necessary, to the next higher 1/100th of 1%) of rates quoted
by not less than two (2) major banks in New York City, selected by the Bank, at
approximately 10:00 A.M., New York City time, on the first day of such Monthly
Interest Period, for deposits in Dollars offered to leading European banks for a
period comparable to such Monthly Interest Period in an amount comparable to the
principal amount of such Euro-Dollar Loan.
"Lien" means, with respect to any asset, any mortgage, deed to secure
debt, deed of trust, lien, pledge, charge, security interest, security title or
other preferential arrangement, which has the practical effect of constituting a
security interest or encumbrance, or encumbrance or servitude of any kind in
respect of such asset to secure or assure payment of a debt or a Guarantee,
whether by consensual agreement or by operation of statute or other law. For
purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to
own subject to a Lien any asset which it has acquired or holds subject to the
interest of a vendor or
251094.7/ 383. 840
7
<PAGE>
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan Documents" means this Agreement, the Note, any Subsidiary
Guaranty, any other documents evidencing or relating to the Revolving Loans, and
any other document, instrument, certificate or agreement delivered in connection
with this Agreement, the Note or the Revolving Loans, as such documents,
instruments, certificates and agreements may be amended or modified from time to
time.
"Margin Stock" means "margin stock" as defined in Regulations G, T, U
or X.
"Material Adverse Effect" means, with respect to any event, act,
condition or occurrence of whatever nature (including any adverse determination
in any litigation, arbitration, or governmental investigation or proceeding),
whether singly or in conjunction with any other event or events, act or acts,
condition or conditions, occurrence or occurrences, whether or not related, that
such event or events, act or acts, condition or conditions, and/or occurrence or
occurrences results in a material adverse change in, or has a material adverse
effect upon, any of (a) the financial condition, operations, business, or
properties of the Borrower and its Consolidated Subsidiaries taken as a whole,
(b) the rights and remedies of the Bank under the Loan Documents, or the ability
of the Borrower to perform its obligations under the Loan Documents to which it
is a party, as applicable, or (c) the legality, validity or enforceability of
this Agreement, the Note or any Loan Document.
"Monthly Interest Period" shall mean, with respect to Euro-Dollar Rate
Borrowings, the period beginning on the first day of a calendar month and ending
on the last day of such calendar month.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) of ERISA.
"Note" means the promissory note, dated of even date herewith, from the
Borrower to the Bank in the original amount of the Commitment and evidencing the
Revolving Loans, together with all amendments, consolidations, modifications,
renewals, and supplements thereto.
"Notice of Borrowing" has the meaning set forth in Section 2.2.1.
"Participant" has the meaning set forth in Section 8.6.2.
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an
unincorporated association, a trust or any other entity or organization,
including, but not limited to, a government or political subdivision or an
agency or instrumentality thereof.
251094.7/ 383. 840
8
<PAGE>
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions.
"Prime Rate" refers to that interest rate so denominated and set by the
Bank from time to time as an interest rate basis for borrowings. The Prime Rate
is but one of several interest rate bases used by the Bank. The Bank lends at
interest rates above and below the Prime Rate.
"Properties" means all property owned, leased or otherwise used,
operated or occupied by the Borrower or any Subsidiary, wherever located, and
whether real property or personal property.
"Purchase Money Liens" means Liens securing the repayment of any
purchase money debt permitted hereunder incurred to finance the purchase of any
Property hereafter acquired by the Borrower or any Consolidated Subsidiary, so
long as such Liens are limited solely to the Property so acquired, secure only
the purchase money debt so incurred and are terminated upon payment in full of
such purchase money debt.
"Redeemable Preferred Stock" of any Person means any preferred stock
issued by such Person which is at any time prior to the Termination Date either
(i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or
(ii) redeemable at the option of the holder thereof.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System, as in effect from time to time, together with all
official rulings and interpretations issued thereunder.
"Regulation G" means Regulation G of the Board of Governors of the
Federal Reserve System, as in effect from time to time, together with all
official rulings and interpretations issued thereunder.
"Regulation T" means Regulation T of the Board of Governors of the
Federal Reserve System, as in effect from time to time, together with all
official rulings and interpretations issued thereunder.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time, together with all
official rulings and interpretations issued thereunder.
251094.7/ 383. 840
9
<PAGE>
"Regulation X" means Regulation X of the Board of Governors of the
Federal Reserve System, as in effect from time to time, together with all
official rulings and interpretations issued thereunder.
"Revolving Loan" means a Base Rate Loan or a Euro-Dollar Rate Loan made
by the Bank pursuant to Section 2.1.
"Sale-Leaseback Transaction" means any sale-leaseback transaction
involving the sale of any assets or properties of the Borrower or any Subsidiary
to any other Person and the leasing back of such asset or property by the
Borrower or any Subsidiary.
"Senior Note Indenture" means the Indenture of Trust, dated as of May
1, 1996, between SunTrust Bank and the Borrower, and including all applicable
covenants with respect to the Senior Notes contained in the Prospectus, dated as
of May 6, 1996, as supplemented May 23, 1996, for the Senior Notes.
"Senior Notes" means the Borrower's $125,000,000 9.75% Senior Notes
due June 1, 2006.
"Solvent" means as to any Person, that such Person (i) owns Property
whose fair saleable value is greater than the amount required to pay all of such
Person's total debts, direct or indirect, contingent or otherwise, (ii) is able
to pay all of such debts as and when such debts mature and (iii) has capital
sufficient to carry on the business and transactions in which it is engaged and
all business and transactions in which it is about to engage.
"Stockholders' Equity" means, at any time, the stockholders' equity of
the Borrower and its Consolidated Subsidiaries, as set forth or reflected on the
most recent consolidated balance sheet of the Borrower and its consolidated
Subsidiaries prepared in accordance with GAAP, but excluding any Redeemable
Preferred Stock of the Borrower or any of its Consolidated Subsidiaries.
Shareholders' Equity generally would include, but not be limited to (i) the par
or stated value of all outstanding Capital Stock, (ii) capital surplus, (iii)
retained earnings, and (iv) various deductions such as (A) purchases of treasury
stock, (B) valuation allowances, (C) receivables due from an employee stock
ownership plan, and (D) employee stock ownership plan debt Guarantees.
"Subsidiary" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other Persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
"Synthetic Lease" shall mean any agreement, or series of related
agreements, between the Borrower and one or more other parties which are
intended to be treated, for accounting purposes, as an operating lease with the
Borrower as lessee and, for tax purposes, as a financing arrangement with the
Borrower as debtor.
251094.7/ 383. 840
10
<PAGE>
"Termination Date" has the meaning set forth in Section 2.7.1.
"Third Parties" means all leases, subleases, licensees and other users
of the Properties, excluding those users of the Properties in the ordinary
course of the Borrower's business and on a temporary basis.
"Total Funded Debt" shall mean that portion of the total liabilities of
the Borrower and its Consolidated Subsidiaries at any date equal to the sum
(without duplication) of: (i) all indebtedness for borrowed money at such date
(including, for this purpose, indebtedness in respect of any outstanding
bankers' acceptances); plus (ii) all Capitalized Lease Obligations outstanding
at such date; plus (iii) all debts, liabilities and obligations which are
Guaranteed by the Borrower or any Consolidated Subsidiary as of such date; plus
(iv) all debts, liabilities or obligations at such date to any seller incurred
to pay the deferred price of property or services having a deferred purchase
price of One Million Dollars ($1,000,000) or more, excepting, in any event,
trade accounts payable arising in the ordinary course of business and purchase
options prior to their exercise; plus (v) all debts, liabilities and obligations
outstanding at such date in respect of any Synthetic Leases, excluding
therefrom, however, any debts, liabilities or obligations under the DR Holdings
Lease up to a maximum thereof of Twenty-Eight Million Dollars ($28,000,000.00),
it being understood and agreed that, subject to such limitation, no debts,
liabilities or obligations (including any constituting Guaranteed Obligations)
under the DR Holding Lease shall be included in the definition of Total Funded
Debt.
"Transferee" has the meaning set forth in Section 8.6.4.
"Unfunded Vested Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the present value of all vested
nonforfeitable benefits under such Plan exceeds (ii) the fair market value of
all Plan assets allocable to such benefits, all determined as of the then most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the Controlled Group to the PBGC
or the Plan under Title IV of ERISA.
"Unused Commitment" means at any date an amount equal to the Commitment
less the aggregate outstanding principal amount of the Revolving Loans.
"Voluntary Store Closing" shall mean any voluntary closing by the
Borrower or any Subsidiary of any franchised restaurant location in the ordinary
course of its business which does not cause, or result in, the forfeiture,
suspension, loss, rejection, disclaimer, impairment, curtailment, alteration of,
or other adverse effect on, any Franchise Rights with respect to the operation
or development of any other existing or future franchised restaurant location or
locations.
"Wachovia" means Wachovia Bank of Georgia, National Association, a
national banking association, and its successors.
11
<PAGE>
"Wachovia Credit Agreement" means the Credit Agreement, dated February
27, 1996, among Borrower, Wachovia, as agent, and the banks that are signatories
thereto.
SECTION 1.2. Accounting Terms and Determinations.
Unlike otherwise specified herein, all terms of an accounting character
used herein shall be interpreted, all accounting determinations hereunder shall
be made, and all financial statements required to be delivered hereunder shall
be prepared in accordance with GAAP, applied on a basis consistent (except for
changes concurred with by the Borrower's independent public accountants or
otherwise required by a change in GAAP) with the then most recent audited
consolidated financial statements of the Borrower and its Consolidated
Subsidiaries delivered to the Bank; provided, however, that upon any change in
GAAP material to Borrower occurring hereafter, the Bank shall have the right to
require either that conforming adjustments be made to any financial covenants
hereafter set forth, or the components thereof, affected by such change or that
the Borrower report its financial condition based on GAAP as in effect
immediately prior to such change occurring.
SECTION 1.3. References.
Unless otherwise indicated, references in this Agreement to "Articles,"
"Exhibits," "Schedules," "Sections" and other Subdivisions are references to
articles, exhibits, schedules, sections and other subdivisions hereof.
SECTION 1.4. Use of Defined Terms.
All terms defined in this Agreement shall have the same defined
meanings when used in any of the other Loan Documents, unless otherwise defined
therein or unless the context shall require otherwise.
