EXHIBIT 10.40
EXECUTION VERSION
RESTRUCTURING AGREEMENT
THIS RESTRUCTURING AGREEMENT (this "Agreement") dated as of December 29th,
2003 is made by and between DFW RESTAURANT TRANSFER CORP., a Texas corporation
("DFW"), NS ASSOCIATES I, LTD., a Texas limited partnership (the "Lender"),
SCHLOTZSKY'S, INC., a Texas corporation ("SI"), SCHLOTZSKY'S FRANCHISOR, LLC, a
Delaware limited liability company ("Franchisor"), and SCHLOTZSKY'S FRANCHISE
OPERATIONS, LLC, a Delaware limited liability company (the "Manager", and
together with DFW, SI and Franchisor, the "SI Parties").
RECITALS
A. DFW, a wholly owned subsidiary of SI, and the Lender entered into an
Amended and Restated Option Agreement, dated as of February 7, 2001, amended by
an Amendment to Amended and Restated Option Agreement, effective June 1, 2002
(as so amended, the "Option Agreement"), pursuant to which the Lender granted
DFW an option to acquire the Lender's rights under that certain Amended and
Restated Area Developer Agreement, dated August 31, 1996, amended from time to
time (as so amended, the "Lender ADA"), between SI and the Lender;
B. DFW exercised its option under the Option Agreement and in connection
therewith, among other things, (i) DFW, the Lender and SI entered into a
Security Agreement, dated as of August 30, 2002 (the "DFW Security Agreement"),
(ii) DFW issued a promissory note, dated August 30, 2002, for the benefit of the
Lender in the original principal amount of $23,268,000.00 (as amended,
immediately prior to the effectiveness of this Agreement, the "Original Note"),
and (iii) SI guaranteed the payment of the Note pursuant to a Guarantee of
Payment dated as of August 30, 2002 (the "SI Guaranty");
C. The Lender required, as a condition to the acceptance of the Original
Note that DFW's obligations thereunder be secured by a pledge of (i) the rights
to be acquired by DFW under the Lender ADA, including without limitation, DFW's
right to receive the royalties paid to the Developer under all Unit Franchise
Agreements for Restaurants situated in the Development Area, as such terms are
defined in the Lender ADA; and (ii) all rights under Assignments from SI to
Lender dated August 27, 1999, September 13, 2000, February 7, 2001, May 15,
2001, August 10, 2001, January 25, 2002 and April 30, 2002 (collectively, the
"Assignments"), pursuant to which SI assigned to the Lender its right to receive
a portion of the royalties payable pursuant to the Franchise Agreements for the
restaurants described in each of the respective Assignments or listed in an
exhibit thereto;
D. Pursuant to a Contribution Agreement, dated as of June 7, 2003 (the
"Contribution Agreement"), between SI and Franchisor, a wholly owned subsidiary
of SI, effective as of that date SI irrevocably contributed, transferred and
conveyed to Franchisor, absolutely and not as collateral security, all of SI's
right, title and interest in, to and under the Conveyed Assets (as defined in
the Contribution Agreement) (such contribution, transfer and conveyance, the
"Contribution to Franchisor");
E. The SI Parties have requested that Lender agree to certain changes to
the terms of the Original Note, and Lender has agreed to do so subject to the
terms and conditions set forth herein, including as to the delivery of the
additional guaranty, security documents, subordination agreement and other terms
and conditions set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and confessed, the parties hereto agree as follows:
1. DEFINITIONS; CONSTRUCTION.
(a) Capitalized terms used herein and not otherwise defined shall
have the meaning assigned to such terms in the Contribution Agreement. In
addition, as used herein, the following terms shall have the following
meanings:
"Account Control Agreement" means an account control agreement, in form
and substance satisfactory to Lender, among the applicable SI Parties, Lender
and the applicable bank with respect to each Collection Account, which shall
provide, among other things, that (i) all items of payment deposited in such
Collection Account and proceeds thereof are held by such bank as agent or
bailee-in-possession for Lender, (ii) the bank has no rights of setoff or
recoupment or any other claim against such Collection Account other than for
payment of its service fees and other charges directly related to the
administration of such Collection Account and for returned checks or other items
of payment, and (iii) subject to the restrictions set forth in such account
control agreement, upon notice from Lender to such bank, the applicable bank
will comply with all instructions originated by Lender with respect to
disposition of funds in such Collection Account without further consent by any
SI Party.
"Account Debtor" means any Person who is obligated under, with respect to,
or on account of, an account, chattel paper, or a general intangible.
"ADA Amounts" means the amounts payable to the Area Developers, in each
case based on a percentage of collected gross sales, and required pursuant to
the Area Development Agreements and in the percentages as in effect on the date
hereof (as set forth in Schedule 4.1(f)(vi)(1) to the Contribution Agreement) or
as may be approved in writing by Lender after the date hereof.
"ADA Buy-Out Payments" means the payments by the SI Parties required
pursuant to the buy-out of the rights of certain Area Developers under their
related Area Development Agreements and related documents, as such payments are
set forth in the ADA Buy-Out Schedule or as may be specifically disclosed to and
approved in writing by Lender (which approval shall be in Lender's sole
discretion) after the date hereof.
"ADA Buy-Out Schedule" has the meaning set forth in Section 4(a) hereof.
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"ADA Documents" means the Area Development Agreements and all other
agreements between SI or the Franchisor and an Area Developer relating to the
Schlotzsky's(R) branded business.
"Affiliate" means, as applied to any Person, any other Person who,
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person; provided, however,
that, for purposes of the definition of "Permitted Dispositions" and Section
7(i) hereof: (a) any Person which owns directly or indirectly 10% or more of the
stock (or other ownership interests) having ordinary voting power for the
election of directors or other members of the governing body of a Person or 10%
or more of the partnership or other ownership interests of a Person (other than
as a limited partner of such Person) shall be deemed an Affiliate of such
Person, (b) each director (or comparable manager) of a Person shall be deemed to
be an Affiliate of such Person, and (c) each partnership or joint venture in
which a Person is a partner or joint venturer shall be deemed an Affiliate of
such Person.
"Agreement" has the meaning set forth in the first paragraph hereof.
"Assignments" has the meaning set forth in the recitals hereto.
"Available Funds" means, for any day, all amounts held by the Manager,
Franchisor or DFW constituting Franchisor Revenues.
"Bank of Commerce Agreement" means that certain Note and Security
Agreement dated as of March 27, 2003 between SI and American Bank of Commerce
with respect to obligations of SI in a principal amount of $150,000.
"Bankruptcy Code" means title 11 of the United States Code, as in effect
from time to time.
"Branding Subsidiary" means Schlotzsky's Brand Products, LLC, a Delaware
limited liability company.
"Business Day" means any day other than a Saturday, Sunday or other day on
which banks in Austin, Texas are authorized or required by applicable law to be
closed.
"Change in Control" means, with respect to any SI Party, any of the
following: (i) the sale of all or more than a majority in book value of the
assets of such SI Party, (ii) the merger of such SI Party, as applicable, with
or into another entity so that after such merger the shareholders of such SI
Party, as applicable, own less than a majority of the shares of the surviving
entity or (iii) the acquisition of beneficial ownership of more than twenty
percent (20%) of such SI Party's common stock or ownership interests for more
than sixty (60) days (with such period of sixty (60) days commencing on the date
that SI receives notice that one or more persons have acquired more than twenty
percent (20%) of the common stock of such SI Party) by a person or group of
persons acting in concert who did not hold such stock at the time of this
Agreement; provided, that if such person or group of persons reduces their
ownership below 20% prior to the expiration of said sixty (60) days it shall not
be considered a Change in Control. Notwithstanding the foregoing, any
transaction that falls within the definition of "Change in Control" as set forth
above that is caused by the acquisition of more than twenty percent (20%) of
SI's stock by (i)
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Xxxxxx X. Xxxxxxxxx, (ii) any member of the immediate family of Xxxxxx X.
Xxxxxxxxx, (iii) any trust formed for the benefit of Xxxxxx X. Xxxxxxxxx or any
member of the immediate family of Xxxxxx X. Xxxxxxxxx or (iv) any entity, a
majority of whose equity interests are owned by, any of the persons referred to
in (i)-(iii) above, shall be excluded from the definition of "Change in
Control."
"Claim" shall mean any and all: suits, actions, or proceedings in any
court or forum, at law, in equity or otherwise; costs, fines, deficiencies, or
penalties; arbitration demands, proceedings or awards; damages, losses,
penalties, fines, judgments, liabilities and expenses (including reasonable
attorneys' fees and disbursements and other costs of collection, defense or
appeal); enforcement of rights and remedies; or any criminal, civil or
regulatory investigations, fines or penalties.
"Closing Date" means the date on which the conditions set forth in Section
4 hereof are either met or waived in writing by Lender.
"Code" has the meaning set forth in Section 13.
"Collateral" means all assets and interests in assets and proceeds thereof
now owned or hereafter acquired by any SI Party or any other Person in or upon
which a Lien is granted under any of the Note Documents.
"Collection Account" has the meaning set forth in Section 6(d).
"Collections" means all cash, checks, notes, instruments, and other items
of payment (including insurance proceeds, proceeds of cash sales, rental
proceeds, and tax refunds).
"Contribution Agreement" has the meaning set forth in the recitals hereto.
"Contribution to Franchisor" has the meaning set forth in the recitals
hereto.
"Debt" means, with respect to any Person, without duplication, (a)
obligations of such Person for borrowed money, (b) obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments, (c)
obligations of such Person to pay the deferred purchase price of property or
services, (d) obligations of such Person as lessee under capital leases, (e)
obligations of such Person to purchase securities or other property that arise
out of or in connection with the sale of the same or substantially similar
securities or property, (f) non-contingent obligations of such Person to
reimburse any other Person in respect of amounts paid under a letter of credit
or similar instrument to the extent that such reimbursement obligations remain
outstanding after they become noncontingent, (g) obligations with respect to
interest rate and currency swaps and similar obligations obligating such Person
to make payments, whether periodically or upon the happening of a contingency,
(h) debt secured by (or for which the holder of such debt has an existing right,
contingent or otherwise, to be secured by) a lien on any asset of such Person,
whether or not such Debt is assumed by such Person, and (i) debt or other
obligations of others guaranteed by such Person.
"Default Rate" has the meaning set forth in the Note.
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"DFW" has the meaning set forth in the first paragraph hereof.
"DFW Collateral" means all assets and interests in assets and proceeds
thereof now owned or hereafter acquired by DFW in or upon which a Lien is
granted under the DFW Security Agreement (including the collateral described
therein) or any of the Note Documents.
"DFW Security Agreement" has the meaning set forth in the recitals hereto.
"Effective Date" means, subject to satisfaction of the conditions set
forth in Section 4, December 15, 2003.
"Existing Liens" means the Liens described in Schedule E-1 hereto.
"Event of Default" has the meaning set forth in Section 12.
"Franchisor" has the meaning set forth in the first paragraph hereof.
"Franchisor Collateral" means all assets and interests in assets and
proceeds thereof now owned or hereafter acquired by Franchisor in or upon which
a Lien is granted under the Franchisor Security Agreement, the Trademark
Security Agreement, the Franchisor Pledge Agreement or any other Note Documents.
"Franchisor Guaranty" means a guaranty executed by Franchisor, in form and
substance satisfactory to Lender, dated as of the date hereof and delivered
pursuant to this Agreement, pursuant to which Franchisor shall guaranty all the
Obligations.
"Franchisor Pledge Agreement" means a stock pledge agreement between
Franchisor and Lender, in form and substance satisfactory to Lender, dated as of
the date hereof and delivered pursuant to this Agreement and the Franchisor
Security Agreement.
"Franchisor Revenues" means, for any period, all revenues of Franchisor
during such period as determined in accordance with GAAP (including accrued
deferred revenues to the extent so recordable as revenues in accordance with
GAAP), all in a manner consistent with the financial statements having been
delivered to Lender prior to the date hereof.
"Franchisor Security Agreement" means a security agreement between
Franchisor and Lender, in form and substance satisfactory to Lender, dated as of
the date hereof and delivered pursuant to this Agreement and the Franchisor
Guaranty, pursuant to which Franchisor shall pledge substantially all of its
assets (subject to exceptions as may be set forth therein) as security for the
obligations of Franchisor under the Franchisor Guaranty and other Note
Documents.
"Governing Documents" means, with respect to any Person, the certificate
or articles of incorporation or formation, by-laws, limited liability agreement,
or other organizational documents of such Person.
"Governmental Authority" means any federal, state, local, or other
governmental or administrative body, instrumentality, department, or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission,
or other similar dispute-resolving panel or body.
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"Indemnified Person" has the meaning set forth in Section 15.
"Lender" has the meaning set forth in the first paragraph hereof.
"Lender ADA" has the meaning set forth in the recitals hereto.
"Management Agreement" means that certain Management Agreement dated as of
June 7, 2003, between Franchisor, Schlotzsky's Brand Products, LLC, Schlotzsky's
NAMF Funding, LLC, Schlotzsky's N.A.M.F., Inc., and the Manager.
"Manager" has the meaning set forth in the first paragraph hereof.
"Manager Compensation and Operating Expenses Amounts" means the sum of (i)
the Manager Fees payable by the Franchisor, DFW or Branding Subsidiary under the
Management Agreement, (ii) payments of, or reimbursements for, any Franchisor,
DFW or Branding Subsidiary SPE Expenses (or other operating expenses) incurred
by or on behalf of Franchisor or Branding Subsidiary, and (iii) officer and
director compensation to the extent permitted under Section 7 hereof; provided,
however, that while the Obligations are outstanding, the Manager Compensation
and Operating Expenses Amounts for any calendar month shall be equal to the
lesser of (a) $400,000 and (b) the actual aggregate amount incurred by DFW,
Franchisor and Branding Subsidiary or by the Manager (on behalf of DFW,
Franchisor or Branding Subsidiary) during such quarter under items (i), (ii) and
(iii) above.
"Manager Fees" means the reasonable fees payable to the Manager for its
services under the Management Agreement by DFW, Franchisor and Branding
Subsidiary, the payment of which shall be the sole and exclusive compensation of
Manager to the extent of compensation payable by DFW, Franchisor or Branding
Subsidiary, and shall cover all costs and expenses incurred by the Manager in
the performance of its obligations to DFW, Franchisor and Branding Subsidiary
under the Management Agreement, including, without limitation, all compensation
of Manager's employees and overhead costs.
"Minimum Franchisee Payment Obligations" means, (a) with respect to
existing Franchise Agreements (other than Franchise Agreements related to stores
that have been resold, closed, or taken back by an SI Party or an Affiliate
thereof), royalty and other payment obligations in the amount (or based on the
percentages) not less than the amount (or applicable percentage) in effect on
the date hereof (as separately disclosed to Lender pursuant to Section 4(a)(xvi)
hereof), and (b) with respect to any new Franchise Agreement, royalty and other
payment obligations in an amount (or based on percentages) not less than at
historical market rates which have been set forth in the UFOCs filed to date.
"NAMF Contributions" means the amounts to be contributed to NAMF by the
Franchisees pursuant to the Franchise Agreements and which are to be
administered by NAMF, so long as such amounts are consistent (as a percentage of
gross sales payable by the Franchisees under the applicable Franchise Agreement)
with the amounts required pursuant to the standard form of Schlotzsky's
Franchise Agreement as in effect on the date hereof and disclosed to Lender.
"New Lender" has the meaning set forth in Section 8.
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"New Lender Financing" has the meaning set forth in Section 8.
"New Lender Intercreditor Agreement" has the meaning set forth in Section
8.
"New Lender Liens" has the meaning set forth in Section 8.
"Note" means the Original Note, as amended and restated pursuant to the
Replacement Note, and as it may be further amended, modified, replaced or
restated from time to time.
"Note Documents" means this Agreement, the Note, the SI Guaranty, the
Franchisor Guaranty, the Franchisor Security Agreement, the Franchisor Pledge
Agreement, the SI Pledge Agreement, the Trademark Security Agreement, the
Account Control Agreements and any other agreement now existing or hereafter
entered into by any SI Party (or any predecessor in interest thereto) and the
Lender in connection with this Agreement or the Note.
"Obligations" means all liabilities, obligations, or undertakings owing by
DFW to the Lender of any kind or description arising out of or outstanding
under, advanced or issued pursuant to, or evidenced by the Note, this Agreement,
or any of the other Note Documents, irrespective of whether for the payment of
money, whether direct or indirect, absolute or contingent, due or to become due,
voluntary or involuntary, whether now existing or hereafter arising, and
including all interest, costs, fees (including reasonable attorneys' fees), and
expenses (including interest, costs, fees, and expenses that, but for the
provisions of the Bankruptcy Code, would have accrued irrespective of whether a
claim thereof is allowed) and any and all other amounts which DFW is required to
pay pursuant to any of the foregoing, by law, or otherwise.
"Option Agreement" has the meaning set forth in the recitals hereto.
"Original Note" has the meaning set forth in the recitals hereto.
"Payment Date" means the 15th day of each calendar month, or, if any such
day is not a Business Day, then the next succeeding Business Day, commencing on
January 15, 2004.
"Permitted Dispositions" means
(a) with respect to Franchisor, the licensing (or termination in the
ordinary course of business in the reasonable business judgment of
Franchisor of any such licensing arrangement) of the Schlotzsky's IP and
related rights pursuant to:
(i) the Branding Subsidiary License Agreement;
(ii) the Franchise Agreements (and related documents), so long
as (A) except for NAMF Contributions, all payments by franchisees
thereunder are to be made to Franchisor and no amounts payable
thereunder are required to be paid to any Affiliate of Franchisor
(other than DFW); (B) each such Franchise Agreement (together with
any such related documents) entered into after June 7, 2003 contains
substantially similar terms as those set forth (or disclosed) in the
UFOC current at the time such Franchise Agreement was entered into,
(C) all such Franchise Agreements require the Minimum Franchisee
Payment Obligations,
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provided, that, Franchisor may offer temporary royalty relief (and
permit payment obligations of less than the Minimum Franchisee
Payment Obligations in connection therewith) for up to 25 store
locations, in addition to the number of store locations that
currently have royalty relief as set forth in the report described
in Section 4(a)(xvi) at any time, covering, for any such store
location, a period not in excess of 6 months in the aggregate (for
all such relief periods applicable to such location), (D) in all
events each such Franchise Agreement and related documents are on
fair and reasonable terms to Franchisor (E) Franchisor shall not
terminate Franchise Agreements with respect to more than 20
locations in any calendar quarter without the written consent of
Lender, which consent shall not be withheld unreasonably;
(iii) the International License Agreements (and related
documents); and
(iv) the Area Development Agreements (and related ADA
Documents) as in effect on the date hereof, and, in each case
subject to the written consent of Lender, any amendments or
additional Area Development Agreements entered into after the date
hereof; and
(b) with respect to Branding Subsidiary, the sub-licensing of the
Schlotzsky's IP and related rights pursuant to the Branding Agreements, so
long as (i) no amounts payable thereunder are payable to any Affiliate of
Franchisor (other than Branding Subsidiary) and (ii) each such Branding
Agreement is on fair and reasonable terms to Branding Subsidiary.
"Permitted Protest" means the right of any SI Party to protest a payment
obligation in connection with its trade accounts payable or ADA Amounts,
provided that (a) a reserve with respect to such obligation is established on
the books of such SI Party in such amount as is required under GAAP, (b) any
such protest is instituted promptly and prosecuted diligently by such SI Party,
in good faith, and (c) Lender is satisfied that, while any such protest is
pending, there will be no impairment of the enforceability, validity, or
priority of any Security Interest; provided, however, that any amounts that may
be claimed by Swiss Re or USRP or any of their respective affiliates as owed to
them shall be deemed to be "Permitted Protests."
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Projections" means, for each of SI (on a consolidated basis) and
Franchisor, forecasted balance sheets, profit and loss statements, and cash flow
statements, all prepared on a basis consistent with such Person's historical
financial statements, together with appropriate supporting details and a
statement of underlying assumptions.
"Public Report" means a Form 10-K or a Form 10-Q of SI for the applicable
annual or quarterly period.
"Replacement Note" has the meaning set forth in Section 2.
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"Security Interest" means any Lien granted in favor of Lender pursuant to
the Note Documents.
"SI" has the meaning set forth in the first paragraph hereof.
"SI Franchise Agreements" has the meaning set forth in Section 9(b).
"SI Guaranty" has the meaning set forth in the Recitals hereto.
"SI Pledge Agreement" means a stock pledge agreement between SI and
Lender, in form and substance satisfactory to Lender, dated as of the date
hereof, pursuant to which SI has granted to Lender a security interest into all
Stock of Franchisor and DFW.
"SPE Expenses" means, as to any Person, expenses payable to non-affiliated
third parties incurred in the ordinary course of business of such Person,
including but not limited to litigation expenses, trademark registration and
maintenance fees and expenses, insurance expenses, auditing fees and any other
fees of the external accountants of such Person.
"Stock" means all shares, options, warrants, interests (including general
or limited partnership interests, limited liability company interests or any
other ownership interests), participations or other equivalents (regardless of
how designated) of or in a Person, whether voting or nonvoting.
"Trademark Security Agreement" means a trademark security agreement
between Franchisor and Lender, in form and substance satisfactory to Lender,
dated as of the date hereof and delivered pursuant to this Agreement and the
Franchisor Security Agreement.
"UFOC" means the Uniform Franchise Offering Circular of the Franchisor.
"Wooleys" means Xxxx X. Xxxxxx and/or Xxxxxxx X. Xxxxxx.
"Xxxxxx Franchisor Note" means that certain promissory note, dated
November 12, 2003, in the original principal amount of $2,500,000.00, made by
Franchisor for the benefit of the Wooleys, as amended pursuant to Section 4(c)
and as it may be further amended or otherwise modified subject to the terms of
this Agreement and the Xxxxxx Subordination Agreement.
"Xxxxxx Notes" means, collectively, (a) the promissory note, dated April
8, 2003, in the original principal amount of $1,000,000.00, made by SI for the
benefit of the Wooleys, and (b) the Xxxxxx Franchisor Note.
"Xxxxxx Obligations" means, collectively, the obligations of the SI
Parties to the Wooleys (a) under the Xxxxxx Notes and (b) with respect to the
American Bank of Commerce Agreement (including any rights of subrogation
resulting from any collection or enforcement against the collateral pledged by
the Wooleys relating thereto).
"Xxxxxx Subordination Agreement" means a Subordination and Intercreditor
Agreement, in form and substance satisfactory to Lender, entered into as of the
date hereof, among Lender,
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the Wooleys, DFW, SI and Franchisor, pursuant to which the security interest
securing the Xxxxxx Obligations will at all times be subordinated to the
security interest securing the Note.
(b) Any terms used herein that are defined in the Code shall be
construed and defined as set forth in the Code unless otherwise defined
herein.
(c) Unless the context hereof clearly requires otherwise, references
to the plural include the singular, references to the singular include the
plural, the term "including" is not limiting, and the term "or" has,
except where otherwise indicated, the inclusive meaning represented by the
phrase "and/or." Any reference in this Agreement or in the other Note
Documents to any agreement, instrument, or document shall include all
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, joinders, and supplements, thereto and
thereof, as applicable (subject to any restrictions on such alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, joinders, and supplements set forth herein).
2. PRINCIPAL BALANCE; CONFIRMATION OF OBLIGATIONS. The parties acknowledge
that (a) the outstanding principal balance of the Note as of the date hereof is
$18,012,099.24, and (b) the outstanding accrued interest on the Note is
$55,270.00; provided, however, that on the Closing Date, the outstanding accrued
interest shall be recalculated assuming the effectiveness of the Replacement
Note (defined below) on the Effective Date (in which case the outstanding
accrued interest as of the date hereof will be recalculated to be $20,726.25).