SECTION 1.5. Terminology.
All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
Titles of Articles and Sections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement.
ARTICLE 2. THE CREDIT
SECTION 2.1. Commitment to Lend.
The Bank agrees, on the terms and conditions set forth herein, to make
Revolving Loans to the Borrower from time to time before the Termination Date;
provided that, immediately after each such Revolving Loan is made, the aggregate
principal amount of Revolving Loans shall not exceed the amount of the
Commitment, as the same may be reduced from time to time pursuant to Section
2.7. Each Borrowing under this Section shall be in an
251094.7/ 383. 840
12
<PAGE>
aggregate principal amount of One Million Dollars ($1,000,000.00) or any larger
multiple of Five Hundred Thousand Dollars ($500,000.00) (except that any such
Borrowing may be in the aggregate amount of the Unused Commitment). Withing the
foregoing limits, the Borrower may borrow under this Section, repay or, to the
extent permitted by Section 2.8, prepay Revolving Loans and reborrow under this
Section at any time or from time to time before the Termination Date.
SECTION 2.2. Method of Borrowing.
2.2.1. Notice to Bank. The Borrower shall give the Bank notice (a
"Notice of Borrowing"), which shall be substantially in the form of Exhibit
A, not later than 11:00 a.m. (Atlanta, Georgia time) on the day of each
Borrowing, specifying:
(a) the date of such Borrowing,
(b) the aggregate amount of such Borrowing, and
(c) whether such Borrowing is to be a Base Rate Loan or
Euro-Dollar Rate Loan.
2.2.2. When Revolving Loans Made. Not later than 1:00 p.m.
(Atlanta, Georgia time) on the date of each Borrowing, the Bank shall (except as
provided in Section 2.2.3) make available such Borrowing, in Federal or other
funds immediately available in Atlanta, Georgia, to the Borrower at the Bank's
Address unless the Bank determines that any applicable condition specified in
Article 3 has not been satisfied.
2.2.3. Application of Certain Proceeds. If the Bank makes a
Revolving Loan hereunder on a day on which the Borrower is to repay all or any
part of an outstanding Revolving Loan, the Bank shall apply the proceeds of its
new Revolving Loan to make such repayment and only an amount equal to the
difference (if any) between the amount being borrowed and the amount being
repaid shall be made available to the Borrower as provided in Section 2.2.2.
2.2.4. No Borrowing Upon Default. Notwithstanding anything to the
contrary contained in this Agreement, no Borrowing may be made if there
shall have occurred a Default, which Default shall not have been cured or
waived.
SECTION 2.3. Note.
2.3.1. Single Note. The Revolving Loans shall be evidenced by the
Note, payable to the order of the Bank for the account of its Lending
Office, in an amount equal to the original principal amount of the
Commitment.
2.3.2. Endorsement to Note. The Bank may record and, prior to any
transfer of the Note shall, endorse on the schedule forming a part thereof
appropriate notations to
251094.7/ 383. 840
13
<PAGE>
evidence the date, amount and maturity of each Revolving Loan, the date and
amount of each payment of principal made by the Borrower with respect thereto
and whether such Revolving Loan is a Base Rate Loan or Euro-Dollar Rate Loan,
and such schedule shall constitute rebuttable presumptive evidence of the
principal amount owing and unpaid on the Note; provided that the failure of the
Bank to make any such recordation or endorsement shall not affect the obligation
of the Borrower hereunder or under the Note. The Bank is hereby irrevocably
authorized by the Borrower so to endorse the Note and to attach to and make a
part of the Note a continuation of any such schedule as and when required.
SECTION 2.4. Maturity of Revolving Loans.
Each Revolving Loan included in any Borrowing shall mature, and the
principal amount thereof shall be due and payable, on the last day of the
Interest Period applicable to such Borrowing.
SECTION 2.5. Interest Rates.
Subject to the terms of Section 7.1:
2.5.1. Base Rate Loans. Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the Base Rate, as it may change
from time to time during such Interest Period. Such interest shall be payable
monthly, in arrears, on the last day of each calendar month, in respect of
interest accrued in such month (or portion thereof), commencing on September 30,
1996 (with the first payment date to cover the period from the Closing Date
until September 30, 1996), until maturity and thereafter on demand. Any overdue
principal of and, to the extent permitted by applicable law, overdue interest on
any Base Rate Loan shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the Default Rate.
2.5.2. Euro-Dollar Rate Loans. Each Euro-Dollar Rate Loan
shall bear interest on the outstanding principal amount thereof at the
Euro-Dollar Rate for such Monthly Interest Period (or portion thereof during
which it is outstanding). If a Euro-Dollar Rate Loan shall be outstanding during
more than one calendar month, the interest rate thereon shall be adjusted to the
new Euro-Dollar Rate as of the first day of the next succeeding Monthly Interest
Period during which it is outstanding. Such interest shall be payable for each
Interest Period on the last day thereof. Any overdue principal of and, to the
extent permitted by law, overdue interest on any Euro-Dollar Rate Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to the Default Rate; provided that the mere application of the Default
Rate to these Revolving Loans shall not give rise to the breakage of an Interest
Period, but only an increased margin applicable to these Revolving Loans.
2.5.3. Bank to Determine. The Bank shall determine each interest rate
applicable to the Revolving Loans hereunder. The Bank shall give prompt
notice to the
251094.7/ 383. 840
14
<PAGE>
Borrower by telecopier of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
2.5.4. Savings Clause. In no contingency or event whatsoever,
whether by reason of advancement of the proceeds hereof or otherwise, shall the
amount paid or agreed to be paid to the Bank for the use, forbearance or
detention of money advanced hereunder exceed the highest lawful rate permissible
under any law which a court of competent jurisdiction may deem applicable
hereto. In the event that such a court determines that the Bank has charged or
received interest hereunder in excess of the highest applicable rate, such rate
shall automatically be reduced to the maximum rate permitted by applicable law
and the Bank shall promptly refund to the Borrower any interest received by the
Bank in excess of the maximum lawful rate or, if so requested by the Borrower,
shall apply such excess to the principal balance of the Note. It is the intent
hereof that the Borrower not pay or contract to pay, and that the Bank not
receive or contract to receive, directly or indirectly in any manner whatsoever,
interest in excess of that which may be paid by the Borrower under applicable
law.
SECTION 2.6. Closing Fee.
The Borrower shall pay to the Bank on the Closing Date a fully earned,
non-refundable closing fee of $15,000.
SECTION 2.7. Termination or Reduction of Commitment.
2.7.1. Termination of Commitments. The Commitment shall
terminate on April 30, 1997 (the "Termination Date"), and any Revolving Loans
then outstanding (together with accrued interest thereon) shall be due and
payable on such date. In addition to the foregoing, the Borrower shall have the
right to terminate the Commitment at any time if no Borrowings are then
outstanding or all Borrowings are repaid or prepaid in accordance with the terms
of Section 2.9, as the case may be, on or prior to such early termination,
provided that (i) the Borrower shall have given at least one (1) Domestic
Business Day's advance written notice to the Bank of such election and (ii) any
such notice of termination shall be irrevocable once made.
2.7.2. Mandatory Reduction and Reinstatement of Commitment. If
at any time the Borrower's "Consolidated Fixed Charge Coverage Ratio" (as
defined in the Senior Note Indenture) is equal to or less than 2.5:1.0, the
Commitment shall be automatically and without further action on the part of the
Bank, the Borrower or any other Person, reduced to $20,000,000 minus (but only
prior to the termination of the BB&T Agreement and all obligations thereunder)
the outstanding amount under the BB&T Agreement. At such time as the Borrower
provides a written certification to the Bank that the "Consolidated Cash Flow
Coverage Ratio" (as defined in the Senior Note Indenture) exceeds 2.5:1.0, the
Commitment shall thereafter be increased to $25,000,000 without any further
action on the part of the Bank, the Borrower or any other Person.
251094.7/ 383. 840
15
<PAGE>
SECTION 2.8. Optional Prepayments.
The Borrower may, on any Business Day, upon giving notice to the Bank
by not later than 11:00 A.M. (Atlanta, Georgia time) on such Business Day, and
making payment to the Bank, on such Business Day of any compensation required by
Section 7.5, prepay any Borrowing in whole at any time, or from time to time in
part in amounts aggregating at least One Million Dollars ($1,000,000) and
integral multiples of Five Hundred Thousand Dollars ($500,000), by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment. Each such optional prepayment shall be applied to prepay the
Revolving Loans.
SECTION 2.9. Mandatory Prepayments.
On each date, if any, on which the Commitment is terminated or reduced
pursuant to Section 2.7, the Borrower shall repay or prepay such principal
amount of the outstanding Revolving Loans, if any, as may be necessary so that
after such payment the aggregate unpaid principal amount of the Revolving Loans
is reduced to zero, in the case of any termination, or does not exceed the
aggregate amount of the Commitment as then reduced, in the case of any
reduction, plus, in each case, accrued interest thereon to the date of
prepayment and any compensation required by Section 7.5.
SECTION 2.10. General Provisions as to Payments.
2.10.1. Timing. The Borrower shall make each payment of
principal of, and interest on, the Revolving Loans and of any fees hereunder,
not later than 2:00 P.M. (Atlanta, Georgia time) on the date when due, in
Federal or other funds immediately available in Atlanta, Georgia, to the Bank's
Address.
2.10.2. Next Banking Day. Whenever any payment of principal of, or
interest on, any Loans or of any fees shall be due on a day which is not a
Domestic Business Day, the date for payment thereof shall be extended to
the next succeeding Domestic Business Day.
SECTION 2.11. Computation of Interest.
Interest on the Revolving Loans shall be computed on the basis of a
year of 360 days and paid for the actual number of days elapsed, calculated as
to each Interest Period from and including the first day thereof to but
excluding the last day thereof.
ARTICLE 3. CONDITIONS TO BORROWINGS
SECTION 3.1. Conditions to First Borrowing.
The obligation of the Bank to make the initial Revolving Loan on the
occasion of the first Borrowing is subject to the satisfaction of the conditions
set forth in Section 3.2 and receipt by the Bank of the following:
251094.7/ 383. 840
16
<PAGE>
3.1.1. This Agreement. A duly executed counterpart of this Agreement
signed by the Borrower;
3.1.2. Note. The duly executed Note complying with the provisions of
Section 2.3;
3.1.3. Opinion. An opinion (together with any opinions of local
counsel relied on therein) of legal counsel for the Borrower, dated as of
the Closing Date, in form and substance satisfactory to the Bank;
3.1.4. Closing Certificate. A certificate ("Closing Certificate"),
dated as of the Closing Date, in form and substance satisfactory to the
Bank, signed by the chief financial officer of the Borrower, to the effect
that (i) no Default has occurred and is continuing on the date of the first
Borrowing and (ii) the representations and warranties of the Borrower
contained in Article 4 are true on and as of the Closing Date;
3.1.5. Other Documents. All documents which the Bank may reasonably
request relating to the existence of the Borrower, the corporate authority
for and the validity of this Agreement, the Note and the other Loan
Documents, and any other matters relevant hereto, all in form and substance
satisfactory to the Bank, including, without limitation, a certificate of
incumbency of the Borrower, signed by the Secretary or an Assistant
Secretary of the Borrower, certifying as to the names, true signatures and
incumbency of the officer or officers of the Borrower authorized to execute
and deliver the Loan Documents, and certified copies of the following
items: (i) the Borrower's Articles of Incorporation, (ii) the Borrower's
Bylaws, (iii) a certificate of the Secretary of State of the State of
Georgia as to the good standing of the Borrower in the State of Georgia,
and (iv) the action taken by the Board of Directors of the Borrower
authorizing the Borrower's execution, delivery and performance of this
Agreement, the Note and the other Loan Documents to which the Borrower is a
party;
3.1.6. Borrowing Notice. A Notice of Borrowing.
SECTION 3.2. Conditions to All Borrowings.
The obligation of the Bank to make a Revolving Loan on the occasion of
each Borrowing is subject to the satisfaction of the following conditions:
3.2.1. Notice. Receipt by the Bank of a Notice of Borrowing;
3.2.2. No Default. The fact that, immediately before and after such
Borrowing, no Default shall have occurred and be continuing;
3.2.3. Truth of Representations. The fact that the representations and
warranties of the Borrower contained in Article 4 of this Agreement shall
be true on and as of the date of such Borrowing; and
251094.7/ 383. 840
17
<PAGE>
3.2.4. Not Overadvance. The fact that, immediately after such
Borrowing, the aggregate outstanding principal amount of the Revolving
Loans will not exceed the amount of the Commitment.
Each Borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date of such Borrowing as to the facts specified in Sections
3.2.2, 3.2.3 and 3.2.4.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 4.1. Corporate Existence and Power.
Each of the Borrower and each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified to transact business in
every jurisdiction where, by the nature of its business, such qualification is
necessary, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted, except where the failure to so qualify, or obtain such licenses,
authorizations, consents or approvals could not be reasonably expected to have
or cause a Material Adverse Effect.
SECTION 4.2. Corporate and Governmental Authorization: No
Contravention.
The execution, delivery and performance by the Borrower and each
Subsidiary which is party thereto of this Agreement, the Note and the other Loan
Documents (i) are within the Borrower's and such Subsidiary's corporate powers,
(ii) have been duly authorized by all necessary corporate action, (iii) require
no action by or in respect of or filing with, any governmental body, agency or
official, (iv) do not contravene, or constitute a default under, any provision
of applicable law or regulation or of the articles of incorporation or by-laws
of the Borrower or such Subsidiary or, to the best of the Borrower's knowledge,
of any material agreement, judgment, injunction, order, decree or other
instrument binding upon the Borrower or any of its Subsidiaries, and (v) do not
result in the creation or imposition of any Lien on any asset of the Borrower or
any of its Subsidiaries.
SECTION 4.3. Binding Effect.
This Agreement constitutes a valid and binding agreement of the
Borrower enforceable in accordance with its terms, and the Note and the other
Loan Documents, when executed and delivered in accordance with this Agreement,
will constitute valid and binding obligations of the Borrower and each
Subsidiary party thereto enforceable in accordance with their respective terms,
provided that the enforceability hereof and thereof is subject in each case to
general principles of equity and to bankruptcy, insolvency and similar laws
affecting the enforcement of creditors' rights generally.
251094.7/ 383. 840
18
<PAGE>
SECTION 4.4. Financial Information: No Material Adverse Effect.
The audited balance sheet of the Borrower and its Consolidated
Subsidiaries as of December 31, 1995, and the related consolidated audited
statements of income, shareholders' equity and cash flows of the Borrower and
its Consolidated Subsidiaries for the Fiscal Year then ended, copies of which
have been delivered to the Bank, and the unaudited financial statements of the
Borrower and its Consolidated Subsidiaries as of and for the Fiscal Quarter
ended closest to June 30, 1996, copies of which have been delivered to the Bank,
fairly present, in conformity with GAAP, the financial position of the Borrower
and its Consolidated Subsidiaries as of such dates and the results of its
operations and cash flow for such periods stated; provided, that, (i) the
interim statements remain subject to normal year-end audit adjustments and (ii)
during the term of this Agreement after the Closing Date, future representations
as to the matters set forth in this sentence shall be deemed to refer to the
most recent financial statements delivered pursuant to Sections 5.1.1 and 5.1.2.
Since December 31, 1995, there has been no event, act, condition or occurrence
having or which could be expected to have a Material Adverse Effect, except for
matters disclosed in the quarterly financial statements referred to above;
provided that during the term of this Agreement following the Closing Date,
future representations as to matters set forth in this sentence shall be deemed
to refer to the last day of the most recent audited financial statements
delivered by the Borrower pursuant to Section 5.1.1.
SECTION 4.5. No Litigation.
There is no action, suit or proceeding pending, or to the knowledge of
the Borrower threatened, against or affecting the Borrower or any of its
Subsidiaries before any court or arbitrator or any governmental body, agency or
official which could have a Material Adverse Effect or which in any manner draws
into question the validity of, or could impair the ability of the Borrower to
perform its obligations under, this Agreement, the Note or any of the other Loan
Documents.
SECTION 4.6. Compliance with Laws Generally; Compliance with ERISA.
The Borrower and each Subsidiary are in compliance in all material
respects with applicable laws (including, but not limited to, ERISA),
regulations and similar requirements of governmental authorities (including, but
not limited to, PBGC), non-compliance with which could have or cause a Material
Adverse Effect, except where the necessity of such compliance is being contested
in good faith through appropriate proceedings. To the best of the Borrower's
knowledge, (i) the Borrower and each member of the Controlled Group have
fulfilled their respective obligations under the minimum funding standards of
ERISA and the Code with respect to each Plan and are in compliance in all
material respects with the presently applicable provisions of ERISA and the
Code, and have not incurred any liability to the PBGC or a Plan under Title IV
of ERISA; and (ii) neither the Borrower nor any member of the Controlled Group
is or ever has been obligated to contribute to any Multiemployer Plan.
251094.7/ 383. 840
19
<PAGE>
SECTION 4.7. Taxes.
There have been filed on behalf of the Borrower and its Subsidiaries
all federal, state and local income, excise, property and other tax returns
which are required to be filed by them and all taxes due pursuant to such
returns or pursuant to any assessment received by or on behalf of the Borrower
or any Subsidiary have been paid, except for amounts that either are immaterial
or are being disputed in good faith and by appropriate proceedings. The charges,
accruals and reserves on the books of the Borrower and its Subsidiaries in
respect of taxes or other governmental charges are, in the opinion of the
Borrower, adequate.
SECTION 4.8. Subsidiaries.
As of the Closing Date, the Borrower has no Subsidiaries, except for
the Subsidiaries set forth on Schedule 4.8, all of which are Consolidated
Subsidiaries.
SECTION 4.9. Not a Holding Company, Public Utility, Investment
Company, Investment Adviser.
Neither the Borrower nor any Subsidiary is a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," or a "public
utility," within the meaning of the Public Utility Holding Company Act of 1935,
as amended; or a "public utility" within the meaning of the Federal Power Act,
as amended; or an "investment company" or a company "controlled" by an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended; or an "investment adviser" within the meaning of the Investment
Advisers Act of 1940, as amended.
SECTION 4.10. Ownership of Property; Liens.
The Borrower owns Properties, or interests in Properties, sufficient
for the conduct of its business; and none of such Properties is subject to any
Lien except as permitted in Section 5.7.
SECTION 4.11. No Default.
Neither the Borrower nor any of its Subsidiaries is in default under or
with respect to any agreement, instrument or undertaking to which it is a party
or by which it or any of its Property is bound which could have or cause a
Material Adverse Effect. No Default has occurred and is continuing.
SECTION 4.12. Full Disclosure.
All written information and, to the best of the Borrower's knowledge,
all other information, heretofore furnished by the Borrower to the Bank for
purposes of or in connection with this Agreement or any transaction contemplated
hereby is, and all such
251094.7/ 383. 840
20
<PAGE>
information hereafter furnished by the Borrower to the Bank will be, true,
accurate and complete in every material respect or based on reasonable estimates
on the date as of which such information is stated or certified. The Borrower
has disclosed to the Bank in writing any and all facts which could reasonably be
expected to have or cause a Material Adverse Effect.
SECTION 4.13. Environmental Matters.
To the best of the Borrower's knowledge, (i) neither the Borrower nor
any Subsidiary is subject to any Environmental Liability which could have or
cause a Material Adverse Effect and neither the Borrower nor any Subsidiary has
been designated as a potentially responsible party under CERCLA or under any
state statute similar to CERCLA. None of the Properties located in the United
States, owned by either the Borrower or a Subsidiary, has been identified on any
current or proposed (A) National Priorities List under 40 C.F.R. ss. 300, (B)
CERCLIS list or (C) any list arising from a state statute similar to CERCLA;
(ii) to the best of the Borrower's knowledge, no Hazardous Materials have been
or are being used, produced, manufactured, processed, treated, recycled,
generated, stored, disposed of, managed or otherwise handled at, or shipped or
transported to or from the Properties or are otherwise present at, in or under
the Properties, owned or operated by either the Borrower or a Subsidiary, or, to
the best of the knowledge of the Borrower, at or from any adjacent site or
facility, except for Hazardous Materials, such as cleaning solvents, pesticides
and other materials used, produced, manufactured, processed, treated, recycled,
generated, stored, disposed of, managed, or otherwise handled in the ordinary
course of business in compliance with all applicable Environmental Requirements;
and (iii) to the best of the Borrower's knowledge, the Borrower and its
Subsidiaries are in compliance with all Environmental Requirements in connection
with the ownership, use and operation of the Properties and the Borrower's and
such Subsidiary's respective businesses.