In connection with this Agreement, DFW is issuing to Lender an Amended and
Restated Promissory Note dated as of the date hereof in substantially the form
attached hereto as Exhibit A (the "Replacement Note"), which Replacement Note,
upon effectiveness thereof pursuant to Section 4 below, shall (a) amend and
restate the Original Note in its entirety, and (b) for all purposes be deemed
the same instrument as the Original Note. This Agreement and the issuance of the
Replacement Note do not extinguish the obligations for the payment of money
outstanding under the Original Note and other Note Documents, as in effect prior
to the Closing Date, or discharge or release the obligations under, such
existing Note Documents, or the Lien or priority of any pledge, security
agreement or any other security therefor. Without limiting the foregoing, each
SI Party hereby confirms and agrees that all outstanding interest and other
obligations under the Original Note immediately prior to the Closing Date shall,
from and after the Closing Date (but effective retroactively as of the Effective
Date for purposes of calculations of outstanding interest accruing from and
after the Effective Date), be, without duplication, interest and other
Obligations payable pursuant to this Agreement, the Replacement Note and the
other Note Documents. Each SI Party hereby (i) confirms and agrees that each
Note Document to which it is a party is, and shall continue to be, in full force
and effect without modification or replacement, except as expressly set forth
herein, and is hereby ratified and confirmed in all respects except that on and
after the Effective Date all references in any such Note Document to "the Note,"
"thereto," "thereof," "thereunder" or words of like import referring to the
Original Note shall mean the Original Note as amended and restated by the
Replacement Note (and including the additional terms set forth in this Agreement
and the other Note Documents as modified hereby), and (ii) confirms and agrees
that to the extent that any such Note Document purports to assign or pledge to
the Lender a security interest in or Lien on, any Collateral as security for the
obligations of the DFW from time to time existing in respect of the Original
Note, such pledge, assignment and/or
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grant of the security interest or Lien is hereby ratified and confirmed in all
respects and shall continue to secure the Obligations hereunder and under the
Replacement Note.
3. CONSENT. Subject to Section 4 below (as to effectiveness), Lender
hereby consents to the Contribution to Franchisor.
4. CONDITIONS TO EFFECTIVENESS. Notwithstanding any delivery of the
Replacement Note, such Replacement Note shall be deemed accepted by Lender (and
become effective as the Note), and the consent contained in Section 3 above
shall become effective, when, and only when, the following conditions have been
satisfied as determined in Lender's sole and absolute discretion:
(a) Lender shall have received, on or before December 30, 2003, each
of the following, in form and substance satisfactory to Lender, and, in
the case of any agreement or instrument, the same shall have been duly
executed by each party thereto (other than Lender) and shall be in full
force and effect:
(i) this Agreement;
(ii) the Replacement Note (to become effective upon
satisfaction of all conditions precedent set forth
herein);
(iii) the Franchisor Guaranty;
(iv) the Franchisor Security Agreement;
(v) the Trademark Security Agreement;
(vi) the Franchisor Pledge Agreement;
(vii) the SI Pledge Agreement;
(viii) the Xxxxxx Subordination Agreement;
(ix) a general legal opinion from counsel to the SI Parties
covering such matters as Lender may require;
(x) evidence satisfactory to Lender as to the authority of
each of the SI Parties to execute, deliver, and
perform each of the applicable documents listed herein
or executed in connection herewith to which such SI
Party is a party and authorizing specific officers of
such SI Party to execute the same;
(xi) copies of each SI Party's Governing Documents, as
amended, modified, or supplemented to the dated
hereof, certified by the Secretary of each such SI
Party;
11
(xii) a certificate of status with respect to each SI Party,
dated within 10 days of the date hereof, such
certificate to be issued by the appropriate officer of
the jurisdiction of organization of such SI Party,
which certificate shall indicate that such SI Party is
in good standing in such jurisdiction;
(xiii) satisfactory evidence as to the non-existence of any
liens on the Collateral other than the Existing Liens,
and as to the accuracy of all representations and
warranties of the SI Parties herein and in the other
Note Documents;
(xiv) Projections for each of Franchisor and SI for the 3
year period following the date hereof;
(xv) a summary report for accounts payable and accrued
liabilities of SI and separately covering accounts
payable and accrued liabilities of DFW, Franchisor and
Branding Subsidiary;
(xvi) a report listing, for each existing Franchise
Agreement, the applicable royalty rate for payments
thereunder, together with all other components of the
Minimum Franchisee Payment Obligations;
(xvii) a report outlining all compensation to directors and
senior management of each of DFW, Franchisor and
Branding Subsidiary, containing such information as
Lender may reasonably require.
(xviii) a schedule of currently pending, threatened or
imminent litigation;
(xix) a schedule listing the currently outstanding Debt of
(1) Franchisor, (2) DFW and (3) SI; and
(xx) a schedule setting forth a summary of the ADA Buy-Out
Payments and other material terms related thereto (the
"ADA Buy-Out Schedule").
(b) Franchisor shall have paid all documented and invoiced Lender
expenses (including reasonable attorneys' fees) incurred in connection
with the transactions contemplated in this Agreement and the other Note
Documents.
(c) Franchisor and the Wooleys shall have amended (a) the Xxxxxx
Franchisor Note to conform the same to the provisions of this Agreement
and the Xxxxxx Subordination Agreement, and (b) that certain Security
Agreement dated as of November 12, 2003 among Franchisor and the Wooleys
to limit the obligations secured thereby so as to conform with Section
7(b) hereof.
12
5. REPRESENTATIONS AND WARRANTIES OF SI PARTIES. Each SI Party represents
and warrants to the Lender, as of the date hereof and as of the Effective Date,
that:
(a) DUE ORGANIZATION AND QUALIFICATION. Such SI Party is duly
organized and existing and in good standing under the laws of the
jurisdiction of its organization and qualified and licensed to do business
in, and in good standing in, any state where the failure to be so licensed
or qualified reasonably could be expected to materially and adversely
affect such SI Party.
(b) DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance by such SI Party of this Agreement and each of the other Note
Documents to which it is a party have been duly authorized by all
necessary action. The execution, delivery, and performance by such SI
Party of this Agreement and the other Note Documents to which it is a
party do not and will not (i) violate any provision of federal, state, or
local law or regulation applicable to such SI Party, the Governing
Documents of such SI Party, or any order, judgment, or decree of any court
or other Governmental Authority binding on such SI Party, (ii) conflict
with, result in a breach of, or constitute (with due notice or lapse of
time or both) a default under any material contractual obligation of such
SI Party, (iii) result in or require the creation or imposition of any
Lien of any nature whatsoever upon any properties or assets of any SI
Party, other than the Liens in favor of Lender, or (iv) except as has been
already obtained, require any approval of the interest holders of any SI
Party or any approval or consent of any Person under any material
contractual obligation of any SI Party. Other than the filing of financing
statements, and fixture filings, the execution, delivery, and performance
by each SI Party of this Agreement and the other Note Documents to which
such SI Party is a party do not and will not require any registration
with, consent, or approval of, or notice to, or other action with or by,
any Governmental Authority or other Person. This Agreement and the other
Note Documents to which such SI Party is a party, and all other documents
contemplated hereby and thereby, when executed and delivered by such SI
Party will be the legally valid and binding obligations of such SI Party,
enforceable against such SI Party in accordance with their respective
terms, except as enforcement may be limited by equitable principles or by
bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(c) STATUS AND LIENS WITH RESPECT TO COLLATERAL. Each of Franchisor
and DFW is the owner of the Collateral pledged by such SI Party, free and
clear of any liens, claims or encumbrances, other than the Existing Liens;
and no dispute, right of setoff, counterclaim, or defenses exist with
respect to all or any part of the Collateral pledged by such SI Party. The
security interests granted by each of Franchisor and DFW to Lender in and
to its properties and assets pursuant to the Note Documents are validly
created, perfected, and first priority security interests, subject only to
the Existing Liens. The delivery at any time by Franchisor or DFW to the
Lender of Collateral shall constitute a representation and warranty by
such SI Party under this Agreement that, with respect to such Collateral,
and each item thereof, the matters heretofore warranted in this clause (c)
are true and correct.
13
(d) LITIGATION. Except as set forth in the schedule described in
Section 4(a)(xviii) hereto, there are no actions or proceedings pending by
or against any SI Party before any court or administrative agency and the
SI Parties do not have any knowledge or belief of any pending, threatened,
or imminent litigation, governmental investigations, or claims,
complaints, actions, or prosecutions involving any SI Party, except for:
(a) ongoing collection matters in which any such SI Party is the
plaintiff; and (b) matters arising after the date hereof that, if decided
adversely to such SI Party would not materially and adversely affect any
SI Party.
(e) DEBT. Except as set forth in the schedule described in Section
4(a)(xix)(1) hereto, Franchisor is not a party to, or otherwise bound by
or a guarantor with respect to, any Debt other than the under the Note
Documents and the Xxxxxx Notes. Without limiting the foregoing, Franchisor
is not a party to, and none of its assets are otherwise bound by, any
guaranties having been given by SI in connection with any Area Development
Agreements or otherwise with respect to the Schlotzsky's IP. Except as set
forth in the schedule described in Section 4(a)(xix)(2) hereto, DFW is not
a party to, or otherwise bound by or a guarantor with respect to, any Debt
other than the under the Note Documents. Except as described in the most
recent Public Report filed prior to the date hereof or as set forth in the
schedule described in Section 4(a)(xix)(3) hereto, SI is not a party to,
or otherwise bound by or a guarantor with respect to, any Debt other than
the under the Note Documents and the Xxxxxx Notes.
(f) CERTAIN OBLIGATIONS NOT PAST DUE. All ADA Amounts and ADA
Buy-Out Payments due and payable prior to the date hereof have been paid
in full.
6. AFFIRMATIVE COVENANTS OF SI PARTIES. So long as any part of the
Obligations remain unpaid or unperformed, each of the SI Parties covenants and
agrees to (and to cause its subsidiaries, as applicable, to):
(a) PAYMENT OF ADA AMOUNTS. Promptly pay when due all ADA Amounts,
including all amounts payable to DFW pursuant or relating to the Lender
ADA and the Assignments.
(b) UPDATES. Promptly notify the Lender of any material change in
any fact or circumstance warranted or represented by such SI Party herein
or in any other Note Document.
(c) NOTICE OF CLAIMS. Promptly notify the Lender of any Claim
affecting the Collateral, or any part thereof, or the Security Interests
created in favor of Lender, and at the request of the Lender, appear in
and defend, at such SI Party's expense, any such Claim; and deliver
written notice, together with applicable supporting evidence or documents,
to Lender within five (5) Business Days of any SI Party acquiring actual
knowledge of any legal action (pending or actual) or any other impending
or actual operating or financial circumstances of such SI Party which will
cause a material financial liability to any SI Party.
14
(d) CASH MANAGEMENT. Commencing from and after February 1, 2004, (i)
have established, and thereafter maintain, separately for each of DFW and
Franchisor, a bank account in such SI Party's name (a "Collection
Account") at a financial institution reasonably acceptable to Lender,
which Collection Account (and all cash, checks and similar items of
payment therein) shall be part of the Collateral and shall at all times be
subject to an Account Control Agreement, (ii) deposit or cause to be
deposited promptly, and in any event no later than the first Business Day
after the date of receipt thereof (including such receipt by the Manager),
all Collections of Franchisor or DFW into such SI Party's Collection
Account, (iii) request in writing and otherwise take such reasonable steps
to cause all of such SI Party's Account Debtors to forward payment of the
amounts owed by them (other than to the extent constituting NAMF
Contributions) directly to (or for deposit by the applicable bank in) such
Collection Account. Without limiting the foregoing, Manager shall at all
times promptly cause all funds payable by Franchisor to DFW under the
Lender ADA and related Assignments to be so deposited in DFW's Collection
Account. Furthermore, to the extent that funds payable by any Franchisee
with respect to any applicable Franchise Agreement are to be applied to
both amounts to be retained by Franchisor and to NAMF Contributions, each
such payment shall be allocated to the portion payable to Franchisor (and
not constituting NAMF Contributions) at least on a pro rata basis with
such NAMF Contributions.