SECTION 4.14. Capital Stock.
All Capital Stock, debentures, bonds, notes and all other securities of
the Borrower and its Subsidiaries presently issued and outstanding are validly
and properly issued in accordance with all applicable laws, including but not
limited to, the "Blue Sky" laws of all applicable states and the federal
securities laws.
SECTION 4.15. Margin Stock.
Neither the Borrower nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of
purchasing or carrying any Margin Stock, and no part of the proceeds of any
Revolving Loan will be used to purchase or carry any Margin Stock or to extend
credit to others for the purpose of purchasing or carrying any Margin Stock, or
be used for any purpose which violates, or which is inconsistent with the
provisions of, Regulations G, T, U or X.
251094.7/ 383. 840
21
<PAGE>
SECTION 4.16. Solvency.
After giving effect to the execution and delivery of the Loan Documents
and the making of the Revolving Loans under this Agreement, the Borrower will be
Solvent.
SECTION 4.17. Possession of Franchises, Licenses, Etc.
The Borrower and its Subsidiaries possess to the extent material all
franchises, certificates, licenses, permits and other authorizations from
governmental and political subdivisions or regulatory authorities, and all
patents, trademarks, service marks, trade names, copyrights, franchises,
licenses and other rights that are necessary for ownership, maintenance and
operation of any of their respective material Properties and assets, and neither
the Borrower nor any of its Subsidiaries is in violation of any thereof, which,
individually or in the aggregate, would or might have or cause a Material
Adverse Effect. Without limiting the generality of the foregoing, and, in any
event, the Borrower and its Subsidiaries possess all Franchise Rights necessary
for the ownership, operation and development of its (or their) franchised
restaurant business as conducted, or contemplated to be conducted, by the
Borrower and such Subsidiaries, including, without limitation, in the case of
"Applebee's" restaurants, franchise agreements for each franchised restaurant
location and exclusive development rights for each designated area in which
franchised restaurants are located or contemplated to be located.
SECTION 4.18. Insurance.
The Borrower and each of its Subsidiaries maintains adequate insurance
on, and in respect of the ownership and operation of, its Properties in at least
such amounts and against at least such risks as are usually insured against in
the same general areas by companies of established repute engaged in the same or
similar business.
ARTICLE 5. COVENANTS
The Borrower agrees that, so long as the Bank has any Commitment
hereunder or any amount payable hereunder or under the Note remains unpaid:
SECTION 5.1. Information.
The Borrower will deliver to the Bank:
5.1.1. Annual Audit. As soon as available and in any event
within ninety (90) days after the end of each Fiscal Year, a consolidated
balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of
such Fiscal Year and the related consolidated statements of income,
shareholders' equity and cash flows for such Fiscal Year, setting forth in each
case in comparative form the figures for the previous fiscal year, all certified
by independent public accountants of nationally recognized standing, with such
certification to be free of any material exceptions and qualifications; provided
that, the information required by
251094.7/ 383. 840
22
<PAGE>
this paragraph may be satisfied by delivery of information pursuant to
Section 5.1.5 or Section 5.1.6.
5.1.2. Interim Statements. As soon as available and in any
event within fifty (50) days after the end of each of the first three (3) Fiscal
Quarters of each Fiscal Year, a consolidated balance sheet of the Borrower and
its Consolidated Subsidiaries as of the end of such Fiscal Quarter and the
related statement of income and statement of cash flows for such quarter and for
the portion of the Fiscal Year ended at the end of such quarter, setting forth
in each case in comparative form the figures for the corresponding quarter and
the corresponding portion of the previous Fiscal Year, all certified (subject to
normal year-end adjustments) as to fairness of presentation, GAAP and
consistency by the chief financial officer of the Borrower; provided, that the
information required by this paragraph may be satisfied by delivery of
information pursuant to Section 5.1.5 or Section 5.1.6.
5.1.3. Compliance Certificates. Simultaneously with the
delivery of each set of financial statements referred to in Sections 5.1.1 and
5.1.2, a certificate, substantially in the form of Exhibit B (a "Compliance
Certificate"), of the chief financial officer of the Borrower (i) setting forth
in reasonable detail the calculations required to establish whether the Borrower
was in compliance with the requirements of Sections 5.3, 5.4, 5.5, and 5.18 on
the date of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any Default then exists, setting
forth the details thereof and the action which the Borrower is taking or
proposes to take with respect thereto;
5.1.4. Default Notice. Promptly, (and, in any event, within
five (5) Domestic Business Days) after the Borrower becomes aware of the
occurrence of any Default, a certificate of the chief financial officer of the
Borrower setting forth details thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
5.1.5. Proxy. Promptly upon the mailing thereof to the
shareholders of the Borrower generally, copies of all financial statements,
reports and proxy statements so mailed;
5.1.6. Registration Statements. Promptly upon the filing
thereof, copies of all registration statements and annual, quarterly or
monthly reports which the Borrower shall have filed with the Securities and
Exchange Commission;
5.1.7. ERISA Notices. If and when any member of the Controlled
Group (i) gives or is required to give notice to the PBGC of any reportable
event (as defined in Section 4043 of ERISA) with respect to any Plan under Title
IV of ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such reportable event, a copy of the notice of
such reportable event given or required to be given to the PBGC; (ii) receives
notice of complete or partial withdrawal liability under Title IV of ERISA, a
coy of such notice; or (iii) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate or appoint a trustee to administer any Plan, a
copy of such notice; and
251094.7/ 383. 840
23
<PAGE>
5.1.8. Wachovia Agreement; BB& T Agreement; Senior Notes.
Promptly upon the occurrence thereof, (x) notice of any "default" or "event of
default" under, or amendment of, (i) the Wachovia Agreement, (ii) prior to the
termination thereof, the BB&T Agreement or (iii) the Senior Notes or the Senior
Note Indenture pursuant to which such Senior Notes were issued and (y) notice
that the Borrower's "Consolidated Fixed Charge Coverage Ratio" (as defined in
the Senior Note Indenture) does not exceed 2.5:1.0.
5.1.9. Other Reports. From time to time such additional
information regarding the financial position or business of the Borrower
and its Subsidiaries as the Bank may reasonably request.
SECTION 5.2. Inspection of Property, Books and Records.
The Borrower will keep, and require each Subsidiary to keep, proper
books of record and account in which full, true and correct entries in
conformity with GAAP (or, in the case of any non-domestic Subsidiary, such other
accounting standards, rules, regulations and practices applicable to businesses
operating in the locality in which each such Person operates); and permit, and
cause each Subsidiary to permit, representatives of the Bank at the Bank's
expense prior to the occurrence of a Default and at the Borrower's expense after
the occurrence and during the continuance of a Default to visit and inspect any
of their respective Properties, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs, finances
and accounts with their respective officers, employees and independent public
accounts. The Borrower agrees to cooperate and assist in such visits and
inspections in each case at such reasonable times and as often as may reasonably
be desired.
SECTION 5.3. Adjusted Funded Debt/Adjusted Capitalization Ratio.
The Adjusted Funded Debt/Adjusted Capitalization Ratio will not as of
any Fiscal Quarter-end exceed .65:1.
SECTION 5.4. Minimum Shareholders' Equity.
Shareholders' Equity will at no time be less than $180,000,000.
SECTION 5.5. Fixed Charge Coverage Ratio.
Borrower's Fixed Charge Coverage Ratio, measured on a rolling four (4)
Fiscal Quarters' basis as of the end of such Fiscal Quarter shall be not less
than 2:1.
SECTION 5.6. Negative Pledge.
The Borrower will not, nor will the Borrower permit any Subsidiary to,
create, assume or suffer to exist any Lien on any asset now owned or hereafter
acquired by it, except: (i) those Liens, if any, described on Schedule 5.6,
concerning existing debt of the Borrower, to be set forth and described more
particularly therein, together with any Lien arising out of the
251094.7/ 383. 840
24
<PAGE>
refinancing, extension, renewal or refunding of any debt secured by any such
Lien, provided that such debt is not secured by any additional assets, and the
amount of such debt secured by any such Lien is not increased; (ii) Liens
incidental to the conduct of its business or the ownership of its Properties
which (A) do not secure debt and (B) do not in the aggregate materially detract
from the value of its Properties or materially impair the use thereof or the
operation of its business, including, without limitation, easements, rights of
way, restrictive covenants, zoning and other similar restrictions on real
property; (iii) materialmen's, mechanics', warehousemen's, carriers', landlords'
and other similar statutory Liens which secure debt or other obligations that
are not past due, or, if past due are being contested in good faith by the
Borrower or the appropriate Subsidiary by appropriate proceedings; (iv) Liens
for taxes not delinquent or taxes being contested in good faith and by
appropriate proceedings; (v) pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security legislation; (vi)
deposits to secure performance of bids, trade contracts, leases, statutory
grants of security and rights of setoff in accounts, securities and other
Properties held at banks or financial institutions to secure the payment or
reimbursement under overdraft, letter of credit, acceptance and other credit
facilities; (viii) rights of setoff, banker's liens and other similar rights
arising solely by operation of law; (ix) Purchase Money Liens; (x) Liens on any
Properties acquired by Borrower or any Subsidiary subsequent to the Closing
Date, to the extent that (A) such Liens are existing at the time of acquisition,
(B) the debt secured thereby is not secured by any other Properties of Borrower
or such Subsidiary except the acquired Properties, (C) the amount of such debt
so secured thereby is not increased at or subsequent to the acquisition and (D)
the total amount of all such debt secured by all such acquired Properties does
not exceed at any time, in aggregate amount, fifteen percent (15%) of Tangible
Net Worth; together with any Lien arising out of the refinancing, extension,
renewal or refunding of any debt secured by any such Lien, provided that such
debt is not secured by any additional assets and the amount of such debt secured
by any such Lien is not increased; and (xi) capital leases made in the ordinary
course of business (but excluding, however, Sale-Leaseback Transactions to the
extent not permitted by Section 5.9) in which there is no provision for title to
the leased Property to pass to the Borrower or such Subsidiary at the expiration
of the lease term or as to which no bargain purchase option exists.
SECTION 5.7. Maintenance of Existence.
Except as permitted in Section 5.9, the Borrower shall, and shall cause
each Subsidiary to, maintain its corporate existence and carry on its business
in substantially the same manner and in substantially the same fields as such
business is now carried on and maintained. Without limiting the generality of
the foregoing, the Borrower shall, and shall cause each Subsidiary to, maintain
at all times in full force and effect all Franchise Rights necessary to the
ownership, operation and development of all franchised restaurant business
conducted, or contemplated to be conducted, by the Borrower and such
Subsidiaries, except with respect to Voluntary Store Closings.
251094.7/ 383. 840
25
<PAGE>
SECTION 5.8. Dissolution.
Neither the Borrower nor any of its Subsidiaries shall suffer or permit
dissolution or liquidation either in whole or in part, except through corporate
reorganization to the extent permitted by Section 5.9.
SECTION 5.9. Consolidation, Mergers, and Sales of Assets;
Sale-Leaseback Transactions.
5.9.1. Consolidation, Mergers, and Sales of Assets. The
Borrower will not, nor will it permit any Subsidiary to, consolidate or merge
with or into, or sell, lease (except pursuant to Sale-Leaseback Transactions
permitted pursuant to Section 5.9.2) or otherwise transfer all or any
substantial part of its assets to, any other Person, or discontinue or eliminate
any business line or segment, provided that, subject at all times to Section
5.18, the Borrower or any Subsidiary may merge with another Person (which is not
the Borrower or such Subsidiary) if (i) such Person was organized under the laws
of the United States of America or one of its states, (ii) the Borrower or such
Subsidiary (as the case may be) is the corporation surviving such merger and
(iii) immediately after giving effect to such merger, no Default shall have
occurred and be continuing; and, provided, further, that any Subsidiaries of the
Borrower may (i) merge or consolidate with each other or with the Borrower (so
long as the Borrower is the corporation surviving such merger), or (ii) sell
assets to each other or to the Borrower.
5.9.2. Sale-Leaseback Transactions. The Borrower will not, nor
will it permit any Subsidiary to, enter into any Sale-Leaseback Transaction
where the Borrower's (or its Subsidiaries') obligations with respect to the
principal component of all leases entered into in connection with all such
Sale-Leaseback Transactions exceeds $20,000,000 in the aggregate at any time.
SECTION 5.10. Use of Proceeds.
The proceeds of [the initial Revolving Loan will be used to repay the
Borrower's obligations under the BB&T Agreement and proceeds of subsequent]
Revolving Loans will be used by the Borrower to finance investments permitted
hereunder, for working capital and for general corporate purposes. No portion of
the proceeds of the Revolving Loans will be used by the Borrower (i) in
connection with, whether directly or indirectly, any tender offer for, or other
acquisition of, stock of any corporation with a view towards obtaining control
of such other corporation if a majority or controlling interest of the officers,
directors or shareholders of such corporation shall be opposed to such
acquisition by the Borrower, (ii) directly or indirectly, for the purpose,
whether immediate, incidental or ultimate, of purchasing or carrying any Margin
Stock, or (iii) for any purpose in violation of any term of this Agreement or of
any applicable law or regulation.
251094.7/ 383. 840
26
<PAGE>
SECTION 5.11. Compliance with Laws; Payment of Taxes.
The Borrower will, and will cause each of its Subsidiaries and each
member of the Controlled Group to, comply in all material respects with
applicable laws (including but not limited to ERISA), regulations and similar
requirements of governmental authorities (including but not limited to PBGC),
except where the necessity of such compliance is being contested in good faith
through appropriate proceedings. The Borrower will, and will cause each of its
Subsidiaries to, pay promptly when due all taxes, assessments governmental
charges, claims for labor, supplies, rent and other obligations which, if
unpaid, might become a Lien against the Property of the Borrower or any
Subsidiary, except liabilities being contested in good faith and against which,
if requested by the Bank, the Borrower will set up reserves in accordance with
GAAP.
SECTION 5.12. Insurance.
The Borrower will maintain, and will cause each of its Subsidiaries to
maintain (either in the name of the Borrower or in such Subsidiary's own name),
with financially sound and reputable insurance companies, insurance on, and in
respect of the ownership and operation of, its Properties in at least such
amounts and against at least such risks as are usually insured against in the
same general area by companies of established repute engaged in the same or
similar business.
SECTION 5.13. Change is Fiscal Year.
The Borrower will not change its Fiscal Year without the consent of the
Bank.
SECTION 5.14. Maintenance of Property.
The Borrower shall, and shall cause each Subsidiary to, maintain all of
its Properties in good condition, repair and working order, ordinary wear and
tear excepted.
SECTION 5.15. Environmental Notices.
The Borrower shall furnish to the Bank, promptly after the Borrower
becomes aware thereof, written notice of all Environmental Liabilities, pending,
threatened Environmental Proceedings, Environmental Notices, Environmental
Judgements and Orders and Environmental Releases, at, on, in, under or in any
way affecting the Properties or any adjacent property and all facts, events, or
conditions that could reasonably be expected to lead
to any of the foregoing.
SECTION 5.16. Environmental Matters.
The Borrower will not, and will not permit any Third Party to, use,
produce, manufacture, process, treat, recycle, generate, store, dispose of,
manage at, or otherwise handled or ship or transport to or from the Properties
any Hazardous Materials except for
251094.7/ 383. 840
27
<PAGE>
Hazardous Materials such as cleaning solvents, pesticides and other similar
materials used, produced, manufactured, processed, treated, recycled, generated,
stored, disposed, managed, or otherwise handled in the ordinary course of
business in compliance with all applicable Environmental Requirements.
SECTION 5.17. Environmental Releases.
The Borrower agrees that upon the occurrence of an Environmental
Release (except for any Environmental Release which (x) occurred in compliance
with all Environmental Requirements and (y) could not reasonably be expected to
have or cause a Material Adverse Effect), it will act immediately to investigate
the extent of, and to take appropriate remedial action to eliminate, such
Environmental Release, whether or not ordered or otherwise directed to do so by
any Environmental Authority.
SECTION 5.18. Investments.
The Borrower will not make (nor will the Borrower permit any Subsidiary
to make) any investment in any Person or Property (which term "investment," for
purposes hereof, shall mean and include, without limitation, the acquisition of
any property, the issuance, acquisition or exchange of any capital stock, debt
or other obligations or security to, from or with any Person, and the making of
any loan, advance, extension of credit, credit accommodation, Guarantee or
capital contribution to or on behalf of any Person), provided, however, that,
notwithstanding the foregoing, the Borrower (or any Subsidiary) may, from time
to time, undertake the following, without the necessity of obtaining the Bank's
prior written consent thereto:
(i) Current Assets. Acquire current assets for use in, or
arising from, the sale of goods or services in the ordinary
course of its business (including, for this purpose, but without
limitation, credit card receivables);
(ii) Capital Expenditures. Make capital expenditures in the
ordinary course of its business;
(iii) Franchise Fees. Pay franchisee fees and royalties to
its franchisors in the ordinary course of its business;
(iv) Escrow Deposits. Make or maintain escrow deposits for
the payment of taxes, rents, utilities, insurance or like matters
in the ordinary course of its business;
(v) Bank Accounts. Make and maintain deposits of cash in
demand deposit accounts of banks in the ordinary course of its
business, and make endorsements of checks, drafts or other
instruments in connection therewith;
251094.7/ 383. 840
28
<PAGE>
(vi) Surplus Cash. Consistent at all times with the
Borrower's internal Statement of Investment Policy, invest
surplus cash in (A) obligations of, or guaranteed by, the United
States of America or any agency thereof, (B) short-term
certificates of deposit issued by, and time deposits with, the
Bank or any other financial institution domiciled in the United
States of America with assets of at least $500,000,000, (C)
short-term commercial paper rated at lest "A1" by Standard &
Poors or "P1" by Moody's, and (D) fixed or adjustable rate
corporate debt securities with a credit rating of at least double
A (Aa/AA) by either Moody's or Standard & Poors, provided that
any fixed rate debt securities have a maturity of one year or
less;
(vii) Subsidiaries. Make investments in those Consolidated
Subsidiaries of the Borrower which are wholly-owned, directly or
indirectly, by the Borrower, in the ordinary course of, and
pursuant to the reasonable requirements of, the Borrower's and
such Subsidiaries' respective businesses, provided that the
aggregate amount of such investments which may be outstanding at
any one time hereafter, as to all such Subsidiaries, shall not
exceed, in any event, Twenty-Five Million Dollars ($25,000,000),
it being understood and agreed that (a) there shall be excluded
from such calculation any investment deemed made by the Borrower
in DF&R Restaurants, Inc., a Texas corporation which is a
wholly-owned, Consolidated Subsidiary of the Borrower, pursuant
to the accounting for the prior acquisition of such corporation
by the Borrower as a pooling of interests; (b) there shall be
deducted in any event from the amount of investments in
Subsidiaries which may be made pursuant to this clause (vii) the
aggregate amount of Capitalized Lease Obligations of all
Subsidiaries which are at any time outstanding; and (c) the
provisions of this clause (vii) henceforth shall be the exclusive
means by which the Borrower (or any Subsidiary) may make
investments in any Subsidiaries (whether or not wholly-owned
Subsidiaries) and shall override any other provisions of this
Section 5.18 (including, particularly, clauses (x), (xi) and
(xii) below) which may be construed otherwise to permit such
investments.
(viii) Travel Advances. Make travel and similar advances to
employees from time to time in the ordinary course of business.