(e) FINANCIAL AND COLLATERAL INFORMATION. Deliver (or shall cause
its applicable Affiliate to deliver) to Lender:
(i) for each of SI and Franchisor, as soon as available, but
in any event within 45 days after the end of each of such SI Party's
fiscal quarters, a company prepared consolidated balance sheet,
income statement, and statement of cash flow covering such SI Party
and its subsidiaries' operations during such period;
(ii) for each of SI and Franchisor, as soon as available, but
in any event within 90 days after the end of each of such SI Party's
fiscal years, financial statements of such SI Party and its
subsidiaries for each such fiscal year, audited by independent
certified public accountants reasonably acceptable to Lender and
certified, without any qualifications, by such accountants to have
been prepared in accordance with GAAP on a basis consistent with
prior periods except as may be otherwise noted (such audited
financial statements to include a balance sheet, income statement,
and statement of cash flow and, if prepared, such accountants'
letter to management);
(iii) as soon as available, but in any event within 45 days
after the end of each fiscal quarter of Franchisor and SI, a report
updating the most recent Projections delivered by the SI Parties (in
substantially the same form as the initial Projections delivered
pursuant to Section 4(a)(xiv)), including detail as to any such
changes and any variance in actual results from the most recent
Projections having been delivered to Lender;
15
(iv) as soon as available, but in any event within 45 days
after the end of each fiscal quarter of SI, an aging report for
accounts payable and accrued liabilities of SI and separately
covering accounts payable and accrued liabilities of DFW, Franchisor
and Branding Subsidiary, in such form and including such information
relating to such accounts payable as requested by Lender from time
to time;
(v) if and when filed by any SI Party, (A) and filings made by
such SI Party with the SEC, (B) copies of each SI Party's federal
income tax returns, and any amendments thereto, filed with the
Internal Revenue Service;
(vi) a schedule of expected annual ADA Amounts and update such
schedule whenever such expected amounts change materially;
(vii) as soon as available, but in any event within 30 days
after the end of each month, a schedule listing, for each Area
Development Agreement, the applicable ADA Amounts and other payments
to any Area Developer thereunder with respect to such Area
Development Agreement (and separately listing, with respect to the
Lender ADA, all amounts payable to DFW pursuant to such Lender ADA
and the Assignments), together with evidence satisfactory to Lender
that all such amounts have been paid;
(viii) as soon as available, but in any event within 30 days
after the end of each month, a report showing, in reasonable detail,
compliance at the end of such month, with the applicable covenants
contained in Sections 7(d) (as to accounts payable), and 7(i)
(including for any such month that is the last month of a fiscal
quarter, the calculation of Franchisor Revenues and amounts, if any,
to be reserved with respect thereto);
(ix) as soon as available, but in any event within 30 days
after the end of each month, a monthly cash flow statement for
Franchisor for such month, including such detail relating thereto as
Lender may request;
(x) upon the request of Lender, any other report reasonably
requested relating to the financial condition of any SI Party or its
subsidiaries.
(f) NEW LENDER FINANCING. An amount equal to at least 75% of the net
proceeds (after payment of applicable origination fees and payments to
third parties) if any, received by any SI Party under the New Lender
Financing shall be applied to the payment of accounts payable and accrued
liabilities.
(g) NOTICE OF BREACH OR EVENT OF DEFAULT. Provide written notice to
Lender of a breach by any SI Party under this Agreement or any Note
Document which constitutes an Event of Default or which with the passage
of time would constitute an Event of Default within 5 days of the
occurrence of the breach or when the SI Party could have reasonably
learned of such breach.
16
(h) DEFAULTS UNDER AREA DEVELOPMENT AGREEMENTS AND ADA BUY-OUT
PAYMENTS. Provide written notice to Lender of any breach by any SI Party
under any payment obligations in connection with any Area Development
Agreements or in connection with any obligations relating to the ADA
Buy-Out Payments, in each case within 5 days of the occurrence of the
breach or when the SI Party could have reasonably learned of such breach.
Without limiting the foregoing, (i) Lender shall have the right (but not
the obligation) to advance funds, and take such other actions as Lender
may determine in its reasonably discretion to be appropriate so as to cure
any such default, (ii) each SI Party shall, and shall cause its
subsidiaries to, cooperate with Lender in connection with any Lender
efforts to cure, or cause the cure of, any such default, (iii) any funds
advanced or paid by Lender shall be part of the Obligations hereunder,
shall accrue interest at the rate applicable to the principal amount of
the Obligations, and shall be secured by the Collateral, and (iv) each SI
Party shall, and shall cause its subsidiaries to, execute such documents
as Lender may reasonably require to evidence the obligations of the SI
Parties to repay all such funds advanced or paid by Lender.
7. NEGATIVE COVENANTS OF FRANCHISOR. Each SI Party further covenants and
agrees that, without the prior written consent of the Lender, such SI Party will
not, and will not permit any of its subsidiaries, or the Manager with respect to
such SI Party or any such subsidiary, to:
(a) ASSET DISPOSITIONS. With respect to Franchisor and its
subsidiaries, sell, lease, license (including entering into or permitting
to exist any Franchise Agreement, Area Development Agreement), assign,
transfer or otherwise dispose of any of its assets, in each case other
than Permitted Dispositions;
(b) LIENS. With respect to any of DFW, Franchisor and Franchisor's
subsidiaries, create any security interest in, mortgage or otherwise
encumber any of its assets (including the Collateral), or any part
thereof, or permit the same to be or become subject to any lien,
attachment, execution, sequestration, other legal or equitable process or
any encumbrance of any kind or character, except the following:
(i) the Security Interest in favor of Lender,
(ii) the New Lender Liens to the extent expressly permitted
under Section 8 hereof, and
(iii) the Liens securing the Xxxxxx Notes, so long as such
Liens (1) are subordinate to the Obligations pursuant to the Xxxxxx
Subordination Agreement, and (2) secure only (A) direct payment
obligations to the Wooleys under the Xxxxxx Notes, (B) obligations
(including guaranty obligations) to either or both of the Wooleys in
an aggregate amount not in excess of $4,300,000 arising by way of
subrogation, contribution, or otherwise in connection with that
certain Guaranty dated as of June 12, 2003 among the Wooleys and
Commerce National Bank, pursuant to which the Wooleys have
guarantied payment obligations of NAMF under that certain Promissory
Note dated June 12, 2003 in the original principal amount of
$4,300,000 issued by NAMF to Commerce National Bank (including any
and all amendments, modifications, renewals, extensions,
17
rearrangements and consolidations thereof, in each case so long as
the principal amount of the obligations directly or indirectly
secured by the Collateral is not increased as a result thereof), and
(C) obligations (including guaranty obligations) to either or both
of the Wooleys in an aggregate amount not in excess of $1,000,000
arising by way of subrogation, contribution, or otherwise in
connection with that certain Guaranty dated as of May 27, 1994 given
by Xxxx X. Xxxxxx, pursuant to which the Xxxx X. Xxxxxx has
guarantied payment obligations of Schlotzsky's Restaurants, Inc.
under that certain that certain Operating Lease dated as of May 27,
1994, by and between Xxxxxxx X. Xxxxxxx and Xxxxx X'Xxxxx Xxxxxxx,
as husband and wife, Xxxxxxx X. Xxxxxxx, Trustee of the Xxxxxxx Xxxx
Xxxxxxx Children's Trust Created under the Will of Xxxx X. Xxxxxxx,
as tenants in common, as lessor, and Schlotzsky's Restaurants, Inc.,
as lessee (including any and all amendments and modifications
thereof, in each case so long as the principal amount of the
obligations secured directly or indirectly by the Collateral is not
increased as a result thereof);
(c) DEBT; NEW LENDER DEBT. With respect to any of DFW, Franchisor
and Franchisor's subsidiaries, create, assume, incur, suffer to exist,
guarantee, or otherwise become or remain, directly or indirectly, liable
with respect to any Debt, except (i) as expressly permitted in the Note
Documents, (ii) the Obligations, (iii) with respect to Franchisor, the
Xxxxxx Obligations to extent subject to the Xxxxxx Subordination
Agreement, and (iv) with respect to Franchisor and its subsidiaries, the
New Lender Financing to the extent expressly permitted under Section 8
hereof;
(d) ACCOUNTS PAYABLE. Create, assume, incur, suffer to exist, at any
time, (i) any accounts payable (not otherwise constituting Debt) of DFW,
Franchisor and Franchisor's subsidiaries (including ADA Amounts) that are
past due by more than 30 days, and (ii) accounts payable of SI and its
subsidiaries (other than DFW, Franchisor and Franchisor's subsidiaries)
that are past due by more than 60 days; provided, however, that the
forgoing shall not apply to (A) accrued contingent liabilities (not yet
due and payable), (B) any accounts to the extent then subject to a
Permitted Protest, (C) accounts payable as of the Closing Date for which a
written payment plan has been proposed by SI and approved by Lender prior
to January 15, 2004 with respect to the applicable creditor and account
payable; and provided, further, that, for any amounts invoiced by any
vendor having invoiced an SI Party on an untimely basis, the foregoing 30
or 60 day period, as applicable, shall begin to run upon receipt of such
invoice by such SI Party;
(e) AMENDMENTS TO MATERIAL CONTRACTS. Except as expressly permitted
or required pursuant to Section 10 below with respect to the Management
Agreement, amend, modify or terminate or consent to an amendment,
modification or termination of the Lender ADA, the Assignments, the
Management Agreement or the Branding Subsidiary License Agreement;
(f) CHANGE IN BUSINESS OR FORM. Make any material change in the
principal nature of its business; change its organizational identification
number, state of organizational or organization identity; or reorganize,
or recapitalize, or reclassify its stock or ownership interests;
18
(g) MERGER. Merge with, consolidate with, acquire all or
substantially all of the assets or capital stock (or other ownership
interests) of, or otherwise combine with, any Person or form any
subsidiary, except that any subsidiary of Franchisor may merge or
consolidate with Franchisor (so long as Franchisor is the surviving
entity);
(h) COMPENSATION. With respect to DFW, Franchisor and Branding
Subsidiary only, increase the annual fee or per-meeting fees paid to the
members of its Board of Directors during any year to greater than $10,000
per director per year; or pay or accrue total cash compensation, during
any year, to its officers in an aggregate amount in excess of 115% of that
paid or accrued in the prior year (or, with respect to the 2003 calendar
year, such amounts as in effect on the date hereof as disclosed in writing
to Lender);
(i) PAYMENTS. With respect to DFW, Franchisor and Franchisor's
subsidiaries, make or permit any distribution, dividend, investment or any
payment of any kind, other than the following:
(i) payments on the Obligations or other payments to Lender;
(ii) payments by Branding Subsidiary to Franchisor (including
distributions and payments under the Branding License Agreement);
(iii) the following payments, to be made in the following
order of priority on a periodic basis acceptable to Lender:
(A) payments of ADA Amounts and ADA Buy-Out Payments
then due and payable (to the extent payable by Franchisor);
provided, that with respect to ADA Buy-Out Payments payable by
SI or any subsidiary or affiliate thereof (other than an SI
Party), such ADA Buy-Out Payments shall be made by SI or its
applicable subsidiary or affiliate (including out of any ADA
Amounts payable to SI or such subsidiary or affiliate); and
provided, further, that with respect to ADA Buy-Out Payments
attributable to payments under Franchise Agreements where SI
or any subsidiary or affiliate thereof is the applicable
Franchisee, all such ADA Buy-Out Payments shall be made
exclusively by SI or such applicable subsidiary or affiliate
thereof (and not out of any ADA Amounts payable by Franchisor
relating thereto);
(B) payments on the New Lender Financing;
(C) payment of Manager Compensation and Operating
Expenses Amounts when due;
(D) so long as no Event of Default shall have occurred
and be continuing or would result therefrom, and in each case
only so long as, both before and after giving effect to each
distribution or payment, DFW shall have (including as a result
of contributions from SI and/or advances from SI or
Franchisor, the repayment of which shall in all events be
subordinate to the Obligations, and the repayment of which
shall be made
19
only to the extent of availability of funds under clause (2)
below) available funds in such amount as may be reasonably
required to make (and such funds shall have been set aside as
a reserve to be used exclusively for so making) all payments
on the Note payable at any time prior to and including the
next Payment Date (in the maximum amount payable hereunder for
such period);
(1) payments (including distributions to SI for
such payments by SI) of (i) obligations under the Bank
of Commerce Agreement (as in effect on the date hereof,
and in an aggregate principal amount not in excess of
the principal amount outstanding as of the date hereof),
and (ii) the Xxxxxx Obligations to the extent permitted
pursuant to the Xxxxxx Subordination Agreement,
(2) Franchisor and DFW may make distributions in
cash to SI, and Franchisor and Branding Subsidiary may
otherwise make any cash expenditure, investment or asset
purchase not otherwise prohibited under the Note
Documents; provided, however, that, in the event that,
for any fiscal quarter, Franchisor Revenues, measured as
of the end of such fiscal quarter (for such fiscal
quarter) based on the financial information required to
be delivered pursuant to Section 6(e) hereof, shall fail
to be in excess of $4,750,000, then DFW and Franchisor
shall retain 50% of all their remaining Available Funds
(including any such amount held by Manager) after making
the payments contemplated in clauses (A), (B), (C) and
(D)(1) above), which retained Available Funds shall be
held in reserve or applied exclusively for payments
permitted under such clauses (or payments with respect
to the Obligations) until such time as Franchisor
Revenues are in excess of $4,750,000 in a later fiscal
quarter, as measured pursuant to this clause.