(ix) Special Life Insurance Program. The Borrower may invest
up to Eight Hundred Fifty Thousand Dollars ($850,000) per Fiscal
Year in the making of annual premiums payable on the split dollar
joint survivor life insurance program implemented, or to be
implemented, covering the lives of Tom E. DuPree, Jr. and his
spouse Anne DuPree, with an initial death benefit of Fifty
Million Dollars ($50,000,000), provided, however, that (i) such
investments are made over a period not to exceed ten (10) Fiscal
Years and (ii) Borrower maintains at all times during the
effective period of the program a security interest in policy
proceeds and cash values of policies issued as part of the
program equal in amount to not less than its then cumulative
premium investments;
(x) Applebee's Franchisees. Make investments in franchisees
of "Applebee's" restaurants, but no investment in Applebee's
International, Inc. (or any Person which subsequent hereto shall
become the franchisor of "Applebee's" restaurants) shall be
251094.7/ 383. 840
29
<PAGE>
permitted to be made subsequent to the Closing Date,
notwithstanding this clause (x) or any other provision of this
Section, except with the prior written consent of the Bank;
(xi) Other Restaurant Concepts. Make investments in other
restaurant concepts, besides "Applebee's," so long as the total
amount of each such investment (either considered individually or
as part of a series of related, concurrent investments), does not
exceed ten percent (10%) of Borrower's consolidated total assets
immediately before such investment (or the last in a series of
related, concurrent investments) is made;
(xii) Other Investments Generally. Make other investments,
not described in clauses (i) through (xi) above, provided that
all such investments, in the aggregate, do not exceed at any one
time ten percent (10%) of Stockholders' Equity.
The Borrower shall notify the Bank from time to time, but
not less frequently than quarterly, or at any time at the Bank's
request, of the nature and amount of any investments made
pursuant to clauses (x), (xi) and (xii) hereof which,
individually or in the aggregate, exceed One Hundred Thousand
Dollars ($100,000).
SECTION 5.19. Subsidiary Debt.
Except solely to the extent expressly permitted in clause (vii) of
Section 5.18 of this Agreement, the Borrower will not permit any Consolidated
Subsidiary of the Borrower which is a wholly-owned Subsidiary, directly or
indirectly, of the Borrower, to create, incur or suffer to exist any of the
following: (i) indebtedness for borrowed funds; (ii) Capitalized Lease
Obligations, provided, however, that DF&R Restaurants, Inc. and its Subsidiaries
may incur Capitalized Lease Obligations in an aggregate amount not to exceed Ten
Million Dollars ($10,000,000) at any one time outstanding; (iii) Guarantees;
(iv) debts, liabilities or obligations to any seller incurred to pay the
deferred purchase price of property or services having a deferred purchase price
of One Million Dollars ($1,000,000) or more, excepting, in any event, trade
accounts payable arising in the ordinary course of business and purchase options
prior to their exercise; and (v) debts, liabilities or obligations in respect of
Synthetic Leases.
ARTICLE 6. DEFAULTS
SECTION 6.1. Events of Default.
If one or more of the following events ("Events of Default") shall have
occurred and be continuing:
6.1.1. Non-Payment. The Borrower (i) shall fail to pay when
due any principal of any Revolving Loan or (ii) shall fail to pay any interest
on any Revolving Loan within five (5) Domestic Business Days after such interest
shall become due, or (iii) shall fail to pay any fee or other amount payable
hereunder or under any Loan Document within five (5) Domestic Business Days
after such fee or other amount becomes due; or
251094.7/ 383. 840
30
<PAGE>
6.1.2. Failure to Observe Certain Covenants. The Borrower shall fail to
observe or perform any covenant contained in Sections 5.3 through 5.8, 5.9,
5.10, 5.11, 5.14, or 5.18, inclusive; or
6.1.3. Failure to Observe Covenants Generally. The Borrower shall fail to
observe or perform any covenant or agreement contained or incorporated by
reference in this Agreement (other than those covered by Sections 6.1.1 and
6.1.2) and such failure shall not have been cured within ten (10) days after the
earlier to occur of (i) written notice thereof has been given to the Borrower by
the Bank or (ii) an executive, senior financial or accounting officer of the
Borrower otherwise becomes aware of any such failure; or
6.1.4. Misrepresentation. Any representation, warranty, certification or
statement made by the Borrower in Article IV of this Agreement or in any
certificate, financial statement or other document delivered pursuant to this
Agreement shall prove to have been incorrect or misleading in any material
respect when made (or deemed made); or
6.1.5. Cross-Default. The Borrower or any Subsidiary shall fail to make any
payment in respect of the Wachovia Agreement, the BB&T Agreement, the Senior
Notes or any other debt, liability or obligation outstanding individually or in
the aggregate with all other such debts, liabilities or obligations, equal to or
in excess of Five Hundred Thousand Dollars ($500,000), other than the Note, when
due or within any applicable grace period; or any event or condition shall occur
which results in the acceleration of the maturity of the debt evidenced by the
Wachovia Agreement, the BB&T Agreement, the Senior Notes or any other such debt,
liability or obligation outstanding of the Borrower or any Subsidiary
individually or in the aggregate with all other such debts, liabilities or
obligations equal to or in excess of Five Hundred Thousand Dollars ($500,000) or
the mandatory prepayment or purchase of the debt evidenced by the Wachovia
Agreement, the BB&T Agreement, the Senior Notes or any such other debt,
liability or obligation by the Borrower (or its designee) or such Subsidiary (or
its designee) individually or in the aggregate with all other such debts,
liabilities or obligations equal to or in excess of Five Hundred Thousand
Dollars ($500,000) prior to the scheduled maturity thereof, or enables (or, with
the giving of notice or lapse of time or both, would enable) Wachovia, BB&T, the
holders of the Senior Notes or the holders of any such other debt, liability or
obligation individually or in the aggregate with all other such debts,
liabilities or obligations equal to or in excess of Five Hundred Thousand
Dollars ($500,000) or any Person acting on such holders' behalf to accelerate
the maturity thereof or require the mandatory prepayment or purchase thereof
prior to the scheduled maturity thereof, without regard to whether such holders
or other Person shall have exercised or waived their right to do so; or
6.1.6. Voluntary Bankruptcy. The Borrower or any Subsidiary shall commence
a voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its Property, or shall consent to any
such relief or to the appointment of or taking possession by any such official
in an
251094.7/ 383. 840
31
<PAGE>
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to pay
its debts as they become due, or shall take any corporate action to authorize
any of the foregoing; or
6.1.7. Involuntary Bankruptcy. An involuntary case or other
proceeding shall be commenced against the Borrower or any Subsidiary seeking
liquidation, reorganization or other relief with respect to it or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its Property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for a
period of sixty (60) days; or an order for relief shall be entered against the
Borrower or any Subsidiary under the federal bankruptcy laws as now or hereafter
in effect; or
6.1.8. ERISA. The Borrower or any member of the Controlled
Group shall fail to pay when due any material amount which it shall have become
liable to pay to the PBGC or to a Plan under Title IV of ERISA; or notice of
intent to terminate a Plan or Plans shall be filed under Title IV of ERISA by
the Borrower, any member of the Controlled Group, any plan administrator or any
combination of the foregoing; or the PBGC shall institute proceedings under
Title IV of ERISA to terminate or to cause a trustee to be appointed to
administer any such Plan or Plans or a proceeding shall be instituted by a
fiduciary of any such Plan or Plans to enforce Section 515 or 4219(c)(5) of
ERISA and such proceeding shall not have been dismissed within thirty (30) days
thereafter; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any such Plan or Plans must be
terminated; or
6.1.9. Judgments. One or more judgments or orders for the payment of money
in an aggregate amount equal to or greater than Five Hundred Thousand Dollars
($500,000) shall be rendered against the Borrower or any Subsidiary and such
judgment or order shall continue unsatisfied and unstayed for a period of thirty
(30) days; or
6.1.10. Tax Liens. A federal tax Lien shall be filed against
the Borrower under Section 6323 of the Code or a Lien of the PBGC shall be filed
against the Borrower or any Subsidiary under Section 4068 of ERISA and in either
case such Lien shall remain undischarged for a period of thirty (30) days after
the date of filing; or
6.1.11. Change of Control. Tom E. DuPree, Jr. shall cease to
own and control, beneficially and with power to vote, at least fifteen percent
(15%) of the outstanding shares of the voting common stock of the Borrower; or
any Person (other than Tom E. DuPree, Jr.) or two or more Persons acting in
concert shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of twenty percent (20%) or more of the outstanding shares of the
voting common stock of the Borrower; or as of any date, a majority of the Board
of Directors of the Borrower consists of individuals who were not either (A)
directors of the Borrower as of the corresponding date of the previous year, (B)
selected or nominated to become directors by a Board of Directors of the
Borrower of which a majority
251094.7/ 383. 840
32
<PAGE>
consisted of individuals described in clause (A), or (C) selected or nominated
to become directors by the Board of Directors of the Borrower of which a
majority consisted of individuals described in clause (A) and individuals
described in clause (B); or
6.1.12. Loss of Franchise Rights. If any of the Franchise
Rights of the Borrower or its Subsidiaries shall be forfeited, suspended, lost,
rejected, disclaimed, impaired, curtailed or otherwise adversely altered or
affected in any manner, in whole or in any material part, for any reason
whatsoever, whether or not related to the Borrower's or such Subsidiary's
performance of its duties and obligations as franchisee at any time hereafter
except with respect to any Voluntary Store Closing; or there shall occur any
default by the Borrower or any such Subsidiary in the payment, performance or
observance of any terms, covenants or conditions of any franchise or development
agreements giving rise to the existence and/or continuation of any such
Franchise Rights, and any grace or cure period relative thereto granted therein
shall have expired without such default being waived or cured; or
6.1.13. BB&T Agreement. The Borrower shall fail to terminate the BB&T
Agreement and repay all of its obligations thereunder within ninety (90) days of
the date hereof; or
6.1.14. Material Adverse Effect. The occurrence of any event, act,
occurrence, or condition which the Bank determines either does or has a
reasonable probability of causing, or resulting in, a Material Adverse Effect;
then, and in every such event, the Bank may by notice to the Borrower terminate
the Commitment and it shall thereupon terminate, and (ii) by notice to the
Borrower declare the Note (together with accrued interest thereon) to be, and
the Note shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower, together with interest at the Default Rate
accruing on the principal amount thereof from and after the date of such Event
of Default; provided that if any Event of Default specified in Sections 6.1.6 or
6.1.7 above occurs with respect to the Borrower or any Subsidiary, without any
notice to the Borrower or any other acts by the Bank, the Commitment shall
thereupon terminate and the Note (together with accrued interest thereon) shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Borrower, together
with interest thereon at the Default Rate accruing on the principal amount
thereof from and after the date of such Event of Default. Notwithstanding the
foregoing, the Bank shall have available to it all other remedies at law or
equity, and may exercise any one or all of them at its discretion.