(j) AFFILIATE TRANSACTIONS. Directly or indirectly enter into or
permit to exist any transaction with or involving any Affiliate of
Franchisor except for (a) the Management Agreement, (b) the transactions
constituting Permitted Dispositions, and (c) additional transactions that
are in the ordinary course of business (and not otherwise prohibited
hereunder), upon fair and reasonable terms, that are fully disclosed to
Lender, and that are no less favorable to Franchisor or such subsidiary
than would be obtained in an arm's length transaction with a
non-Affiliate;
(k) SEPARATE FUNDS. Commingle any Franchisor funds with funds of any
other Person, or commingle any DFW funds with funds of any other Person;
and
(l) INDEPENDENT DIRECTORS. From and after 90 days after the Closing
Date, permit any person who is, or at any time has been, a director
(including independent director) officer, employee or other Person
affiliated in any respect with any other SI Party, to serve as an
independent director for any of Franchisor or any of its subsidiaries,
20
it being understood that the foregoing shall not prevent Franchisor and
its subsidiaries and NAMF Funding, LLC from having one or more independent
directors in common.
8. NEW LENDER FINANCING. Lender agrees to subordinate its rights with
respect to the Franchisor Guaranty and the Franchisor Collateral to a third
party lender or group of lenders (collectively, the "New Lender") providing
financing to Franchisor or SI (all of which shall be in the form of immediately
available funds) in an aggregate amount not to exceed $3,000,000 (such
financing, the "New Lender Financing"), which New Lender Financing may be
secured by Liens of all or any SI assets and/or Franchisor Collateral
(collectively, the "New Lender Liens"); provided, however, that such New Lender
Financing and New Lender Liens shall be permitted hereunder, and Lender shall
provide such subordination, in each case only in the event that, and for so long
as, (i) Lender and New Lender enter into an intercreditor agreement, in form and
substance acceptable to Lender (the "New Lender Intercreditor Agreement"), which
shall provide, among other provisions, that Lender may purchase New Lender's
position at par, at Lender's option upon reasonable written notice from Lender
to New Lender, (ii) Lender shall have approved in writing the structure, cost
and terms of such New Lender Financing, (iii) Lender shall have the option, but
not the obligation, to make a loan to the applicable SI Parties upon similar
terms (which loan shall be in lieu of the New Lender Financing), and shall have
declined to exercise such option (it being understood that, in the event Lender
declines to exercise such option, the SI Parties may proceed with such New
Lender Financing only for so long as the terms thereof are substantially the
same as those having been offered to Lender), (iv) such New Lender Financing
shall have been consummated (and the funds made available to the applicable SI
Parties) on or before June 30, 2004, (v) such New Lender Financing shall be
repaid through monthly payments over a two (2) year period, which payment
schedule shall not include a balloon payment and shall not have interest-only
for a period extending beyond June 30, 2004 (it being understood that the
proposed payment schedule presented to Lender prior to the date hereof of
interest-only through June, 2004 and the remainder amortized over 18 months is
acceptable), and (vi) such New Lender Financing shall be fully repaid prior to
December 15, 2005.
9. ADDITIONAL TERMS RELATING TO SI AND THE SCHLOTZSKY'S IP.
(a) CONFIRMATION OF SI GUARANTY. SI further unconditionally and
irrevocably confirms, reaffirms and ratifies in all respects each of the
terms and conditions of the SI Guaranty, and acknowledges and agrees that,
notwithstanding the execution of this Agreement and the other Note
Documents, the SI Guaranty remains in full force and effect with respect
to the Note and all other Note Documents, and Lender retains all rights to
enforce the SI's obligations thereunder. SI acknowledges and represents
that, with respect to the SI Guaranty and the Obligations, there currently
exist no defenses or claims of offset or otherwise against the enforcement
thereof by Lender, and to the extent such claims, offsets or defenses
exist, SI hereby unconditionally and irrevocably waives the same.
(b) RIGHTS IN SCHLOTZSKY'S IP. SI, for itself and all its
subsidiaries (other than Franchisor and Branding Subsidiary) hereby
represents, warrants and covenants that, in each case other than rights
granted in favor of Lender and rights granted to DFW under the Lender ADA
and Assignments relating thereto, (a) except pursuant to the terms of
21
those certain Franchise Agreements and any other agreement specifically
set forth in Schedule 9(b), (such Franchise Agreements and other
agreements, collectively the "SI Franchise Agreements"), each of SI and
each such subsidiary does not have, and will at no time have (and hereby
waives any right it may at any time have with respect to) any ownership
interest or right or license to use any of the Schlotzsky's IP or other
Franchisor Collateral, (b) all updates, revisions, developments,
derivations and versions of or relating to the Schlotzsky's IP developed
in connection with the Schlotzsky's franchise system by SI or any
subsidiary thereof shall be the sole property of Franchisor (and to the
extent developed by SI or any such subsidiary thereof, shall be promptly
be transferred to Franchisor).
(c) Each SI Party hereby (i) represents that it has delivered to
Lender a true and correct copy of each SI Franchise Agreement as in effect
on the date hereof, (ii) represents that each such SI Franchise Agreement
expressly prohibits any sublicensing by SI or the applicable subsidiary
thereof, (iii) agrees that it shall not, nor shall it permit any of its
subsidiaries to, amend or otherwise modify any such SI Franchise Agreement
without Lender's prior written consent, and (iv) agrees that,
notwithstanding the foregoing, following any Event of Default and in
connection with the exercise by Lender of its remedies with respect to the
Collateral, at Lender's option, (A) each SI Franchise Agreement shall be
amended (and each SI Party shall so cause such amendment), effective
immediately upon Lender's delivery of notice to SI as to exercise of such
option, so as to provide payment terms and obligations (and Franchisee
Payments) based on the royalty rates (of not less than 2%) and other
payment obligations in Franchisor's standard form of Franchise Agreement
as in effect on the date hereof or as modified after the date hereof with
Lender's consent, provided however, that such royalties shall not be paid
if the payment would result in the EBITDA for such location to be negative
for the period applicable to the royalty, and provided, further, that the
payment thereof does not result in the breach of covenants under financing
agreements now in existence with third parties, and (B) SI shall change
its corporate name (and cause each applicable subsidiary thereof to change
its corporate name) so as to not include "Schlotzsky's" or any other name
including, or similar to, any of the Schlotzsky's IP.
10. ADDITIONAL TERMS RELATING TO THE MANAGEMENT AGREEMENT.
(a) MANAGER SUBORDINATION. All rights of Manager in and to payments
from Branding Subsidiary or any SI Party, or otherwise with respect to the
Collateral, will be fully subordinate in right of payment to the
Obligations, and no such payments shall be made or received except as
permitted pursuant to this Agreement.
(b) PERFORMANCE UNDER MANAGEMENT AGREEMENT. Manager shall at all
times perform its obligations, and exercise its rights, under the
Management Agreement, in a manner consistent with, and so as to cause
Branding Subsidiary and each SI Party to be in compliance with, this
Agreement and the other Loan Documents. Lender shall be deemed a third
party beneficiary as to all rights and obligations of the Branding
Subsidiary and each SI Party under the Management Agreement.
22
(c) DELIVERY OF REPORTS. Manager shall, within 15 days of Lender's
request thereof and at Manager's expense (subject only to such
compensation as Manager may be entitled pursuant to the Management
Agreement), deliver to Lender such reports (other than those to be
provided under Section 5(e)) or other information with respect to Branding
Subsidiary, any SI Party or the Manager's services under the Management
Agreement relating thereto as may be reasonably requested by Lender from
time to time.
(d) CHANGES TO MANAGEMENT AGREEMENT. The SI Parties hereby agree, to
cause, within fifteen (15) days after the date hereof, an amendment to the
Management Agreement, in form and substance satisfactory to Lender, to (i)
reflect the payment of the Manager Compensation and Operating Expenses in
an amount consistent with this Agreement (and not to exceed $400,000 per
month), (ii) change the term of the Management Agreement to terminate
(without payment of any termination or similar fee), by its terms and
without any further action or notice, on December 15, 2006, subject to
successive one-year extensions, each of which shall require Lender's
written consent. Without limiting the foregoing, without Lender's prior
written consent, (x) Manager and the SI Parties shall not, amend, or
permit the amendment of, the Management Agreement with respect to any SI
Party or Branding Subsidiary, and (y) Manager shall not resign, and the SI
Parties shall not cause or permit such resignation or the appointment of a
substitute manager (pursuant to Section 4.4 of the Management Agreement or
otherwise).
(e) LENDER EXERCISE OF REMEDIES. From and after the occurrence of
any Event of Default, and without limiting any other rights or remedies of
Lender, Lender shall have the right to exercise all rights of each SI
Party under the Management Agreement, and in such event, (i) for all
purposes and all actions of Manager, Manager's authority granted under the
Management Agreement with respect to any SI Party or the Collateral shall
be deemed to be subject to the control and authority of Lender, (ii) in no
event shall any SI Party or Branding Subsidiary (or Lender, to the extent
assuming any obligations of any SI Party) be liable to Manager for any
acts or omissions of Manager constituting negligence, violations of law,
breach of the Management Agreement or failure to perform in accordance
with the Management Standard (as defined therein), and (ii) in connection
with Section 2.7 (Indemnification) of the Management Agreement, Lender
shall be deemed an "Indemnitee", and all fees and expenses of Lender with
respect to separate counsel under Section 2.7(b) of the Management
Agreement shall be paid by Manager. Without limiting, and in addition to,
the foregoing, from and after an Event of Default, and in connection with
the exercise of remedies of Lender, Lender, at its option and in its sole
discretion (and in addition to any other rights and remedies available to
Lender), shall have the right, but not the obligation, to do any of the
following: (1) have all or any portion of the rights and obligations of
Franchisor or DFW under the Management Agreement be assigned to, and
assumed by, Lender or any designee thereof (it being understood that in no
event shall Lender of such designee have any obligations under the
Management Agreement other than as may be expressly assumed at such time),
(2) transfer all or any portion of the Collateral free and clear of any
obligations of Franchisor, DFW or Branding Subsidiary under the Management
Agreement, and/or (3) terminate the Management Agreement with respect to
DFW, Franchisor and/or Branding Subsidiary, without any obligation or
liability other than payment of accrued and unpaid ordinary fees and
reimbursements of Manager as of the date of such termination (the payment
of
23
which shall be the sole obligation of DFW, Franchisor and/or Branding
Subsidiary, as applicable, and shall be subordinate in right of payment to
the Obligations).