ARTICLE 7. CHANGE IN CIRCUMSTANCES; COMPENSATION
SECTION 7.1. Basis for Determining Interest Rate Inadequate
or Unfair.
If on or prior to the first day of any Interest Period, the Bank
determines that deposits in Dollars (in the applicable amounts) are not being
offered in the relevant market for such
251094.7/ 383. 840
33
<PAGE>
Interest Period, or the Bank determines that the Adjusted LIBOR Rate, as
determined by the Bank, will not adequately and fairly reflect the cost to the
Bank of funding the relevant Euro- Dollar Rate Loans for such Interest Period,
then, the Bank shall forthwith give notice thereof to the Borrower, whereupon
until the Bank notifies the Borrower that the circumstances giving rise to such
suspensions no longer exist, the obligations of the Bank to make the Euro-Dollar
Rate Loans specified in such notice shall be suspended. Unless the Borrower
notifies the Bank at least two (2) Domestic Business days before the date of any
Borrowing of such Euro-Dollar Rate Loans for which a Notice of Borrowing has
previously been given that it elects not to borrow on such date, such Borrowing
shall instead be made as a Base Rate Borrowing.
SECTION 7.2. Illegality.
If, after the date hereof, the adoption of any applicable law, rule or
regulation, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof (any such
agency being referred to as an "Authority" and any such event being referred to
as a "Change of Law"), or compliance by the Bank (or its Lending Office) with
any request or directive (whether or not having the force of law) of any
Authority shall make it unlawful or impossible for the Bank (or its Lending
Office) to make, maintain or fund its Euro-Dollar Rate Loans, the Bank shall
forthwith give notice thereof to the Borrower, whereupon until the Bank notifies
the Borrower that the circumstances giving rise to such suspension no longer
exist, the obligation of the Bank to make Euro-Dollar Rate Loans shall be
suspended. If the Bank shall determine that it may not lawfully continue to
maintain and fund any of its outstanding Euro-Dollar Rate Loans to maturity and
shall so specify in such notice, the Borrower shall immediately prepay in full
the then outstanding principal amount of each Euro-Dollar Rate Loan, together
with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar
Rate Loan, the Borrower shall borrow, pursuant to Section 2.2.2, a Base Rate
Loan in an equal principal amount (on which interest and principal shall be
payable contemporaneously with the related Euro-Dollar Rate Loans), and the Bank
shall make such a Base Rate Loan.
SECTION 7.3. Increased Cost and Reduced Return.
7.3.1. Change of Law. If after the date hereof, a Change of
Law or compliance by the Bank (or its Lending Office) with any request or
directive (whether or not having the force of law) of any Authority either: (i)
shall subject any Bank (or its Lending Office) to any tax, duty or other charge
with respect to the Revolving Loans, the Note or its obligation to make
Revolving Loans, or shall change the basis of taxation of payments to the Bank
(or its Lending Office) of the principal of or interest on the Revolving Loans
or any other amounts due under this Agreement in respect of the Revolving Loans
or its obligation to make Revolving Loans (except for changes in the rate of tax
on the overall net income of the Bank or its Lending Office imposed by the
jurisdiction in which the Bank's principal executive office or Lending Office is
located); or (ii) shall impose, modify or deem applicable any reserve, special
deposit insurance or similar requirement (including, without limitation, any
such requirements imposed by the Board of Governors of the Federal Reserve
System, but
251094.7/ 383. 840
34
<PAGE>
excluding any such requirement included in an applicable Euro-Dollar Reserve
Percentage) against assets of, deposits with or for the account of, or credit
extended by, the Bank (or its Lending Office); or (iii) shall impose on the Bank
(or its Lending Office) or the London Interbank Market any other similar
condition affecting the Revolving Loans, the Note or its obligation to make
Revolving Loans; and the result of any of the foregoing is to increase the cost
to the Bank (or its Lending Office) of making or maintaining any Revolving Loan,
or to reduce the amount of any such received or receivable by the Bank (or its
Lending Office) under this Agreement or under the Note with respect thereto, by
an amount deemed by the Bank to be material, then, within fifteen (15) days
after demand by the Bank the Borrower shall pay to the Bank such additional
amount or amounts as will compensate the Bank for such increased cost or
reduction.
7.3.2. Capital Adequacy. If the Bank shall have determined
that after the date hereof the adoption of any applicable law, rule or
regulation regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof, or compliance by the Bank (or its
Lending Office) with any request or directive regarding capital adequacy
(whether or not having the force of law) of any Authority, has or would have the
effect of reducing the rate of return on the Bank's capital as a consequence of
its obligations hereunder to a adoption, change or compliance (taking into
consideration the Bank's policies with respect to capital adequacy), by an
amount deemed by the Bank to be material, then from time to time, within fifteen
(15) days after demand by the Bank, the Borrower shall pay to the Bank such
additional amount or amounts as will compensate the Bank for such reduction.
7.3.3. Notice of Determination. The Bank will promptly notify
the Borrower of any event of which it has knowledge, occurring after the date
hereof, which will entitle the Bank to compensation pursuant to this Section and
will designate a different Lending Office if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the
judgment of the Bank, be otherwise disadvantageous to the Bank, in any respect
deemed material by the Bank. A certificate of the Bank claiming compensation
under this Section and setting forth the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Bank may use any reasonable averaging and
attribution methods.
7.3.4. Assignees Covered. The provisions of this Section 7.3
shall be applicable with respect to any Assignee or other Transferee (excluding
any Participants), and any calculations required by such provisions shall be
made based upon the circumstances of such Assignee or other Transferee.
SECTION 7.4. Rate Loans Substituted for Affected Euro-Dollar
Rate Loans.
If (i) the obligation of the Bank to make or maintain Euro-Dollar Rate
Loans has been suspended pursuant to Section 7.2 or (ii) any Bank has demanded
compensation under Section 7.3.1, and the Borrower shall, by at least five (5)
Euro-Dollar Business Days' prior notice to the Bank have elected that the
provisions of this Section shall apply to the Bank,
251094.7/ 383. 840
35
<PAGE>
then, unless and until the Bank notifies the Borrower that the circumstances
giving rise to such suspension or demand for compensation no longer apply: (i)
all Revolving Loans which would otherwise be made by the Bank as Euro-Dollar
Rate Loans, shall be made instead as Base Rate Loans and (ii) after each of the
Euro-Dollar Rate Loans has been repaid, all payments of principal which would
otherwise be applied to repay such Euro-Dollar Rate Loans shall be applied to
repay its Base Rate Loans instead.
SECTION 7.5. Compensation.
Upon the request of the Bank, delivered to the Borrower, the Borrower
shall pay to the Bank such amount or amounts as shall compensate the Bank for
any actual out of pocket loss, cost or expense incurred by the Bank (in
connection with the relevant Interest Period) as a result of: (i) any payment or
prepayment (whether pursuant to Section 7.2 or otherwise) of a Euro-Dollar Rate
Loan on a date other than the last day of an Interest Period for such Euro-
Dollar Rate Loan; or (ii) any failure by the Borrower to prepay a Euro-Dollar
Rate Loan on the date for such prepayment specified in the relevant notice of
prepayment hereunder; or (iii) any failure by the Borrower to borrow a
Euro-Dollar Rate Loan on the date for the Euro- Dollar Borrowing of which such
Euro-Dollar Rate Loan is a part specified in the applicable Notice of Borrowing
delivered pursuant to Section 2.2.
ARTICLE 8. MISCELLANEOUS
SECTION 8.1. Notices.
All notices, requests and other communications to any party hereunder
or under any Loan Document shall be in writing (including bank wire, telecopier
or similar writing) and shall be given to such party at its address or
telecopier number set forth on the signature pages hereof or such other address
or telecopier number as such party may hereafter specify for the purpose by
notice to the other party. Each such notice, request or other communication
shall be effective (i) if given by telecopier, when such telecopy is transmitted
to the telecopier number specified in this Section and the appropriate
confirmation is received, (ii) if given by mail, seventy-two (72) hours after
such communication is deposited in the United States mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided that notices
to the Bank under Article 2 shall not be effective until received.
SECTION 8.2. No Waivers.
No failure or delay by the Bank in exercising any right, power or
privilege hereunder or under any Note shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided shall be cumulative and not exclusive of any
rights or remedies provided by law.
251094.7/ 383. 840
36
<PAGE>
SECTION 8.3. Expenses; Documentary Taxes.
The Borrower shall pay (i) all out-of-pocket expenses of the Bank,
including fees and disbursements of special counsel for the Bank, in connection
with the preparation of this Agreement and the other Loan Documents, any waiver
or consent hereunder or thereunder or any amendment hereof or thereof or any
Default or alleged Default hereunder or thereunder and (ii) if a Default occurs,
all out-of-pocket expenses incurred by the Bank, including fees and
disbursements of counsel (including a reasonable allocation of the cost of
internal counsel), in connection with such Default and collection and other
enforcement proceedings resulting therefrom, including out-of-pocket expenses
incurred in enforcing this Agreement, the Note and other Loan Documents. The
Borrower shall indemnify the Bank against any transfer taxes, documentary taxes,
assessments or charges made by any Authority by reason of the execution and
delivery of this Agreement, the Note or the other Loan Documents.
SECTION 8.4. Indemnification.
The Borrower shall indemnify the Bank and each affiliate thereof and
their respective directors, officers, employees and agents from, and hold each
of them harmless against, any and all losses, liabilities, claims or damages to
which any of them may become subject, insofar as such losses, liabilities,
claims or damages arise out of or result from any actual or proposed use by the
Borrower of the proceeds of any extension of credit by the Bank hereunder or
breach by the Borrower of this Agreement, the Note or any other Loan Document or
from any investigation, litigation or other proceeding (including any threatened
investigation or proceeding) relating to the foregoing, and the Borrower shall
reimburse the Bank, and each affiliate thereof and their respective directors,
officers, employees and agents, upon demand for any expenses (including, without
limitation, legal fees) incurred in connection with any such investigation or
proceeding; but excluding any such losses, liabilities, claims, damages or
expenses incurred by reason of the gross negligence or willful misconduct of the
Person to be indemnified. The indemnification provisions (including, without
limitation, provisions for default interest, to the extent that this Section 8.4
might be construed as duplicating the Borrower's obligation to pay interest at
the Default Rate as required elsewhere in this Agreement) set forth in this
Section 8.4 are meant to be without duplication of any other indemnification
provisions set forth in this Agreement.