(f) MANAGER COOPERATION. In the event of any termination, in whole
or in part, of the Management Agreement or transfer of Collateral, Manager
shall, at its sole cost and expense, fully cooperate with Lender, any
designee thereof or any successor manager in effecting the termination of
the responsibilities and rights of the Manager and transition of the
services having been provided by Manager, including (a) the transfer of
any applicable bank accounts, and all cash amounts, checks and other
instruments that have been or at any time thereafter are received by the
Manager with respect to the Collateral (or relating to any SI Party or
Branding Subsidiary, as applicable), and (b) the prompt delivery to
Lender, any successor or replacement manager and each SI Party, as
applicable, of all documents, information and servicing records then in
the Manager's possession or control, in each case with respect to the
Collateral, such SI Party or Branding Subsidiary, as applicable.
11. AUDIT RIGHTS. Each of DFW and Franchisor Branding Subsidiary shall
permit (and cause Manager to permit) Lender or its designee (at DFW's or
Franchisor's expense) to examine and audit, not more often than twice per
calendar year, upon prior reasonable notice to Manager and/or such SI Party, as
applicable, during business hours, but without unreasonably disturbing such SI
Party's or the Manager's operations, the quarterly results of DFW, Franchisor
and Branding Subsidiary reflected in filings with the Securities and Exchange
Commission and supporting information thereto.
12. DEFAULT. The occurrence of one or more of the following shall be
deemed an event of default ("Event of Default"):
(a) DFW fails to pay when due and payable, or when declared due and
payable, all or any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the
Bankruptcy Code, would have accrued on such amounts), fees and charges due
the Lender, reimbursement of Lender expenses, or other amounts
constituting Obligations), and shall not cure such failure within three
(3) Business Days after DFW receives written notice of such failure from
Lender;
(b) Any representation or warranty made by any SI Party in this
Agreement or any other Note Document shall prove to have been false or
misleading in any material respect as of the time made or furnished and
any such default shall not be remedied within a period of five (5) days
after notice of the occurrence of such default is given to such SI Party;
(c) Any SI Party shall default in the performance or observance of
any covenant, condition or provision of Sections 6(c), 6(d), 6(e), 7 or 10
of this Agreement and any such default shall not be remedied within a
period of thirty (30) days after notice of the occurrence of such default
is given to such SI Party; or
(d) Any SI Party shall default in the performance or observance of
any other material covenant, condition or provision of this Agreement or
any other Note Document
24
and any such default shall not be remedied within a period of thirty (30)
days after notice of the occurrence of such default is given to such SI
Party;
(e) Any SI Party shall commence a voluntary proceeding under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, 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 in furtherance of any of the foregoing; or
(f) An proceeding under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect is commenced against any SI
Party, and any of the following events occur: (a) such SI Party consents
to the institution of such proceeding against it, (b) the petition
commencing such proceeding is not timely controverted, (c) the petition
commencing such proceeding is not dismissed within 60 calendar days of the
date of the filing thereof, (d) an interim trustee is appointed to take
possession of all or any substantial portion of the properties or assets
of, or to operate all or any substantial portion of the business of, such
SI Party, or (e) an order for relief shall have been entered therein; or
(g) If there is a default under the Xxxxxx Notes (or related
documents), the Bank of Commerce Agreement (or related documents), or the
New Lender Financing, or any other material agreement to which DFW,
Franchisor or any of Franchisor's subsidiaries is a party and such default
(i) occurs at the final maturity of the obligations thereunder, or (ii)
results in a right by the other party thereto, irrespective of whether
exercised, to accelerate the maturity of such SI Party's or subsidiary's
obligations thereunder or to terminate such agreement; or
(h) The occurrence of any Change in Control of any SI Party.
13. REMEDIES. Upon the occurrence of an Event of Default, in addition to
any and all other rights and remedies which the Lender may then have hereunder,
under the Uniform Commercial Code of the State of Texas or of any other
pertinent jurisdiction (the "Code"), or otherwise, the Lender may, at its
option:
(a) declare all Obligations, whether evidenced by this Agreement,
the Note or any of the other Note Documents, or otherwise, immediately due
and payable;
(b) terminate this Agreement and any of the other Note Documents as
to any future liability or obligation of Lender, but without affecting any
of the Lender's liens in the Collateral and without affecting the
Obligations;
(c) enter upon the premises where any of the Collateral not in the
possession of the Lender or its agent is located and take possession
thereof and remove the same, with or without judicial process;
(d) reduce its claim to judgment or foreclose or otherwise enforce
the Security Interest, in whole or in part, by any available judicial
procedure;
25
(e) after notification, if any, provided for herein or in the
applicable Note Documents, sell, lease, or otherwise dispose of, at the
offices of the Lender, on the premises of any SI Party, or elsewhere, all
or any part of the Collateral, in its then condition or following any
commercially reasonable preparation or processing, and any such sale or
other disposition may be as a unit or in parcels, by public or private
proceedings, and by way of one or more contracts (it being agreed that the
sale of any part of the Collateral shall not exhaust the Lender's power of
sale, but sales may be made from time to time, and at any time, until all
of the Collateral has been sold or until the Obligations have been paid
and performed in full), and at any such sale it shall not be necessary to
exhibit any of the Collateral;
(f) at its discretion, surrender any policies of insurance on the
Collateral and receive the unearned premiums, and, in connection
therewith, each SI Party hereby appoints the Lender as the agent and
attorney-in-fact for such SI Party to collect such premiums;
(g) at its discretion, retain the Collateral in satisfaction of the
Obligations whenever the circumstances are such that the Lender is
entitled to do so under the Code or otherwise; and
(h) exercise any and all other rights, remedies and privileges it
may have under any other agreement securing all or part of the
Obligations.
Notwithstanding the foregoing, upon the occurrence of any Event of Default
described in Section 12(e) or Section 12(f), in addition to the remedies set
forth herein, without any notice to any SI Party or any other Person or any act
by the Lender, the Obligations then outstanding, together with all accrued and
unpaid interest thereon and all fees and all other amounts due under this
Agreement, the Note and the other Note Documents, shall automatically and
immediately become due and payable, without presentment, demand, protest, or
notice of any kind, all of which are expressly waived by the SI Parties.
Any and all proceeds ever received by the Lender from any sale or other
disposition of the Collateral, or any part thereof, or the exercise of any other
remedy pursuant hereto shall be applied by the Lender to the Obligations in such
order and manner as the Lender, in its sole discretion, may deem appropriate,
notwithstanding any directions or instructions to the contrary by any SI Party;
if such proceeds are not sufficient to pay the Obligations in full, DFW shall
remain liable to the Lender for the deficiency.
With respect to any of the Collateral which is or becomes accounts,
contract rights, instruments, or chattel paper, the Lender, without notice to
any SI Party, shall be entitled, but not obligated, at any time and from time to
time to notify and direct the Account Debtor or obligor thereon to thereafter
make all payments on such Collateral directly to the Lender, regardless of
whether any SI Party was previously making collections thereon. Each Account
Debtor and obligor making payment to the Lender hereunder shall be fully
protected in relying on the written statement of the Lender that he then holds
the Security Interest which entitles him to receive such payment, and the
receipt of the Lender for such payment shall be full acquittance therefor to the
one making such payment.
26
14. COSTS, RISKS. Should any part of the tangible Collateral come into the
possession of the Lender, whether before or after an Event of Default, the
Lender may, but shall have no obligation to, use or operate such Collateral for
the purpose of preserving it or its value, or pursuant to the order of a court
of appropriate jurisdiction or in accordance with any other rights held by the
Lender in respect of the Collateral. DFW covenants to promptly reimburse and pay
to the Lender, at the Lender's request the amount of all reasonable expenses
(including the cost of any insurance and payment of taxes or other charges)
incurred by the Lender in connection with its custody, preservation, use, or
operation of the Collateral, and, all such expenses, costs, taxes, and other
charges shall be a part of the Obligations and shall bear interest at the
Default Rate from the date incurred until the date repaid to the Lender. It is
agreed, however, that the risk of loss or damage to such Collateral is on the SI
Parties, and the Lender shall have no liability whatsoever (i) for failure to
preserve the value of any Collateral, (ii) for maintaining any obligation in
terms of payment, or (iii) for failure to obtain or maintain insurance, or to
determine whether any insurance ever in force is adequate as to amount or as to
the risks insured.
15. EXPENSES; INDEMNITY.
(a) DFW agrees to pay or reimburse Lender for all costs and expenses
incurred by Lender in connection with the preparation, execution and
delivery of this Agreement and any other Note Document and the
consummation and performance of the transactions contemplated hereby,
including, without limitation, all legal fees. DFW further agrees to pay
or reimburse Lender for all costs and expenses (all of which shall become
part of the Obligations) incurred in connection with the enforcement or
attempted enforcement, or preservation of any rights under this Agreement,
and any other Note Document, or in connection with any refinancing, or
restructuring of any such documents in the nature of a "workout" or of any
insolvency or bankruptcy proceeding, including, without limitation,
reasonable attorneys' fees and costs. The foregoing costs and expenses to
be reimbursed by DFW shall include all search, filing, recording,
insurance and appraisal charges and fees and taxes related thereto, and
other out-of-pocket expenses incurred by Lender and the cost of
independent public accountants and other outside experts retained by
Lender. Without limiting the foregoing, Lender may request, from time to
time, deposits for reasonably anticipated costs and expenses as a
condition to evaluation by Lender of any request by any SI Party with
respect to any consent, amendment or waiver relating to this Agreement or
any other Note Document (it being understood that in no event shall any
such deposit create any obligation for Lender to agree to provide any such
consent, amendment or waiver). The agreements in this Section shall
survive repayment of all Obligations and termination of this Agreement.
(b) DFW shall indemnify and hold Lender and its Affiliates, and
their respective employees, attorneys and agents (each, an "Indemnified
Person"), harmless from and against any Claim which may be instituted or
asserted against or incurred by any such Indemnified Person as the result
of the transactions contemplated under this Agreement and the other Note
Documents, including any legal costs and expenses of disputes between the
parties to this Agreement or any other Note Document; provided, that DFW
shall not be liable for indemnification of an Indemnified Person to the
extent that any such Claim is finally determined by a court of competent
jurisdiction to have resulted solely from such Indemnified Person's gross
negligence or willful misconduct. NO
27
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO
ANY NOTE DOCUMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR
ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR
INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE
ALLEGED AS A RESULT OF THIS AGREEMENT OR ANY OTHER NOTE DOCUMENT OR AS A
RESULT OF ANY TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.
(c) In any suit, proceeding or action brought by Lender relating to
any item of Collateral or any sum owing hereunder, or to enforce any
provision of any item of Collateral, DFW and Franchisor shall save,
indemnify and keep Lender harmless from and against all expense, loss or
damage suffered by reason of such action or any defense, setoff, or
counterclaim asserted for any reason by the other party or parties to such
litigation and however arising. All obligations of any SI Party with
respect to any item of Collateral shall be and remain enforceable against,
and only against, such SI Party, and shall not be enforceable against
Lender.
16. NOTICE. Reasonable notification of the time and place of any public
sale of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made
(including retention thereof in satisfaction of the Obligations), shall be sent
to the applicable SI Party and to any other person entitled under the Code to
notice. It is agreed that notice sent or given at least ten (10) calendar days
prior to the taking of the action to which the notice relates is reasonable
notification and notice for the purposes of this paragraph.
17. RIGHTS CUMULATIVE. All rights and remedies of the Lender hereunder are
cumulative of each other and of every other right or remedy which the Lender may
otherwise have at law or in equity or under any other contract or other writing
for the enforcement of the Security Interest or in the collection of the Note or
the Obligations, and the exercise of one or more rights or remedies shall not
prejudice or impair the concurrent or subsequent exercise of other rights or
remedies.
18. ASSIGNMENT. The rights, powers and interests held by the Lender
hereunder, together with the Security Interest in the Collateral, may be
transferred and assigned by the Lender, in whole or in part at such time and
upon such terms as the Lender may deem advisable.
19. POWER OF ATTORNEY. The Lender is hereby appointed the attorney-in-fact
of the Franchisor, effective upon the occurrence of an Event of Default, for the
purpose of carrying out the provisions of this Agreement and taking any action
and executing any instruments which the Lender may deem necessary or advisable
to accomplish the purposes hereof, which appointment as attorney-in-fact is
irrevocable and coupled with an interest.
20. NO WAIVERS. No failure on the part of the Lender to exercise, and no
delay in exercising any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by the Lender of any
right, power or remedy hereunder preclude any other or further exercise thereof
or the exercise of any other right, power or remedy.
28
21. BINDING EFFECT. This Agreement shall be binding on each SI Party and
its successors and assigns and shall inure to the benefit of the Lender, and the
Lender's successors and assigns.
22. TERMINATION. This Agreement and the Security Interest in the
Collateral will terminate when the Obligations secured hereby have been paid in
full by extinguishment thereof but not by renewal, modification or extension
thereof.
23. GOVERNING LAW. The law governing this Agreement will be that of the
State of Texas in force on the date of execution of this Agreement. All
obligations of the Franchisor under the terms of this Agreement shall be
performable in Dallas County, Texas.
24. MAILINGS. Any notice, request, instruction or other document required
or permitted to be delivered hereunder by either party hereto to the other shall
be in writing and shall be delivered or mailed, registered or certified, postage
prepaid, addressed as follows:
To SI: Schlotzsky's Inc.
000 Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxx, XX 00000
Attention: General Counsel
Telephone No.: 000-000-0000
Telecopy No.: 512-236-3740
To Franchisor: Schlotzsky's Franchisor, LLC
000 Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Legal
Telephone No.: 000-000-0000
Telecopy No.: 512-236-3740
To Manager: Schlotzsky's Franchise Operations, LLC
000 Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Legal
Telephone No.: 000-000-0000
Telecopy No.: 512-236-3740
To DFW: DFW Restaurant Transfer Corp.
000 Xxxxxxxx Xxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Legal
Telephone No.: 000-000-0000
Telecopy No.: 000-000-0000
29
To the Lender: NS Associates I, Ltd.
0000 XXX Xxxxxxx, Xxxxx 000
Xxxxxx, Xxxxx 00000
Attention: Xxxxxx X. Xxxxxxxxx
Telephone No.: 000-000-0000
Telecopy No.: 000-000-0000
With a copy to: Xxxxxx X. Xxxx, Esq.
Power & Xxxxxxx, L.L.P.
0000 Xxxxx Xxxxxxx Xxxxxxxxxx, Xxxxx 0000
Xxxxxx, Xxxxx 00000
Telephone No.: 000-000-0000
Telecopy No.: 214-373-8768
With a copy to: Xxxx X. Xxxxxxxx
Paul, Hastings, Xxxxxxxx & Xxxxxx LLP
000 Xxxxx Xxxxxx Xxxxxx
Xxxxxx-xxxxx Xxxxx
Xxx Xxxxxxx, XX 00000
Telephone No.: 000-000-0000
Telecopy No.: 000-000-0000
or to such replacement address as any party hereto shall hereafter designate by
written notice to the other parties.
25. SEVERABILITY. If any provision of this Agreement is held to be
illegal, invalid, or unenforceable under present or future laws effective during
the term of this Agreement, the legality, validity, and enforceability of the
remaining provisions of this Agreement shall not be affected thereby, and in
lieu of each such illegal, invalid, or unenforceable provision there shall be
added automatically as a part of this Agreement a provision as similar in terms
to such illegal, invalid, or unenforceable provision as may be possible and be
legal, valid, and enforceable.
26. COUNTERPARTS. This Agreement has been executed in a number of
identical counterparts, each of which, for all purposes, is to be deemed an
original, and all of which collectively constitute one agreement, but in making
proof of this Agreement, it shall not be necessary to produce or account for
more than one such counterpart.
27. NUMBER AND GENDER OF WORDS. Whenever herein the singular number is
used, the same shall include the plural where appropriate, and words of any
gender shall include each other gender where appropriate.
28. RELEASE. Each SI Party, their successors-in-title, legal
representatives and assignees and, to the extent the same is claimed by right
of, through or under such SI Party, for their past, present and future
employees, agents, representatives, officers, directors, shareholders, and
trustees, do hereby forever remise, release and discharge Lender, and Lender's
respective successors-in-title, legal representatives and assignees, past,
present and future officers, directors, shareholders, trustees, agents,
employees, consultants, experts, advisors, attorneys and
30
other professionals and all other persons and entities to whom Lender would be
liable if such persons or entities were found to be liable to such SI Party, or
any of them (collectively hereinafter the "Lender Parties"), from any and all
manner of action and actions, cause and causes of action, claims, charges,
demands, counterclaims, suits, debts, dues, sums of money, accounts, reckonings,
bonds, bills, specialties, covenants, contracts, controversies, damages,
judgments, expenses, executions, liens, claims of liens, claims of costs,
penalties, attorneys' fees, or any other compensation, recovery or relief on
account of any liability, obligation, demand or cause of action of whatever
nature relating to, arising out of or in connection with this Agreement, the
Note, the other Note Documents or any other related documents, including but not
limited to, acts, omissions to act, actions, negotiations, discussions and
events resulting in the finalization and execution of this Agreement, as, among
and between the SI Parties and the Lender Parties, such claims whether now
accrued and whether now known or hereafter discovered, from the beginning of
time through the date hereof. EACH SI PARTY HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY AND EXPRESSLY WAIVE AND RELINQUISH ANY AND ALL RIGHTS AND BENEFITS
THAT THEY MAY HAVE UNDER ANY APPLICABLE LAW RESTRICTING THE EFFECTIVENESS OF A
WAIVER AS TO UNKNOWN OR UNSUSPECTED CLAIMS. THE SI PARTIES HEREBY ACKNOWLEDGE
THAT THE FOREGOING WAIVER (INCLUDING AS TO UNKNOWN OR UNSUSPECTED CLAIMS) WAS
SEPARATELY BARGAINED FOR, AND THAT THIS WAIVER IS AN ESSENTIAL TERM OF THIS
AGREEMENT, WITHOUT WHICH THE CONSIDERATION WOULD NOT HAVE BEEN GIVEN BY THE
LENDER TO THE SI PARTIES.
29. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
[signature pages to follow]
31
EXHIBIT 10.40
EXECUTION VERSION
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day, month and year first above written.
DFW:
DFW RESTAURANT TRANSFER CORP.
By: /s/ XXXXXXX X. XXXXXX
--------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Senior Vice President
FRANCHISOR:
SCHLOTZSKY'S FRANCHISOR, LLC
By: /s/ XXXXXXX X. XXXXXX
--------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Senior Vice President
SI:
SCHLOTZSKY'S, INC.
By: /s/ XXXXXXX X. XXXXXX
--------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Senior Vice President
MANAGER:
SCHLOTZSKY'S FRANCHISE OPERATIONS, LLC
By: /s/ XXXXXXX X. XXXXXX
--------------------------------------
Name: Xxxxxxx X. Xxxxxx
Title: Senior Vice President
[SIGNATURE PAGE TO RESTRUCTURING AGREEMENT - 1 OF 2]
LENDER:
NS ASSOCIATES I, LTD.
By: NS Associates, Inc.
Its: General Partner
By: /s/ XXXXXX XXXXXXXXX
----------------------------------
Xxxxxx Xxxxxxxxx
President
[SIGNATURE PAGE TO RESTRUCTURING AGREEMENT - 2 OF 2]
EXECUTION VERSION
SCHEDULE E-1
EXISTING LIENS
Liens described in the financing statements listed below filed with the State of
Delaware, Department of State, U.C.C. Filing Section, showing Schlotzsky's
Franchisor, LLC as Debtor:
1. Secured Party: Deli Keys, Ltd., 0000 Xxxxxxxxxxxx, Xxxxxx, XX 00000
Filing Number: 3226844 2
Filing Date/Time: August 11, 2003; 8:00 am
2. Secured Party: New Florida Markets, Ltd., 0000 Xxxxxxx Xxxxx, Xxxxxxxx,
XX 00000
Filing Number: 3226846 7
Filing Date/Time: August 11, 2003; 8:00 am
3. Secured Party: Xxxx Xxxxxxx and Xxxxx Xxxxxxx, 0000 Xxxxx 00xx Xxxxxx,
Xxxxxxx, XX 00000
Filing Number: 3280425 3
Filing Date/Time: October 21, 2003; 8:00 am
4. Secured Party: Xxxx X. Xxxxxx and Xxxxxxx X. Xxxxxx, 000 Xxxxxxxx Xxxxxx,
Xxxxxx, XX 00000
Filing Number:
Filing Date/Time: December 29, 2003;
SCHEDULE 9(b)
SI FRANCHISE AGREEMENTS
[Schedule begins on the following page]
Store # Franchisee City State
1445 56th & 6th, Inc. New York NY
1697 56th & 6th, Inc. Murfreesboro TN
1266 San Xxxxxx, L.L.C. Houston TX
1722 Schlotzsky's Restaurants, Inc. Northlake IL
1686 Schlotzsky's Restaurants, Inc. Xxx Xxxxxx XX
0000 Schlotzsky's Restaurants, Inc. Eagan MN
2157 Schlotzsky's Restaurants, Inc. Woodbury MN
1324 Schlotzsky's Restaurants, Inc. Atlanta GA
1809 Schlotzsky's Restaurants, Inc. Xxxxxxxxxxxx XX
0000 Schlotzsky's Restaurants, Inc. Rome GA
1824 Schlotzsky's Restaurants, Inc. Newnan GA
1875 Schlotzsky's Restaurants, Inc. Canton GA
1873 Schlotzsky's Restaurants, Inc. Alpharetta GA
2588 Schlotzsky's Restaurants, Inc. Round Rock TX
1534 Schlotzsky's Restaurants, Inc. Sandy UT
2152 Schlotzsky's Restaurants, Inc. Salisbury NC
2552 Schlotzsky's Restaurants, Inc. Springdale AR
1114 Schlotzsky's Restaurants, Inc. College Station TX
1115 Schlotzsky's Restaurants, Inc. College Station TX
1154 Schlotzsky's Restaurants, Inc. Houston TX
1168 Schlotzsky's Restaurants, Inc. Houston TX
1661 Schlotzsky's Restaurants, Inc. Houston TX
1693 Schlotzsky's Restaurants, Inc. Pearl MS
1876 Schlotzsky's Restaurants, Inc. Southaven MS
2109 Schlotzsky's Restaurants, Inc. Humble TX
1342 Schlotzsky's Restaurants, Inc. Houston TX
2554 Schlotzsky's Restaurants, Inc. Xxxxxxxx XX
0000 Schlotzsky's Restaurants, Inc. Austin TX
1099 Schlotzsky's Restaurants, Inc. Austin TX
1102 Schlotzsky's Restaurants, Inc. Austin TX
1103 Schlotzsky's Restaurants, Inc. Austin TX
1108 Schlotzsky's Restaurants, Inc. Austin TX
1222 Schlotzsky's Restaurants, Inc. Austin TX
2624 Schlotzsky's Restaurants, Inc. San Antonio TX
1550 Schlotzsky's Restaurants, Inc. Chattanooga TN
1232 Schlotzsky's Restaurants, Inc. Austin TX
1517 Schlotzsky's Restaurants, Inc. Austin TX
2100 Schlotzsky's Restaurants, Inc. Xxxxx Xxxx XX
0000 Schlotzsky's Restaurants, Inc. Xxxxx Xxxx XX
0000 Schlotzsky's Restaurants, Inc. Xxxxxx Xxxxxx XX
0000 Schlotzsky's Restaurants, Inc. Hoover AL
1599 Schlotzsky's Restaurants, Inc. Raleigh NC
2123 Schlotzsky's Restaurants, Inc. Raleigh NC
Schlotzsky's, Inc. Confidential Page 1 of 1
List of company restaurants3 Schedule 9(g)
EXHIBIT A
FORM OF PROMISSORY NOTE
EXECUTION VERSION
THIS PROMISSORY NOTE AND THE INDEBTEDNESS EVIDENCED
HEREBY ARE ENTITLED TO THE BENEFITS OF, AND SUBJECT TO
THE TERMS SET FORTH IN, THAT CERTAIN SUBORDINATION
AGREEMENT DATED AS OF DECEMBER 29, 2003 BY AND AMONG
PAYEE, XXXX X. XXXXXX, XXXXXXX X. XXXXXX, SCHLOTZSKY'S
FRANCHISOR, LLC, SCHLOTSKY'S, INC., SCHLOTZSKY'S
FRANCHISE OPERATIONS, LLC AND MAKER.