SECTION 8.5. Amendments and Waivers.
Any provision of this Agreement, the Note or any other Loan Documents
may be amended or waived if, but only if, such amendment or waiver is in writing
and is signed by the Borrower and the Bank.
SECTION 8.6. Successors and Assigns.
8.6.1. No Assignment by Borrower. The provisions of this Agreement shall be
binding upon and insure to the benefit of the parties hereto and their
respective successors
251094.7/ 383. 840
37
<PAGE>
and assigns; provided that the Borrower may not assign or otherwise transfer any
of its rights under this Agreement.
8.6.2. Participation. The Bank may, without the consent of the
Borrower, at any time sell to one or more Persons (each a "Participant")
participating interests in any Revolving Loan, the Note, the Commitment
hereunder or any other interest of the Bank hereunder. In the event of any such
sale by the Bank of a participating interest to a Participant, the Bank's
obligations under this Agreement shall remain unchanged, the Bank shall remain
solely responsible for the performance thereof, the Bank shall remain the holder
of the Note for all purposes under this Agreement, and the Borrower shall
continue to deal solely and directly with the Bank in connection with the Bank's
rights and obligations under this Agreement. The Bank, if it sells a
participating interest in the Revolving Loan, Note, Commitment or other interest
under this Agreement, shall, within ten (10) Domestic Business Days of such
sale, provide the Borrower with written notification stating that such sale has
occurred and identifying the Participant and the interest purchased by such
Participant. The Bank and the Borrower agree that each Participant shall be
entitled to the benefits of Article 7 with respect to its participation in
Revolving Loans outstanding from time to time, but only to the extent that the
Bank would have been entitled thereto pursuant to the terms of this Agreement.
8.6.3. Assignments. The Bank may at any time assign to one or
more banks or financial institutions (each an "Assignee") all, or a
proportionate part of all, of its rights and obligations under this Agreement
and the Note, and such Assignee shall assume all such rights and obligations.
8.6.4. Disclosures. Subject to the provisions of Section 8.7,
the Borrower authorizes the Bank to disclose to any Participant, Assignee or
other transferee (each a "Transferee") and any prospective Transferee any and
all information in the Bank's possession concerning the Borrower which has been
delivered to the Bank by the Borrower pursuant to this Agreement or which has
been delivered to the Bank by the Borrower in connection with the Bank's credit
evaluation prior to entering into this Agreement.
8.6.5. Status of Transferee. No Transferee shall be entitled
to receive any greater payment under Section 7.3 than the Bank would have been
entitled to receive with respect to the rights transferred, unless such transfer
is made with the Borrower's prior written consent or by reason of the provisions
of Section 7.2 or 7.3 requiring the Bank to designate a different Lending Office
under certain circumstances or at a time when the circumstances giving rise to
such greater payment did not exist.
SECTION 8.7. Confidentiality.
The Bank agrees to exercise its best efforts (and, in any event, with
at least the same degree of care as it ordinarily exercises with respect to
confidential information of its other customers) to keep any information
delivered or made available by the Borrower to it, including, without
limitation, information obtained by the Bank by reason of a visit or
251094.7/ 383. 840
38
<PAGE>
investigation by any Person contemplated in Section 5.2, confidential from any
one other than persons employed or retained by the Bank who are or are expected
to become engaged in evaluating, approving, structuring or administering the
Revolving Loans; provided, however that nothing herein shall prevent the Bank
from disclosing such information (i) upon the order of any court or
administrative agency, (ii) upon the request or demand of any regulatory agency
or authority having jurisdiction over the Bank, (iii) which has been publicly
disclosed other than by an act or omission of the Bank except as permitted
herein, (iv) to the extent reasonably required in connection with any litigation
(with respect to this Agreement, any of the other Loan Documents, in connection
with any of the foregoing, or any other obligations of the Borrower or any
Subsidiary owing to the Bank) to which the Bank or its Affiliates may be a
party, (v) to the extent reasonably required in connection with the exercise of
any remedy hereunder, (vi) to the Bank's legal counsel and independent auditors
and (vii) to any actual or proposed Participant, Assignee or other Transferee of
all or part of its rights hereunder which has agreed in writing to be bound by
the provisions of this Section 8.7.
SECTION 8.8. GEORGIA LAW.
THIS AGREEMENT, EACH NOTE AND EACH OTHER LOAN DOCUMENT
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF GEORGIA.
SECTION 8.9. Interpretation.
No provision of this Agreement or any of the other Loan Documents shall
be construed against or interpreted to the disadvantage of any party hereto by
any court or other governmental or judicial authority by reason of such party
having or being deemed to have structured or dictated such provision.
SECTION 8.10. CONSENT TO JURISDICTION.
THE BORROWER AND THE BANK IRREVOCABLY (A) SUBMITS TO THE NONEXCLUSIVE
PERSONAL JURISDICTION IN THE STATE OF GEORGIA, THE COURTS THEREOF AND THE UNITED
STATES DISTRICT COURTS SITTING THEREIN, FOR THE ENFORCEMENT OF THIS AGREEMENT,
THE NOTE AND THE OTHER LOAN DOCUMENTS, (B) WAIVE ANY AND ALL PERSONAL RIGHTS
UNDER THE LAW OF ANY JURISDICTION TO OBJECT ON ANY BASIS (INCLUDING, WITHOUT
LIMITATION, INCONVENIENCE OF FORUM) TO JURISDICTION OR VENUE WITHIN THE STATE OF
GEORGIA FOR THE PURPOSE OF LITIGATION TO ENFORCE THIS AGREEMENT, THE NOTE OR THE
OTHER LOAN DOCUMENTS, AND (C) AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT
IN THE MANNER PRESCRIBED IN SECTION 8.1 FOR THE GIVING OF NOTICE TO THE
BORROWER. NOTHING HEREIN CONTAINED, HOWEVER, SHALL PREVENT THE BANK FROM
BRINGING ANY ACTION OR EXERCISING ANY RIGHTS AGAINST ANY SECURITY AND AGAINST
THE BORROWER PERSONALLY,
251094.7/ 383. 840
39
<PAGE>
AND AGAINST ANY ASSETS OF THE BORROWER, WITHIN ANY OTHER STATE OR
JURISDICTION.
SECTION 8.11. Counterparts.
This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
SECTION 8.12. Survival.
All representations, warranties and covenants made herein shall survive
the execution and delivery of all of the Loan Documents. The terms and
provisions of this Agreement shall continue in full force and effect until the
payment of the Note and termination of the Commitment.
SECTION 8.13. Entire Agreement: Amendment; Severability.
This Agreement shall constitute the entire agreement among the parties
hereto with respect to the subject matter hereof. Neither this Agreement nor any
provision hereof may be changed, waived, discharged, modified or terminated
orally, but only by an instrument in writing in accordance with Section 8.5. If
any provision of any of the Loan Documents or the application thereof to any
party thereto or circumstances shall be invalid or unenforceable to any extent,
the remainder of such Loan Documents and the application of such provisions to
any other party thereto or circumstances shall not be affected thereby and shall
be enforced to the greatest extent permitted by law.
SECTION 8.14. TIME OF THE ESSENCE.
TIME IS OF THE ESSENCE IN THIS AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS.
SECTION 8.15. Bank Not a Joint Venturer.
Neither this Agreement nor any agreements, instruments, documents or
transactions contemplated hereby (including the Loan Documents), shall in any
respect be interpreted, deemed or construed as making the Bank a partner or
joint venturer with the Borrower or as creating any similar relationship or
entity.
{REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
251094.7/ 383. 840
40
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, under seal, by their respective authorized officers, as of the
day and year first above written.
"BORROWER"
APPLE SOUTH, INC. (SEAL)
By:/s/ Erich J. Booth
Erich J. Booth, Chief Financial Officer and
Treasurer
Attest:/s/ Ben Waites
Ben Waites, Assistant Secretary
Apple South, Inc.
Corporate Headquarters
Hancock at Washington
Madison, Georgia 30650
Attn: Erich J. Booth,
Chief Financial Officer
Telecopier Number: (706) 342-4057
41
<PAGE>
"BANK"
FIRST UNION NATIONAL BANK OF
GEORGIA
By:/s/ William T. Grasty
Title: Underwriter
Lending Office:
First Union National Bank of Georgia
999 Peachtree Street, N.E.
12th Floor
Atlanta, Georgia 30309
Attention: Georgia Corporate Banking
Telecopier Number: ____________________
42
<PAGE>
EXHIBIT 23.1
The Board of Directors
Apple South, Inc.:
We consent to incorporation by reference in the registration statements
(No. 33-49748, No. 33-68978, No. 333-3764, and No. 333-3736) on Form S-8 and
(No. 333-02958) on Form S-3 of Apple South, Inc. of our report dated January 24,
1997, except as to note 15, as to which the date is February 7, 1997, relating
to the consolidated balance sheets of Apple South, Inc. as of December 29, 1996
and December 31, 1995, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 29, 1996, which report appears in the December 29, 1996
annual report on Form 10-K of Apple South, Inc.
KPMG Peat Marwick LLP
Atlanta, Georgia
February 18, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.)
</LEGEND>
<CIK> 0000849101
<NAME> Apple South, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-29-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-29-1996
<CASH> 3,923
<SECURITIES> 52
<RECEIVABLES> 4,568
<ALLOWANCES> 0
<INVENTORY> 6,143
<CURRENT-ASSETS> 24,687
<PP&E> 380,523
<DEPRECIATION> 0
<TOTAL-ASSETS> 457,827
<CURRENT-LIABILITIES> 40,181
<BONDS> 215,891
0
0
<COMMON> 391
<OTHER-SE> 191,038
<TOTAL-LIABILITY-AND-EQUITY> 457,827
<SALES> 546,022
<TOTAL-REVENUES> 546,022
<CGS> 150,090
<TOTAL-COSTS> 460,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,417
<INCOME-PRETAX> 18,224
<INCOME-TAX> 6,550
<INCOME-CONTINUING> 11,674
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,674
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0
</TABLE>