AMENDED AND RESTATED PROMISSORY NOTE
$23,268,000.00 AS OF DECEMBER 15, 2003
FOR VALUE RECEIVED, the undersigned, DFW RESTAURANT TRANSFER CORP.,
a Texas corporation ("Maker"), HEREBY PROMISES TO PAY to the order of NS
ASSOCIATES I, LTD., a Texas limited partnership ("Payee"), the principal sum of
TWENTY-THREE MILLION TWO HUNDRED SIXTY-EIGHT THOUSAND Dollars ($23,268,000.00)
(or such other amount as may be outstanding hereunder from time to time), plus
interest accruing on the unpaid balance thereof as herein provided.
1. RELATED DOCUMENTS. This Amended and Restated Promissory Note
(this "Promissory Note") is the "Note" referred to in, and the holder hereof
shall be entitled to the benefits of, that certain Restructuring Agreement dated
as of December 29, 2003 (the "Restructuring Agreement") among the Payee, the
Maker, Schlotzsky's Franchisor, LLC ("Franchisor"), and Schlotzsky's, Inc.
("SI"), to which reference is made for a description of certain security for
this Promissory Note and for a statement of additional terms and conditions
applicable to this Promissory Note, including with respect to required payment
conditions on which the indebtedness evidenced hereby (and any other
Obligations) may be declared to be immediately due and payable. Capitalized
terms used herein and not otherwise defined herein shall have the meanings
ascribed thereto (if any) in the Restructuring Agreement. As referenced in the
Restructuring Agreement, this Promissory Note (a) amends, restates and replaces
that certain promissory note dated August 30, 2002 and issued by Maker in the
original principal amount of $23,268,000.00 to Payee, as modified prior to the
date hereof (such promissory note, as so modified, the "Original Note"), and (b)
for all purposes, shall be deemed the same instrument as the Original Note.
Payment of this Promissory Note is secured by that certain Security Agreement
dated as of August 30, 2002, between Maker and Payee. Payment of this Promissory
Note is further secured by (a) a Guaranty dated as of August 30, 2002, by SI, as
amended, (b) a Guaranty of even date herewith, executed
PROMISSORY NOTE - PAGE 1
by Franchisor, (c) a Security Agreement of even date herewith between Payee and
Franchisor, (d) a Trademark Security Agreement of even date herewith between
Payee and Franchisor, (e) a Stock Pledge Agreement of even date herewith between
Payee and Franchisor, and (f) a Stock Pledge Agreement of even date herewith
between Payee and SI.
2. OUTSTANDING PRINCIPAL AND INTEREST. As of December 15, 2003 (the
"Effective Date"), (a) the outstanding principal balance of this Promissory Note
(taking into account all payments having been made on the Original Note through
and including the Closing Date referenced in the Restructuring Agreement,
including the payment required to be made on December 15, 2003 pursuant to
Section 4(a) below) is $18,012,099.24, and (b) the outstanding accrued and
unpaid interest on this Promissory Note (taking into account all payments having
been made on the Original Note through and including the Closing Date referenced
in the Restructuring Agreement) is $20,726.25.
3. INTEREST. Prior to maturity, the unpaid principal amount of this
Promissory Note shall bear interest at the following per annum rate (such rate
of interest to be referred to herein as the "Contract Rate"):
(a) From the Effective Date through, and including, December 14,
2004, the Contract Rate shall be three percent (3%) per annum;
(b) At all times after December 14, 2004, the Contract Rate shall
be an annual rate equal to the greater of (i) Prime Rate (as
in effect from time to time) plus four percent (4%), and (ii)
eight percent (8%).
For purposes of this Note and the other Note Documents, "Prime Rate"
means, the rate of interest announced, from time to time, as reported in The
Wall Street Journal as the "prime rate", or in the event no such rate is
announced, then a comparable rate selected by Payee and specified in a written
notice to Maker. The Maker understands that the Prime Rate may not be the lowest
rate of interest charged to or paid by Customer of Payee or any financial
institution, that the Prime Rate is not necessarily more favorable than another
rate or index, and that rates on other loans or credit facilities may be based
on indices other than the Prime Rate.
Accrued interest on the unpaid principal balance of this Promissory
Note shall be computed on the basis of a year consisting of 365 days, applied to
the actual number of days in each calendar month, but in no event shall such
computation result in an amount of accrued interest that would exceed accrued
interest on the unpaid principal balance hereof during the same period at the
Highest Lawful Rate.
Notwithstanding the foregoing, if at any time the Contract Rate
exceeds the Highest Lawful Rate, as hereinafter defined, the rate of interest to
accrue on this Promissory Note as provided above shall be limited to the Highest
Lawful Rate; however, any subsequent reductions in the Contract Rate shall not
reduce the rate of interest to
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accrue on this Promissory Note below the Highest Lawful Rate until the total
amount of interest accrued on this Promissory Note equals the amount that would
have accrued if the Contract Rate had at all times been in effect.
If any principal and/or interest or any installment thereof is not
paid on or before the date such installment is due Maker shall pay to Payee a
late charge equal to the lesser of (x) five percent (5%) of the payment of
principal and/or interest then due and/or interest or (y) the maximum amount
permitted by applicable law. Upon the occurrence and during the continuation of
an Event of Default, and notwithstanding any lower rate otherwise applicable
under the Note Documents, all amounts payable hereunder or under the Note
Documents (including all Obligations) shall bear interest at per annum rate
equal to the lower of (a) the Highest Lawful Rate, and (b) the Prime Rate plus
8.0% per annum (such rate, the "Default Rate"). Notwithstanding the foregoing,
so long as payment is made within the time frame permitted under Section 12(a)
of the Restructuring Agreement (to the extent applicable to such payment), the
late charge and Default Rate shall not apply.
Maker agrees that the maximum lawful rate of interest (the "Highest
Lawful Rate") applicable to this Promissory Note under Texas law shall be the
indicated rate ceiling as specified under Texas law; provided that, if permitted
by law, Payee may from time to time implement any ceiling under such laws and
revise the index, formula or provision of law used to compute the rate under
this Promissory Note by notice to Maker as provided in such laws; provided
further that, if any other provision of Texas, state or federal law now or
hereafter in effect and applicable hereto shall permit a greater interest rate
than the maximum rates currently in effect, the Highest Lawful Rate shall be the
highest lawful interest rate hereunder. In determining whether or not the
interest paid or payable, under any specific contingency, exceeds such Highest
Lawful Rate, the Maker and the Payee shall, to the full extent permitted by
applicable law, exclude voluntary prepayments and the effects thereof, and
amortize, prorate, allocate and spread, in equal parts, the total amount of
interest throughout the entire contemplated term of this Promissory Note so that
the interest rate is uniform throughout the entire term of this Promissory Note.
If it is so determined that any interest in excess of such Highest Lawful Rate
is provided for, such excess shall be applied first to any other amounts not
constituting interest due or which may become due under this Promissory Note,
and the balance, if any, shall be refunded to Maker; provided, however, that in
no event shall Maker be obligated to pay, and Payee hereby waives payment of,
the amount of interest to the extent it is in excess of the amount permitted by
applicable law. By execution of the Promissory Note, Maker acknowledges that
Maker believes the loan evidenced by this Note to be non-usurious and agrees
that if, at any time, Maker should have reason to believe that such loan is in
fact usurious, Maker will give the holder of this Note notice of such condition
and Maker agrees that the holder shall have sixty (60) days in which to make
appropriate refund or other adjustment in order to correct such condition if in
fact such exists.
3
4. PAYMENTS ON NOTE.
(a) Commencing on December 15, 2003 and continuing on the
fifteenth (15th) day of each month thereafter, through and including November
15, 2004, payments of principal and accrued interest in the amount of One
Hundred Twenty Thousand Dollars ($120,000) each shall be due and payable.
(b) Commencing on December 15, 2004 and continuing on the
fifteenth (15th) day of each month thereafter, payments of principal and accrued
interest in the amount of Four Hundred Twenty Thousand Dollars ($420,000) each
shall be due and payable.
(c) A final payment of all principal and accrued interest,
together with all other Obligations, shall be due and payable on December 15,
2006.
Both principal and interest are payable in lawful money of the
United States of America to Payee at 0000 XXX Xxxxxxx, Xxxxx 000, Xxxxxx, Xxxxx
00000, or such other address as the holder hereof shall notify Maker in writing
pursuant to the Restructuring Agreement, in immediately available funds without
setoff or counterclaim. All payments with respect to this Promissory Note or any
other Note Document shall be applied as follows: first, to all costs and
expenses (including reasonable attorneys fees) incurred by Maker and
constituting Obligations; second, to all accrued and unpaid interest, premium,
if any, and fees owing to Maker constituting Obligations; and third, to the
principal amount hereof (and interest shall thereupon cease to accrue upon the
principal so credited); and the remainder to any other Obligations then due and
payable. If any payment falls on a date that is not a Business Day, such payment
shall be deemed to be due and payable on the next succeeding Business Day, and
interest shall continue to accrue on the amount thereof until paid in full. For
purposes hereof, the term "Business Day" shall mean any day that is not a
Saturday, Sunday or day on which national banks in Austin, Texas are required or
permitted to close.
Maker may, at any time or from time to time, prepay the principal
amount outstanding hereunder, in whole or in part, without premium or penalty,
so long as any interest then accrued on the principal so prepaid has been (or is
concurrently) paid in full.
5. ACCELERATION. This Promissory Note is subject to acceleration in
connection with any Event of Default, and to exercise of remedies by Payee, in
each case as set forth in the Restructuring Agreement and the other Note
Documents.
6. REIMBURSEMENT OF COSTS. In the event this Promissory Note is
placed in the hands of an attorney for collection or if all or any part of the
indebtedness represented hereby is proved, established or collected in any court
or in any bankruptcy, receivership, debtor relief or other court proceedings,
Maker and all endorsers and each other party now or hereafter liable for payment
of this Promissory Note jointly and severally agree to pay reasonable attorneys'
fees and collection costs to the holder hereof
4
in addition to the principal and interest payable hereunder (all of which shall
be part of the Obligations).
7. WAIVERS. Maker and each endorser and each other party now or
hereafter liable for payment of this Promissory Note severally waive presentment
for payment, notice of dishonor, protest, notice of protest and diligence in
collecting or bringing suit against any party liable hereon and agree to any and
all extensions, renewals, partial payments, substitutions of evidence of
indebtedness and the taking, release or substitution of any security or
collateral with or without notice before or after maturity.
[SIGNATURE PAGE TO FOLLOW]
5
8. GOVERNING LAW. This Promissory Note shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas.
MAKER:
DFW RESTAURANT TRANSFER CORP.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
[SIGNATURE PAGE TO AMENDED AND RESTATED NOTE]
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